Cost-Benefit Analysis Through the Back Door of "Reasoned Decisionmaking"?

Richard G. Stoll¹

Few environmental cases have received as much attention as American Trucking Ass'n v. U.S. Environmental Protection Agency,² recently argued before the U.S. Supreme Court. Even readers of the mainstream press³ are aware that industrial petitioners have urged the Court to inject cost-benefit considerations into the Clean Air Act (CAA) ambient air quality standard-setting process, and in effect overrule the 20-year Lead Industries Ass'n v. U.S. Environmental Protection Agency⁴ precedent of the D.C. Circuit.

Two little-noticed D.C. Circuit cases decided in the summer of 2000, however, have imposed at least some form of cost-benefit obligations on the U.S. Environmental Protection Agency (EPA) despite statutory silence on the issue. In both cases, the court vacated EPA rules on "reasoned decisionmaking" grounds, and said that cost-benefit factors should be evaluated by the Agency.

Thus, the court may invalidate an EPA rule that fails to account for costs and benefits through the "back door" of reasoned decisionmaking requirements. Granted, these new D.C. Circuit cases fall far short of requiring the use of traditional cost-benefit analysis. The decisions may, however, with attentive nurturing by counsel and positive responses from the court, drive additional cost-benefit discipline into EPA decisionmaking as the case law advances.

The first ruling occurred in American Petroleum Institute v. U.S. Environmental Protection Agency (API).⁵ The second decision is Chemical Manufacturers Ass'n⁶ v. U.S. Environmental Protection Agency (CMA).⁷ The D.C. Circuit issued the opinions less than a month apart—API on June 27 and CMA on July 25.

Chevron⁸ Statutory Interpretation and State Farm⁹ Reasoned Decisionmaking Review

It is useful to place the "reasoned decisionmaking" concept in context. When the D.C. Circuit reviews EPA's (and other agencies') regulations, it often focuses on two fundamental issues: (1) whether EPA's interpretation of a statutory provision is sustainable; and (2) whether EPA engaged in reasoned decisionmaking in reaching that interpretation. These are independent issues, and the court may vacate an EPA regulation on either ground. The first inquiry is known as the Chevron "two-step" test. The second inquiry is frequently equated with the familiar "arbitrary or capricious" test from the Administrative Procedure Act (APA).¹⁰ The leading Supreme Court cases articulating these two lines of inquiry were decided only one year apart—in 1983 and 1984.

Chevron Two-Step Test

In considering whether a rule exceeds EPA's statutory authority, the D.C. Circuit usually first applies the "two-step" test set forth in Chevron. "Step I" is whether Congress has directly addressed the point in question. If it has, "that is the end of the matter; for the court … must give effect to the unambiguously expressed intent of Congress."¹¹ Where the statute is "silent or ambiguous with respect to the specific issue," the court engages in a Chevron "Step II" inquiry. The issue then becomes whether EPA has rendered a "permissible construction of the statute," i.e., whether EPA's interpretation "in the context of [a] particular program is a reasonable one."¹²

[31 ELR 10229]

State Farm Reasoned Decisionmaking

Even where an EPA interpretation passes muster under Chevron, the court may also scrutinize EPA's actions under State Farm. In State Farm, the Supreme Court elaborated upon the APA "arbitrary or capricious" standard with guidance the D.C. Circuit frequently relies upon. The most heavily quoted guidance is that in formulating a rule, an agency must "articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made."¹³ The court must also consider whether the agency's decision "was based on a consideration of the relevant factors."¹⁴ The Supreme Court used the phrase "reasoned decisionmaking" to summarize its guidance,¹⁵ and this terminology is used frequently by the D.C. Circuit.

As might be surmised, the Chevron Step II and the State Farm inquiries may overlap.¹⁶ That is, whether an interpretation is reasonable in the context of a particular program may depend somewhat on how EPA has arrived at such interpretation through the decisionmaking process.

The API Opinion of June 2000

These consolidated cases dealt with three issues. The issue of relevance to this Dialogue dealt with EPA's oft-litigated and much-maligned "definition of solid waste" under the Resource Conservation and Recovery Act (RCRA).¹⁷ More particularly, the issue was whether certain wastewaters containing small amounts of oil that could be reused in an industrial process should be considered "discarded," and therefore a solid waste under the applicable statutory definition. Judge Sentelle wrote the portion of the opinion dealing with this issue.¹⁸

In the petroleum refining process, large quantities of water are used to remove impurities from crude oil. The resulting wastewaters—which must be treated to meet Clean Water Act (CWA) requirements before discharge to a river—contain a small percentage of residual oil. This "oil-bearing wastewater" is treated in three phases. During the primary treatment phase, the oil is separated from the wastewater. This recovered oil is then recycled back into the refinery production process. While the amount of oil in the wastewater is relatively small on a percentage basis, the amount recovered, as the court said, is "not insignificant"—up to 1,000 barrels a day at some refineries.¹⁹

EPA's rule claimed RCRA jurisdiction over the wastewaters, including the oil in the wastewaters, under the theory that the oil was "discarded." Industry petitioners disputed this, claiming that the oil was a valuable in-process material destined for recovery and therefore not discarded. As the court characterized the issue: "At bottom, the parties disagree over the proper characterization of primary treatment. Is it simply a step in the act of discarding? Or is it the last step in a production process before discard?"²⁰

In its rulemaking preamble, EPA had addressed the issue using a two-step syllogism: (1) the primary purpose of the primary treatment is the CWA's compliance, not usable oil recovery; and (2) if the primary purpose is waste treatment rather than recovery, then the material being treated must be considered "discarded." The court initially discussed the Chevron two-step test and ruled "permissible" EPA's determination that in the abstract, the predominant purpose of primary treatment may be discarded. The court went on to rule: "However, the record must reflect that EPA engaged in reasoned decisionmaking to decide which characterization is appropriate. The record in this case is deficient in that regard."²¹

The court found particular fault with EPA's stated conclusion—"clearly, wastewater treatment is the main purpose." The court said a conclusion is not clear "merely because one says so," and proceeded to discuss how a rational decisionmaker could have concluded the contrary.²² EPA had attempted to buttress its conclusion on the ground that only a small percentage of the wastewater stream was comprised of recoverable oil. The court said that did not mean the recovered oil was not valuable, and drew a comparison to the rock of a diamond mine that may "only contain a tiny portion of precious carbon, but that is enough to keep miners busy."²³

The court conceded that if petroleum refiners "got nothing from primary treatment," it would be difficult to explain why, other than to discard, refiners would "engage in a costly treatment activity with no economic benefits."²⁴ But, the court said, the industry petitioners claimed they would engage in the recovery regardless of the requirements of the CWA. The court faulted EPA's lack of reasoned response with the following observation:

EPA does not explain why this possibly valid motivation is not compelling. EPA makes no attempt to balance the costs and benefits of primary treatment, or otherwise explain why the Clean Water Act requirements are the real motivation behind primary treatment…. If the non-Clean Water Act benefits of the initial treatment are [31 ELR 10230] enough to justify firms' incurring costs (petitioners point to material in the record that may support such a proposition), the EPA would have to reconcile that fact with the conclusion that the Clean Water Act purpose was primary.²⁵

The court accordingly vacated EPA's rule to the extent it failed to exclude the oil-bearing wastewaters from the RCRA definition of solid waste.²⁶ Thus, even though nothing in the statutory definition of solid waste suggests that costs and benefits would be a factor in determining what would be covered, and even though EPA's general duty under RCRA to issue regulations that "protect the public health and the environment" is silent on the issue of costs and benefits,²⁷ EPA's failure to evaluate costs and benefits in this context resulted in judicial rejection of its rule.

The CMA Opinion of July 2000²⁸

In 1996, EPA initiated a rulemaking to impose "maximum achievable control technology" (MACT) standards on hazardous waste combustors (HWCs) under the CAA. EPA issued the final HWC MACT rules in two phases. In 1998, EPA established procedural requirements; in 1999, EPA issued substantive MACT standards. EPA must set MACT compliance dates for each source category. Under CAA § 112(i)(3)(A), affected sources must achieve compliance "as expeditiously as practicable," but no later than three years after the effective date of the MACT standard.²⁹ In the 10 years EPA has implemented its MACT authority, EPA has always established a uniform compliance date for each source category.

In the 1998 HWC rule, however, EPA established an "early cessation" requirement under which not all sources in a category would have the same compliance date. Rather, EPA established a phased notification scheme under which each source would be required within one and two years after the rule's effective date either to (1) demonstrate sufficient progress toward compliance with the new MACT standards, or (2) declare its intent to stop burning hazardous waste rather than comply with the new MACT standards.

Sources declaring their intent not to comply with the new MACT standards would under this "early cessation" rule be required to cease burning hazardous waste no later than two years after the new MACT rule's effective date. Sources that declared their intent to comply with the new MACT rule would, on the other hand, be given the full three years to comply.

Trade associations for various types of HWCs challenged this early cessation rule on two principal grounds. They first argued that EPA did not have statutory authority for such an early cessation program. Second, they challenged the rule on reasoned decisionmaking grounds. They argued that while EPA had made a conclusory finding that the rule would produce "numerous benefits for human health and the environment," the Agency had offered no support for such a conclusion and in fact the rule would result in no benefit to human health and the environment. This was because, the associations argued, EPA had also found that if any HWC ceased burning hazardous waste at the end of the second year, the waste that facility would have burned would in all likelihood be sent to another HWC for burning, and that HWC would not be in compliance with the new MACT standard for another year. Thus, during the third year, even though waste might be moved from one facility to another, there would be no overall reduction in emissions.

In an opinion by Judge Tatel,³⁰ the D.C. Circuit rejected the petitioners' statutory authority argument, saying it required "little discussion."³¹ Thus, like the API court, the CMA court found no fault with EPA's rule on the basis of raw statutory authority. Also like the API court, however, the CMA court rejected EPA's interpretation on reasoned decisionmaking grounds. In fact, in CMA, the court summarized its views quite strongly: "We think that the Agency's action represents a classic case of arbitrary and capricious rulemaking."³²

Quoting from State Farm, the court found EPA had failed to "articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made."³³ This was because, as the court stressed, EPA's bald assertion that there were "numerous" health and environmental benefits from its early cessation rule was not supported by any reasoning. In fact, the court pointed out, the possibility of environmental harm might be increased during the third year because more movement of wastes could increase the chances of leakage or spillage.³⁴

As noted above, the Chevron Step II inquiry may overlap with the State Farm reasoned decisionmaking inquiry, and the D.C. Circuit analyzed EPA's early cessation rule under both. In Step II, the issue is whether the Agency has reached a "permissible" interpretation, and the court ruled EPA had not. This was because through lack of reasoned decisionmaking, EPA had failed to show its interpretation to be "consistent with the statute's purpose."³⁵

The court said the statute's purpose was, as provided in CAA § 101(b)(1),³⁶ to protect and enhance air quality so as to promote the public health and welfare. But since EPA could not explain why there were any environmental benefits, the court held that it was "unreasonable for the Agency to have interpreted the phrase 'compliance as expeditiously as practicable' as requiring it to impose costly [31 ELR 10231] obligations on regulated entities without regard to the [CAA's] purpose."³⁷

Given the "absence of environmental benefits" in light of these "costly obligations," the court vacated EPA's early cessation rule. It stressed: "In reaching this conclusion, we emphasize that we do not question EPA's authority under the [CAA] to implement an early cessation program if it determines through reasoned decisionmaking that the program would produce environmental or health benefits."³⁸

Conclusion

Both of these recent D.C. Circuit cases have important common attributes:

(1) The statutory authority being implemented was silent on the issue of whether EPA was required to consider costs and benefits;

(2) The court rejected petitioners' claims that EPA had exceeded its statutory authority;

(3) The court rejected EPA's conclusory findings that were not buttressed with further elaboration on the record;

(4) The court based its rejection on State Farm reasoned decisionmaking grounds; and

(5) The court vacated the rule because EPA's decisionmaking process did not adequately evaluate benefits in light of costs.

As stressed at the outset, this is all a far cry from an overrule (either explicit or implicit) of Lead Industries. These cases may, however, provide useful authority to parties seeking reasonableness and rationality in future EPA rules. They may also provide the basis for increased judicial scrutiny of cost and benefit factors through application of the reasoned decisionmaking doctrine.

1. The author is a member of the Washington, D.C. law firm of Freedman, Levy, Kroll & Simonds. In February 2001, Freedman Levy is merging with the national law firm of Foley & Lardner where the author will be a partner in the D.C. office.

2. 175 F.3d 1027, 29 ELR 21071 (D.C. Cir. 1999), modified on reh'g, 195 F.3d 4, 30 ELR 20119 (D.C. Cir. 1999), petition for cert. granted sub nom. Browner v. American Trucking Ass'n, 120 S. Ct. 2003 (2000) and 120 S. Ct. 2193 (2000) (oral argument held Nov. 7, 2000). The D.C. Circuit ruled that, under EPA's interpretation, Clean Air Act (CAA) § 109, 42 U.S.C. § 7409, ELR STAT. CAA § 109, was unconstitutionally vague and exceeded Congress' power to delegate. The U.S. Supreme Court granted EPA's certiorari petition on the constitutional issue. Industrial parties filed a cross-petition, which the Court also granted. The industrial parties argued that the Court could avoid the constitutional issue by ruling that CAA § 109 required EPA to consider costs as well as benefits in setting ambient standards. This would have the effect of overruling long-standing precedent in the D.C. Circuit. Lead Indus. Ass'n v. EPA, 647 F.2d 1130, 10 ELR 20643 (D.C. Cir. 1980), cert. denied, 449 U.S. 1042 (1980).

3. E.g., Attack on Clean Air Act Falters in High Court, N.Y. TIMES, Nov. 8, 2000, at Al.

4. 647 F.2d 1130, 10 ELR 20643 (D.C. Cir. 1980), cert. denied, 449 U.S. 1042 (1980).

5. 216 F.3d 50, 30 ELR 20686 (D.C. Cir. 2000).

6. The Chemical Manufacturers Association has since changed its name to the American Chemistry Council.

7. 217 F.3d 861, 30 ELR 20782 (D.C. Cir. 2000).

8. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 14 ELR 20507 (1984).

9. Motor Vehicle Mfrs. Ass'n of the United States v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 13 ELR 20672 (1983).

10. 5 U.S.C. § 551, available in ELR STAT. ADMIN. PROC.

11. 467 U.S. at 842, 14 ELR at 20508.

12. Id. at 845, 14 ELR at 20509.

13. State Farm, 463 U.S. at 43, 13 ELR at 20676.

14. Id.

15. Id. at 52, 13 ELR at 20678.

16. American Petroleum Inst. v. EPA, 216 F.3d 50, 57, 30 ELR 20686, 20688 (D.C. Cir. 2000) (Chevron step II and arbitrary and capricious test "overlap, but are not identical"); Animal Legal Def. Fund v. National Ass'n for Biomedical Research, 204 F.3d 229, 234 (D.C. Cir. 2000) (there is "complete overlap" between Chevron step II and State Farm review); Arent v. Shalala, 70 F.3d 610, 615 (D.C. Cir. 1995) (Chevron review and arbitrary and capricious review "overlap at the margins").

17. The statutory definition appears in RCRA, see 42 U.S.C. § 6903(27), ELR STAT. RCRA § 1004(27).

18. In API the panel addressed three issues, and each judge took responsibility for writing one portion of the opinion.

19. 216 F.3d at 55, 30 ELR at 20687.

20. Id. at 57, 30 ELR at 20688.

21. Id.

22. Id.

23. Id.

24. Id.

25. Id. at 58, 30 ELR at 20688 (emphasis added).

26. Id.

27. 42 U.S.C. §§ 6922(a), 6923(a), 6924(a), 6925(a), ELR STAT. RCRA §§ 3002(a), 3003(a), 3004(a), 3005(a).

28. The author argued this case on behalf of all petitioners.