Natural Resources Defense Council, Inc. v. Herrington

Nos. 83-1195 et al. (D.C. Cir. July 16, 1985)

ELR Digest

The court holds that the Department of Energy (DOE) violated the Energy Policy and Conservation Act (EPCA) and the National Environmental Policy Act (NEPA) by reversing a decision to issue energy efficiency standards for eight home appliances and by failing to prepare a proper environmental analysis of its decision. EPCA, as amended in 1978 by the National Energy Conservation Policy Act, requires DOE to develop standards for 13 kinds of home appliances unless DOE finds that such standards would not result in significant conservation or would not be technologically feasible or economically justified. If DOE declines to regulate an appliance, such action preempts state and local regulation. In 1980, DOE formally found that conservation standards for eight of the appliances would result in significant conservation and would be economically justified. DOE proposed standards and issued an environmental assessment (EA) to satisfy NEPA. In April 1982, DOE published a notice redefining "significant" energy conservation and proposing to set no standards. In December 1982 and August 1983, DOE published final rules determining that no standards should be set for the eight appliance categories, in seven cases because the energy savings would not be significant or economically justified, and in one case solely because the standard would not be economically justified. The court reviews DOE's factual findings under the substantial evidence standard prescribed by EPCA § 336(b)(2) and DOE's policy judgments under an "arbitrary and irrational" standard.

The court first holds that DOE's revised, three-part definition of "significant" energy conservation does not accord with EPCA. The court notes that a finding of a potential for significant savings is merely a trigger of a more searching review of the practicality of regulating; Congress could not have intended to set that threshold so high as to throw away cost-free chances to have non-trivial amounts of energy. DOE's definition is so stringent that, as applied to two of the appliances, it deems insignificant energy savings greater than the total energy consumption of the most minor appliances that the Act allows DOE to regulate. DOE's rationale for the first part of its test, tying significance to whether regulation would reduce national dependence on oil imports, focuses only on Congress' ultimate end and ignores Congress' chosen means: to achieve the goal using many programs, no one of which need be decisive. The rationale for the second part of the test, focussing on whether individual standards would affect the need for new energy generating capacity, also ignores possible cumulative effects. The rationale for the third part of the test, which invokes the voluntary goals established under the original EPCA, transplants those simple numerical goals into a different situation and ignores legislative history suggesting Congress viewed much smaller savings as significant. The court notes that it is not dictating how DOE is to exercise the broad discretion for setting significance levels, but ruling that DOE has ignored the guidance Congress did provide.

The court next upholds DOE's methods of calculating the savings that standards would achieve. In its calculations, DOE presumed that the market would force manufacturers to improve efficiency somewhat, even without regulation. The court rejects petitioners' claim that this assumption is inconsistent with EPCA. The court also holds that DOE satisfactorily explained key assumptions it made in its model of consumer behavior in the face of rising energy prices. Though the model may be flawed, DOE responsibly addressed alleged defects identified by commenters.

The court finds fault with DOE's actions and methods for determining what savings are technologically feasible. First, the court holds that DOE has failed to make a final determination of the maximum technologically feasible levels of conservation for all product types and classes as required by EPCA § 325(i)(3). DOE identified such levels in its 1980 proposed rules, but has failed to finalize them. DOE's rationales for not preparing a final determination simply ignore the mandate of the statute. The court also finds fault with certain of DOE's assumptions about feasibility, first holding that DOE's conclusion that all innovations not beyond the prototype stage by 1980 are infeasible is not supported by substantial evidence. DOE's alternative rationale for excluding prototypes, that no data would exist by which to judge their economic justifiability, goes against Congress' clear intent that technology be considered before economics and that economic analysis need not be precise. Further, it appears that DOE does have enough data to estimate economic justifiability. DOE's contention that existing test procedures might be inadequate to evaluate prototypes is also not supported in the record. The court concludes that DOE has taken an impermissible shortcut around the analytical tasks Congress set in the EPCA. Similarly, the court holds that DOE's exclusion of technologies available only in foreign markets is unsupported. DOE's rejection of options that take longer than five years to pay for themselves is contrary to the text and legislative history of the Act and unsupported by DOE. In contrast, DOE's decision to exclude design options that would require long lead times and significant increases in a manufacturer's engineering staff was supported in the record. The court declines to rule on several challenges to exclusion of specific design options, noting that DOE will be able to reconsider them on remand. DOE will also have to update the 1980 data that served as a basis for its technological evaluation on remand, the court notes. The Act and its legislative history suggest that Congress intended that DOE's data be reasonably current.

Turning to DOE's conclusions about economic justification for the standards, the court holds that DOE must reconsider its analysis of the burdens and benefits of regulation. The court notes that in any case, DOE would have to repeat its analysis of economic feasibility after it reevaluated technological feasibility. But as guidance to the agency, the court notes several flaws in the present analysis that should be corrected on remand. DOE's evaluation of the need to save energy, required by EPCA § 325(d)(6), was linked to DOE's unlawful definition of significant savings and is tainted by that linkage. DOE has failed to reasonably justify its choice of a 10 percent discount rate, as that rate is supported only by an Office of Management and Budget circular, neither the directive nor the record reveals the basis for the selection of that rate or refutes commenters' arguments that lower rates are appropriate. In making its findings on the economic benefits of central air conditioner (CAC) regulation, DOE made some questionable decisions in excluding peak load reduction as a possible benefit and in failing to consider the benefits available from certain high-efficiency models. Its decision to reduce the estimated annual use of CACs is ultimately unsupported in the record. The court declines to rule on DOE's use of an allegedly flawed cost efficiency curve, finding the issue to be fact-bound and certain to have different parameters on remand. DOE's assumptions, about how manufacturers would finance production changes, clearly biased the results of the modeling and are not adequately explained in the record. Nor has DOE adequately explained why it used information it knew to be incorrect in calculating the burdens of high-efficiency CAC standards. This failure alone requires remand of DOE's rejection of these standards. DOE did not exceed its authority in giving some weight to the burden of "foregone investment" on manufacturers when regulation diverts their capital into improving energy efficiency. Similarly, it was within its discretion in giving some weight to the possibility that standards would hiner development of useful but energy-consuming innovations. Completing this section of analysis, the court declines to rule on whether DOE rationally decided that the burdens outweighed the benefits, since it must reassess both on remand.

On a procedural point, the court holds that DOE abused its discretion under EPCA § 336(a)(2) by denying petitioners the opportunity to cross-examine a DOE panel at a public hearing on appliance regulation. The statute allows interested parties an opportunity to cross-examine DOE employees about disputed material facts unless DOE finds that such action would not promote timely and effective resolution of disputed matters. Even though petitioners' questions involved some policy matters, the court rules they raised material questions of fact. Since DOE disallowed the questions without addressing their effect on resolution of issue, DOE abused its discretion. Further, the court notes, total barring of cross examination is probably out of step with the intent of the statute as expressed in the legislative history. Also, the court rules § 336(a)(2) allows cross examination of all DOE employees at hearings, not merely those presenting oral testimony.

On the NEPA issues, the court holds that DOE could not rely on the EA for the 1980 proposed rules to cover the 1982 and 1983 final rules. In particular, DOE concluded that if the energy savings predicted from promulgation of the 1980 rules was not significant, then the smaller energy cost due to preemption of some state standards would also not be significant. This conclusion has no support in the record. Also unsupported are DOE's conclusions that quite probably the final actions would result in no increases in energy consumption and that DOE's exercise of its power to exempt state standards from preemption on a case-by-case basis would prevent significant impacts.

The court vacates the rules.

The full text of this opinion is available from ELR (154 pp, $24.00, ELR Order No. C-1337).

Counsel for Petitioners
Alan S. Miller
Natural Resources Defense Council
1350 New York Ave. NW, Suite 300, Washington DC 20006
(202) 783-7800

Gregory Wheatland
1516 9th St., MS-14, Sacramento CA 95814
(916) 324-3237

Counsel for Respondent
Susan V. Cook
Land and Natural Resources Division
Department of Justice, Washington DC 20530
(202) 633-3140

Wald, J.

[OPINION OMITTED BY PUBLISHER IN ORIGINAL SOURCE]