June 29, 2015

On the last day of its Term, the Supreme Court of the United States issued a decision that is likely to be an important precedent in litigation challenging agency rules that impose unreasonable costs.  In Michigan v. Environmental Protection Agency, the Court ruled that the EPA acted unreasonably when it regulated emissions of air pollutants without considering the regulations' costs, even though the statute itself imposed no explicit cost-benefit requirement.  The case's significance is likely to extend well beyond the EPA, to regulatory actions of many other federal administrative agencies.

The Statute

The Clean Air Act requires the EPA to regulate stationary sources (such as refineries and factories) that emit more than 180 specified "hazardous air pollutants."  For sources that emit large quantities of a pollutant, the EPA must regulate.  For fossil-fuel-fired power plants, however, the statute directs the EPA to study the public health hazards reasonably anticipated from their emissions, and then provides that the EPA "shall regulate" if it "finds . . . regulation is appropriate and necessary after considering the results of [the study]."  When the EPA regulates, it set "floor standards" for the emission of pollutants, which generally reflect the emissions limitations already achieved by the best-performing 12% of sources within the applicable category.  In certain circumstances, the EPA may also impose more stringent, "beyond-the-floor" standards.  For these, the statute expressly requires the agency to consider costs (along with other factors).

The EPA completed the required study in 1998, and it concluded in 2000 that regulation of coal- and oil-fired power plants was "appropriate and necessary."  In 2012, the EPA reaffirmed the appropriate-and-necessary finding and promulgated floor standards for power plants' emission of pollutants.  The agency estimated that its regulation would force power plants to bear costs of $9.6 billion per year, while producing benefits of only $4 to $6 million per year--a factor of between 1600 and 2400 to 1.  Yet the agency interpreted the statute to mean that "costs should not be considered" when determining whether power plants should be regulated.

Twenty three states and industry sought review of the rule in the U.S. Court of Appeals for the D.C. Circuit, challenging the EPA's refusal to consider costs.  After the D.C. Circuit upheld the rule, the Supreme Court granted certiorari.

The Supreme Court's Decision

The Supreme Court reversed and remanded.  The Court began by reiterating that "[n]ot only must an agency's decreed result be within the scope of its lawful authority, but the process by which it reaches that result must be logical and rational."  Although the Court has long held that the judiciary should accept an agency's reasonable resolution of an ambiguity in a statute that the agency administers, "agencies must operate within the bounds of reasonable interpretation."

Some provisions of the Clean Air Act require the EPA to regulate sources whenever their pollutant emissions exceed a specified threshold.  Other provisions direct the EPA to regulate after considering only what is necessary to protect health and safety.  When a statute expressly directs an agency to regulate on the basis of such "discrete criter[ia]," it may not be appropriate for the agency to consider costs.  Here, however, Congress directed the EPA to regulate power plants if (but only if) regulation is "appropriate and necessary."  That "capacious[ ]" phrase is "the classic broad and all-encompassing term that naturally and traditionally includes consideration of all the relevant factors," including cost.  Such a term may leave an agency with flexibility, but "the agency may not 'entirely fail to consider an important aspect of the problem' when deciding whether regulation is appropriate."

The Court held that the natural meaning of the phrase "appropriate and necessary" requires at least some attention to cost.  That is because "[o]ne 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."  And cost includes "more than the expense of complying with regulations; any disadvantage could be termed a cost."  "No regulation is 'appropriate' if it does significantly more harm than good."

The Court also noted that administrative agencies have long treated costs as a centrally relevant factor in determining whether to regulate.  "Consideration of costs reflects the understanding that reasonable regulation ordinarily requires paying attention to the advantages and the disadvantages of agency decisions."  "Against the backdrop of this established administrative practice," it was unreasonable for the EPA "to read an instruction to determine whether 'regulation is appropriate and necessary' as an invitation to ignore cost."

The Court further held that the agency's refusal to consider costs could not be justified by the fact that other provisions of the Clean Air Act expressly make costs relevant.  Instead, that shows only that the statute's "broad reference to appropriateness encompasses multiple relevant factors (which include but are not limited to cost)," whereas "other provisions' specific references to cost encompass just cost."

Finally, the Court rejected the argument that it would be sufficient for EPA to consider costs later, in setting standards, rather than in considering whether to regulate at all.  Though the agency may not be required "to conduct a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value," it was hardly clear that mitigating the cost of some elements in the regulatory scheme would "ensure cost-effectiveness" overall.

Practical Implications

The Supreme Court's decision has implications that extend well beyond the Clean Air Act and the EPA, and it is likely to affect regulatory proceedings and litigation involving a broad range of federal administrative agencies.

First, the Court has clarified that when an administrative regulation is premised on a statutory term like "appropriate and necessary"--or some other "broad and all-encompassing term that naturally and traditionally includes consideration of all the relevant factors"--it is unreasonable for the agency to refuse to consider costs in determining whether to regulate.

Second, even when a statute is silent as to costs and benefits, it is not "rational" for an agency "to impose billions of dollars in economic costs in return for a few dollars in . . . benefits."  That is because "reasonable regulation ordinarily requires paying attention to the advantages and the disadvantages of agency decisions."  The agency generally will be required to consider costs even when other statutory provisions make costs relevant but the particular provision at issue does not.

Third, the Court has provided some guidance on how an agency must meaningfully consider costs.  The Court did not hold that an agency is always required "to conduct a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value."  It generally will be up to the agency, "within the limits of reasonable interpretation," to decide how to account for costs.  But the agency must show that its choices "ensure cost-effectiveness"; it will not be sufficient to show merely "that some elements of the regulatory scheme mitigate costs in limited ways."  And "'cost' includes more than the expense of complying with regulations; any disadvantage could be termed a cost." 

Gibson, Dunn & Crutcher LLP       

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about the firm's Administrative Law and Regulatory, Environmental Litigation and Mass Tort, Appellate and Constitutional Law, or Energy, Regulation and Litigation practice groups, please contact the Gibson Dunn lawyer with whom you usually work, or the following practice leaders and members:   

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Miguel A. Estrada - Washington, D.C. (202-955-8500, mestrada@gibsondunn.com)

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