Supreme Court Rejects EPA’s Authority to Force Power Generation Shifting Under Clean Air Act

Latham & Watkins LLP
Contact

Latham & Watkins LLPThe decision will limit EPA’s options for future regulation of existing power plant GHG emissions and may have broader implications for other federal agency rulemakings.

On June 30, 2022 the US Supreme Court issued its long-awaited ruling in West Virginia v. EPA — the consolidated petitions addressing EPA’s authority to regulate existing power plant greenhouse gas (GHG) emissions under Section 111(d) of the Clean Air Act (CAA). In a 6-3 opinion drafted by Chief Justice Roberts, the Court ruled against EPA, holding that EPA’s attempt to force an overall shift in power generation from higher-emitting to lower-emitting sources exceeded EPA’s statutory authority. Indeed, the Court noted that such a sweeping transformation of the nation’s power sector implicated a “major question” requiring explicit congressional authorization, that the Court argued the CAA did not provide.

Despite speculation that the Court might opt for a more sweeping and express limit on EPA’s ability to regulate GHG emissions overall, the Court’s holding was limited to EPA’s power plant GHG regulation under Section 111(d) and, in particular, the majority’s view that EPA’s interpretation of Section 111(d) to encompass generation shifting is unlawful. However, the generation shifting requirement of EPA’s regulation comprised a significant portion of the anticipated emissions reductions from EPA’s rule, and this decision will significantly constrain EPA’s options in regulating power plant GHG emissions moving forward absent Congressional action. While the Biden Administration has contemplated a new or modified rule under Section 111(d), the Court’s decision seriously constrains EPA’s options and suggests that the ultimate resolution may depend in large part on Congress and the states. Beyond this rulemaking, the Court’s decision also has broader implications on federal agency rulemaking, as the Court’s decision was based on the majority’s use of the major questions doctrine to identify limits on agency rulemaking authority.

Background and History of West Virginia v. EPA

On January 19, 2021, on the eve of President Biden’s inauguration, the US Court of Appeals for the District of Columbia Circuit (D.C. Circuit) overturned the EPA’s Affordable Clean Energy (ACE) Rule, which sought to replace the Obama Administration’s Clean Power Plan (CPP). Both rules would regulate carbon dioxide (CO2) emissions from existing electric generating units under Section 111(d) of the CAA. Additional information is provided in Latham’s update on that decision. Among other aspects of the rule, the D.C. Circuit struck down the ACE Rule’s reversal of the CPP and the ACE Rule’s conclusion that the CPP exceeded the EPA’s statutory authority by employing generation shifting (shifting electric generation from higher to lower emitting sources) as a Best System of Emission Reduction (BSER) under Section 111(d). In the ACE Rule, the EPA concluded that the agency’s authority to define BSER is limited to measures that can be applied “to or at” an individual stationary source, that generation shifting conflicts with the CAA’s unambiguous statutory requirement, and that the ACE Rule interpretation is the only permissible reading of the statute. In the prior CPP, EPA determined the degree of emissions limitation achievable through application of that generation shifting system and used it to establish the emissions guidelines. In reversing that CPP regulation, the ACE Rule decided that the interpretive question of whether BSER can include generation shifting fell under the major questions doctrine.

The D.C. Circuit majority opinion striking down the ACE Rule did not immediately address the status of the CPP, but the Court later stayed its vacatur of EPA’s repeal of the CPP, so the CPP would not immediately spring back into effect. EPA subsequently confirmed it would undertake a new future rulemaking to address power sector GHG emissions.

Court’s Opinion

Majority Decision

The Court reversed the D.C. Circuit decision in a 6-3 opinion written by Chief Justice Roberts and joined by Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett. The majority opinion framed the question before the Court as whether EPA’s 2015 regulation imposing generation shifting requirements among the measures identified as BSER for existing power plants was within the authority granted to EPA under the CAA. The Court concluded that it was not.

At the outset, the majority rejected EPA’s argument that the Court lacked jurisdiction to hear the case. The majority concluded that State petitioners have Article III standing because they are harmed by the D.C. Circuit opinion that struck down the ACE Rule and brought the CPP back into legal effect. The majority was unpersuaded by EPA’s argument that there is no harm to the States, because EPA has announced it will not enforce CPP before promulgating a new 111(d) rule.

The majority decision then turned to the general issue of the major questions doctrine, outlining some of the considerations of that doctrine and prior cases applying these limits on agency authority. In the Court’s words, “[e]xtraordinary grants of regulatory authority are rarely accomplished through ‘modest words,’ ‘vague terms,’ or ‘subtle device[s].’” Rather, “in certain extraordinary cases, both separation of powers principles and a practical understanding of legislative intent make us ‘reluctant to read into ambiguous statutory text’ the delegation claimed to be lurking there.” In these extraordinary cases, the Court concluded that the agency must point to ‘clear congressional authorization’ for the power it claims.”

Applying those principles to the EPA regulation at issue, the majority opinion deemed this a major questions case because EPA’s use of Section 111(d) to “substantially restructure the American energy market,” was a “transformative expansion in its regulatory authority.” The opinion found that Section 111(d), which the Court characterized as a “little used backwater”, had rarely been used since its inception decades ago, The Court noted that previous Section 111 rulemakings included measures that would reduce pollution by operating “more cleanly” and EPA has never used a system to shift emissions activities “from dirtier to cleaner sources.” The opinion recounted previous EPA descriptions of Section 111(d) as intending a “technology-based approach,” and the opinion described a “technology-based standard” as one that “focuses on improving the emissions performance of individual sources.”

The majority concluded that Congress did not authorize EPA to use the CAA to require generation shifting under Section 111. In the majority’s opinion, EPA’s view of its authority was unprecedented and had the practical effect of revising the statute. The majority doubted Congress intended to assign decisions of energy markets to EPA. Moreover, the majority stated that CPP essentially adopted a cap-and-trade scheme or set of state schemes, similar to those Congress has consistently rejected.

Importantly, the Court did not decide whether BSER can only be interpreted as measures to “improve emissions performance at individual sources.” Although the majority noted that EPA has observed this limitation for the past 40 years, the majority concluded that this question was not before the Court. Therefore, the question of whether EPA is purely limited to “inside the fenceline” measures in the Court’s view remains to be seen.

Concurrence and Dissent

In his concurrence (which Justice Alito joined), Justice Gorsuch joined the majority’s decision on the merits but provided additional “observations” about the “major questions doctrine.” Justice Gorsuch argued that there are at least three instances in which a major question is likely at issue: (1) an agency attempts to resolve an issue that is currently being debated at the federal or state level; (2) an agency attempts to regulate a significant portion of the American economy or require significant monetary spending by private persons or entities; and (3) an agency seeks to intrude in an area that is the particular domain of state law. Justice Gorsuch further argued that courts can assess whether clear congressional statements have authorized such agency power, including through: (1) review of legislative provisions relied on by the agency; (2) examination of the age and focus of the statute; (3) examination of the agency’s past interpretations of relevant statutes; and (4) whether there is a mismatch between the agency’s challenged action and its congressionally assigned mission and expertise. When read in conjunction with the majority opinion, the concurrence suggests implications beyond EPA’s regulation of the power sector. In many respects, the majority and concurring opinions articulate an expansive critique of the modern administrative state.

Justices Sotomayor, Kagan, and Breyer, in dissent, argued that the “major questions doctrine” is a newly defined term created by the majority that attempts to replace the Court’s normal rules of reading statutory delegations of authority in context and with “common sense” — referred to as text-in-context statutory interpretation. Specifically, the dissenting Justices argued that cases relied on by the majority do not invoke a “major questions doctrine” but instead rely on text-in-context statutory interpretation. And in the dissent’s view, text-in-context interpretation demonstrates that the CPP was within EPA’s statutory authority because Section 111 broadly confers power on EPA to select the “best system of emission reduction” for power plants.

Implications

The power sector is not likely to experience the immediate practical implications of the decision as EPA is not currently enforcing any GHG power sector regulation. Indeed, as pointed out by the dissenting Justices, the energy industry has already undertaken generation shifting and has exceeded the targets set in the CPP in the absence of CPP’s enforcement. Moreover, EPA is not even scheduled to propose a new regulation until March 2023, according to EPA’s regulatory agenda. It will be many more years before EPA finalizes a rule, and states are required to implement it for generating units within their borders.

However, there will certainly be significant implications for EPA’s forthcoming rulemaking. As the opinion notes, EPA’s CPP relied heavily on emissions reductions attributed to generation shifting requirements. Heat rate improvements and other mechanisms for reducing emissions at individual plants result in very modest overall CO2 reductions. Thus, without ability to account for generation shifting reductions, EPA will be constrained in its emissions guidelines for existing sources.

Questions remain whether, despite the decision’s constraints on EPA authority, states in implementing the future EPA emission guidelines can still adopt market-based or flexible compliance mechanisms to satisfy EPA’s guidelines. Although the decision prevents EPA from considering generation shifting as BSER in setting the emissions guidelines, it may still leave room for states to have more flexibility in how to achieve them.

The decision also casts doubts on EPA’s use of other CAA sections to achieve more aggressive GHG emission reductions in the power sector. Advocates and stakeholders have floated proposals for using CAA Section 115 or the National Ambient Air Quality Standards implementation program to regulate GHG emissions. But in the majority’s words, “Congress certainly has not conferred a like authority upon EPA anywhere else in the Clean Air Act. The last place one would expect to find it is in the previously little-used backwater of Section 111(d).”

In anticipation of the ruling, an EPA political appointee stated at a May 25, 2022 confirmation hearing that the agency has “already identified regulatory options for proceeding” and that those options reflect “extensive outreach” with the utility sector, States, co-regulators, utility regulator, system operators and frontline communities. Shortly after the opinion was issued, the White House directed the Department of Justice and affected agencies to review the decision to find viable and lawful options for continuing to address pollution and climate change. Administration officials have reportedly been preparing for the ruling and potentially have options for proceeding, although details regarding those potential options or a firm timeline for issuance have not been provided.

With EPA’s authority constrained in this manner, there is likely to be increased pressure on Congress and the states to enact measures to reduce power sector GHG emissions.

Looking beyond the EPA rulemaking at issue in this case, the majority’s discussion of the major questions doctrine is likely to signal a roadmap for potential challengers to other rulemakings. Indeed, these themes have already been discussed in the context of challenges to EPA’s regulatory actions involving motor-vehicle GHG standards and are likely to be used in challenges to a wide variety of federal agency decisions.

The power sector can expect further litigation surrounding EPA power sector GHG rulemaking and continued uncertainty as it relates to those regulations. In the short-term, the focus of power sector GHG regulatory advocacy is likely to turn to Congress and the states.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Latham & Watkins LLP | Attorney Advertising

Written by:

Latham & Watkins LLP
Contact
more
less

Latham & Watkins LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.