WASHINGTON — A federal appeals court panel overturned one of the Obama Administration's hallmark air quality rules on Tuesday, ruling that the Environmental Protection Agency overstepped its authority in curbing pollution from Midwest power plants too sharply.
The 2-1 ruling by the U.S. Court of Appeals for the District of Columbia Circuit represents a major victory for utilities and business groups, who fought the Cross-State Air Pollution Rule on the grounds that it was costly, burdensome, and arbitrary.
Environmentalists, who had hailed the rule as a major improvement over a Bush-era regulation, bemoaned the decision as a blow to public health.
Federal regulators have struggled for years with how best to cut sulfur dioxide and nitrogen oxide emissions from Midwest power plants. They blow downwind and contribute to forming smog and acid rain in the East.
The EPA issued a rule — which was supposed to take effect Jan. 1, 2011, but was delayed by the court — that would have required utilities in 28 states to install new pollution controls.
It also established a limited cap-and-trade system that would have allowed utilities to buy and sell pollution credits in order to comply with the new standards.
EPA officials calculated that the new rule would yield health benefits for 240 million Americans.
The agency predicted that by 2014 this rule, in concert with others, would cut sulfur dioxide emissions nationwide by 73 percent, compared with 2005 levels, and reduce nitrogen oxide emissions nationwide by 54 percent.
But Southern Co., EME Homer City Generation, and Energy Future Holdings Corp. units in Texas challenged the rule, saying they could not meet the new requirements in time.
In addition, the state of Texas, the National Mining Association, and the International Brotherhood of Electrical Workers also sued EPA in separate cases on the grounds that it was based on flawed computer models and could jeopardize the nation's electricity supply by forcing companies to shut down older coal-fired plants.
In the ruling, the court wrote that the EPA used a section in the Clean Air Act known as the "good neighbor provision" to "impose massive emissions reduction requirements on upwind states without regard to the limits imposed by the statutory text. Whatever its merits as a policy matter, EPA's Transport Rule violates the statute."
The court also wrote that the EPA overstepped its bounds in regulating power plants directly, rather than giving upwind states a chance to develop their own plans for federal compliance.
"EPA can't force states to do more than their fair share, and can't force ‘one size fits all' federal programs without allowing states to craft their own solution," said Joseph Stanko, who heads government relations at the law firm Hunton & Williams, and represents coal-fired utilities.
Jeffrey Holmstead, who helped craft an earlier interstate pollution rule when he headed EPA's air and radiation office under George W. Bush and is now a partner at Bracewell & Giuliani, said the ruling might prompt environmentalists and industry officials to seek new legislation.
But Mr. Holmstead, who also represents several utilities, said it represents a significant legal loss for an administration working aggressively to curb power-plant pollution.
"This is certainly a major setback for the administration's efforts to target coal-fired power plants, and I think it raises the real possibility that by overreaching, they may come up with nothing," he said.
Mark Durbin, a spokesman for Akron-based FirstEnergy Corp., whose Toledo Edison unit supplies electricity for most of northwest Ohio, said the utility is reviewing the decision and would have no comment on it.
However, he said the ruling has no bearing on the decision to shut down three of the four generator units at the utility's Bay Shore plant in Oregon. Those three units are being shut down because of their noncompliance with a different EPA rule that governs mercury and air-toxics standards.
To bring those three units into compliance, FirstEnergy would have to upgrade each to include technology that would reduce their mercury emissions. It is not cost effective to do so, Mr. Durbin said.
The Cross-State Air Pollution rule looks at a utility's pollution levels system-wide and established a limited cap-and-trade system that would have allowed utilities to buy and sell pollution credits in order to comply.
Frank O'Donnell, who heads the advocacy group Clean Air Watch, called the Cross-State Pollution Rule "a key element" of the administration's effort to improve the nation's air quality.
"This is clearly a big blow for breathers in downwind states," Mr. O'Donnell said. "The court's rationale in this case is a legal one. This decision does not eliminate the need to reduce dangerous air pollution that blows across state lines."
John Walke, clean air director at the advocacy group Natural Resources Defense Council, urged the administration to appeal the decision.
EPA spokesman Alisha Johnson said the agency is reviewing the decision and will determine what steps to take after the review is complete.