EPA and DENR | Rulemaking by Guidelines
Article Date: Friday, June 07, 2013
Written By: Richard Sieg
As a former regulator, I reflect upon my experience as an environmental engineer at the N.C. Department of Environment and Natural Resources (DENR) with great memories. I worked with fine regulatory professionals, some of whom remain my friends today. I recall presentations by DENR and/or its attorneys to the regulated community where Chevron deference was emphasized as creating an uphill, if not impossible, battle for anyone who would dare try to use the administrative process to appeal agency decisions. Then, I attended Vermont Law School where Patrick Parenteau1 taught an environmental litigation course. For those of you who don’t know him, he has made a living suing the government for environmental interests. In that class, he taught that agencies, filled with wonderful people, make mistakes that not even Chevron can cure. The agencies must operate within the bounds of the relevant Administrative Procedure Act (APA), the prescribed bounds within each statute, and the U.S. and State Constitutions. One mistake that fits within this category is an agency creating rules through the issuance of guidelines.
The United States Environmental Protection Agency (EPA) and DENR share a common desire to create substantive, generally applicable requirements of the regulated community through the use of guidelines. The allure is obvious. Rule-making is cumbersome and it is more “efficient” to rule by guidelines. However, both the state and federal APAs require agencies to use a defined process for rule-making and Constitutional concerns abound when an agency creates a rule with the stroke of a pen.
Under the federal APA, “‘rule’ means the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency. . . .” (5 U.S.C.A. § 551(4).) As history clearly shows, a “rule” may come in many forms: “guidance” documents, letters, speeches, etc.
“Interpretive rules” explain the agency’s interpretation of the law, and “policy statements” are used by an agency to explain how it intends to exercise its discretion. Guidance may contain both interpretive rules and policy statements. The bounds for agency guidance are far from unfettered, as the courts have reviewed numerous “guidance” documents for compliance with the federal APA. However, only “final” agency actions are reviewable by the courts. Bennett v. Spear laid out the two-part test for when an agency action is final and, therefore, judicially reviewable: the action must (1) mark “consummation” of an agency’s decision-making process; and, (2) determine a party’s “rights or obligations” or be an action from which “legal obligations flow.” (520 U.S. 154, 177-78 (1997).) Guidance is not a legally binding document, whereas a rule is. As the D.C. Circuit explains in Cement Kiln Recycling v. Envtl Prot. Agency (Cement Kiln): “the question of whether the guidance document is a legislative rule that is subject to notice and comment – rather than a policy statement that is not – turns on ‘whether the agency action binds private parties or the agency itself with the ‘force of law.’” (493 F.3d 207, 215-16 (D.C. Cir. 2007) (citing Gen. Elec. v. Envtl Prot. Agency, 290 F.3d 377, 382 (D.C. Cir. 2002)).) As a practical (and legal) matter, the guidance may be considered binding facially or as applied by the agency. Id. at 227. In short, “guidance” becomes a rule when it commands, orders, or requires regulated entities to perform certain actions or when the agency applies it that way. (Id. at 227-28.)
In Appalachian Power Co. v. Envtl Prot. Agency, the D.C. Circuit set aside EPA periodic monitoring guidance pursuant to the Clean Air Act that expanded upon the requirements of the existing periodic monitoring rule. (208 F.3d 1015, 1024, 1028 (2000).) The guidance on its face commanded, required, ordered and dictated. (Id. at 1023.) The guidance was EPA’s final agency position, “reflecting a settled agency position which has legal consequences both for State agencies administering their permit programs and for companies like those represented by petitioners who must obtain Title V permits in order to continue operating.” (Id.) Also, the state agencies were treating the guidance strictly (e.g., as a legislative rule). Then, in General Electric v. Envtl Prot. Agency (GE), the court went even further by holding the PCB Risk Assessment Review Guidance Document (PCB Guidance Document) invalid solely based on the language in the document. (290 F.3d 377, 384-85 (D.C. Cir. 2002).) This guidance document set a standard for total toxicity, would only allow approaches discussed in the guidance to be used, and contained the strong language also found in Appalachian Power. Id. Thus, the GE court found the guidance document facially binding on the regulated community without more. EPA learned from these experiences.
In Cement Kiln, the same court found that EPA’s Human Health Risk Assessment Protocol guidance document was cleansed of the forceful language found in the PCB Guidance Document discussed in GE and thus was not a rule “on its face.” (493 F.3d at 215-16, 227.) When this case was heard, it was too early to know whether EPA would apply the guideline as a rule and therefore an “as applied” challenge was not ripe. But, again, by merely softening the language of a guidance document (e.g., taking out commands), EPA may still run afoul of the federal APA, if it or the states apply the guidance like a rule.
In March 2013, two letters from EPA to Senator Charles Grassley were held to contain legislative rules that should have gone through federal APA rule-making procedures in Iowa League of Cities v. Envtl Prot. Agency. (711 F.3d 854, 854-55 (8th Cir. 2013).) According to the 8th Circuit panel, these letters added new, substantive requirements for publicly owned treatment works related to blending and mixing zones and thus the court vacated the letters. (Id. at 873-76.) This case is on appeal. One year earlier, the National Mining Association (NMA) won reversal of EPA guidance creating a conductivity benchmark that in practice would block the issuance of dredge-and-fill permits. (National Min. Ass’n v. Jackson, 880 F.Supp.2d 119, 119-42 (D.C. Cir. 2012) (NMAII).) In 2011, the D.C. District Court soundly rejected EPA’s motion to dismiss, stating that NMA “is likely to prevail on its claim that the EPA has exceeded its statutory authority.” (Nat’l Min. Ass’n v. Jackson, 768 F.Supp.2d 34, 49 (2011)) (NMAI).) As forecasted by the NMAI court in 2011, the NMAII court held that the EPA “overstepped the authority afforded it by [the Clean Water Act].” (NMAII, 880 F.Supp.2d at 138.) This decision is also on appeal. In 2011, EPA guidance describing an alternative proposed penalty program under the Clean Air Act (CAA) for ozone nonattainment areas was struck down by the D.C. Circuit Court of Appeals. (Natural Resources Defense Council v. Envtl Prot. Agency, 559 F.3d 561 (D.D.C. 2009).) The EPA alternative was distinct from the statutory program present in the highly prescriptive CAA. In a “stinging rebuke,” the Appellate Court held that EPA “overstepped its authority and essentially issued a regulation under the guise of nonbinding guidance.” Again, according to the courts, EPA failed to satisfy its federal APA rulemaking requirements in these three cases.
North Carolina Law
The N.C. Administrative Procedure Act (NCAPA) provides constraints on state agencies such as DENR that are similar to the federal APA. In North Carolina, a “rule” is “any agency regulation, standard, or statement of general applicability that implements or interprets [state or federal law] or [federal regulation] or that describes the procedure or practice requirements of an agency.” (N.C. Gen. Stat. § 150B-2.) Certain exemptions from the “rule” definition exist. For instance, any agency can mandate the use of forms for the submittal of information required to be submitted to the agency under the law (or codified rules). Also, “nonbinding interpretative statements” that “merely define, interpret, or explain the meaning of a statute or rule” are not “rules.” (Id.) Finally, a “rule,” not exempted by the N.C. APA, may not be enforced by an agency unless it is created through rule-making. (§ 150B-18.)
According to the N.C. Supreme Court, a procedural rule “[describes] how the agency will discharge its assigned functions. . . .” State of NC ex rel. Commissioner of Insurance v. N.C. Rate Bureau, 300 N.C. 381, 411 (1980). A legislative rule “fill[s] the interstices of statutes . . . , [going] beyond mere interpretation of statutory language or application of such language and within statutory limits . . . [establish] substantive requirements.” (Id.) An interpretive rule “interpret[s] and appl[ies] the provisions of the statute. . . .” (Id.) As discussed in Rate Bureau, legislative rules must go through the rule-making process. (Id.) In Rate Bureau, the North Carolina Rate Bureau (NCRB) filed for a rate change with the Commissioner of Insurance. The proposal provided unaudited company data justifying the increase, which resulted in the Commissioner’s rejection of the rate increase. The N.C. Supreme Court held that the Commissioner’s action violated lawful, mandatory procedures and was arbitrary and capricious.
The court explained that, in regard to the unaudited data, the relevant statutes provided the Commissioner broad authority to require NCRB to provide necessary data, but the statute did not explicitly state that the data shall be audited. While such a requirement was authorized by the statute, merely extrapolating the statute to this requirement was unacceptable. This requirement was a rule, subject to rule-making. “Put another way, the Commissioner’s enunciated rule was established as a result of a delegation of legislative power to his agency. G.S. 58-9(1) empowers the Commissioner to ‘make rules and regulations . . . to enforce, carry out and make effective the provisions of this Chapter, and to make such further rules and regulations not contrary to any provision of the Chapter.’” (Id. at 412.) The court continued that the Commissioner set down “additional substantive requirements” by mandating the use of audited data. Finally, the court explained that the rule came with sanctions, since the Commissioner denied the requested rate increase based on NCRB’s failure to satisfy the new requirement – the new legislative rule.
The facts and law in Rate Bureau should concern DENR and other state agencies. DENR has published many guidelines through the years that look, taste and feel like a rule. Like the Commissioner in Rate Bureau, DENR has been delegated broad authority to establish rules for its various programs. DENR may fill in the gaps of statutes by adding substantive requirements, but it must do so through rule-making.
Let’s arbitrarily select the DENR underground storage tank (UST) Program guidance documents to review.
It has a virtual library of “guidance documents” that order or compel the regulated community to satisfy substantive requirements. (Underground Storage Tank Section, http://portal.ncdenr.org/web/wm/ust/guidance.) If the regulated parties do not follow the requirements, DENR sanctions them by issuing Notices of Violation, taking enforcement action, or refusing to close contaminated sites. If the guideline requirements do not meet one of the statutory exclusions from the rule definition, then they are rules that must go through rule-making. It is not a matter of what the agency would prefer to do. In its “Guidelines for Assessment and Corrective Action for UST Releases,” DENR provides numerous standards that responsible parties must follow. The UST Section’s guidelines are prescriptive, commanding the regulated party to complete substantive requirements for the closure of USTs and for the assessment and cleanup of sites contaminated as a result of UST and non-UST (e.g., spills) releases.
A review of N.C. case law did not reveal cases where DENR’s “guidelines” were at the heart of the issues in a case. However, the Department of Health and Human Services (DHHS) has been rebuked recently on more than one occasion for overstepping its authority by enforcing guidelines or written policy as rules. In Dillingham v. N.C. Dep’t of Human Res., DHSS relied on its “manual” when it determined that the applicant was ineligible for Medicaid. (132 N.C.App. 704, 705-06, 10-12 (1999).) The applicant had transferred his assets and claimed that the transfer was made exclusively for a purpose other than Medicaid eligibility.
DHSS’s Medicaid Manual required applicants to prove by “clear and convincing written evidence” that the motive for the transfer was as proffered. (Id. at 706.) Neither the rule nor the law required written evidence for this situation and this decision was set aside. In McCrann v. N.C. Dep’t of Health and Human Services, a similar case, DHHS applied this policy in denying an applicant’s Medicaid eligibility. (209 N.C.App. 241 (2011).) The “policy” defined “those services [the applicant] is eligible to receive” and the court stated: “[t]hus, we conclude the trial court was correct in finding that the Waiver provision is a rule pursuant to the North Carolina APA.” (Id. at 248-49.) These DHSS cases are very interesting, especially from the substantive due process perspective, as the agency decides to eliminate a citizen’s right to Medicaid coverage with a stroke of the pen.
While N.C. case law seems devoid of disputes with DENR similar to federal disputes, the question is: why? Like EPA, DENR uses guidance documents to set various substantive standards or requirements that, if exceeded or otherwise not satisfied, require the regulated community to spend large sums of money. Some of these guidelines or portions thereof tell regulated parties what they must do to comply with the law. The guidelines as applied are commands – therefore, they are rules. DENR may argue that it needs the ability to craft “flexible” guidelines to allow for case managers to deal with unique problems at a specific site. But there are portions of the guidelines that are mandatory standards, and DENR applies these guidelines generally to the regulated community as law. Without a NCAPA exemption, they are rules that demand rule-making. The U.S. Supreme Court summarizes this issue well in the Appalachian case:
The phenomenon we see in this case is familiar. Congress passes a broadly worded statute. The agency follows with regulations containing broad language, open-ended phrases, ambiguous standards and the like. Then as years pass, the agency issues circulars or guidance or memoranda, explaining, interpreting, defining and often expanding the commands in the regulations. One guidance document may yield another and then another and so on. Several words in a regulation may spawn hundreds of pages of text as the agency offers more and more detail regarding what its regulations demand of regulated entities. Law is made, without notice and comment, without public participation, and without publication in the Federal Register or the Code of Federal Regulations. With the advent of the Internet, the agency does not need these official publications to ensure widespread circulation; it can inform those affected simply by posting its new guidance or memoranda or policy statement on its website. An agency operating in this way gains a large advantage. It can issue or amend its real rules, i.e., its interpretative rules and policy statements, quickly and inexpensively without following any statutorily prescribed procedures.
Richard J. Pierce, Jr., Seven Ways to Deossify Agency Rulemaking, 47ADMIN.L.REV.59,85(1995).FN9 The agency may also think there is another advantage—immunizing its lawmaking from judicial review.FN9 How much more efficient than, for instance, the sixty rounds of notice and comment rule[-]making preceding the final rule in Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 34, 103 S.Ct. 2856, 77 L.Ed.2d 443(1983).
(Appalachian, 208 F.3d at 1020 (emphasis added).) As stated earlier, the U.S. Supreme Court has soundly rejected rule-making without complying with the federal APA. Similarly, N.C. courts should soundly reject rule-making without compliance with the NCAPA.
N.C. law clearly states: “An agency shall not seek to implement or enforce against any person a policy, guideline, or other interpretive statement that meets the definition of a rule . . . if the policy, guideline, or other interpretive statement has not been adopted as a rule in accordance with [the NCAPA].” (N.C. Gen. Stat. § 150B-18.) The author would recommend that the N.C. Legislature mandate a review of agency “guidance” documents for the purpose of weeding out those that are end runs on the rule-making process. First, the agency should review its current guidance library and ensure that any “rules” are either withdrawn or properly codified. Then, the process should be established to review new guidance, either modifications to existing guidance or new guidance, to ensure that these do not need to go through NCAPA rule-making procedures. While it may be more efficient for the agency to rule by guidance, the federal APA, the NCAPA, the relevant organic statutes, the U.S. and N.C. Constitutions demand otherwise. EPA has struggled with this issue and it is only a matter of time before DENR will as well. •
1. You may find more information on Professor Parenteau at http://www.vermontlaw.edu/our_faculty/faculty_directory/patrick_a_parenteau.htm.
Richard Sieg is an attorney in the Winston-Salem office of Kilpatrick Townsend & Stockton LLP. He focuses his practice on environmental and natural resources litigation and regulatory compliance concerns.
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.