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Federal Regulation, Judicial Stays, and the Right to Appeal

Some Thoughts on The Clean Power Plan Litigation

J. Kennerly Davis, Brian Taylor Goldman January 03, 2017
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The election results have raised serious doubts about the future of President Obama’s Clean Power Plan (“CPP” or “Plan”).  During the campaign, President-elect Trump repeatedly moved to kill the Plan outright.

There are, of course, many legal complexities associated with the requirements of the Clean Air Act and federal administrative procedure.  Observers differ about the options available to the new administration, and about whether the Plan will actually be repealed or simply modified to some extent.

Whatever the fate of the CPP, one part of its contentious history highlights a fundamental problem with federal regulation generally, a procedural flaw that seriously compromises the constitutional guarantee of procedural due process.

The CPP was published in the Federal Register on October 23, 2015.  The Plan aims, by 2030, to reduce carbon dioxide emissions from existing electric power plants by 32 percent from 2005 levels by driving what the EPA has described as an “aggressive transition to zero-carbon resources.”  The published Plan called for each state to submit by September 2016 a plan to begin emission reductions by 2022 and to achieve full reduction compliance by 2030.

Compliance cost estimates for the CPP have varied widely.  The EPA has asserted that compliance costs will be minimal, ranging from $7 billion to $9 billion per year.  Others, including power industry critics of the Plan, have estimated that the cost of the Plan will be magnitudes more because of the need to prematurely retire and replace massive amounts of existing coal-fired generating capacity.  The economic consultancy National Economic Research Associates has estimated that compliance costs may approach $40 billion per year.

Forty-two petitions for review were filed in the D.C. Circuit challenging the CPP.  In addition, nine stay petitions were filed by a total of 109 parties.  Eighty-four declarations were filed in support of the stay.  The widespread support for a stay indicated the critical importance to the parties of obtaining immediate relief from the significant economic burdens imposed by the Plan and its looming compliance deadlines.

The parties involved in the CPP litigation were faced with a dilemma common to all those wanting to challenge the legality of a new regulation, a dilemma created by the need to consider the time required to litigate and the time required to comply.

It takes a long time to fully litigate a rule that has been promulgated by a federal agency.  By the same token, it can take a long time and a great deal of money for a regulated party to modify its operations sufficiently to achieve compliance with a new rule.  This is especially true if compliance requires, as it does for the electric industry in the case of the CPP, material modifications to long-lived plants and equipment.

A regulated party is often faced with a choice between equally disagreeable alternatives.  If it elects to challenge the new rule and takes no steps to comply while its litigation advances, and its challenge is ultimately unsuccessful, it may then not be able to achieve compliance before the deadlines specified in the challenged rule.  If it does miss specified deadlines while pursuing litigation, the regulated party may incur additional expenses in the form of fines and penalties.

If, on the other hand, a regulated party challenging a new rule takes steps to comply while its litigation advances, and its challenge is ultimately successful, then it will have wastefully disrupted its operations by spending money to make adjustments for compliance. Moreover, the regulated party may then spend more money to undo these same adjustments when they are determined to be unnecessary.

The steps taken by the regulated party to comply may be too costly to undo if they involve planning, financing and procurement decisions related to the modification of significant long-lived assets.  In this case, if the decisions of the regulated party are irreversible because of their cost and time to implement, then any victory it may achieve in litigation will have no practical benefit.  The regulator will prevail even while losing in court.  The regulator’s proposal will become a fait accompli simply because of economic realities and the way that rulemaking and the appeals process currently work.

The EPA’s Mercury and Air Toxics Standard (“MATS”) provides a striking example of fait accompli regulation and the extent to which it can undermine effective judicial review of newly promulgated rules.  In June 2015, the Supreme Court ruled in Michigan v. Environmental Protection Agency that the EPA had erred by failing to consider the cost of its regulation limiting mercury and other emissions from power plants; the Court remanded the regulation with instructions to the EPA to consider compliance costs before reaching a final determination about the rule.  The EPA quickly responded with a press release noting that since the MATS was first proposed “investments have been made and most plants are already well on their way to compliance.”  The agency later followed up with a compliance cost assessment that supported the MATS as previously promulgated.  And that was that.

The MATS case highlights the importance of the stay sought by the parties challenging the CPP.  Without a stay, the electric industry would again be under significant pressure to undertake expensive, probably irreversible, modifications to its plants and equipment even as it challenged the legality of the regulation that necessitated the modifications.

On January 21, 2016, the D.C. Circuit denied all the stay motions that had been filed in the CPP litigation.  Within a matter of days, a total of five stay applications were filed with Chief Justice Roberts, who referred them to the full Court.  On February 9, 2016, by a five-to-four vote, the Supreme Court granted all five stay applications without qualification.  Justice Scalia’s last vote on the Court was his to support the order granting the stay applications.

Numerous commentators have observed, correctly, that the Supreme Court’s action granting the stay in the CPP litigation was highly unusual.  The criteria for any stay are difficult to satisfy.  Applicants must demonstrate, among other things, that they likely face irreparable harm in the absence of a stay and that, ultimately, they are likely to prevail on the merits.  And the Supreme Court had never before granted a regulatory stay in circumstances like those of the CPP litigation, where the lower court had not ruled and had itself declined to stay the regulation while it considered the case.

The fact that the stay granted in the CPP litigation was such a “long shot” underscores the seriousness of the threat posed by fait accompli rulemaking and the extent to which aggressive agencies can often effectively deny regulated parties their constitutionally guaranteed right of due process and meaningful appeal.  And in this case, even where a stay was granted, the EPA and supporters of the CPP have cast doubt on the effectiveness of the relief granted by the Court.

The one-page order blocks the EPA from enforcing the CPP until a final determination of the litigation on the merits.  But what happens then?  What impact does the stay have on the various compliance deadlines contained in the CPP?

In fact, during the months following the Supreme Court’s February 9 order, the impact of the stay on CPP compliance deadlines was the subject of some debate.  Parties challenging the CPP argued that the stay tolled the compliance deadlines and, if the Plan was ultimately upheld on the merits, all the deadlines would have to be reset and extended by at least the same amount of time that the stay had remained in place.

Supporters of the CPP disagreed about the impact of the stay.  They acknowledged that the stay suspended EPA’s authority to enforce the CPP, but they noted that the order did not direct the EPA to cease all work on the Plan, nor did it explicitly toll the compliance deadlines.  Plan supporters argued that the EPA was free to continue developing and finalizing the details of the CPP, and free to work with states and other interested parties that wished to cooperate in such activities.  Plan supporters also argued that any tolling of CPP compliance deadlines would constitute an inappropriate delay in the ongoing and critically important effort to reduce greenhouse gas emissions.

The EPA did continue to advance the CPP in a variety of ways, such as by working on a rule for the design of a Clean Energy Incentive Program and by issuing Plan implementation “guidance” to receptive states on several Plan-related subjects.  And in April 2016, an EPA spokesman characterized the effect of the stay on CPP compliance deadlines as “ambiguous.”

Statements like that, and continued agency development work on the challenged Plan, tend to negate the relief provided by the stay and leave the regulated parties in much the same place they were in before the Supreme Court’s order on February 9.  Confronted with the compliance deadlines of the CPP, and knowing the amount of time it will take to comply, they have reason to be concerned that if they do not continue to work toward compliance with the CPP, they will not have enough time to do so if the Plan is ultimately upheld by the courts.  This puts significant pressure on the regulated parties to undertake expensive, probably irreversible, modifications to their plants and equipment even as they continue to challenge the legality of the Plan.

As noted earlier, the election results have raised real doubts about the future of the CPP.  Whatever the particular fate of the Plan, its contentious history reveals, like the MATS case, a fundamental problem with federal regulation that deserves the thoughtful attention of all concerned.

During this period of governmental transition, there is a lot of talk about regulatory reforms that could be pursued to address one sort of issue or another.  It could be worthwhile to add the issue of fait accompli regulation, as manifested in the CPP and MATS cases, to the general discussion of regulatory reform unfolding on Capitol Hill and elsewhere.

If the issue is addressed, those thinking about possible reforms might consider the potential usefulness and applicability of a concept found in some commercial contracts.  There, an obligation of a party to perform, such as the obligation to make a specified payment, may be triggered only upon the issuance by a court of competent jurisdiction of a final non-appealable judgment resolving any disputes or other contingencies surrounding the obligation to make the payment.  Parties to these commercial agreements include such a provision because they recognize that it would be unreasonable to require the party to actually make the payment in question before any and all disputes and contingencies related to the payment obligation have been fully litigated and resolved. Similarly, the rise in dissenting-shareholder clauses in merger agreements reflects the reality that the exercise of appraisal rights affects the economics of a merger. As a result, dissenting-shareholder clauses typically permit the acquirer to delay closure of the merger in order to address the changed landscape of the deal.

In the context of federal regulation, such a concept might be embodied in a reform statute that would expressly toll all the compliance deadlines in a challenged rule until the litigation has been completed on the merits. If the challenged rule is ultimately upheld, the statute would expressly require all the compliance deadlines in the rule to be reset and extended by an amount of time at least as great as the time required to complete the litigation and resolve the challenge on the merits. The EPA itself has endorsed this position. In 2011, after the Supreme Court reversed the D.C. Circuit’s ruling vacating the EPA’s Cross-State Air Pollution Rule, the EPA filed a motion (later granted) in the D.C. Circuit, requesting that the court, upon lifting the stay, toll all compliance deadlines by three years.

Of course, all the issues that might arise from such a reform would have to be carefully considered and addressed in the statute.  For example, there might be certain situations, defined in the statute as “emergencies,” during which the regulated party would be required to undertake specified temporary compliance measures even though its litigation is active and its overall compliance obligations are tolled. The burden to justify an emergency could be placed on the regulatory agency. Such a situation would be similar to the emergency exception for notice and comment rulemaking. There are many other complexities that would have to be dealt with, but the effort could be well worth it if a real solution could be found to the problem revealed by the CPP and MATS cases.

Not long after the founding of our Republic, Chief Justice Marshall observed in Marbury v. Madison that “the very essence of civil liberty consists in the right of every individual to claim the protection of the laws, whenever he receives an injury.”  No regulated party should be denied the effective protection of the laws that provide for judicial review of an agency rule simply because of the compliance deadlines in the rule and the length of time it will take to challenge the rule in court.

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J. Kennerly Davis, Jr. is a former Deputy Attorney General for Virginia, and currently focuses his practice on energy law and economic regulation. He is a former finance executive at a Fortune 500 electric power and gas company, and currently serves on the Executive Committee of the Administrative Law & Regulation Practice Group.

Brian Taylor Goldman is a J.D. Candidate (2017) at Columbia Law School. He received his B.A. summa cum laude and Phi Beta Kappa from the University of Pennsylvania. Following graduation, he will clerk for the Hon. Diarmuid F. O’Scannlain (9th Cir.)

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