The smart money is on the Environmental Protection Agency to prevail as the D.C. Circuit Court reviews its landmark Clean Power Plan, according to experts. But it may not be due to the legal arguments alone.

Energy lawyers reached by Utility Dive in the week after oral arguments on the carbon regulations largely agreed the EPA had a good day in court, and that the composition of the D.C. Circuit favors the agency. But they also pointed out that agency lawyers have a big task in proving EPA has authority to regulate “beyond the fenceline” of individual power plants.

“Nothing that happened [in the hearing] really changed my opinion that it's more likely than not the D.C. Circuit will uphold the rule — mainly based on the prior decisions the judges have made and the political affiliations of the judges," Brian Potts, a partner at the law firm Perkins Coie LLP, told Utility Dive.

The oral arguments last week at the D.C. Circuit were irregular in a number of respects. Instead of hearing the arguments as a three judge panel, the court announced it would hear the case "en banc," with all active judges presiding. That move came after the Supreme Court put a judicial hold on official implementation efforts for the Clean Power Plan until court challenges conclude.

The en banc decision suggested the court was especially interested in the case, and the judges did not disappoint. All but two of the six Democratic- and four Republican-appointed judges posed questions to the lawyers, stretching the hearing to over 7 ½ hours.

In the aftermath of the hearing, observers said the decision is likely to hinge on whether the judges defer to the agency’s interpretation of the Clean Air Act — or if they decide that the CPP is such a transformative regulation that a “clear statement” from Congress is needed. But at the end of the day, that decision may turn as much on the judicial philosophies of the judges as the text of the Clean Air Act itself.

“The case has a bit of a Rorschach quality to it in that you could really see it the one way and you could see it the other way,” Notre Dame law professor Bruce Huber told Utility Dive. “There's a very easy way of thinking of this as outside the bounds of the terrain we've carved for the last four decades [of Clean Air Act laws], but on the other hand, you could say we've built doctrines of deference precisely because we want expert agencies responding to the problems of the time.”

With a potential 4-4 split looming at the 8-judge Supreme Court, how the judges apply those philosophies could prove more important than usual.

Best system of emissions reduction?

In the aftermath of the hearing, observers agreed the judges seemed most interested in one particular line of questioning.

“The one that the court seemed to be struggling with the most was the whole question of whether EPA could require the owners of sources to subsidize their competitors,” Jeff Holmstead, a partner at Bracewell & Giuliani, a firm that supplied lawyers for the petitioners, told Utility Dive. “That seems to be the weakest part of EPA's case and it wasn't only the Republican appointees, it was the Democratic appointees who seemed to have real questions about that and that's likely to be at the heart of the case whenever we get a decision.”

The Clean Power Plan, petitioners argued, is forcing transformative change in the power sector by shouldering coal plant owners with emissions rates that are impossible to attain, and then forcing them to offset their emissions by constructing renewables or buying emissions credits.

They argued this sort of “generation shifting” is outside the EPA’s authority under the Clean Air Act, which limits the agency to regulating emissions from individual sources, not an entire fleet of power plants.

“The petitioners are really focusing on the word ‘source’ and hanging their argument on that word for the most part,” Ari Peskoe, a senior fellow in electricity law at Harvard Law School, told Utility Dive. 

Respondents, including a group of electric utilities supporting the CPP, called the generation shifting “business as usual. They said this is how the power sector would comply with any sort of carbon regulatory action anyway. They also argued that Section 111(d) of the Clean Air Act — the statutory foundation of the CPP — calls for the Best System of Emissions Reduction (BSER), which would seem to suggest broader regulatory powers than simply regulating individual sources.

The BSER provision is “significantly different from other standards imposed by the Clean Air Act,” Huber said, such as directives for the Best Available Control Technology or the Lowest Achievable Emissions Rate, which govern the regulation of other pollutants.

“When you talk about BACT or LAER, which are two of the major standards elsewhere in the code, those do seem to be thinking in terms of a narrower scope of options than the BSER,” Huber said. “To think about a system of emissions reductions seems to invoke a broader expanse of regulatory room, more degrees of freedom.”

Thinking about the case in this way may encourage judges to defer to EPA’s interpretation. But at the same time, the lawyers agreed that EPA is applying the Clean Air Act in a new way, and that some judges seemed to be searching for a way to set a limiting principle on the agency’s legal interpretation.

“Historically [EPA has] never done it like this and it gives them incredibly broad authority,” Potts said, “and that's why you saw, I think, many of the judges who want to uphold it trying to come up with hypotheticals and other things that could make it more narrow, so it's not such a broadening of EPA's authority.”

Even if the six Democratic-appointed judges want to uphold the rule, they still have to write an opinion that “comports with the Supreme Court cases of recent years that have spoken about … the way you can't remake the economy on the back of an ill-suited statutory text,” Huber said.

“Given that, they have to figure out how to write an opinion that both authorizes this action and doesn't give away the farm, and that certainly was evident,” he added.

The primacy of climate change

If these judges were indeed searching for a way to authorize the EPA action, the question arises as to why. After all, shouldn’t judges not have an interest in the way a case turns out?

For the energy lawyers that Utility Dive spoke with, the answer was simple.

“Bottom line here is that if this rule was about anything other than climate change I think EPA would lose on BSER 10-0,” Potts said. “I think you won’t get a lot of people admitting it, but the truth of the matter is that because the issue is climate change, the judges are human and they take that into account.”

Holmstead, whose firm argued for the petitioners, agreed.

“I tend to agree that if you take all of the passion of climate change and the Paris agreement out, I think EPA loses 10-0,” he said. “But there certainly seem to be some judges who were looking for a way to allow EPA to do something like this, and I think that’s hard to take out of the case.”

Huber agreed that climate change may influence the judges’ thinking, adding that the importance the Obama administration has placed on the regulation could also have an impact.

“This is not [a judge] tweaking around the edges of a regulatory program deciding here's some rogue regulator who got a little aggressive in this particular enforcement action,” he said. “It's a social problem for which a massive solution has been generated by the sitting administration and if I’m going to declare that to be outside the bounds of the statute, I better be darn sure that I’m right about that.”

For Peskoe, attributing the judges’ questioning too much to personal opinion is fraught with peril — it's too much about “trying to get in the heads of the judges,” he said — but he agreed that the fact this case is about climate and carbon, and not another pollutant, could have an impact.

“The fact is CO2 is different and unlike many other pollutants it's not the local effects that matter, it's the global effects,” he said. “Because of the nature of the pollutant and sources, EPA says it has the flexibility to do this rule differently than it has done in the past. They kind of go hand in hand, but I'm not sure it's as much about the politics as it is about the technical specifics at issue here.”

“But,” he added, “I guess you can read everything politically if you want to.”

On to the Supreme Court

Despite the fact that each lawyer expects the case to turn on the question of BSER, each also cautioned that the oral arguments don’t necessarily reflect the entire thinking of the judges. Issues of constitutional authority, the record of the case and questions of notice — covered in our earlier write-up on the hearings — could prove important as well.

“On those issues, EPA is probably stronger on the law than industry,” Potts said. “On the other two [regarding the Clean Air Act text], industry is probably stronger on the law, but the court is going to want to give the EPA some deference due to the importance of climate change.”

“One of the interesting things about oral arguments in a case like this is, there's a good body of research to suggest that judges' minds are already made up, or that oral arguments don't serve all that much of a purpose among decision-makers themselves,” Huber said.

As long as those arguments were, the judges will have months to pour over countless briefs and confer with one another, perhaps bringing another issue to the fore.

In the end though, the legal experts agreed the central question in the case could easily come down to how the judges view the concept of Chevron deference. Named after a case from the 1980s in which the NRDC sued over a weakened EPA emissions rule and Chevron appealed a lower court ruling to the Supreme Court, the concept directs courts to defer to agency interpretation of the law when it is not wildly outside the written statute.

Given the persisting confusion over Clean Air Act amendments and some ambiguously worded passages, EPA says it should get deference due to its long-standing authority to regulate carbon from the power sector. Opponents, however, argue the rule is so transformative that it should necessitate a “clear statement” from Congress, a concept enumerated in another Supreme Court Case, Utility Air Regulatory Group vs. EPA.

In dealing with that question, judges will have to decide if the regulation can be transformative if the industry is headed in that direction — toward a system with lower carbon emissions — anyway.

“The [petitioner] response is it's transformational mostly as a legal matter because this is the first time EPA has asserted it can require owners of sources to shut them down and build new sources,” Holmstead said. “So how they deal with that type of threshold question is going to be important.”

No matter how the D.C. Circuit rules, the losing side is almost certain to appeal to the Supreme Court. Given that the justices already put a stay on the carbon rules, they are likely to take any decision up for review. However, the court currently only has eight members, making a 4-4 split on the carbon rules plausible if there is no replacement by the time the case reaches them.

“I would wager a lot of money that there's a split right now, 4-4, on this,” Potts said. “So it's all going to come down to the new justice.”

The Clean Power Plan isn’t likely to reach the court before October 2017, so the new president will likely have time to put forth a new justice if Supreme Court nominee Merrick Garland is not approved by the Senate before then. But if the Congressional gridlock continues and the court stays at its current eight members, that could empower the D.C. Circuit even more. In the case of a tie, the lower court’s ruling stands.

“I think the D.C. Circuit knows that,” Huber said. “They are well aware of that and that adds even more sense of responsibility to their play.”

Any eventual decision from the Supreme Court could be precedent-setting for both the EPA and environmental regulation at large. If the judges vacate the rule on the “fenceline” provision, EPA’s main tool for reducing carbon would be moot. But if they uphold the agency’s interpretation as presented, it could open the door for much more expansive carbon regulation from the agency on sources like the industrial sector.

“If EPA can compel certain types of facilities to shut down and compel the industry to build whole new different types of facilities, that's a pretty powerful weapon that could be used against a whole different bunch of industries as well," Holmstead said.