MATS decision doesn’t change much now, but may for future regulation

Blog Post
In a decision that likely will have little impact on the power generation sector immediately, this week the U.S. Supreme Court held, in the case of Michigan v. EPA, that the United States Environmental Protection Agency failed to properly consider cost when making its decision in the promulgation of the mercury and air toxics standard rule (MATS). The decision, on a 5-4 vote, remands the case to the D.C. Circuit Court, for further instruction to EPA on how to proceed. The Court did not vacate the rule, so the emissions requirements remain in effect. As a practical matter, the decisions by power generators to invest in control measures to comply with MATS rule or to simply retire older coal units has already been made.
The longer term implications of the decision appear to be on the Supreme Court’s application of deference to federal agencies under the Chevron standard. Under Chevron, a court is directed to “accept the reasonable resolution of an ambiguity in a statute that the agency administers.” Going further, applying Utility Air Regulatory Group v. EPA, even under the deferential standard, “agencies must operate within the bounds of reasonable interpretation.” In this case, Justice Scalia made clear that the majority opinion that the “appropriate and necessary” language set forth by Congress in the Clean Air Act, 42 U.S.C. §7412(n)(1)(A) requires “at least some attention to cost.” While EPA did look at cost eventually, it failed to do so at the outset when determining if mercury emissions should be regulated.
Because the rule remains in effect (remand v. vacating the rule) generators must continue to comply with MATS requirements. As a matter of procedure, it is unclear how quickly the D.C. Circuit or EPA will move to address the concerns of the Court. When EPA does respond, there is every expectation that it will include substantial attention to its cost analysis. What is more, the coal plants retiring under the MATS requirements are also under pressure from low priced gas and challenging economics, making any repowering of retired units highly unlikely. Lastly, separate and aside from MATS, President Obama’s Clean Power Plan which will seek to regulate carbon emissions from power generation sources is due later this summer, and it too is expected to have a profound impact on coal generation units. When combining these pressures and externalities, the impact of the MATS rule appears to have already been felt, addressed, and resolved by power generators needing to comply.
After a day to digest and analyze the Court’s opinion, much of the Wall Street investment community greeted the MATS ruling as a yawner. Compliance costs have already been paid and are fully sunk costs, retirement decisions are not easily reversible and likely mean increased costs to reverse course, and market fundamentals (e.g. low cost of natural gas) continue to put economic pressure on coal and nuclear units further reducing the likelihood of any change in course on retirements.
Perhaps the most interesting take away from the Michigan v. EPA, ruling is how it may be applied to future rule making efforts, including the Clean Power Plan under 111(d). The Court’s ruling seems to place limits on the extent to which EPA can regulate without sufficient consideration of the costs associated with the proposed regulation. While the EPA in Michigan ultimately did consider cost, it did not do so in it is initial evaluation which the Court found to be problematic. Further, it would appear that closer scrutiny may be applied to EPA cost estimates rather than simply accepting them at face value. Justice Scalia noted in the majority opinion that $9.6 billion in compliance costs for $4-6 million of annual benefits was attributable to mercury reductions, the remaining savings of between $37 – 90 billion came from fine particulates and other pollutants. While not dispositive of  the cost issue, this focus on direct benefit and cost implications will likely be cited by opponents of the final 111(d) rule when it is published and perhaps requiring further consideration by the Court.
In summary, the war over MATS may not officially be over, but the fighting that remains may be like the Battle of New Orleans in the War of 1812 – a battle won but outcome of the conflict was already decided. It will not be long before the majority opinion of Michigan v. EPA is cited in other EPA rule makings. The application of the holding in this case might have appreciable effect on future efforts at regulation. With future litigation on water and air related issues sure to come, the application of the Michigan outcome bears watching.

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