Category: Court Decisions

FERC’s Demand Response Strategy Hits a Snag: D.C. Circuit Vacates Order 745 in Electric Power Supply Association v. FERC

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  • I am delighted to welcome guest blogger Sharon Jacobs. Sharon was my colleague at Harvard Law School and will be an Associate Professor at Colorado Law beginning this summer.  Sharon’s scholarship focuses on administrative, energy and environmental law and she has a forthcoming article on federalism and demand response programs, so she is the perfect person to discuss the D.C. Circuit’s recent decision in Electric Power Supply Association v. FERC, which invalidated a federal order designed to encourage demand response. -James Coleman

By Sharon B. Jacobs

It is a poorly kept secret that D.C. Circuit judges do not exactly clamor to be assigned Federal Energy Regulatory Commission (FERC) cases. The notable exception is now-Senior Judge Stephen Williams, who loves them. His grasp of the intricacies of energy regulation is unparalleled on any court in the country. It is unfortunate, therefore, that Judge Williams was not assigned to the D.C. Circuit panel that recently handed down Electric Power Supply Association v. FERC. In a 2-1 opinion authored by Judge Janice Rogers Brown and joined by Judge Laurence Silberman, the panel vacated FERC’s final rule on compensation for demand response resources in wholesale energy markets. Judge Harry Edwards offered a well-reasoned and ultimately more persuasive dissent.

Demand response is the reduction of electricity use in response to a price signal. In other words, customers are paid not to consume energy. Demand response has been called the sale of “negawatts,” although the phrase is an imperfect description of the actual transaction. Where demand response bids are accepted, market administrators need not purchase as much generation (supply) to meet aggregate demand. Because the cost of electricity goes up as demand increases, especially at times of peak consumption, demand response can lead to significant savings.

Electricity markets are divided into two spheres: retail (sales to end-use customers) and wholesale (sales for resale). For the most part, states regulate the former, while FERC controls the latter. FERC’s demand response strategy affects both markets. In an earlier order, FERC allowed aggregating companies to bid retail customers’ demand response commitments directly into wholesale markets. In the rule challenged in this case, Order 745, FERC sought to further eliminate barriers to demand response participation in wholesale markets by requiring market administrators to pay demand resources the “locational marginal price” or “LMP” for each megawatt not consumed. The locational marginal price is the same price that generators receive when they bid their megawatts of power into wholesale markets. It reflects the value of energy at a specific location at the time of delivery. PJM, the market administrator for the mid-Atlantic region, explains that the LMP fluctuates like taxi fares—lighter electricity traffic yields a lower, steadier fare, whereas congestion on the wires causes the fare to rise. FERC included a caveat in its rule: demand response resources would only receive the LMP when their participation in wholesale markets would be cost effective, as determined by a specified “net benefits” test.

The bulk of the opinion concerned a threshold question: whether FERC acted within the scope of its jurisdiction under the Federal Power Act when it established compensation and other rules for retail demand response resources participating in wholesale markets. Under the Act, FERC has clear jurisdiction over rates for wholesale sales of electric energy in interstate commerce as well as rules, regulations and practices affecting those rates. FERC argued that it could set wholesale rates and other rules for demand response in wholesale markets because they were practices “directly affecting” wholesale sales. The panel majority disagreed, instead characterizing what FERC did as indirect regulation of the retail market for electricity.

There were three major problems with the opinion.  First, the majority found the Federal Power Act’s jurisdictional provisions much clearer than they are in fact.  It applied the normally deferential Chevron test, under which the court will defer to the agency’s reasonable interpretation of an ambiguous statutory provision it is authorized to administer, to FERC’s jurisdictional claims. Though some have argued that allowing the agency to determine the scope of its own jurisdiction when statutory language is ambiguous is analogous to permitting the fox to guard the henhouse, the Supreme Court recently affirmed the propriety of this practice in City of Arlington v. FCC. The Federal Power Act’s grants of jurisdiction did not anticipate demand response and the statute’s application to the phenomenon, as the dissent recognized, is unclear. In other words, the statutory provisions at issue, as applied to demand response, are ambiguous. Thus, the court should have deferred to FERC’s reasonable interpretation of those provisions at Chevron step two.

Second, Judge Brown found that the Federal Power Act foreclosed FERC’s reading because the Commission’s interpretation “has no limiting principle.” In an argument reminiscent of Justice Scalia’s warning in his Massachusetts v. EPA dissent that Frisbees and flatulence could be regulated under EPA’s capacious definition of “air pollutant,” Judge Brown warned that FERC’s interpretation of its “affecting” jurisdiction would authorize it to regulate “steel, fuel, and labor markets.” As the dissent pointed out, however, the limiting principle could not be clearer. Under the D.C. Circuit’s own holding in CAISO v. FERC, FERC may only regulate practices that “directly affect” wholesale rates or are “closely related” to those rates, “not all those remote things beyond the rate structure that might in some sense indirectly or ultimately do so.” As Judge Edwards pointed out in his dissent, this language clearly precludes regulation of “steel, fuel, and labor markets.”

Third, to the extent that the true motivation for the decision was general unease about federal encroachment on traditional areas of state regulatory power, the decision overlooked a key aspect of FERC’s demand response rules that mitigate any unwanted impact on state authority. An earlier FERC order, Order 719, offered state and local regulatory authorities an “opt-out”: those who did not want their retail customers participating in wholesale markets for demand response could prohibit them from doing so via legislation or regulation. Order 745’s pricing scheme was layered on top of this jurisdictional compromise. In Judge Edwards’s words, “[t]his is hardly the stuff of grand agency overreach.”

The most controversial part of Order 745, and the real reason the rule was the subject of such concerted opposition, got the least airtime in the opinion. In what was billed as an alternate holding in Part IV (but felt more like dicta), the panel found that Order 745’s locational marginal pricing scheme was arbitrary and capricious. In under two pages of text, the opinion declined to “delve now into the dispute among experts” yet asserted that the Commission had not “adequately explained how their system results in just compensation.” “If FERC thinks its jurisdictional struggles are its only concern with Order 745,” the opinion cautioned, “it is mistaken.” In a much more nuanced discussion of the Commission’s choice and the deference due to FERC “in light of the highly technical regulatory landscape that is its purview,” Judge Edwards concluded that the Commission provided a “thorough explanation” for selecting the locational marginal price as the appropriate level of compensation. In a nutshell, FERC’s argument was that the compensation level was necessary to overcome barriers to participation by demand response resources in wholesale markets and that it accurately reflected the value demand response provided to those markets.

Prior to this ruling, FERC had been successfully pursuing a policy of what I call, in a forthcoming article, “bypassing federalism”:  working a de facto rather than a de jure reallocation of regulatory power by extending its influence through the expansion of wholesale markets. In the context of demand response, that strategy was undermined by the Commission’s aggressive posture on pricing in Order 745. It was the idea that demand response resources would be paid the LMP for their “negawatts,” thereby competing directly with generation in wholesale markets, that triggered the groundswell of opposition from generation resources. The decision will not go into effect until seven days after the disposition of any motion for rehearing, and FERC is still considering its options as well as the decision’s impact on its rules and related programs. The panel’s decision may yet be reversed by the D.C. Circuit en banc or by the Supreme Court. But, as a policy matter, the Commission might have avoided a direct confrontation over its demand response rules by moving more deliberately on the pricing question.  As I have written elsewhere, for agencies whose regulatory schemes face concerted opposition, discretion is sometimes the better part of valor.

State Energy Policy and the Commerce Clause: Spotlight on Colorado and Minnesota

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By Alexandra B. Klass
University of Minnesota Law School
aklass@umn.edu

Within the past month, two federal district courts—one in Colorado and one in Minnesota—have issued important decisions on the constitutionality of state clean energy policies. Both cases raised the same legal issue, namely, whether the state laws in question regulate extraterritorially in violation of the dormant Commerce Clause of the U.S. Constitution. But the courts reached different results in each case and, more importantly, the Minnesota and Colorado policies reviewed by each court were quite different from each other even though both involved efforts to promote clean energy within the state. Some of the recent commentary on the two cases has downplayed the significant differences between the two state policies in question, leading to confusion about the implications of the courts’ rulings.

First, a bit about the dormant Commerce Clause. The Commerce Clause of the U.S. Constitution grants Congress the authority to regulate interstate commerce. But the Supreme Court has also interpreted that provision to contains a “dormant” aspect that limits states from interfering with the free flow of commerce among the several states. A law can violate the dormant Commerce Clause if: (1) it facially discriminates, has a discriminatory purpose, or is discriminatory in effect; (2) the law is facially neutral and there is no evidence of discriminatory intent or effect but the burdens of the law on interstate commerce outweigh the in-state benefits; or (3) the law attempts to control conduct completely outside its borders and thus regulates “extraterritorially.” The dormant Commerce Clause has been applied to state laws for over 100 years, including laws banning or limiting out-of-state imports of goods or services, out-of-state exports of goods or services, minimum pricing laws tied to prices in other states, laws attempting to regulate trucks and trains in interstate transportation, and a variety of other state laws intended to promote in-state businesses as well as environmental, health and safety interests over similar out-of-state interests.

Now, onto the recent state energy policy cases. Both cases involve efforts by states to encourage the use of renewable electricity resources in the state and limit the generation of electricity that emits significant amounts of CO2 in an effort to address climate change. But the two state policies under constitutional challenge involve very different ways of reaching that goal. The Colorado lawsuit involves a challenge to a state renewable energy mandate. Such laws, known as renewable portfolio standards, renewable energy standards, clean energy mandates, or renewable energy mandates, have been adopted in over half the states. Such laws require utilities and other electricity providers in the state to generate or purchase a certain percentage of their electricity for retail sale from renewable energy sources by a particular date, often 15%, 20%, or 30% by 2020 or 2025, with lower amounts mandated between now and the targeted date. Such laws encourage the use of wind, solar, geothermal, or hydropower energy with significant variation among the states with regard to what resources “count” and the percentages required.

By contrast, the Minnesota lawsuit does not involve a challenge to the state’s renewable energy mandate, even though Minnesota has one of the most aggressive renewable energy mandates in the nation. Instead, the lawsuit involves a challenge to another Minnesota energy policy that limits the construction, use, or import of new coal-fired power in the state by prohibiting the construction of facilities that emit a certain amount of CO2 each year or imports from such facilities. Only a few states (New York, Oregon, California) in addition to Minnesota have such limits on coal-fired power. All of those states impose those limits on coal-fired electricity in addition to imposing a renewable energy mandate on electricity providers in the state.

The Colorado case

In Energy and Environmental Legal Institute v. Epel, __ F. Supp. 2d __, 2014 WL 1874977 (D. Colo., May 9, 2014), a non-profit organization representing and promoting coal energy interests along with one of its members challenged the state’s renewable energy standard, which requires Colorado electric utilities and other retail electricity providers in the state to provide up to 30% of their retail electricity sales from renewable energy sources by a certain date. Electricity providers can meet their renewable energy mandate by either generating or buying renewable power directly or by purchasing renewable energy credits. The plaintiffs argued on summary judgment that the renewables mandate places a restriction on how out-of-state goods are manufactured, and requires out-of-state electricity to be generated according to Colorado’s terms. Thus, according to the plaintiffs, by projecting Colorado’s policy decisions onto other states, the law regulates extraterritorially in violation of the dormant Commerce Clause.

The court rejected this argument and held that the law did not impact wholly out-of-state transactions. If a Wyoming coal company generates electricity and sells it to a South Dakota business, the Colorado law does not apply. Instead, the court found that the law applies only to energy generators that choose to do business with a Colorado utility and, even then, the law only applies in determining whether the energy the Colorado utility purchases counts towards its renewables mandate. The court agreed that the Colorado law would influence the profits of out-of-state companies whose electricity could not be used to fulfill the mandate, but held that the dormant Commerce Clause “neither protects the profits of any particular business, nor the right to do business in any particular manner.” The court also found that the law did not discriminate against interstate commerce or unduly burden interstate commerce.

The Minnesota case

In North Dakota v. Heydinger, __ F. Supp. 2d __, 2014 WL 1612331 (D. Minn., Apr. 18, 2014), the State of North Dakota, North Dakota lignite coal interests, and multi-state electric cooperatives in the upper Midwest sued the State of Minnesota over limits on coal-fired power in its Next Generation Energy Act. The provisions of the law at issue state that after a certain date, no person shall, without CO2 offsets: (1) construct a new “large energy facility” (defined to encompass coal-fired power plants but not most natural gas-fired plants) in the state; (2) import power from a new large energy facility from outside the state; or (3) enter into a long-term power purchase agreement that would contribute to statewide power sector CO2 emissions. The plaintiffs argued on summary judgment that the limits on imports of coal-fired power from outside the state regulated extraterritorially in violation of the dormant Commerce Clause and discriminated against interstate commerce. Notably, even though Minnesota has a renewable energy mandate that is also part of the state’s Next Generation Energy Act, the plaintiffs in the Minnesota case did not challenge Minnesota’s renewable energy mandate at all. As a result, the state energy policy at issue in the Minnesota case is quite different from the state energy policy at issue in the Colorado case, even though both state policies are intended address climate change by imposing requirements on state electricity providers.

In an April 2014 decision, the U.S. District Court for the District of Minnesota agreed with the plaintiffs that the limits on coal-fired electricity imports regulated extraterritorially. Because the court struck down the import limits on those grounds, it did not reach the claims that the law also discriminated against interstate commerce. In reaching its decision, the court adopted an extremely broad interpretation of the law, finding that it applied to any electric power provider selling electricity on the multi-state, regional electric grid (encompassing more than 10 states), rather than applying only to persons located in or operating in Minnesota. The court pointed to statements made by the Minnesota Department of Commerce in earlier regulatory proceedings that indicated the agency might apply the law to multi-state electric cooperatives based outside the state but with members in Minnesota if the cooperative generated coal-fired power outside the state and sold it into the multi-state grid. Because electrons cannot be tracked once they have entered the electric grid, the court found such a transaction could apply where the buyers and seller were all outside of Minnesota because some of the electricity might enter the state of Minnesota. Because such an application of the law would apply even when no party to the transaction was based in Minnesota, the court found that the law regulated extraterritorially in violation of the dormant Commerce Clause. The court rejected the argument that it should not interpret the law so broadly to encompass all sales of electricity into the multi-state grid even though the state had never actually applied the law to these types of out-of-state transactions that did not directly involve a Minnesota-based actor intending to import coal-fired power to the state.

Conclusions

So what should we take away from these two decisions? First, it is important to keep in mind what was not at issue in either case. For some time now, there has been concern among policymakers and scholars regarding state renewable energy mandates that preference in-state renewable resources over out-of-state renewable resources through multipliers and other provisions that encourage the use of in-state wind, solar, or hydropower. Many state laws contain such a preference for in-state renewable resources because such preferences allowed legislators to argue that a renewable energy mandate would not only promote the use of clean energy but would also help promote new, in-state industries. While this is certainly good politics and may be good policy, such preferences raise dormant Commerce Clause concerns because they expressly benefit in-state industries over identical out-of-state industries. But the Colorado renewable energy mandate at issue does not contain such preferences and thus treats in-state and out-of-state renewable and non-renewable electricity resources alike. Likewise, even though the Minnesota renewable energy mandate was not even at issue in the Minnesota litigation, it is important to point out that Minnesota, like Colorado, does not preference in-state renewable resources over out-of-state renewable resources.

Second, states attempt to meet clean energy and climate change goals through a variety of policies. States have significant authority to regulate electricity sales, transportation, and industrial facilities and in recent years have used that authority to enact renewable energy mandates, place bans on coal-fired power, and impose other regulatory requirements on industrial facilities, fuel providers, electricity providers, and other businesses that contribute to CO2 emissions. Each type of policy has a different impact on in-state businesses and out-of-state parties that do business in the state. As a result, each type of policy raises different legal issues. Thus, the fact that the courts in the Colorado and Minnesota cases reached different results is significant, but it is also important not to lose sight of the fact that each court reviewed state energy policies that have similar goals, but were designed in completely different ways and have very different impacts on in-state and out-of-state actors.

Last, each court’s decision relied in large part on how broadly it found the state law to apply. In the Colorado case, the court stated that the law applied only to Colorado electricity providers and thus did not impact electricity generators in other states except when they chose to do business with electricity providers in Colorado. By contrast, in the Minnesota case the court interpreted the law limiting the use of new-coal fired power to apply to any party selling electricity into the multi-state electricity grid if there was some chance that those electrons could flow into Minnesota. Whether the language of the statute supports such a broad interpretation of the law remains to be seen and will likely be an issue on appeal. The fact remains, however, that how broadly courts interpret the reach of state energy policies will impact significantly whether those laws can withstand dormant Commerce Clause scrutiny.

For more information on the dormant Commerce Clause, its potential application to state energy policy, and recent litigation, see Alexandra B. Klass & Elizabeth Henley, Energy Policy, Extraterritoriality, and the Dormant Commerce Clause, San. Diego J. of Climate & Energy L. (forthcoming 2014), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2376411.

Federal Court Strikes Down Minnesota’s Limits on Coal Power Imports: A Critical Moment for State Regulation of Imported Fuel & Electricity

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State of North Dakota, et al., v. Beverly Heydinger, et al., Case No. 11-cv-3232, (D. Minn., Apr. 18, 2014).

On April 18, the U.S. District Court for the District of Minnesota struck down the State of Minnesota’s restrictions on importing electricity from coal power plants in other states. The court held that these restrictions improperly regulated electric generators and utilities outside the state. The decision sets a precedent that could threaten state regulations of imported fuel and electricity, such as the numerous renewable power standards and California’s low carbon fuel standard. These regulations have been a flashpoint for conflicts between in-state and out-of-state interests, including Canadian energy producers who believe that the standards discriminate against them.

Minnesota adopted the restriction on electricity imports in its 2007 Next Generation Energy Act, which placed a moratorium on construction of new coal power plants within the state. The point of the moratorium was to limit greenhouse gas emissions from coal burning, which contributes to climate change. Without the import restriction, Minnesota’s moratorium might have little effect: companies looking to build a new coal plant could simply build in neighboring states, exporting electricity to Minnesota and increasing greenhouse gas emissions. So Minnesota declared that “no person shall . . . import or commit to import from outside the state power from” new coal plants or “enter into a new long-term power purchase agreement that would increase statewide power sector carbon dioxide emissions.” Minn. Stat. § 216H.03, subd. 3. New coal plants could only avoid this ban if they paid to reduce emissions elsewhere or qualified for an exception.

North Dakota and utilities with coal power plants brought a lawsuit alleging that Minnesota’s restrictions unconstitutionally regulated outside of Minnesota’s territory, and the court agreed. The U.S. Constitution’s Commerce Clause gives the federal government the authority to regulate interstate commerce and implies that states cannot “discriminate against or unduly burden interstate commerce” without congressional authorization. This rule is called the “dormant commerce clause” because it applies when congress has not authorized state regulation. One aspect of this rule is that states cannot adopt a regulation that “has the practical effect of controlling conduct beyond the boundaries of the state.”

The court held that the import restriction necessarily regulated out-of-state conduct because electricity on the grid “does not recognize state boundaries.” Electricity is not like a package that is shipped from a seller to a buyer. Instead, the interstate electric grid creates a pool of power. Electric generators contribute electricity and consumers withdraw electricity. It is as though one group was emptying buckets of water into a lake and another group was filling buckets of water from a lake. Companies may talk about purchasing electricity “from” a specific utility, but that is an accounting convention, not a description of a physical process—the electricity purchased comes from an undifferentiated pool. Thus, when a North Dakota utility sells to a North Dakota customer some of the electricity might be diverted into Minnesota, violating Minnesota’s import restriction. So Minnesota’s law regulates out-of-state conduct, and the court held that it violated the U.S. Constitution and enjoined any enforcement.

The decision raises two potential problems for state regulation of imported electricity and fuel. First, more than half of the fifty states have renewable power standards that apply to imported electricity. Under the court’s decision these standards would be invalid unless they exempted incidental imports from out-of-state utilities serving out-of-state customers. The Harvard Environmental Law Program’s Policy Initiative’s Energy Fellow Ari Peskoe has suggested some ways that states could try to insulate their regulations from a similar challenge.

Second, the court suggested that there may be strict limits on a state’s ability to regulate imported fuel and electricity through renewable portfolio standards or low carbon fuel standards. The usual rule under the dormant commerce clause is that states “may not attach restrictions to exports or imports to control commerce in other states” or otherwise “project” their regulation into other states. But the entire point of state restrictions on imported fuel and electricity is to affect out-of-state greenhouse emissions. States want to regulate imported fuel and electricity because they are concerned that out-of-state energy producers are contributing to climate change—they don’t want to import oil from places where it takes a lot of greenhouse gas emissions to produce oil and they don’t want to import electricity from states that are producing it using a lot of greenhouse gas emissions. And that concern makes sense: even if those greenhouse gas emissions take place in other states or countries, they’re just as bad for the entire world’s climate. As a result, the U.S. Court of Appeals for the Ninth Circuit recently suggested that the dormant commerce clause’s prohibition on extraterritorial regulation is only meant for extraterritorial price-regulation, so it doesn’t threaten California’s low carbon fuel standard or, presumably, state renewable power standards.

The Minnesota court, however, rejected the Ninth Circuit’s reasoning, noting that the Supreme Court and several appellate courts have held that states may not project their regulation into neighboring states, even when the regulation was not about prices. This conflicting reasoning comes at an important moment for state regulation of imported fuel and electricity. There is still no legal consensus on the validity of these regulations, which are being challenged in several lawsuits around the country. Statepowerproject.org, a website created by the Harvard Environmental Law Program’s Policy Initiative, is tracking these lawsuits.

Second, there is no consensus on whether these state import restrictions are a wise way to make climate policy. Although states have good reason to be concerned about the fossil-fuel industry in their trading partners, other states and countries worry that these import regulations are aimed at burdening out-of-state industry. Canada doesn’t think California should tell it how to produce oil, and is concerned that California’s regulation has been rigged to harm it. Quebec believes that state renewable portfolio standards discriminate by refusing to credit its hydropower exports as renewable. And states like North Dakota have the same concerns about Minnesota’s regulation. These conflicting interests may create conflicting regulations and state-to-state trade wars that would splinter interstate energy markets. In a forthcoming article in Fordham Law Review, titled “Importing Energy, Exporting Regulation,” I argue that the federal government should address this problem by supervising state regulation of imported energy, exempting non-discriminatory regulations from dormant commerce clause review.

No one yet knows how this legal and policy debate will be resolved. The Minnesota decision frames the legal debate through its searching dormant commerce clause review and clarifies the stakes by striking down a closely watched state electricity regulation. The one certainty is that the debate will continue.

Oral Argument Hints that Supreme Court May Trim Back U.S. Industrial Source Greenhouse Gas Regulations

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Today the Supreme Court heard oral argument in Utility Air Regulatory Group v. Environmental Protection Agency (EPA), in which petitioners challenged the EPA’s “Prevention of Significant Deterioration” (“PSD”) regulations for stationary industrial sources of greenhouse gases. These regulations, finalized in 2010, require sources that emit over 100,000 tons of greenhouse gases to obtain a PSD permit and adopt the “best available control technology” for every pollutant that they emit, including greenhouse gases.

The oral argument provided few surprises: it was as complex as expected in this case of arcane statutory interpretation. As described below, the argument did hint, however, that the Supreme Court might adopt a compromise position, holding that 1) industrial sources cannot be required to obtain a PSD permit purely on the basis of their greenhouse gas emissions, but 2) can be required to adopt best available control technology for their greenhouse gas emissions if they need a PSD permit anyway due to their emissions of other pollutants. This ruling would likely have little impact on EPA’s broader agenda on greenhouse gas emissions.

The argument follows from the Supreme Court’s landmark decision in Massachusetts v. EPA, a 2007 case in which the Supreme Court held that greenhouse gases were a pollutant under the general terminology of the U.S. Clean Air Act. Relying on this decision, EPA has adopted greenhouse gas standards for new cars and trucks. It has also proposed greenhouse gas standards for new coal and natural gas power plants. And it is due to propose standards for existing coal and gas plants at some point this summer. This case, however, concerns a separate set of standards, adopted under the Clean Air Act’s catch-all for industrial sources, the Prevention of Significant Deterioration requirement that requires state and local permitting agencies to ensure that new major sources adopt the “Best Available Control Technology.” Petitioners today made clear that they are not challenging EPA’s rules for cars, or its proposed rules for individual source categories such as power plants. Instead, they challenge only EPA’s PSD catch-all.

EPA’s argument is simple: the Clean Air Act requires PSD regulation for sources of “any air pollutant” and Massachusetts v. EPA said that a greenhouse gas is a pollutant. Furthermore, the Clean Air Act language for PSD is the same as the language EPA used for the car rules and the power plant rules that petitioners are not disputing.

But there’s a catch. The Clean Air Act requires a PSD permit from any new source that emits over 250 tons of “any air pollutant.” That threshold makes sense for pollutants like lead and sulfur dioxide, but far too many sources emit that level of greenhouse gases, so EPA raised the level to 100,000 tons to avoid regulating hundreds of thousands of sources, which EPA acknowledges would be absurd.

Petitioners’ argue that, rather that re-write the statutory thresholds, EPA should not have included greenhouse gases in its PSD program. They say “any air pollutant” can mean different things in different parts of the act. It may be hard to imagine that Congress used the same word to mean different things in different places, but it’s even harder to imagine that Congress used the word “250” to mean “100,000.”

That left three arguments at play in today’s arguments:

1) The government defended its entire regulation: sources that emit over 100,000 tons of greenhouse gases need a PSD permit, and a PSD permit requires the “best available control technology” for greenhouse gases.

2) Industry argued the opposite: emitting greenhouse gases cannot trigger a need for a PSD permit, and even if an industrial source needs a PSD permit because it emits other pollutants, it should not have to adopt “best available control technology” for greenhouse gases. That is, greenhouse gases are not included in the PSD program at all.

3) The Justices spent most of their time pressing both sides why they should not adopt some version of a compromise suggested by one petitioner and a dissenting circuit court judge: emitting greenhouse gases cannot trigger a PSD permit, but if a source needs a permit, it must adopt the best available control technology for greenhouse gases.

This compromise would not rely on altering the 250-ton threshold set by the statute. Justice Kennedy, the swing-vote, noted that the government had not cited any case that would allow that type of statutory re-write. At the same time, the compromise would force the biggest industrial facilities, which need a PSD permit anyway, to adopt best available control technology for greenhouse gases. Professor Jody Freeman, President Obama’s Counselor for Energy and Climate Change, recently suggested that perhaps EPA should have adopted this approach from the beginning to avoid the risk of Supreme Court reversal.

Both petitioners and the government tried to suggest that this fallback was inadequate. This was difficult for the petitioners, given that one of the petitioners had proposed that fallback. And Justice Kennedy, the presumed swing vote, emphasized that he was looking for an argument that followed “both the result and the reasoning” of Massachusetts v. EPA, which stressed the possible benefits of greenhouse gas regulation.

But the government also had a difficult time explaining why it could not accept the proposed compromise. Nearly all sources that emit 100,000 tons of greenhouse gases emit over 250 tons of some other pollutant, so they would require a PSD permit in any case. (And, under the compromise, this would mean they must adopt best available control technology for greenhouse gases.) The only sources that would be excluded, under the compromise, would be the few sources that emit threshold levels of greenhouse gases, but not any other pollutant. EPA estimated that its regulation would cover 86% of greenhouse gases emitted by facilities over the statutory threshold, whereas the compromise would cover 83%. Justices Ginsburg, Roberts, Breyer, and Sotomayor all mentioned this distinction, suggesting that there was very little difference between the government’s position and the proposed compromise.

On the other hand, Chief Justice Roberts, another potential swing-vote, noted that this compromise might require two definitions of “pollutant” within the statutory section on PSD: one definition for the kind of pollutant that triggers the need for a permit, and another definition for the kind of pollutant that must be controlled with the best available technology. Even if it is okay to have one definition for cars and another for PSD, it is somewhat troubling to have inconsistent definitions within the PSD program itself.

The government added a final wrinkle to the compromise suggestions. Justice Sotomayor, who seemed friendly to the government, asked the government if it must lose, how it would like to lose. (See pages 67-72 of the oral argument transcript.) In answer, Solicitor General Donald Verrilli, suggested that “pollutant” should still include all greenhouse gases except carbon dioxide, which is the most common greenhouse gas, and the reason that EPA changed the threshold. This is a particularly complex suggestion, and has already earned a critique from RFF’s Nathan Richardson.

In sum, oral argument suggests that there is some appetite for a compromise among the Supreme Court’s swing votes, and even among some of the government’s supporters. But, as usual, there are too many factors at play for a firm prediction.

________________

Two disclaimers:

1) Before entering my academic career in 2011, I represented some of the petitioners in their challenge to EPA’s regulations.

2) I have omitted some details of the regulations and the petitioners’ arguments to avoid belaboring an already complex argument.

 

 

 

Eighty percent of success is showing up: Or “How a pro se farmer won a default against the United States in his suit to invalidate the permit for half of Keystone XL (& why it probably won’t last)”

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On April 25, Michael Bishop, a farmer acting pro se, filed a lawsuit in the U.S. District Court for the Eastern District of Texas to revoke TransCanada’s permit to construct the southern half of the Keystone XL project.  This part of the project, known as the “Gulf Coast Project” or “Phase III”, travels from Cushing, Oklahoma to the Gulf Coast.  Bishop sued the Army Corps of Engineers and its Commanding General, Thomas Bostick, because the Army Corps issued the permit to TransCanada.  The complaint that Bishop filed asked the court to order the Army Corps to revoke Keystone’s permit. Bishop then served this complaint on the Army Corps of Engineers, its officers, and the Attorney General of the United States.

Now, you might not like the chances of a pro se farmer aligned against the U.S. Attorney General, the Army Corps of Engineers, and TransCanada.  But as Sheriff Bell would say: “even in the contest between man and steer the issue is not certain.”  And, as it turns out, no one showed up to contest the lawsuit.  Even though the permit at issue belonged to TransCanada, it is not a defendant.  It was up to the government, and the government did not show up.  As a result, on Wednesday, the clerk entered a default against the Army Corps and its officers.
Mr. Bishop had won, and national news stories trumpeted his victory–e.g. Bloomberg “Texas Farmer Wins Entry of Default in Keystone Lawsuit“.  He told Bloomberg, “Tomorrow I’m going to ask the judge for everything I had in my original petition. I’m going to ask him to revoke the permit and effectively shut this pipeline down until they comply with the law.”
The victory will likely prove short-lived, however. On Thursday, the U.S. Attorney’s office for the Eastern District of Texas filed an emergency motion to vacate the clerk’s entry of default.  Although acknowledging that the AG, Army Corps, and officers had been served, the government pointed out that the U.S. Attorney’s office had not been served, a requirement under Federal Rule of Civil Procedure 4(i).  As a result, the government also suggested that the complaint itself should be dismissed “due to failure of service.”
In the end, it seems unlikely that a lawsuit of this importance will end in a default.  But it’s an important reminder of three things: 1) the variety of legal venues and strategies available to environmental plaintiffs looking to slow the flow of oil, 2) the difficulty of keeping track of the myriad resulting lawsuits, and 3) the importance of showing up.

Cross posted on ABlawg: The University of Calgary Faculty of Law Blog.

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