US Supreme Court grapples with federal authority over coal-fired power sector GHGs

The US Supreme Court wrestled with claims and counterclaims 28 February that the US government is overreaching in its efforts to regulate power sector, the second-largest source of GHGs in the nation, despite the absence of a federal regulation on the books.

During oral arguments that spanned more than two hours, Supreme Court justices questioned lawyers for the West Virginia-led coalition of states and coal companies about the US Environmental Protection Agency's (EPA) authority to regulate GHGs at power plants, and more broadly at other stationary sources across economic sectors.

Due to climate change, frequent and more intense storms, wildfires, droughts, and heatwaves are being felt all across the US and indeed the world. A UN report released the same day as the oral arguments buttressed that reality.

Yet, the US government has not been able to regulate GHGs from the power sector, owing to pushback from states like West Virginia, where coal and natural gas production and generation drive their economy. This is despite US President Joe Biden's pledge to decarbonize the power sector by 2035.

Until the Supreme Court issues its ruling on the reach of federal authority, EPA cannot rewrite the power sector GHG regulation, and that means approximately 280 US coal power plants will remain unregulated for GHGs in the foreseeable future.

Boosting coal, gas

West Virginia along with like-minded states and mining companies contend EPA's authority to curb GHGs ends at the fencelines of individual coal-fired units. This means EPA can only set GHG standards within these coal-fired units that involve efficiency improvements to air heaters, boilers, and other related equipment that will give rise to fewer emissions and greater uptake of coal. They oppose any regulatory approach that gives power plants flexibility to go beyond these units and install carbon capture and sequestration or shift from the costlier and dirtier coal-fired plants to the relatively lower-emitting natural gas or emissions-free renewables.

The power sector, however, is opposed to this stance, with Consolidated Edison, Exelon, and National Grid USA leading a host of utilities intervening in the case. The trade group Edison Electric Institute also filed a friend of the court brief in support of having more power plant flexibility.

Although the high court's ruling is not expected earlier than April, an opinion favoring West Virginia and its cohorts, meaning an adverse one for EPA, could have implications for Biden's goal to decarbonize the power sector and the economy as a whole because it could tie the federal government's hands on what GHG reduction approaches it could mandate on sectors other than the power sector.

Specifically, it would mean EPA would not be allowed to offer carbon sequestration and storage, average GHG reductions across high-emitting units within a plant, engage in carbon credit trading, and above all, switch to natural gas generation or renewables.

Conversely, a favorable ruling would give Biden the regulatory tools to achieve the goal of halving the nation's GHG emissions across all economic sectors.

Did Congress speak to this question?

Although Chief Justice John Roberts openly questioned whether the US Congress intended federal agencies to have the power that it didn't state explicitly, he alluded during the arguments to the EPA regulation, noting that "the US code is filled with delegations to different agencies. And many of those are of a technical nature."

The conservative-leaning justices did not let the states or the coal companies off the hook though, peppering them with tough questions.

The usually taciturn conservative-leaning Justice Clarence Thomas said he could not understand why West Virginia would be harmed by having a regulation outside the so-called fenceline of individual coal-fired units.

"There's quite a bit of talk about outside the fence and inside the fence. I don't know how you can draw such clean distinctions. It would seem that some of the activity that you might think is…source-based is also outside the fence," Thomas said.

Basis for challenge

The West Virginia-led coalition and coal companies objected to a January 2021 decision from the US Court of Appeals for the District of Columbia Circuit (DC Circuit), which the Supreme Court agreed to review in later October.

The DC Circuit, the states and coal companies said EPA has given itself "unfettered access" to promote GHG reduction approaches that would encourage the power sector to switch away from coal-fired generation, the mainstay in states like West Virginia and Wyoming, where mines are located, to relatively cleaner-burning natural gas or renewables to meet reduction targets.

In that ruling, the DC Circuit dismissed the 2019 Affordable Clean Energy (ACE) rule that limited GHG reductions to efficiency improvements, while repealing the 2015 Clean Power Plan (CPP) that offered power plant flexibility. However, EPA acted quickly after the DC Circuit decision and sought a partial stay from the court to prevent CPP from being reinstated.

During the arguments, the states and the coal companies repeatedly raised the specter that EPA would revive CPP, the Obama-era GHG regulation for power plants which would have been revived by the dismissal of the 2019 rule had the EPA not acted quickly to stay it in court until it writes a new regulation to replace it.

This prompted many a justice to ask US Solicitor General Elizabeth Prelogar whether EPA's actions were harming the states.

Prelogar, however, made it clear that there is "no federal regulation on the books," so there is no harm coming to the states that are charged with writing plans to comply.

"What they're focused on is the effects of what's going to happen in the future," she said, announcing that the EPA plans to issue a notice of proposed rulemaking for the power sector at the end of 2022.

Market forces driving down coal-fired power

In the runup to the 28 February arguments, lawyers tracking the case pointed out that West Virginia is pursuing a case that has far greater ramifications than just limiting the EPA's regulatory authority over the power sector. It could have serious implications for the industrial sector, which remains the third-largest source of GHG emissions in the US, and, potentially, the Biden administration's goal to decarbonize the power sector.

However, market forces are already at play and have driven down coal-fired generation since 2009, replacing it with natural and renewables.

Equally important to note is that no justice asked any of the lawyers about EPA's authority to regulate GHG emissions from other sectors of the economy.

Invoking 'major questions doctrine'

During the arguments, the nine justices also grappled with the claims made by the attorneys for coal-generating states and coal companies that the DC Circuit ruling gave EPA "transformative power" to change the nation's power generation mix through regulation.

West Virginia Solicitor General Lindsay See in particular argued this authority invokes the "major questions doctrine"—a decade-old legal doctrine that allows a federal agency to interpret the law within reason when there is no clear language from Congress and the underlying statute is ambiguous.

When Justice Samuel Alito questioned Prelogar, she said, "If it were really a transformational type of regulation, it wouldn't be adequately demonstrated, it wouldn't be what the industry is already doing to control pollution, it wouldn't be cost effective, and maybe it would transform the nature of our reliance on particular forms of energy, and so threaten the reliability of the grid."

Justice Thomas appeared skeptical when Jones Day attorney Jacob Roth, arguing on behalf of Westmoreland Mining Holdings, a Colorado coal company, said that EPA overreached its Clean Air Act Section 111 authority that was used to issue GHG regulations. Under this provision of the law, Congress authorized EPA authority to curb power plant pollution using the best system of emissions reduction (BSER).

BSER is a term Congress coined in the Clean Air Act to refer to reduction approaches, such as the energy efficiency improvements in ACE, that EPA has identified for a particular pollutant in a specific industry or source category after considering its technical feasibility, cost, non-air quality health and environmental impacts, and energy requirements.

Roth claimed EPA's authority was constrained to requiring BSERs within individual power plants, not redesigning the energy sector.

When Justice Stephen Breyer pressed him further to explain EPA's overreach, he compared the performance standards that the agency set for power plants with those for passenger cars.

"I can get 30 miles a gallon, I can get 35 miles a gallon. We don't mean I can take the bus. We don't mean I could stay home," he said.

EPA authority extends to source categories

However, Beth Brinkman, of Washington-based law firm Covington & Burling, who represented the power companies, reminded the justices that BSER is meant for a category of pollution sources, not just for an individual source.

Citing the example of emissions trading, which power companies have been utilizing to reduce ozone-forming pollutants and CO2, Brinkman said the Clean Air Act allows EPA to set BSERs for categories only after they have been adequately demonstrated.

For her part, Justice Department's Prelogar acknowledged that individual power plants are responsible for complying with rules, but all power plants don't have to follow the same solution, such as installing carbon capture and storage.

Notwithstanding the fact that EPA has repeatedly said it is not reinstating the CPP, Roth argued the agency—due to the court's now-stayed reinstatement of the 2015 regulation—is attempting to "effectively dictate not only the technical details of how a coal plant operates, but also the big-picture policy of how the nation generates its electricity."

"That immense authority cannot be reconciled with the statutory text and structure, let alone with the major questions doctrine," he added.

However, Thomas pointed out that "EPA could regulate the source in a way that actually requires change, for example, in the mix of energy generation" that could make the cost of running a facility so high that a power plant would naturally change its generation fuel from coal to natural gas, or a utility would switch to solar generation.

Roth acknowledged that the incidental effects of regulation can cause resource switching. But he added that the states are objecting to EPA's inclusion of measures—such as the use of renewables or switching to gas or co-firing with biomass (woody waste)—as the BSER because they are designed to shutter coal-fired power plants.

Still, Thomas persisted in his questioning: "But what's the difference? If you can do it indirectly or directly? Isn't it the same result?"

Limited to fencelines

Thomas was following up on lines of questioning opened up by Breyer and Justices Elena Kagan, and Sonia Sotomayor, who attempted to tease out the states' insistence that EPA's GHG authority is limited inside the power plant fenceline.

"Inside the fence can be very small, or it can be catastrophic … technological fixes that could drive the entire coal industry out of business," Kagan said, questioning its relevance to the coal industry.

Picking up on what Kagan said about generation shifting away from coal, Sotomayor asked West Virginia's See to explain the "major question" that Congress didn't address.

"It can't be that what Congress has chosen … leap in or out of the fence activities that lead to generation shifting?" she said.

Thomas said he wasn't clear on the distinction that Roth and See were trying to make about EPA authority inside the fenceline.

Roth shifted away from the fenceline argument, saying that was used as a "shorthand" to describe the measures that EPA could require to reduce the emissions rate, while See also described it as a shorthand for the limits Congress placed on EPA's authority.

Brinkman, however, during her turn pointed out yet further problems with West Virginia's inside-the-fenceline argument. She reminded the justices that coal is prewashed offsite to remove impurities before it is brought to a coal-fired power plant.

West Virginia wants to limit states' authority

When Kagan asked See to clarify whether states are also precluded under the Clean Air Act from setting standards that would result in generation switching, she said: "We do agree that the states are limited in setting a standard … in the same way that EPA is limited when it sets the best system of emission reduction."

Kagan found See's response at odds with the flexibility states have to set standards. The Clean Air Act allows EPA standard-setting to act as the floor against which states can set their own standards, Kagan said.

See said it is a false argument that more options for EPA means more options for the state.

She pointed to the CPP as an example, saying the rule set an aggressive schedule with options for states, "but really there weren't, because states couldn't actually have other options other than generation shifting."

See's response was in line with West Virginia's stance, which seeks to limit the impact to its fossil fuel industry. The Appalachian state is reliant on the mining and power generation industries for employment and revenue, as the second-largest coal producing state in the US in 2020 and the fifth-largest natural gas producer.

Chief Justice Roberts asked the Department of Justice to clarify whether West Virginia was being injured because it was deprived of the ACE regulation, which it preferred.

"Nothing prevents them from regulating however they wish," Prelogar said, making it clear that the state is not injured by an absence of federal regulation.

Posted 01 March 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.