November 01, 2014

The Supreme Court’s Homer Decision: A gift to EPA or a Trojan horse?

Brian H. Potts and Richard G. Stoll

In the U.S. Supreme Court’s EPA v. EME Homer Generation decision of April 2014, six Justices went out of their way to reverse the U.S. Court of Appeals for the D.C. Circuit and uphold critical elements of U.S. Environmental Protection Agency’s (EPA’s) far-reaching Cross-State Air Pollution Rule (CSAPR) for electric power plants. Despite troubling statutory language on which the D.C. Circuit had based its decision, in the view of the Supreme Court majority (including conservative Justices John Roberts and Anthony Kennedy), EPA’s approach made “good sense.” 134 S. Ct. 1584, 1607 (2014).

In the near term, Homer won’t have much impact on the environment or the electric utility industry because even though the decision was widely touted in the media as a complete win for EPA, Homer left critical issues for the D.C. Circuit to decide on remand. Resolving these issues could result in invalidation of CSAPR, in whole or in part, in some or in all affected states. It also appears that more rulemaking will be necessary before any form of CSAPR is put into actual effect. Homer’s long-term impacts, however, could be quite significant.

CSAPR’s tangled past

Issued in July 2011, CSAPR was aimed at reducing the interstate transport of sulfur dioxide (SO2) and nitrogen oxides (NOx) from electric power plants in 27 states and the District of Columbia. CSAPR is based on a short clause in the federal Clean Air Act (CAA), commonly called the “good neighbor” provision, requiring State Implementation Plans (SIPs) to prohibit “any source . . . within the State from emitting any air pollutant in an amount which will . . . contribute significantly to nonattainment in . . . any other State.” 42 U.S.C. § 7410(a)(2)(D)(i). For example, if Chicago’s air pollution is significantly contributing to air quality problems in Wisconsin, Illinois is required to eliminate that pollution. Otherwise, Illinois is not being a good neighbor.

EPA issued CSAPR to correct “fundamental flaws” the D.C. Circuit had found in an earlier CAA “good neighbor” rule known as the Clean Air Interstate Rule (CAIR). The D.C. Circuit remanded CAIR to EPA in its 2008 North Carolina v. EPA decision, 531 F.3d 896 (D.C. Cir. 2008), but the court allowed CAIR to stay in effect while EPA sought to remedy CAIR’s flaws.

Generally, the 2011 CSAPR created sulfur dioxide (SO2) and nitrogen oxide (NOx) allowance budgets for each state and then allowed interstate trading of those allowances. CSAPR was set to begin in 2012 and then ratchet down the number of allowances available in 2014. That was EPA’s plan until over 50 parties challenged the rule in the D.C. Circuit and obtained a stay, stopping CSAPR’s implementation in its tracks.

After briefing on the merits, the D.C. Circuit ruled 2–1 that CSAPR’s approaches (described below) for (1) calculating state budgets and (2) imposing site-specific “FIP-first” controls both violated the CAA. Because it found CSAPR so fundamentally flawed, the D.C. Circuit vacated the rule in its entirety, leaving CAIR in place.

The Supreme Court’s decision

In their majority decision, the six Justices clearly sympathized with EPA’s plight, as the CAA directs the agency to slash air pollution blowing among the states without giving EPA much guidance on how to do it. The CAA merely provides that states must reduce the “amounts” of their pollution that “contribute significantly” to air quality problems in other states. Moreover, as the majority recognized, EPA has spent over a decade trying to implement the “good neighbor” provision and still hasn’t been able to get a rule through the courts.

Industry and many states argued that, under the clear statutory language in the CAA, EPA can only require a state to reduce amounts of pollution sent across its borders to a level necessary (but not more than necessary) to address air quality problems in downwind states. But, instead of following such an “air quality only” approach, CSAPR forces affected states to reduce power plant emissions by requiring cost-effective controls across the board. The result is that CSAPR causes some lesser polluting states to do more than their fair share, while under-regulating some of the more polluting states.

Under the plain words of the CAA, we believe (as did the D.C. Circuit) that the challengers had the better legal argument: the good neighbor provision only requires states to reduce the “amounts” of interstate pollution that “contribute significantly” to downwind air quality problems; it says nothing about cost or requiring cost-effective controls. Yet the Court sided with EPA’s cost-effectiveness approach. Why?

Because the majority decided that EPA’s approach is an “efficient and equitable solution” to the intractable cross-state air pollution problem:

Efficient because EPA can achieve the levels of attainment, i.e., of emission reductions . . . at a much lower overall cost. Equitable because, by imposing uniform cost thresholds on regulated states, EPA’s rule subjects to stricter regulations those States that have done relatively less in the past to control their pollution.

134 S. Ct. at 1590, Syllabus. The majority also sided with EPA on the “FIP first” issue. In issuing CSAPR, EPA in one fell swoop issued (1) new federally mandated targets (“budgets”) for each state along with (2) FIPs for each state mandating facility-specific allowance allocations to meet those budgets. During the comment period on the rule, many parties vigorously objected to this approach. They argued that the terms of the statute, longstanding practice, and the “cooperative federalism” principles embedded in the statute required that EPA first set the budgets and then give states the opportunity to develop SIPs with allowance allocations for each affected facility. The D.C. Circuit agreed with the challengers on this point, but the Supreme Court did not.

As a legal matter, EPA defended its FIP-first approach as based on the CAA’s “plain language.” As a policy matter, EPA defended the approach based on language from the D.C. Circuit’s 2005 North Carolina decision admonishing EPA not to tarry in fixing the problems the Court found with CAIR.

EPA based its “plain language” argument on section 110, which explicitly requires EPA to issue a FIP within two years after EPA finds a SIP inadequate. EPA had issued a few state SIP good neighbor disapprovals over the past few years, and, in the final CSAPR rulemaking, EPA summarily issued a “mass” SIP disapproval for 22 states. EPA maintained that these SIP disapprovals set up its authority under section 110 to issue good-neighbor FIPs in those states. For the 22 states subject to the “mass” disapproval, EPA claimed authority under section 110(k)(6), which generally authorizes EPA to “correct” previous EPA SIP actions it later finds to be “in error.”

In reversing the D.C. Circuit, the Supreme Court acknowledged that “co-operative federalism” may be a CAA policy goal, yet the Court agreed with EPA that the terms of the statute permitted EPA to issue a good neighbor FIP for any state without first setting budgets for each state—but only so long as EPA had taken action validly to disapprove a SIP for such state.

Key issues unresolved

On both issues it addressed, the Supreme Court punted on important questions that must now go back—along with other important questions—to the D.C. Circuit for resolution. First, while the Court ruled that EPA’s cost-effectiveness approach is generally lawful, the Court left open the possibility of specific states making “as applied” challenges to the rule:

If EPA requires an upwind State to reduce emissions by more than the amount necessary to achieve attainment in every downwind State to which it is linked, the Agency will have overstepped its authority, under the Good Neighbor Provision, to eliminate those ‘amounts [that] contribute . . . to nonattainment.’ Nor can EPA demand reductions that would drive an upwind State’s contribution to every downwind State to which it is linked below [the level that EPA has determined to be significant].

134 S. Ct. at 1608. The Supreme Court held that there wasn’t enough evidence in the record to conclude that either of these “overcontrol” possibilities occurred for any states. But the Court said that particular states could challenge the rule as applied to them, if they can demonstrate that they are being overregulated.

Second, as to “FIP first,” the Supreme Court did not reach the critical issue of whether EPA’s process of disapproving the SIPs was proper and resulted in valid SIP disapprovals—particularly the 22-state “mass” disapproval EPA claimed was authorized by the CAA section 110(k)(6) “correction” authority. The Supreme Court stated it would now be up to the D.C. Circuit to consider that issue on remand.

Finally, there are a number of issues that the D.C. Circuit never resolved in the first decision, which it will have to decide now. Many of these issues could lead to partial or complete vacatur of the rule . . . again.

Homer as precedent

Thus, while EPA secured a victory of sorts in Homer, the overall fate of CSAPR is still subject to major uncertainties. These uncertainties derive from two basic sources: (1) several issues before the D.C. Circuit on remand could result in portions of the rule being reversed nationally or on a state-by-state basis, thus setting up the potential for further Supreme Court review, and (2) EPA issued CSAPR in 2011 with two compliance phases to commence in 2012 and 2014—so regardless of what happens in the D.C. Circuit, additional rulemaking will be necessary for there to be a workable program. And any such rulemaking, of course, carries with it new opportunities for judicial review.

Perhaps most importantly, the electric utility industry has drastically changed since EPA first released CSAPR in 2011. Natural gas prices have plummeted, due in large part to the hydraulic fracturing boom, leading utilities to use more cleaner-burning natural gas and less coal when generating electricity. The resulting precipitous drop in SO2 and NOx emissions has made the original CSAPR budgets essentially meaningless for many states that already have emissions below their CSAPR state budget amounts. In the near term, even if CSAPR makes it out of the D.C. Circuit intact, the currently crafted rule will therefore not likely lead to any significant emission reductions.

If nothing else, however, Homer finally gives EPA a blueprint for regulating cross-state air pollution based on across-the-board, cost-effective controls. And regardless of what happens to this version of CSAPR in the D.C. Circuit, we expect to see another, more-stringent version in the future based on that blueprint.

Brian H. Potts and Richard G. Stoll

Brian H. Potts and Richard G. Stoll are partners at Foley & Lardner LLP.