Fifth Circuit's Ruling Puts Next Steps on Cooling Water Regulation and Cost-Benefit Analysis in Hands of Obama EPA -- and OIRA

It turns out there’s more than one way an offshore oil rig can kill a fish. Even when they’re not spewing oil into the ocean, oil rigs kill vast numbers of fish and other aquatic organisms in their daily operations by sucking them up into their cooling water intake systems, where they get squashed against screens and otherwise beat up by the mechanism.   Power plants do it too, as does any industrial facility that circulates water for cooling. Congress recognized this problem four decades ago and so put a specific provision in the Clean Water Act directing the EPA to regulate cooling water intake structures. But there’s been a fight raging for years about just how EPA should carry out those responsibilities. 

You may remember that the U.S. Supreme Court weighed in on this controversy last year in Entergy Corp. v. Riverkeeper, largely siding with industry to say that EPA could use cost-benefit analysis to set these regulations. Two weeks ago, the U.S. Court of Appeals for the Fifth Circuit weighed in as well, in a decision in ConocoPhillips, et al. v. EPA that essentially kicked another ball back into the Obama administration’s court. That might be good news for the fish, if the decision was simply left to Lisa Jackson’s EPA—the agency Congress entrusted with this responsibility in the first place. But with Cass Sunstein’s Office of Information and Regulatory Affairs (OIRA) likely to meddle in this rulemaking as it has in others, I’m afraid we may end up with a result that’s good for industry but bad for our already struggling aquatic ecosystems. 

The Fifth Circuit’s ruling concerned the final “Phase III” of EPA’s regulation of cooling water intake structures, which applies to offshore oil rigs, small power plants and a bunch of other miscellaneous facilities. (Last year’s Supreme Court ruling was on Phase II—existing large power plants.) EPA’s approach to Phase III was a bit schizophrenic, which meant it had something for everyone to hate. In part of the rule, EPA declined to do cost-benefit analysis and imposed stringent requirements on new offshore oil rigs, which industry challenged. But in another part of the rule, relating to existing small power plants and manufacturers, EPA did do a cost-benefit analysis, and on that basis decided not to issue any regulation at all.   Environmentalists challenged that part. In its decision two weeks ago, the Fifth Circuit rejected industry’s challenge and upheld the new facilities part of the rule, reiterating what the Supreme Court said clearly in Entergy—that EPA can but doesn’t have to use cost-benefit analysis when setting these regulations.  As to the existing facilities portion of the rule, the court granted a joint motion by the EPA and the environmentalists to remand it back to the agency. That’s the ball that’s now in the Obama EPA’s court, along with the Phase II rule, which was remanded following the Supreme Court’s Entergy decision last year.

EPA’s phased approach to the regulation of cooling water intake structures began with the Phase I rule, issued in 2001.  That rule applied to new power plants and other facilities above a certain size, with the exception of offshore oil rigs. In designing this rule, EPA took its marching orders directly from the language of the Clean Water Act, tasking itself with identifying “the best technology available for minimizing adverse environmental impact”(66 Fed. Reg. 65256, 65260 (Dec. 18, 2001) quoting the language of the statute at 33 U.S.C.)   It determined that closed cycle cooling technology (which reduces harm to aquatic organisms by 98 percent) was the “best . . . available” and required all Phase I plants to use it. The Second Circuit, in 2004, agreed.

Phase II, issued in 2004, applied to large existing power plants. This time, EPA considered requiring closed cycle cooling technology again, but once the draft rule came back from the OIRA review mandated under Executive Order 12866, EPA had dropped the closed cycle cooling requirement in favor of a much less stringent rule and was citing its cost-benefit analysis as the reason.

The Phase II rulemaking and the cost-benefit analysis that accompanied it offers a perfect illustration of why cost-benefit analysis is such an irrational way to make decisions about protecting the environment and of why industry loves it so much. The simple truth is that when you insist on converting all of the costs and all of the benefits of environmental regulation into dollar terms, the environment invariably loses.   The environmental benefits of regulation get undercounted, because it’s simply too hard to attach a dollar figure to every fish, snail, plankton, and ecosystem impacted by industrial activity.  

Indeed, that’s exactly what happened when EPA tried to count up the costs and benefits of the Phase II rule. Lacking adequate data, it counted only a fraction of the species actually impacted by the rule, and even with respect to those, it only counted the two percent of fish that would have actually been harvested and eaten by humans (and then, only for the dollar value they'd fetch at market). The agency acknowledged that its estimate was grossly incomplete. Indeed it warned against drawing any conclusions from cost-benefit analysis, saying: “A comparison of complete costs and incomplete benefits does not provide an accurate picture of net benefits to society.” Nonetheless, once the draft rule came back from OIRA review, EPA had dropped the closed cycle requirement, citing the fact that its dollar estimate of costs ($413 million) outweighed its dollar estimate of benefits ($146 million).

Last year, the Supreme Court upheld the Phase II rule and EPA’s use of cost-benefit analysis, but it did so in an opinion that was narrow enough to offer some hope for the fish. It gave EPA discretion to use cost-benefit analysis but did not require it. Moreover, the Court suggested that such discretion may not extend so far as to authorize “a rigorous form of cost-benefit analysis” but might only allow the agency to determine whether costs are “wholly disproportionate” to benefits.

The next step in this saga unfolded on July 23 when the Fifth Circuit released its opinion on the Phase III rule. That rule, issued in 2006, covers everything left over after Phases I and II: smaller existing facilities (including paper, chemical, petroleum, aluminum, and steel manufacturers as well as small power plants) and new offshore oil rigs, along with some other miscellaneous new facilities not covered by the Phase I rule.  For the new offshore rigs and the miscellaneous new facilities, EPA imposed additional requirements that should significantly reduce environmental damage. In developing this part of the rule, the agency declined to conduct a cost-benefit analysis because the environmental benefits were too hard to measure. In their challenge, industry argued that this failure to do cost-benefit should invalidate the rule. But the Fifth Circuit disagreed. Following the clear language of the Supreme Court’s Entergy opinion, it held that while EPA may use cost-benefit analysis under this section of the statute, it is not required to.  

On the existing facilities portion of the rule, however, EPA decided not to issue a regulation at all, simply leaving those facilities to a case-by-case assessment by the states.   EPA's reason for deciding not to regulate?  Cost-benefit analysis (see 71 Fed. Reg. 35017). The agency conducted a cost-benefit analysis that looked very similar to the one it had produced in connection with the Phase II rule. It left out substantial numbers of affected species for lack of data, left out cumulative and ecosystem impacts entirely, and, even with respect to commercially harvested species, counted only two and a half percent of the fish (those that would actually have been caught). This vast underestimate of the environmental benefits of the rule, not surprisingly, yielded a relatively small dollar figure—around $2 million, compared with $39 million in estimated costs. But this time, EPA didn’t even bother with the caveats that had accompanied the Phase II rule (about the dangers of comparing a complete estimate of costs with an incomplete estimate of benefits). Instead, the agency went ahead and unabashedly based its decision on its conclusion that “the monetized costs . . . are wholly disproportionate to the monetized environmental benefits.”

This idea of a “wholly disproportionate” cost-benefit analysis can be traced back to a D.C. Circuit case (Weyerhaeuser v. Costle) that took the phrase from the legislative history of the Clean Water Act.   Congress and the judges of the D.C. Circuit were concerned that lots of environmental benefits would defy monetization, and that EPA would tie itself in knots trying to perform a fully monetized cost-benefit analysis. Accordingly, rather than waste time and resources trying to convert all costs and benefits into a single monetary metric, they wanted EPA to just do a rough apples-to-oranges comparison that simply made sure that costs were not “wholly disproportionate” to benefits.  

That’s very different from what EPA did here, however, which was to conclude that monetized costs were “wholly disproportionate” to monetized benefits—hardly a meaningful or fair comparison, given how hopelessly incomplete EPA’s monetized benefits estimate was. While we can’t know for sure, it’s certainly within the realm of reason to suppose that the agency’s estimate could have undercounted the actual environmental benefits of regulation—to the extent they have monetary values—by a factor of twenty or more. And if that’s the case, then the costs and benefits were not disproportionate at all, and certainly not “wholly” so.

The environmentalists who challenged the Phase III rule, however, never got a chance to hear the Fifth Circuit’s reaction to these arguments. Once the Supreme Court’s decision on the Phase II rule came down, allowing but not requiring the EPA to use cost-benefit analysis, Riverkeeper and the other environmental groups and states that challenged the existing facilities portion of the rule figured they were better off joining the government’s motion to remand it back to Obama’s EPA (which is also reconsidering the Phase II rule on remand.) After all, since the Supreme Court said the agency is allowed but not required to use cost-benefit analysis, the Obama EPA could simply re-write this Bush era rule based on an assessment of the best technology available, rather than spinning their wheels trying to put a dollar value on every fish, oyster and plankton.

Unfortunately, however, the Supreme Court and the EPA are not the only players here. EPA will have to run the gauntlet at Cass Sunstein’s OIRA with any new proposed rule. And based on that office’s track record so far, we can expect the economists at OIRA to approach this rule much the way they did under the Bush administration—providing an open door to industry lobbyists, using their authority under Executive Order 12866 to insist on a formal, extensively monetized CBA, and pushing for a less stringent rule if EPA can’t make the dollar benefits add up to as much as the dollar costs. 

Indeed, a Federal Register notice published by EPA just two days before the Fifth Circuit opinion came down suggests that EPA is already bowing to that anticipated pressure from OIRA. The notice announces EPA’s intent to conduct a “willingness-to-pay survey” to assess “the public policy significance . . . of the ecological gains” from cooling water intake regulation at existing facilities.   In other words, they are literally going to survey people and ask them how much the fish that get squashed and chewed up at cooling water intake structures are worth to them.  This is exactly the kind of fruitless wheel-spinning Congress was trying to guard against.   Rather than jumping headlong into the cost-benefit morass EPA should stand up to OIRA and accept the Supreme Court’s—and now the Fifth Circuit’s—explicit permission to set these rules without a cost-benefit analysis.