What the Supreme Court MATS Ruling Means for Utilities and the EPA Clean Power Plan

Gavin Bade

August 1, 2015

On June 29, the Supreme Court released a ruling to reject the Environmental Protection Agency’s (EPA’s) Mercury and Air Toxic Standards (MATS), a regulatory scheme aimed at reducing mercury and other harmful pollution from the nation’s fleet of power plants, especially those that burn coal.

The court did not, as some outlets reported immediately after the ruling, strike down the MATS program. Rather, it took issue with the way that the EPA crafted the regulatory package, ruling that it did not properly consider costs as it wrote the rules, and remanded the case back to the U.S. Court of Appeals for the District of Columbia Circuit. That court, commonly called the D.C. Circuit, must now decide how to proceed with the EPA.

In the hours and days after the ruling, speculation ran rife throughout the U.S. energy industry as to what the decision means. Will the agency have to rewrite MATS? Does the ruling spell trouble for the Clean Power Plan? What does it all mean for utilities? Utility Dive spoke to some legal experts to find out.

Breaking Down the MATS Ruling

MATS is not dead yet. Justice Antonin Scalia, who wrote the majority opinion, did not deny that the EPA was justified in regulating mercury and other harmful pollutants, nor did he find that it had overstepped its role as a federal agency by making states and utilities comply.

The ruling, as Utility Dive reported, centered on how the agency determined that the regulations on mercury were “appropriate and necessary,” an initial finding that begins the process of writing a regulation. The plaintiffs, a coalition of states and industry groups led by the Michigan Attorney General, argued that the EPA should have considered the costs of the regulation when it made that initial finding. The EPA argued that it factored in cost later into the process of crafting the rules—after the “appropriate and necessary” finding was released—and that it was under no specific obligation from the Clean Air Act to factor them in for that initial finding.

Scalia sided with the plaintiffs, finding that the EPA did not interpret the Clean Air Act correctly when it failed to include costs when it decided that the regulations were appropriate and necessary. The fact that he did not go further, however, has left many legal experts concluding that the ruling was not as bad for the EPA or the Obama administration as it could have been.

“This is not necessarily a stinging defeat for the administration. It may be a temporary setback, but not a wholesale retreat,” Harold Blinderman, an Energy and Environmental Lawyer at the law firm Day Pitney, told Utility Dive. “The Supreme Court and Justice Scalia did not conclude that EPA could not regulate mercury and air toxics. It just concluded that
the agency needed to build in more process up front, consider cost up front, and that there needs to be more cost analysis.”

“They didn’t even say it had to be a formal cost-benefit analysis,” he added, “but that EPA needs to consider cost in some way.”

That interpretation comes straight from the text of the ruling: “It will be up to the agency to decide (as always, within the limits of reasonable interpretation) how to account for cost,” Scalia wrote in the majority opinion.

Kagan’s Dissent

Some in the legal world took exception to Scalia’s interpretation. Bruce Huber, an Energy and Environmental Law Professor at Notre Dame Law School, said he found the conservative justice’s opinion to be questionable.

“[The opinion] appears to be more along the lines of a narrow and, dare I say, almost persnickety insistence of what the word ‘appropriate’ means in the context of the Clean Air Act,” Huber told Utility Dive.

“I’m normally on the textual side of statutory interpretation,” he continued. “I generally think that if Congress passes something we have to abide by what the law says. But here, I think Kagan gets the better of the argument, 100%.”

Elena Kagan, the court’s most recent appointee, wrote the minority opinion of the 5-4 decision, siding with the EPA. The agency argued that while it did not factor in cost to that initial appropriate and necessary finding, it did consider costs at multiple points while writing the actual rules, and that should satisfy its statutory requirements.

Kagan wrote that Scalia and the majority would be correct if the agency “gave cost no thought at all.” But, she argued, “that is just not what happened here.”

“Over more than a decade, EPA took costs into account at multiple stages and through multiple means as it set emissions limits for power plants,” she wrote. “And when making its initial ‘appropriate and necessary’ finding, EPA knew it would do exactly that—knew it would thoroughly consider the cost-effectiveness of emissions standards later on. That context matters.”

Kagan went on to argue that the agency’s decision to consider costs after its initial appropriateness finding was understandable. The agency was not ignoring costs, she wrote, but rather deciding to consider them at a later part of the rulemaking process.

“Suppose you were in charge of designing a regulatory process,” Kagan wrote. “The subject matter—an industry’s emissions of hazardous material—was highly complex, involving multivarious factors demanding years of study. Would you necessarily try to do everything at once? Or might you try to break down this lengthy and complicated process into discrete stages? And might you consider different factors, in different ways, at each of those junctures? I think you might.”

What Is Next for MATS

Whether Scalia was being “persnickety” or not, his interpretation of the Clean Air Act is the one that won the day, sending the MATS rule back to the D.C. Circuit for review. Now, 1 of 2 things can happen, legal sources told Utility Dive. The nation’s top appeals court could throw the rule out entirely, and make the EPA start from scratch—or it could ask the agency to amend the ruling to factor in costs in a way that would satisfy the requirements of Scalia’s opinion.

Huber told Utility Dive that he thinks the D.C. Circuit will not throw out the MATS rule altogether.

“I think in all likelihood this goes back down to the D.C. Circuit and they don’t vacate the rule altogether,” he said. “I think they probably, essentially, as they’ve done several times in recent memory, leave the rule intact and order the EPA to remedy its process.”

The narrow wording of Scalia’s opinion is what makes this outcome probable, Huber said. As Blinderman noted, Scalia did not specify how the EPA should take cost into account in its “appropriate and necessary” finding—he only ruled that they had to do so.

“Because they phrased it in that limited way, I think it’s pretty easy for the EPA to say ‘OK, well let me just insert my later findings about cost into the process—are you happy now’?” Huber said. “And I suspect at that point the D.C. Circuit says, ‘We’re happy, this seems consistent with the Supreme Court decision.'”

Tom Wood, a Utility and Environmental Lawyer at the firm Stoel Rives, had a different take from Huber. He said it’s likely that the D.C. Circuit would have to remand the rule, since the problem Scalia identified was so early in the rulemaking process.

“I think that they’re going to have to remand it back and say that you need to start with the fundamental premise and then come back and justify that in light of the rule,” he said.

But in practice, he continued, that process would likely beget a similar result to Huber’s prediction.

“In an academic sense, it’s essentially that they start from the beginning, but in a practical sense, they’re not because all this has been written and implemented,” he said. “I think there will be a certain amount of consensus there that EPA needs to go back and justify its basis of taking into account cost, but that may end up being them going back and shoring up the foundation. The house is already built.”

Huber added that the EPA’s cost findings associated with the MATS rule, studied after the initial appropriateness finding, were so supportive of the limits on mercury and other air toxins that the agency should have no problem justifying them to a D.C. Circuit that already signed off on its interpretation once before.

“We didn’t see a D.C. Circuit that was really out to get this rule. That court is a tough hurdle for the EPA to get through, and we saw a favorable opinion there, a decision there that seemed to respect what [the agency] was trying to accomplish,” Huber said. “So if I had to gaze into my crystal ball, I would imagine that in 4 or 5 years from now we have a mercury rule that is identical to the one we have now and we’re up and running and all is well.”

The Consequences for Utilities

Environmentalists may take solace in Huber’s predictions, but those 4 or 5 years of wait time are more likely to give utility executives ulcers. While the MATS ruling did not completely throw out the regulations, it did inject “one more layer of uncertainty into the planning process for utilities,” said Joe Hall, Head of the Energy Industry Group at the firm
Dorsey & Whitney.

In a certain sense, the ruling’s impact on utilities seems muted at first. Because the compliance deadline was in April 2015, most power companies are already compliant with the rules. But some 200 power plants, representing about 20% of U.S. generating capacity, were given 1-year extensions on the compliance deadline, in most cases to complete installation of emissions scrubbing technologies. The fate of those plants remains uncertain, and will likely hinge on how the D.C. Circuit handles the rule.

That uncertainty spells trouble for utilities, Hall said.

“We’re talking about literally billion dollar investments, and every time you add another layer of uncertainty to it, you have questions about prudence.” he said. “What happens if you’ve received one of these extensions to the MATS rule and the rule is invalidated? Those issues will need to be answered.”

Even more complicated are questions about funds spent on emissions technology that may not have already been approved by state utility regulators and/or recovered in rate based through customer bills. Ultimately, Hall said, if the rule is struck down or changed substantially, utilities may have to endure some sort of prudence review of their costs for the emissions technologies.

Such a review could go one of two ways, Hall said. Regulators could agree that the expenditures were incurred prudently, even if the utility is over-complying, because of the way the MATS rules were originally written.

“But,” he said, “what they don’t want to do is be in a position where they are deemed to have spent money that isn’t necessary, because then they face the risk of not being able to recover that.”

Hall told Utility Dive that power companies that have already gone through the compliance process are in pretty good shape, but those with extensions for plant upgrades or to buy power on the open market could face some issues.

“If you’ve already made the investment and you’ve been able to recover it and the state deemed it to be prudent, then you’re in a much less precarious position than if you are in the process of getting an extension for MATS compliance, or are in the process of developing a new facility or new transmission or PPAs on the understanding that you would be MATS compliant at the end of next summer,” he said.

For now, utilities are in a holding pattern, waiting to see how the D.C. Circuit will respond to the Supreme Court ruling. But the uncertainty may not be over quickly.

Thaddeus Lightfoot, a partner at Dorsey & Whitney, explained that the D.C. Circuit often takes months and even years to decide what to do with a remanded decision.

In 2013, the Supreme Court remanded a D.C. Circuit decision in the case EPA v. EME Homer City Generation, which dealt with the agency’s Cross-State Air Pollution rule. Lightfoot told Utility Dive in an email that the appeals court has yet to decide what to do.

“The D.C. Circuit received the mandate reversing and remanding the case approximately one month after the Supreme Court issued its order,” he wrote “After receiving the mandate, the D.C. Circuit opened briefing to determine how to proceed. It held oral arguments 10 months later, and is still deliberating 13 months after receiving the Supreme Court’s mandate.”

The Clean Power Plan

While the D.C. Circuit mulls how to proceed with the MATS standards, the energy community is looking ahead to a court challenge to the EPA’s other big pollution control package: the Clean Power Plan.

While the finalized rule, which aims to cut CO2 emissions from power plants 30% nationwide by 2030, is not expected to be released until August, 13 states already have formed a coalition with industry groups to challenge the regulations in court, and a Supreme Court case is expected.

Since the MATS ruling on June 29, legal scholars and the media have been scouring Scalia’s opinion for clues as to how the court might interpret the Clean Power Plan. Some outlets, in the hours after the ruling, pointed to a silver lining for the Obama administration because the MATS ruling undercuts a key argument of those challenging the Clean Power
Plan—that the Clean Air Act precludes EPA from regulating carbon emissions from power plants because it has already regulated such emissions under the MATS rule.

The legal authorities Utility Dive spoke with, however, took a much different interpretation. In a number of recent opinions, they say, the court’s majority has been increasingly skeptical of granting deference to federal agencies on their interpretations of the law.

That concept of deferring to agency interpretation is commonly called Chevron deference, named after a 1984 case Chevron v. NRDC. The principle requires the court to defer to interpretations of laws made by government agencies charged with enforcing them, unless those interpretations are unreasonable.

That principle has historically been a strong one at the court, especially among conservative-minded judges wary of judicial overreach, Huber said. But recent decisions by the court indicate that the justices may be moving away from that doctrine of restraint and toward more active interpretation of major laws. Huber said the first major indication of that shift was the health-care case decided last week, King v. Burwell.

The health-care case, he said, would have seemed on its face to be one ripe for Chevron deference. The case rested on the interpretation of a vaguely-worded passage of a thousand-page law—a classic case for the court to say that it would simply defer to how the agency interpreted it.

But in his majority opinion, Chief Justice John Roberts took a different approach, Huber said.

“Roberts goes out of his way to say some areas of law are essentially so important and so unique that we are not bound to defer to the agency at all,” Huber said. “Then he engages in the statutory interpretation, and proceeds to conclude that the interpretation of the statute that the IRS took was the right one. But he’s quite clear that he’s not deferring to
their interpretation. He’s interpreting it for himself, and he simply agrees with the position they took.”

It would not be surprising, Huber said, if the court took a similar approach to the Clean Power Plan (CPP), since it is such a significant regulatory package and presents serious legal questions in its implementation. In particular, critics question whether the EPA can regulate “beyond the fenceline” of power plants, essentially compelling states and
utilities to shift to a lower-carbon generation mix, rather than only regulating the plants themselves.

“It would not at all be a stretch to imagine whenever we get a CPP challenge that [Roberts] says, ‘Look, this is an equally important matter of public policy, this is a huge regulatory undertaking, and on these instances there is no Chevron deference,'” Huber said.

In that case, a textual interpretation of the Clean Air Act could find the Clean Power Plan invalid because there is no explicit mention of regulatory powers beyond the fenceline in the act.

Other legal experts found points of concern for the Clean Power Plan’s legality in the MATS ruling itself.

“As Justice Scalia wrote in the majority opinion, Chevron [deference] allows agencies to choose among competing reasonable interpretations of a statute; it does not license interpretive gerrymanders under which an agency keeps parts of statutory context it likes while throwing away parts it does not,” Lightfoot said in an email.

“Justice Thomas went even further in his concurrence,” he added, “noting that the Supreme Court has been too deferential to agencies in the past and must ‘stop to consider [the Constitution] before blithely giving the force of law to any other agency ‘interpretations’ of federal statutes.’ This is a clear push-back by the Supreme Court on agency deference.”

Wood agreed with Huber and Lightfoot, noting that the Supreme Court seems to be moving to further distinguish when Chevron applies to EPA cases.

“At the same time that, in many ways, the D.C. Circuit is deferring more to the agency, you’ve got the Supreme Court in this most recent case saying, ‘What the heck are you doing, EPA?’ and not deferring to them. They’re really diving into their own interpretation,” he said.

“But,” Wood added, “they’re also saying that if we’re under a pure Chevron analysis, we defer to you as long as what you are doing is squarely within the statute. Here… they were saying, ‘Well, the way we’re dealing with Chevron is we’re saying that you’re not within the scope of the statute, so we don’t have any reason to defer to you.'”

The EPA, for its part, says that the MATS ruling will not impact the Clean Power Plan. In a June 30 blog post, Janet McCabe, Head of the agency’s Air Pollution Office, called the decision “very narrow.”

“This decision does not affect other Clean Air Act programs that address other sources and types of air pollution . . . it means that rules and programs that reduce other types of pollutants under other sections of the Clean Air Act—like ozone and fine particles (smog and soot) can continue without interruption or delay,” she wrote.

With the plan not due to be released until August, a Supreme Court challenge could be years away. By that time, many of the legal issues may have been rendered mostly moot. As the proposed rule is written today, states and utilities would need to begin complying with the carbon regulations as soon as 2020. That could mean that by the time a challenges reaches the Supreme Court, utilities will all need to be cutting carbon aggressively. And even if that’s not the case, some of the most powerful utility figures in the country expect the EPA to be well prepared for the challenge.

“This is going to move forward,” Alexandra Dunn, Executive Director of the Environmental Council of the States, said at the Edison Electric Institute’s annual convention in June. The CEOs of 5 major utilities—AEP, Exelon, SCE, Dominion, and Southern Co.—expressed similar sentiments on the chances of the rule’s legal survival, although the AEP and
Southern CEOs called the plan a “massive overreach” of the federal government.

“Here’s what someone at EPA told me,” Dunn said. “This is one where every legal argument against this rule has been laid out from day one. There are no hidden, gotcha arguments.”