In a 5 to 4 split decision, the U.S. Supreme Court ruled on Monday, June 28th, that the U.S. Environmental Protection Agency (“EPA”) unreasonably interpreted the federal Clean Air Act (“CAA”) when EPA decided deemed that costs were irrelevant in deciding whether to regulate hazardous air emissions from electric utility sources under section 112 of the CAA. Michigan v. EPA, No. 14-46 (U.S. June 28, 2015): SCOTUS MATS Decision The majority opinion was authored by Justice Scalia and was joined by the Chief Justice and Justices Thomas, Kennedy, and Alito. Specifically at issue was whether the EPA was required by section 112(n)(1), 42 U.S.C. § 7412(n)(1), to consider compliance costs in determining that it was “appropriate and necessary” to regulate toxic air emissions from fossil fuel-fired utilities. (See section 112 here.) Due to issues such as grid reliability, Congress did not initially list electric utilities as a source category to be regulated under the air toxics provisions of the 1990 CAA amendments. Instead, Congress ordered EPA to study the hazards to public health that could reasonably anticipated to occur as a result of such emissions and then to regulate electric utilities if it found that regulation was “appropriate and necessary” after performing the study.

In addressing the question of whether regulation was appropriate and necessary, EPA focused only on health impacts and did not consider compliance costs. The agency found that regulation was appropriate because the power plants’ emissions of mercury and other hazardous air pollutants posed risks to human health and the environment, and that controls were available to reduce these emissions. In 2012, the EPA issued its final electric utility mercury and air toxics standards (“MATS”) rule. A history of that rulemaking may be found here. EPA noted that during the rulemaking it did consider costs in deciding what level of emissions reduction should be achieved by the affected sources. Thus, EPA asserted that it had taken costs into account consistent with the statute’s requirements.

 The petitioners, which included Michigan and 20 other states as well as organizations such as the National Mining Association, argued that EPA was required to look at compliance costs in the study required by Congress before determining whether it was appropriate to proceed with setting any standards. They noted that in the final rule EPA had estimated in its Regulatory Impacts Analysis (“RIA”) that the “annual social costs” (i.e., the compliance costs for electric utilities that would be borne by consumers) were $9.6 billion. To the extent the agency could estimate the health benefits of the rule, it determined that they were from $4 to $6 million, although the agency said it could not fully quantify the benefits. In other words, according to the RIA, the ratio of costs to benefits from reducing the hazardous air emissions was between 2,400 to 1 and 1,600 to 1, but EPA interpreted the CAA to allow it to find that even so, regulation of mercury emissions was “appropriate and necessary.”

The Court held that EPA’s interpretation of the statute was unreasonable and that the agency must consider compliance costs before deciding to regulate electric utilities as a source category under section 112. The majority opinion reversed a prior decision of the U.S. Court of Appeals for the D.C. Circuit and remanded the matter to the D.C. Circuit for further proceedings. In doing so, the Court expressly stated that EPA is not necessarily required to perform a formal cost-benefit analysis in deciding how costs should be factored into determining whether regulation is appropriate under section 112(n)(1).

 It is unclear how this decision might affect one of the arguments expected to be raised against the EPA’s section 111(d) rule for electric utilities when it is finalized later this year. The 111(d) rulemaking is designed to regulate emissions of carbon dioxide from existing fossil fuel-fired power plants. One of the issues regarding that rule, however, is whether section 111(d) applies to electric utilities at all. This argument is based on the House of Representatives version of section 111(d)(A)(i), which states that section 111(d) is inapplicable to a source category which already is regulated under section 112. Therefore, the effect of today’s opinion on EPA’s 111(d) rulemaking will become clearer after further proceedings on the MATS rule at the D.C. Circuit.