It was difficult to say which side got the better of the Clean Power Plan’s showdown at the D.C. Circuit Court on Tuesday. The 10-judge panel proved quite active, with all but two judges questioning lawyers during oral arguments that lasted more than seven hours.

During the hearing, the EPA and industry lawyers sparred over agency authority, the Clean Air Act's text, and the constitutional separation of powers. Here's what the judges heard. 

Differing interpretations of the Clean Air Act

At the start of the hearing, West Virginia Solicitor General Elbert Lin told the court in his opening statement that the CPP would dramatically transform the power sector of his state and the nation as a whole.

By deploying a "little used" provision of the Clean Air Act — Section 111(d) — Lin argued that the EPA is effectively compelling coal plant owners to either make investments in renewable energy or shut down prematurely. The CPP, he noted, sets target emission rates for fossil fuel generators, not allowing them to operate if they emit above those thresholds.

Those standards, Lin and other petitioners argued, are "impossible" for existing coal plants to meet, meaning that if they want to stay open, plant owners need to purchase emissions credits to offset their carbon pollution. This effectively mandates coal plant owners to subsidize their competitors or shut down, the petitioners argued.

That sort of "generation shifting," is outside of the EPA's authority, petitioners said in yesterday's hearing. While the Clean Air Act allows EPA to mandate performance improvements at individual power plants, they argue it does not allow the agency to mandate plant owners invest in different generation resources — wind and solar in this case — to offset pollution rates.

But to the EPA and many in the power sector, this type of regulation is already commonplace.

"Generation shifting is business as usual for the power sector," Kevin Poloncarz, a lawyer representing power company intervenors, told the judges.

In fact, he said his utility clients expressly asked the EPA to construct the regulation in this way, since emissions trading would beget the cheapest pollution abatement, especially compared with the alternative of setting emissions caps for each individual generator.

"Ultimately, this is how the power sector would comply regardless," Poloncarz said.

Though the EPA has not used Section 111(d) in exactly this manner before, agency lawyers said they are well within the Clean Air Act's limits.

The law compels the agency to devise the "best system of emission reductions" (BSER) for any given pollutant, EPA lawyers noted, and that's what the agency did after the Supreme Court ruled in 2007 (Massachusetts v. EPA) that the EPA must regulate carbon dioxide under the act.

Whether that interpretation holds up to the judges' scrutiny remains to be seen. During the hearing, judges weighed the prospect of deferring to the EPA on the construction of the rule, or deciding that the CPP is such an important regulatory scheme that their intervention is justified.

"I feel somewhat betwixt and between," Judge Patricia Millet, an Obama appointee, said during the hearing. On one side, Mass v. EPA shows that the Supreme Court was aware of Congressional inaction and wanted the EPA to regulate carbon, she said. That would push for deference.

But at the same time, she said, the impacts of the case could be so immense — and the EPA's regulatory scheme so novel — that a "clear statement" might be necessary from Congress to authorize the agency to take this interpretation of the Clean Air Act.

Section 111 vs. Section 112

After sparring over the statutory limits of the Clean Air Act, lawyers turned their attention to the structure of the text itself.

Under the formulation of the Clean Air Act, petitioners argued, emission sources covered by Section 112 of the law, which regulates hazardous air pollutants, cannot also be covered by Section 111, the foundation of the CPP. Their argument rested on two sources — a footnote to a Supreme Court decision and two contradictory 1990 amendments to the Clean Air Act.

In 2011, the Supreme Court affirmed the EPA’s authority to regulate CO2 in AEP v. Connecticut, with Justice Ruth Bader Ginsburg writing that state governments cannot sue power companies for climate change harms, as it is the agency’s job to address that issue through regulation.

But in her decision, Ginsberg wrote a seemingly unrelated footnote that’s since been seized on by agency opponents.

“There is an exception,” Ginsberg wrote, “EPA may not employ [Section 111(d)] if existing stationary sources of the pollutant in question are regulated under the national ambient air quality standard program ... or the ‘hazardous air pollutants' program, [Section 112].”

Agency lawyers argued the footnote is dictum — a judge’s non-binding opinion outside of the case at hand, and that it was made in a case that generally affirmed EPA’s authority to regulate carbon. But petitioners said their case is supported by the text of the law, specifically a 1990 House amendment to the Clean Air Act that says the agency cannot use Section 111(d) to regulate existing power sources if they are already covered under another section.

The Senate passed a version of the amendment allowing the overlapping rules, but lawmakers did not reconcile the two in the rush to finalize the bill. Petitioners told the judges they consider the Senate amendment to be a “drafting error” and that the EPA essentially chose the interpretation of the law it wanted to fit the Clean Power Plan.

A number of judges appeared to find the “double regulation” argument questionable. Given the ambiguity in the text, Millet wondered whether the judges should simply cede to the EPA’s interpretation of the law — a practice known as Chevron deference after a 1984 case. Judge Nina Pillard, another Obama appointee, likened the petitioners’ argument to the concept of “driving on the right side of the road and obeying the speed limit.”

Agency lawyers called for the judges to accept EPA’s interpretation of the text, emphasizing that it was ordered by the Supreme Court to find a way to regulate carbon under the act. But petitioners stuck to their guns, saying the text is in fact not ambiguous and the EPA created the ambiguity to get around the letter of the law.

“EPA decided it had to trigger Chevron-type power,” Harvard Law Professor Laurence Tribe told the judges, to make one law out of two competing versions.

Constitutional questions

The Clean Air Act’s ambiguity between sections also presented constitutional issues to the judges.

Petitioners argued the CPP “unconstitutionally commandeers” the power of state governments to regulate their power systems and runs roughshod over the separation of federal powers.

Under the Federal Power Act, states are in charge of ensuring reliable electric power within their borders. By mandating wholesale changes to the power grid, petitioners argued the EPA is infringing on that right and the powers of states.

Judge David Tatel, a Clinton appointee, questioned that premise, comparing the CPP to the Americans with Disabilities Act (ADA). That law similarly requires state governments to use their explicit zoning and police powers to enforce federal mandates, he noted.

That law is different in type and scale, Tribe argued in response, before emphasizing that his problem lies with “horizontal federalism” between branches of the federal government.

Millet probed that point, noting that the Supreme Court told EPA in the AEP case to regulate carbon emissions under the Clean Air Act, but Tribe said the agency’s interpretation was too far outside the text to warrant Chevron deference. By “inventing and manufacturing” ambiguity in the Clean Air Act, he argued the EPA is not simply interpreting law, but making it.

Respondents roundly rejected both constitutional arguments. Calling the CPP “bread and butter cooperative federalism,” U.S. Attorney Amanda Shafer Berman argued the state planning process gives governments ample control over the trajectory of their power mixes, and that the regulation is not a threat to reliability.

Judge Brett Kavanaugh, a George W. Bush appointee, pushed back, saying that from the perspective of the petitioners, they have no choice but to change their power mixes. In that case, shouldn’t there be a clear statement from Congress about what the Clean Air Act actually says, rather than relying on an agency interpretation?

Not necessarily, Berman replied. In this case, EPA’s authority should stand because of its long-standing authority to regulate pollutants under the law and the fact that it has been ordered a number of times to devise a carbon regulatory system in the absence of Congressional action.

Quick takes

EPA supporters were generally upbeat following the hearing, with a number telling reporters they were confident ahead of what most expect will be an eventual hearing before the Supreme Court.

“The Clean Power Plan had a very good day. But we aren’t taking that to the bank just yet,” David Doniger, director of the NRDC’s climate and air program, said in a statement after the hearing. “What is certain, though, is we need to take swift and decisive action to combat climate change. This plan is our best available tool, and the court should uphold it.”

But the petitioners were confident as well. Despite power sector comments in support of generation shifting, West Virginia Attorney General Patrick Morrisey told Utility Dive he was especially encouraged by that round of questioning.

“I think there's a real distinction between actions that are taking place voluntarily in the marketplace and forced compliance, and that's effectively what this is,” he said. “As you heard, it became pretty clear that with this rule, you cannot achieve the standards that are being set.”

Though many other EPA rules involve emissions trading schemes, Morrisey said this one steps into new territory.

“I think what you're looking at is that this is actually forcing the owners and the operators to cross-subsidize and if they can't meet the specific standards, they are going to potentially have to go 300 miles to build a windmill,” he said. “That's never envisioned by this section of the Clean Air Act and I think you also heard today that as people were focusing on whether the EPA could regulate, what was very clear to me was that they cannot regulate through [Section] 111 (d).”

The EPA, of course, contests those points, saying it is well within its authority under the Clean Air Act to set those standards. What judges think of the issue could weigh heavily on their decision, which is expected by year’s end. Stay tuned to Utility Dive for more coverage of this case in the days and weeks to come.