SKRMETTA: Cost Matters – EPA Trillion-Dollar Rule Struck Down, For Now

Yesterday, the United States Supreme Court ruled that the EPA failed to follow the law by not taking into consideration the cost of the EPA regulations on coal fueled power plants. Simply put the Congressional Clean Air Act directs the Environmental Protection Agency to regulate emissions of hazardous air pollutants from certain stationary sources. (e.g. refineries and factories). Under 42 USC 7412, the EPA may regulate power plants under this program but only if the EPA concludes that regulation is “appropriate and necessary” after studying hazards to public health posed by power plant emissions.

Not surprisingly, EPA found that power plant regulation is appropriate because, in their opinion, the power plants emissions pose risks to public health and the environment and because controls capable of reducing these omissions were available. Remember, as proposed presidential policy, in 2008, Candidate Barack Obama stated, “So if somebody wants to build a coal power plant, they can. It’s just that it will bankrupt them because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted.”

It’s clear that a primary position of the executive department is that EPA regulations were going to become costly on the coal industry. Unfortunately it won’t stop there, because while this particular EPA regulation looked at Mercury and other chemicals, the greenhouse gas aspect of the policy looks at carbon dioxide, referred to as the EPA 111 D rules, which will make these Mercury regulations, known as MACT or some version thereof, pale in comparison to carbon dioxide costs.

EPA found regulation was necessary but refused to consider cost when making its decision. EPA originally estimated that the cost of alterations to power plants would be $9.6 billion a year, but the quantifiable benefits from the resulting reduction in hazardous air pollution emissions would be $4-$6 million a year. The EPA continued from there, disregarding the excessive cost of the rule and the benefits. What should be noted is that the EPA’s original estimate seems to be completely off-base as to the cost of this regulation. For example one power plant in Louisiana complied early with this rule and the cost to date is $111 million. Now, consider that there are approximately 589 coal-fired power plants in the United States currently in service. Let’s take as a baseline that the costs to the Louisiana coal-fired power plant will be the average of the cost to the other 588 plants in existence in the United States.

Now let’s do a little math, 588 coal-fired power plants nationwide x $111 million to retrofit each plant = $65,260,000,000.00, ($65.26 billion dollars). I’m willing to give the benefit of the doubt to the EPA’s analysis that they looked at the cost over a period of years. So let’s divide $65,260,000,000.00 in costs by 30 years for the amortization. That number is $2,175,333,333.33 per year, ($2.175 billion). Now I know what you’re saying, that’s per year, so let’s look at it per month. That figure divided by 12 = $181,277,777.78. ($181 million per month). This is a reasonably estimated cost nationwide per month based on empirical data, not a computer model.

So with the empirical data of knowing exactly what a coal-fired power plant, albeit a fairly new one, cost in retrofit to comply with this specific EPA regulation, we know that this regulation will cost, if allowed to have its full impact on consumers, approximately $181 million per month for 30 years all across the United States. I understand that the EPA uses statistical computer modeling to determine what future costs might be on its regulation. I’m not suggesting that the EPA underestimated the impact of this regulation intentionally. It is the nature of computer assisted statistically modeled data to present inaccurate results. I clearly remember my statistics professor at university expressing to me that “statistical modeling is in of itself an inexact science”.

A better approach would have been to pick one test subject, apply the rule, and determine what the ultimate cost totaled. So we can apply an empirical analysis to know that the cost of this EPA regulation far exceeds the original statistical model. Now, the EPA originally estimated the benefits at about $6 million a year maximum, and given an opportunity to remodel the benefits showed benefits at a maximum of $90 billion per year. We apply the empirical knowledge of the cost against the original statistical model of benefits can see that the cost out paces the benefits. The reoccurring theme throughout the opinion was that the EPA refused to consider whether the costs of its decision outweighed the benefits gave no thought at all to cost because it considered cost irrelevant to the initial decision to regulate.

It should be pointed out that all cost assessed on power plants by the EPA would eventually be sought to be recovered by utilities from ratepayers. When we get past the current EPA regulation on coal-fired plants in the near future, we have to look at the regulating costs of the EPA on the carbon dioxide rules, also known as the 111 D rules, costs to the nations ratepayers will be many times more than the cost of this particular EPA regulation.

The Supreme Court held the EPA interpreted 42 USC 7412 (n)(1)(A) unreasonably when it deemed cost irrelevant to the decision to regulate power plants. And that the EPA’s action was unlawful as its decision did not rest on a consideration of the relevant factors required by law. The court found that the “EPA strayed well beyond the bounds of reasonable interpretation in concluding that cost is not a factor relevant to the appropriateness of regulating power plants”.

“Appropriate and necessary” is a phrase that leaves a lot of room for interpretation. The court found that “when you read this phrase naturally against the backdrop of its established administrative law the phrase plainly encompasses cost.” The court further went on to state, “it is not rational, never when appropriate, to impose billions of dollars in economic cost in return for a few dollars in health or environmental benefits. “

The court further stated that the “EPA’s counterarguments were unpersuasive.” They argued that cost was only a broad reference. The EPA further argued the Clean Air Act makes cost irrelevant to the initial decision to regulate sources other than power plants, the whole point of having a separate provision for power plants was to treat power plants differently. The court found this argument unpersuasive.

The court ruled, “The EPA must consider cost, including cost of compliance, before deciding whether regulation is appropriate and necessary.” The court reversed the ruling of the Court of Appeals for the District of Columbia and remanded.

Justice Scalia delivered the opinion of the majority of the court, identifying the main issue in this matter. The Supreme Court had to decide whether it was reasonable for the EPA to refuse to consider cost when making its findings regarding regulatory matters over power plants.

Congress established a unique procedure to determine the applicability of the clean air act to fossil fuel fired power plants. The last Congress found it appropriate to allow the EPA to treat power plants as other stationary site industrial facilities. In the statute, it allows for standards, set at a floor level, to reflect the emissions limitations already achieved by the best performers. In some circumstances, the agency can also impose stricter standards known as below the floor standards. But the statute expressly requires the agency to consider cost, alongside other factors, when imposing beyond the floor standards.

In 2012 the EPA reaffirmed its appropriate and necessary finding on regulating power plants. The EPA then concluded that costs should not be considered when deciding whether power plants should be regulated under 42 USC 7412.

Federal administrative agencies are required to engage in reasoned decision-making. Those decisions must be within the scope of the agency’s lawful authority and the process must be logical and rational to reach their decision.

The Supreme Court found that an agency’s action can only be lawful if it rests on a consideration of the relevant factors. Certainly the EPA’s decision would have changed standards on the quantity of pollutants, but its actions ultimately cost power plant owners, even by the EPA’s own computer modeled estimate nearly $10 billion a year. The EPA refused to consider whether the costs of its decision outweighed the benefits. In fact the EPA gave no thought at all to cost because it considered cost irrelevant to the initial decision to regulate.

It’s important to note that the clean air act treats power plants differently from other stationary sources of pollutants. In fact Congress established its own criteria for the EPA to apply when deciding whether to include other sources in the program.

In stark contrast, Congress instructed the EPA to add power plants to the program if, but only if EPA finds regulation appropriate and necessary. According to the court, “One does not need to open up a dictionary in order to realize the capaciousness of this phrase. In particular, appropriate is the classic broad and all-encompassing term that naturally and traditionally includes consideration of all the relevant factors. And while this may give flexibility to an agency, that agency may not entirely fail to consider an important aspect of the problem when deciding whether regulation is appropriate. Read naturally in the present context, the phrase appropriate and necessary requires at least some attention the cost. One would not say that it is even rational, never mind appropriate, to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits. Indeed, no regulation is appropriate if it does significantly more harm than good.”

Further, Justice Scalia stated, “Cost is always a consideration. Indeed the analysis of cost reflects the reality that too much wasteful expenditure devoted to one problem may well mean considerably fewer resources available to deal effectively with other, perhaps more serious, problems.”

Justice Breyer concurred in part. He stated, “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.”

The congressional directive to the EPA to study cost as part of the statute is further indication of the relevance of cost to the decision to regulate. The court went on to identify the controlling case in this matter, Chevron USA Inc. v. Natural Resources Defense Council Inc. 467 US 837, which “allows agencies to choose among competing reasonable interpretations of statute”; it does not license interpretive gerrymander’s under which an agency keeps parts of statutory context it likes while throwing away the parts it does not.”

The EPA identified a handful of reasons to interpret the statute to mean that cost is irrelevant to the initial decision to regulate. The EPA also argued that it need not consider cost when first deciding whether to regulate power plants because it can consider cost later when deciding how much to regulate them. The court both arguments of the EPA unpersuasive.

Without an accurate analysis of the issue of determining whether regulation is in of itself appropriate and necessary, including cost from the very beginning, the EPA fundamentally allows itself to get past step one. Justice Breyer gave an excellent analogy on this point as follows, “Indeed by the EPA’s logic, someone could decide whether it’s appropriate to buy a Ferrari without thinking about cost, because he plans to think about cost later when deciding whether to upgrade the sound system.”

EPA went on to argue that the clean air act makes cost irrelevant to the initial decision to regulate. That line of reasoning overlooks the whole point of having a separate provision of the clean air act about power plants. Justice Breyer went on to state, “Power plants are treated differently from other stationary sources . . . ., but Congress wrote the provision more expansively, directing the EPA to regulate power plants if appropriate and necessary. That election by Congress settled the case. The agencies preference for symmetry cannot trump an asymmetrical statute.”

The court went on to explain that “it did not embrace the EPA’s far-reaching claim that Congress made costs altogether irrelevant to the decision to regulate power plants…. The EPA did not say, what the dissent stated, that the consideration of cost in subsequent stages would ensure the costs are not disproportionate to the benefits. Again the EPA said that cost is irrelevant to the decision to regulate.”

The final holding of the court was that the EPA interpreted 42 USC 7412 unreasonably when it deemed cost irrelevant to the decision to regulate power plants.

Interesting comments from Justice Thomas included that the case raises serious questions about the constitutionality of our government’s broader practice of deferring to agency interpretations of federal statutes. He went on to discuss the Chevron case, whose deference is premised on a presumption that Congress, when it left ambiguity in a statute meant for implementation by an agency, understood that the ambiguity would be resolved, first and foremost by the agency, having the agency rather than the courts to possess whatever degree of discretion the ambiguity allows.

Justice Thomas stated, “This is often been described as Congresses choice for interpretive authority. But discretion is not a form of legislative power. And agencies tend to speak with the force of law when they address ambiguity in statutes or fill a space in the enacted law even when Congress did not actually have an intent to a particular result. Either way, the Chevron cases deference raises serious separation of powers questions.”  Justice Thomas went on the state that “judicial power, as originally understood, requires a court to exercise its independent judgment in interpreting and expounding upon the laws. Interpreting federal statutes include, including ambiguous ones, calls for that exercise of independent judgment.”

Further, he stated, “The problem with the Chevron case is that it precludes judges from exercising that judgment, forcing them to abandon what they believe is the best reading of an ambiguous statute in favor of an agency’s construction. That causes the wrest from the court the ultimate interpretive authority to say what the law is and hands it over to the executive.”

Justice Thomas further stated, “The problem with the current case law is that the courts are removed from interpretation of rule in the agencies themselves determine the formulation of policy. Unfortunately statutory ambiguity then becomes an implicit delegation of rule-making authority, and that authority is used not find the best meaning of the text, but to formulate legally binding rules to fill in gaps based on policy judgments made by an agency rather than the Congress. The cases cited in the opinion bring into scope of the potentially unconstitutional delegations of power we’ve come to in the name of the Chevron case.”

Justice Thomas went on to state, “what EPA claims for itself here is not the power to make political judgments in implementing Congress’s policies, nor even the power to make trade-offs between competing goals set by the Congress. It is the power to decide – without any particular fidelity to the text – which policy goals EPA wishes to pursue. Should EPA wield its vast powers over electric utilities to protect public health? A pristine environment? Economic security? We are told that the breadth of the word appropriate authorizes EPA to decide for itself how to answer the question. And while there may be some unique historical justification for deferring to federal agencies, those cases reveal how paltry an effort we have made to understand it or to confine ourselves to its boundaries. “

Justice Thomas went on to state, “we should be alarmed that it felt sufficiently emboldened by those precedents to make the bid for deference that it did here. We seem to be straying further and further from the Constitution without so much as pausing to ask why. We should stop to consider that document before blithely giving the force of law to any other agency interpretations federal statutes.”

The analysis of the majority in this decision made an accurate legal interpretation. Unfortunately, the root problem associated with the EPA regulations of power plants is that the agency shows little concern over the ultimate cost to the consumer. Indeed, it is clear that cost in the interpretation of EPA MACT rules on coal-fired power plants were treated with no concern. I think we can assume that the EPA understands that utilities, by case law of the United States Supreme Court, will pass these costs on to the consumers in their monthly bills. And while the public service commission can take action to sue to restrain this pass through costs, ultimately the law will control and we will all pay for these regulations.

What we can learn from this, is that we have been given a reprieve, on the implementation of these particular regulations and hopefully more time on the implementation of the EPA carbon dioxide regulations. I do not put this lightly when I state that it is within all possibility that if utility providers nationwide are forced to comply with these, and other, EPA regulations that are being moved through the system, consumers of the United States will face costs in the hundreds of billions of dollars beginning as early as 2020.

The Supreme Court of the United States acted efficiently in this matter and the decision allows the process to slow down the EPA juggernaut. All of the plaintiffs will be working aggressively to determine the effects on remand. My hope is that we can find reasonable leadership in the next administration to address the problems of the expansive authority of the EPA and its impact on the citizens of the United States. Ultimately we need to find a way to ensure reliable deliverable electricity to the consumer at the lowest cost possible. A family utility bill should not be looked at as a mechanism to collect regressive federal taxes and fees.

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