On June 29, 2015, the Supreme Court cast serious doubt upon the future of the Mercury and Air Toxics Standards (“MATS”) by finding that the Environmental Protection Agency (“EPA”) failed to adequately consider the costs of the rule as part of its initial decision to issue the rule under the Clean Air Act (“CAA”).1  MATS is a regulatory regime aimed at reducing emissions of mercury and other pollutants from power plants.  MATS would have imposed caps on coal and oil-fired power plants’ emissions of mercury, toxic metals, and other pollutants.

While the decision has far-reaching implications, the rule remains in effect, at least temporarily.  The Supreme Court did not permanently invalidate the MATS rule, but rather remanded it back to the D.C. Circuit.  The D.C. Circuit may now either vacate the rule, or remand it to EPA – intact and in effect – until EPA responds with a sufficient cost evaluation.2

EPA drafted MATS under CAA Section 112, which empowers EPA to study hazardous air pollutants and list them for regulation.  Specifically, Section 112 directs the Administrator to “perform a study of the hazards to public health reasonably anticipated” from power plant emissions, and regulate them to the extent the Administrator “finds such regulation is appropriate and necessary after considering the results of the study.”3  In ruling on a challenge to MATS brought by twenty-three states and several trade associations, the Court examined whether EPA was required to consider cost as part of an initial determination that regulation was “appropriate and necessary” under Section 112.

Writing for the majority, Justice Antonin Scalia wrote that EPA erred in forgoing a cost analysis at the outset of regulation, stating that “it is unreasonable to read an instruction to an administrative agency to determine whether ‘regulation is appropriate and necessary’ as an invitation to ignore cost.”  EPA argued that it was not required to take costs into account when deciding whether or not to regulate, but in any event had calculated them later in the regulatory process.  The Court rejected this argument, finding that while cost calculations may become relevant again later in the process, they are still required at the outset to determine if regulation is appropriate and necessary.

Justice Scalia was joined by Chief Justice John Roberts and Justices Kennedy, Alito, and Thomas.  Justices Kagan, Ginsburg, Breyer and Sotomayor joined in dissent.

Practical Impacts

Most of the generation facilities covered by the MATS rule have already invested in mercury control retrofits because the rule’s compliance deadline passed in April 2015.  However, the fate of roughly 200 power plants that received one-year extensions from the compliance deadline remains uncertain.  These power plants, which account for approximately 20 percent of domestic generating capacity, have yet to start or complete their renovations.4  Their compliance burden turns on whether the D.C. Circuit decides to vacate the MATS rule entirely, or remand it back to EPA for redrafting.

The D.C. Circuit is expected to remand the rule, which may allow EPA to reissue it in a substantially identical form.5  Because the Supreme Court only found fault in EPA’s cost analysis and not in its authority to issue the rule, EPA can simply recycle and update the cost figures and the new rule will likely be impervious to challenge.6  If the D.C. Circuit does remand the rule to EPA, the rule will continue to be effective in its current form during the revisionary phase.  This means that companies subject to the rule will have to continue to comply with its mandates, even while a final rule is being drafted.  If the rule is vacated entirely, then noncompliant generation facilities may not need to ultimately comply with the rule, but will likely still have to comply with the Cross-State Air Pollution Rule7 and state regulations.

Looking Ahead – Impact of Michigan v. EPA on the Clean Power Plan

The MATS ruling could have a significant impact on the expected release of the Clean Power Plan (“CPP”) later this summer.  EPA is promulgating the CPP under Clean Air Act Section 111(d), which directs each State to submit a plan to EPA that “establishes standards of performance for any existing source for any air pollutant.”8  The CPP will likely face immediate legal challenge once finalized.  Several lawsuits have already been filed challenging the CPP, but all have been dismissed on ripeness grounds because they were only challenging the CPP in its proposed form.  The plaintiffs from those suits will likely re-file with substantially similar arguments once the final rules are issued this summer.9  However, the basis for the looming suits largely depends on the D.C. Circuit remanding the MATS rule to EPA, rather than vacating it entirely.

Each of the suits that were previously dismissed on ripeness grounds argued that EPA cannot use Section 111(d) to regulate under the CPP because EPA is already regulating power plant emissions via the MATS rule under Section 112.  The text of Section 111(d) expressly prohibits regulation of pollutants “emitted from a source category which is regulated under Section 112.”10  However, if the D.C. Circuit vacates the MATS rule rather than remanding it to EPA, the claim of duplicative regulation will be moot. If MATS is vacated, the challenges to CPP are less likely to be successful because power plants will no longer be regulated under Section 112.

EPA acknowledges that a literal reading of the statutory text may preclude regulating power plants under both Sections 111(d) and 112, but claims that an ambiguity in the drafting of Section 111 allows EPA to regulate under both sections.11  The ambiguity arises from Congress’ simultaneous adoption of two different versions of Section 111; one from the Senate and one from the House – the result of Congress’ failure to reconcile inconsistencies in the Clean Air Act before passage.  While both versions forbid EPA from issuing duplicative regulations, the Senate version prevents EPA from regulating any pollutant covered by Section 112, and the House version prevents EPA from regulating any source covered by Section 112.  The Senate version favors EPA because the CPP regulates carbon dioxide, while the MATS rule does not.  Therefore, the Senate version provides for the CPP carbon rules because the regulated pollutants are different, even though the sources are the same.

EPA will claim that this ambiguity entitles the Agency to deference in its decision to follow the Senate version under the standard established in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.12  However, the traditional notions of strong deference to agency interpretation under Chevron might be changing, as recent Supreme Court decisions indicate.  For example, the Supreme Court in its recent healthcare decision King v. Burwell13 decided to simply avoid a Chevron deference analysis even though the case seemed to call for one.  The Court appeared to limit Chevron even further in the MATS decision, finding that EPA’s interpretation of the Clean Air Act was entirely unreasonable, even when viewed with strong deference – a rare occurrence in a case decided under the Chevron deference standard.  Justice Thomas also weighed in, writing at length in his concurrence opposing the mechanical application of Chevron deference.

A shift in the application of Chevron deference could strengthen the imminent challenges to the CPP because a court may be less likely to accept EPA’s interpretation of the ambiguity in Section 111 created by Congress’ accidental double-drafting.  As Justice Scalia stated in the MATS decision:  “Chevron 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.”14  If a court considers EPA’s choice to use the Senate version of Section 111 instead of the House version to be ignoring “statutory context,” then the CPP may be entitled to no deference.

The CPP is due to be released later this summer.  If issued as currently drafted, the CPP will require the States to submit qualifying emissions reduction plans by 2016, and begin making actual carbon reductions by 2020.  Much like with the MATS rule, mandatory compliance benchmarks may outpace litigation, and it is therefore crucial that companies continue to comply with the finalized rule and watch the space for EPA interpretive guidance and other releases until litigation is complete.