United States: Clean Power Plan Has Its Day In Court

In a marathon day-long session before a packed courtroom (and a number of overflow rooms) on Tuesday, September 27, 2016, the full US Court of Appeals for the DC Circuit heard oral arguments in a litigation challenging the centerpiece of President Obama's climate change legacy—the US Environmental Protection Agency's Clean Power Plan (CPP). The CPP, which is projected to decrease the electricity sector's CO2 emissions to 32% below 2005 levels by 2030, represents the most significant federal action ever taken to address climate change. While the CPP is strongly supported by many Democrats, environmental organizations and renewable energy producers, it has also evoked strong opposition from Republicans, the coal industry and other industry stakeholders.

The DC Circuit judges peppered attorneys on both sides with tough questions regarding the complex statutory, constitutional, procedural and technical issues related to the CPP. Going into the oral arguments, EPA was viewed as holding a slight advantage in the DC Circuit given that six out of its ten judges were appointed by Democratic presidents. During the hearing, the liberal DC Circuit judges were generally more sympathetic to arguments for judicial deference to administrative agencies, and therefore, to upholding the CPP, while the conservative judges appeared more skeptical as to whether the CPP comports with the agency's authority under the Clean Air Act (CAA). Of the multiple issues at play in the case, the CPP arguably is most vulnerable on whether EPA, in setting CO2 standards for existing power plants, may consider the potential for shifting from coal generation to natural gas and renewable energy generation.

The stakes at oral argument were significant as the DC Circuit's decision, which could come in as soon as late 2016/early 2017, may end up serving as the binding opinion on the legality of the CPP. This past February, the US Supreme Court issued a stay blocking EPA from implementing the CPP. At that time, it was expected that the high court would serve as the ultimate arbiter of the rule's legality. However, with Judge Antonin Scalia's death and the Senate's continued refusal to consider the nomination of Judge Merrick Garland, the Supreme Court is split, with four conservative judges and four liberal judges. If this split persists into 2017, it could result in a deadlocked 4-4 decision, the effect of which would be to uphold the DC Circuit's decision. The Supreme Court could also decline to grant a writ of certiorari if the justices believe that they may render a deadlocked decision. Further, even if the Supreme Court does grant certiorari, a DC Circuit decision upholding the CPP, coupled with a Clinton victory in November, could send a strong signal to states and the electric industry that the CPP will move forward, which could, in turn, accelerate planning on state implementation plans (SIPs).

The outcome of the CPP litigation will also have international ramifications. The Obama Administration made frequent mention of the CPP in the run-up to last December's United Nations Climate Change Conference at which over 190 countries coalesced in support of the Paris Agreement, which established a framework to keep global warming to less than two degrees Celsius. If our courts strike down the CPP, it could undermine efforts to implement the Paris Agreement.

The fate of the CPP may also rest on the US Presidential election. Democratic presidential nominee Hillary Clinton has pledged to continue to defend the CPP, while Republican presidential nominee Donald Trump has pledged to roll back the CO2 rule.

Below, we provide a summary and analysis of the statutory, constitutional, procedural and technical issues raised before the DC Circuit during oral arguments in the CPP litigation.

Background

In August 2015, EPA finalized the CPP, which established state-specific CO2 standards under section 111(d) of the CAA for existing power plants. The CPP, along with setting state average rate-based standards, issued national subcategory standards for coal and natural gas power plants. Section 111(d) requires that EPA establish "standards of performance," based on "the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction and any nonair health and environmental impact and energy requirements) the Administrator determines has been adequately demonstrated." In setting rate-based standards, EPA determined the "best system of emission reduction" (BSER) by using the following three building blocks: (i) heat-rate improvements at existing power plants; (ii) increased dispatch from natural gas generation; and (iii) increased generation from zero-carbon resources. As an alternative to a rate-based standard, EPA also permitted states to adopt mass-based standards.

In Fall 2015, multiple parties, including 27 states and industry and labor stakeholders, sued EPA to block the CPP. Eighteen states and a significant number of cities, environmental and public health organizations and renewable energy companies intervened in the litigation in support of EPA. This past February, the Supreme Court surprised many by issuing a stay blocking implementation of the CPP, despite the fact that the case was before the DC Circuit and that the Circuit had already denied a similar stay request by the plaintiffs. Oral arguments were originally scheduled for June 3, 2016, before a three-judge DC Circuit panel, but the Court decided to delay the hearing and instead hold an en banc (i.e., full court) hearing, which took place on September 27.

Statutory claims

Arguably, the most contentious legal issue at the hearing was whether EPA, under section 111(d) of the CAA, has the authority to rely on "beyond the fence line" measures, or generation shifting, in setting CO2 standards for existing power plants. West Virginia Solicitor General Elbert Lin, one of the two attorneys representing the plaintiffs on this issue, contended that existing Supreme Court precedent precludes a federal agency from making decisions of "vast economic and political significance" or that would bring about "an enormous and transformative expansion" absent a specific delegation of authority from Congress. According to Lin, the "transformative" nature of the CPP included both its use of Section 111(d) and also the changes to the electricity mix that the standards could trigger. 

Judge Thomas Griffith, who was appointed by President George W. Bush, pushed back on Lin's argument that the CPP was "transformative," citing some projections that the rule would reduce coal generation nationally by 5% at most. While Judge Griffith generally sides with conservatives on challenges to EPA's rules, his questions suggested that he may be open to upholding the CPP. In addition, lead US Department of Justice Attorney Eric Hostetler as well as representatives from State and environmental intervenors contended that the CPP is not transformative but accretive, building upon already existing changes in the electricity sector, including reduced costs for renewable energy and governmental incentives, such as state renewable portfolio standards and the extension of the federal production tax credit for wind energy and the investment tax credit for solar energy. In support of the contention that the CPP is not "transformative",  attorneys supporting the rule also contended that the CPP's compliance costs are less than the costs for other Clean Air Act regulations, such as the Mercury and Air Toxics Standards.  In responding to the attorneys' arguments over whether Congress had vested EPA with authority to promulgate the CPP, Judge Brett Kavanaugh said that the CPP implicated separation of power concerns, noting that these section 111(d) standards would have significant economic ramifications. Further, Kavanaugh repeatedly referenced the fact that Congress declined to pass cap-and-trade legislation, which, in his view, would have established a CO2 reduction program similar to what the CPP is attempting to accomplish.

Other arguments were raised as to whether BSER, as defined in the CPP, could extend beyond an actual source. Peter Keisler, who represented the non-state industry and labor plaintiffs, contended that section 111(d) only permits EPA to regulate "sources" and, as such, BSER must be limited to technologies that could be employed at an actual source, not generation shifting to natural gas or renewables. Keisler also asserted that the CPP subcategory standards for coal and natural gas power plants are unachievable because they are more stringent than EPA's standards for new power plants. This point—that EPA's subcategory standards are not achievable—appeared to resonate with Judge Kavanaugh, whose follow-up questions on this issue appeared to support the plaintiff's position.

Hostetler, the lead DOJ attorney representing EPA, defended the CPP by referencing various other trading programs under the CAA, including the Acid Rain Program and the Cross-State Air Pollution Rule, among others. However, Judge Patricia Millett (a President Obama appointee), while seemingly generally supportive of the rule, indicated that the CPP is different than other trading programs because it would require that coal power plants "subsidize" other forms of electricity. Other liberal judges seemed comfortable with a more expansive definition of "system" to include actions "beyond the fence line," such as generation shifting.

Judge David Tatel and other liberal judges also suggested that the CPP should be upheld based on the Supreme Court's decisions in Massachusetts v. EPA and American Electric Power v. Connecticut. In Massachusetts, the Supreme Court held that EPA maintained the authority under the CAA to regulate GHG emissions, whereas in American Electric Power, the Court rejected a nuisance seeking to limit emissions from power plants in part by referencing EPA's authority to issue regulations under section 111.

Section 112 claims

This claim rests on the argument that section 112 of the CAA precludes EPA from regulating power plants under section 111. When Congress adopted the 1991 amendments to the CAA, the House and Senate language on section 111(d) was never reconciled. The Senate provision would prohibit EPA from regulating the same pollutant under both sections 112 and 111(d). On the other hand, the House language would block EPA from regulating the same source under both sections 112 and 111(d). Plaintiffs contend that the House language should be controlling and that since EPA is regulating power plants' mercury and hazardous air emissions under section 112, the agency cannot promulgate CO2 emissions for power plants under section 111(d).

The DC Circuit judges appeared skeptical of the plaintiffs' argument that section 112 bars EPA from regulating power plants' CO2 emissions. Judge Cornelia Pillard rejected the logic that Congress intended to prohibit EPA from regulating harmful air emissions from a source under section 111 solely because the agency is already regulating that source's hazardous air pollutants under section 112. Judge Kavanaugh, along with Alison Wood, who represented non-state petitioners on this issue, did point to legislative history which, they suggested, supported the contention that Congress was attempting to limit regulation on power plants. Despite these statements, Judge Kavanaugh acknowledged that the House and Senate language, read together, is "very convoluted." Further, Judge Kavanaugh indicated that he is "struggling" with whether this language blocks the CPP. His comments, coupled with the other judges' questions, suggest that the DC Circuit may be likely to dismiss the claim that section 112 blocks EPA from regulating CO2 emissions under section 111(d).

The Constitutional claim

For this claim, the plaintiffs contended that the CPP violates the Tenth Amendment by commandeering state officials to implement the CO2 standards and make changes to state electricity regulation. The judges, who asked questions during this portion of the hearing, expressed skepticism that that the CPP violated this amendment. Judge Griffith asked why the CPP is different from any other federal regulation. Judge Tatel suggested that under the plaintiff's logic, the Americans With Disabilities Act (ADA) would be unconstitutional. Constitutional scholar Laurence Tribe, who represented non-state plaintiffs on this issue, countered that this hypothetical would be akin to Congress failing to pass the ADA and then having the Administration direct a federal agency to promulgate regulations to implement the law.

Notice claims

These claims rest on the argument that EPA violated the Administrative Procedure Act (APA) by promulgating a final rule that departed significantly from the draft rule. Specifically, the plaintiffs contended that the draft rule did not include any national subcategory standards for coal and natural gas power plants, whereas the final rule included such subcategory standards. The liberal judges on the DC Circuit Court noted that existing precedent precludes the Court from considering the notice claims until a federal agency issues a decision on a request for reconsideration (a coalition of states and other entities have filed petitions for request, but EPA has yet to rule on these petitions). David Rivkin, who represented complaining states on this issue, acknowledged that existing DC Circuit precedent precludes the court from considering this issue, but asked the judges to reconsider this precedent. The conservative DC Circuit judges generally declined to engage on the notice issue, potentially foreshadowing that the Court may reject these claims.

Record-based claims

The plaintiffs contend that the CPP's CO2 reduction goals are unachievable for states. Misha Tseytlin, representing state petitioners on this issue, contended that Montana, West Virginia and other states would be unable to meet their CO2 targets due to the lack of renewable and natural gas generation within their borders. Tseytlin further argued that states like Montana and West Virginia cannot access allowances or emission reduction credits from states that may be able to "over-comply" with the CPP, such as California. Judge Sri Srinivasan, a President Obama appointee, pushed back on this assertion, noting that states can join California by amending their own laws and/or regulations. Other judges, including Judge Kavanaugh and Judge Millett, did express concern about whether there are processes under the CPP to assist individual states that may not be able to meet their CO2 goals. Despite these concerns, there was also the sentiment expressed, even by Judge Kavanaugh, that it may be premature to assess whether the CPP's targets are achievable until the rule is actually implemented.

Conclusion

The DC Circuit is expected to issue a decision on this litigation in late 2016 or early 2017. The losing side could then appeal the decision to the Supreme Court, but as we note above, the high court could decline to grant certiorari, particularly if it remains deadlocked with four conservative and four liberal justices. There is some discussion that the Senate may consider President Obama's nomination of Merrick Garland in a lame-duck session, but this talk remains mere speculation at this point. Thus, the task of appointing a replacement for Justice Scalia may be left to the next Administration and, irrespective of whether Clinton or Trump wins, the confirmation process for the next Supreme Court justice is sure to be controversial given that it will determine whether liberals or conservatives maintain a majority on the Court.

While the legal wrangling continues, EPA is moving forward on several CPP-related fronts, including providing guidance on the Clean Energy Incentive Program, an early action program to incentivize renewable energy or energy efficiency projects, and model trading rules, which are intended to guide states in developing compliance plans. Dentons will continue to update and analyze legal and policy developments related to the CPP.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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