Electric utilities anticipate a summer of new EPA rules targeting the industry, including a proposed New Source Performance Standard (NSPS) greenhouse gas (GHG) rule for existing power plants, the finalization of the NSPS GHG rule for new power plants, and the finalization of a rule targeting the water intake structures at existing power plants.¹ On the eve of what promises to be a very active summer, April saw our Nation's top courts ruling on two significant EPA rules with a third decision imminent. Last week the U.S. Supreme Court resurrected the Cross–State Air Pollution Rule ("CSAPR"), and just two weeks earlier, the D.C. Circuit upheld the Mercury Air Toxics Standards ("MATS") Rule. The Supreme Court's decision on EPA's GHG permitting rules is anticipated within the next two months.

The Supreme Court's CSAPR Decision

On April 29, 2014, the Supreme Court, in a 6–2 decision,² reversed and remanded the 2012 decision of the D.C. Circuit to vacate CSAPR – a rule designed to reduce the impact that U.S. power plants located in upwind states have on the creation of fine particulate ("PM_2.5") and ozone in downwind states. The Supreme Court upheld EPA's authority to proceed with CSAPR with two primary holdings:

1."The [Clean Air Act] does not command that States be given a second opportunity to file a SIP after EPA has quantified the State's interstate pollution obligations."

2."EPA's cost effective allocation of emissions reductions among up–wind States is a permissible, workable, and equitable interpretation of the Good Neighbor Provision."

Regarding the first holding, the Court upheld EPA’s ability to propose Federal Implementation Plans (FIPs) before providing states the opportunity to submit State Implementation Plans (SIPs). The state petitioners, including Texas, persuaded the D.C. Circuit that EPA erred by failing to provide states the opportunity to issue their SIPs, rather than being immediately subject to a FIP upon the issuance of the Rule. Overruling the D.C. Circuit, the Supreme Court found that the "[Clean Air Act's] plain text" supported EPA's position. While EPA had historically provided states the opportunity to allocate emission budgets among their in-state sources, this did not prevent EPA from issuing a FIP and refusing to provide a similar opportunity to the states in CSAPR. 

The Court also disagreed with the D.C. Circuit on a second important issue – EPA's decision to use a cost–of–reduction approach to establishing emissions allowances – an approach that required each upwind state subject to the rule to reduce emissions up to a certain cost threshold, rather than trying to calculate and reduce the actual amount of emissions on downwind states. The Court deferred to EPA, repeatedly citing to the complexity and difficulty of EPA's task in establishing emissions allowances. Quoting the oft–cited opinion in Chevron v. NRDC, the Court held that EPA's methodology was a "permissible construction of the statute." Although acknowledging that EPA's method could lead to over control of emissions, the Supreme Court found that "nothing in the Good Neighbor Provision's text precludes" EPA from developing a program in this way. The Supreme Court also stated that "by imposing uniform cost thresholds on regulated States, EPA's rule subjects to stricter regulation those States that have done less in the past to control their pollution."

Justice Scalia responded to the majority’s opinion with a 21–page dissent focusing primarily on overreach by the Agency. He criticized the majority's deference to the EPA to go beyond authority specifically delegated in the Clean Air Act, adding at the beginning and end of his dissent:

Importantly, the Supreme Court's ruling relates only to the facial challenges on which the D.C. Circuit based its earlier decision. The Court recognized that its decision did not foreclose "as–applied" challenges by States and affected parties and expressly acknowledged that EPA's application of CSAPR would be impermissible if it required a State to reduce its output of pollution: (1) more than is necessary to achieve attainment in every downwind State; or (2) in a manner that would drive an upwind State's contribution to every downwind State below the one percent (of NAAQS) significance threshold. Texas, which is uniquely impacted by the rule in both process and in substance, is thus likely to pursue and could potentially prevail on such an as–applied challenge.

As a result of the Supreme Court's ruling, the D.C. Circuit will need to address the pending stay on the rule, as well as other pending challenges that were not part of the facial challenge ruled on by the Supreme Court. If the stay is lifted, it is still not clear how or when EPA will proceed with the CSAPR. Certain adjustments will have to be made to compliance dates and EPA will be called upon to harmonize its approach with near–term proposals (e.g., the Ozone Transport Rule) and factor–in air quality improvements that have occurred since CSAPR was initially adopted.

The D.C. Circuit Court's MATS Rule Decision

One of the rules impacting emissions since the CSAPR was originally adopted is the Mercury and Air Toxics Standard (MATS) rule. On April 15, 2014, the D.C. Circuit, in a 2–1 decision, upheld EPA's MATS rule. The MATS rule requires new and existing coal– and oil–fired power plants to reduce the emissions of hazardous air pollutants, including mercury, chromium, arsenic, and others. The D.C. Circuit in the MATS case, much like the Supreme Court in the CSAPR decision, deferred to agency action and found that EPA acted reasonably in promulgating the MATS rule. One of the key arguments of petitioners challenging the rule was that EPA should have considered costs when developing the rule, but the D.C. Circuit found that EPA did not need to consider costs – it only had to determine that emissions posed a health risk. This resulted in a strong dissent, in which the dissenting judge stated that while "EPA could conclude the benefits outweigh the costs...the problem...is that EPA did not even consider the costs. And the costs are huge, about $9.6 billion a year...by EPA's own calculation."

While it is still unclear if any parties will challenge the decision of the D.C. Circuit with the U.S. Supreme Court, the April 16, 2015, compliance date (with some utilities receiving site–specific extensions to April 16, 2016) for the rule is rapidly approaching. Some in the industry have already begun to install controls and undertaken other measures to reduce targeted emissions and these actions will likely accelerate following the D.C. Circuits decision in this case. How the emission reductions resulting from MATS will play into whether and to what extent EPA proceeds with CSAPR remains an open question.

¹ This rule is known as the 316(b) rule, in reference to a specific Clean Water Act provision.

² Justice Alito recused himself from consideration of this case.