PFAS Solutions (Part 2): The Potential Impact of Loper Bright on the PFAS Market

In this episode of William Blair Thinking Presents, Tim Mulrooney, group head of global services, follows up on his last episode about the PFAS market to detail how the recent Supreme Court ruling known as Loper Bright could have far-reaching implications for all types of regulations, including environmental ones like PFAS.

Podcast Transcript

00:23
Chris T
Hi everybody. Welcome to William Blair Thinking Presents. Today is July 18th, 2024.

In early June, our equity research group head of Global Services, Tim Mulrooney, joined us for a podcast episode about PFAS market and how it might evolve over the next several years, particularly given how several new regulations, you know, that were recently passed, panned out. But several weeks ago, the Supreme Court issued a ruling known as Loper Bright, which could have far reaching implications on all types of regulations, including environmental ones, like PFAS.

So, with that in mind, Tim, thanks for joining. Would you mind giving us a little bit of background on what this is all about? Maybe start with Chevron and then go from there?

01:10
Tim M
Yeah, sure. Thanks for having me, Chris. So, the Supreme Court recently ruled in a 6 to 3 vote, to overturn a 40-year-old standard known as the Chevron Doctrine. Now, the Chevron Doctrine basically said that when a statute is ambiguous. Like when it's not clear, and an agency provides a reasonable interpretation of that statute, then the courts should give way.

The courts should defer to that interpretation. The Chevron case really solidified the idea of deference to agencies and the court process, basically two parts. I mean, first, you look to see if that statute's clear, and if so, then the clear meaning prevails. And if the statutes ambiguous, then the interpretation of the agency prevails as long as that interpretation is reasonable.

This is because the agency is regarded as the leading authority in its respective field. The agency gets to make the call, and that's basically how things have gotten done over the last 40 years.

02:23
Chris T
Okay. So that's Chevron. What is Loper? Am I pronouncing that right? Loper?

02:27
Tim M
Yeah. Loper Bright is what they call it. And it was a decision on June 28th. This idea of Chevron in deference is no longer the standard. The courts are no longer obligated to defer to the agencies when a regulation is being challenged in court. So, I'll get to the implications of what all this means. But just stepping back for a second, just to get a little more context here.

So basically, when Congress passes a law, they often leave it somewhat ambiguous so that federal agencies can fill in the blanks. Now, these agencies, they can then craft regulations based on current conditions, which can obviously change over time. And so that's kind of how our executive branch runs the government. Congress passes a law with high level goals. And the agencies, which are the experts in each given field, whether it's, you know, the environment with the EPA or the health care system with HHS, I mean, these agencies try to achieve these goals by passing specific regulations. So, I'll give you an example. Congress passed the Clean Water Act in 1972 with the goal of keeping our waters in the United States free of dangerous pollutants.

But as we learn more about what is toxic, as we learn about more new chemicals in our water like PFAS, the EPA has the added flexibility to add in new regulations to achieve the goals of the Clean Water Act. So purposeful, ambiguity isn't necessarily a bad thing. People think, when something's ambiguous, it's bad. But, you know, it can be advantageous when we want our government to act quickly rather than waiting on Congress to do something which, you know, as we all know, is difficult.

But on the flip side, all this interpretation of what congress meant and, you know, perhaps more importantly, what they didn't mean is the subject of constant court battles. And so, historically, a court would defer to the agency's interpretation of the statute, you know, provided it was reasonable. But now courts must exercise their independent judgment in deciding whether an agency's acted within its statutory authority.

04:50
Chris T
Got it. So, what would you say the implications of all of this are for investors?

04:56
Tim M
So, at the end of the day, the ruling makes it harder for federal agencies to defend regulations that end up in court. It also creates opportunities for companies to challenge rules that are unfavorable to their bottom line. And so, you know, legal experts are predicting a flurry of litigation in areas all over the place. I mean, regulating chemicals, control and greenhouse gas emissions, public health, fair lending, worker safety.

I mean, these are just to name a few of them. In my coverage area, we've spoken now to several environmental lawyer lawyers on this. And they expect a period of uncertainty where the EPA's actions are under close scrutiny in the courts in a way that they weren't before. And this increased uncertainty basically leaking into the stock prices of some of our companies, because higher uncertainty, you know, of course, means a higher discount rate, which brings the valuation down in a traditional DCF model.

And we can't say for sure what court cases are going to be challenged. And we certainly can't say how the judges are ultimately going to rule. So, we're just in this weird place right now where maybe not much will change in the end, or maybe a lot will change. We just don't know right now.

06:29
Chris T
So are the things that we do know. Is there anything we should be keeping in mind right now?

06:35
Tim M
I think there are some things that we that we do know. Number one, we expect and we know that companies and their lawyers are combing through the Federal Register right now to find cases where, you know, they can now challenge a prior ruling based on the fact that it was previously decided by Chevron, but hoping to now have a different outcome that could cut some red tape and improve that bottom line.

This is particularly true given the fact, that the statute of limitations recently changed through another recent Supreme Court ruling called Corner Post, which essentially lengthens that look back period, lengthens the period of time you can look back to bring challenges. But that's another story for another time. I mean, what else do we know? We also know that Loper Bright might change the way that agencies craft regulations.

Perhaps they make sure that the way they construct the regulation fits really well within the statutory language. Perhaps they bring more data, more science, you know, more studies, more evidence to back up their new regulations. And I guess you'd say similarly, we would expect corporations that challenge these regulations in court. They will be more incentivized to bring more data and science into their arguments, because they know they've got a better shot at winning now that judges won't automatically just defer to the agency and also say, you know, something that we are hearing more of is it might impact the way that Congress crafts legislation. Maybe they could try to make it more targeted, less ambiguous. It might work in closer collaboration with the agencies to ensure that that laws intent is implemented correctly and could better withstand any, you know, potential future court challenges.

08:26
Chris T
Okay, so that's great information for people thinking about this from a broader viewpoint. But let's narrow this a bit to focus on the environmental space.

08:35
Tim M
Yeah, I can do that. So, number one. I mean, most lawyers that we've spoken to still expect that there will be there will still be deference that, you know, in a lot of these court cases, particularly, when it's an area that requires a lot of scientific expertise, you know, like a lot of very specific knowledge. Judges are smart and they're really good at interpreting statutes, and they have a lot of tools to help them do that. But at the end of the day, you know, judges, they can't be taking PhD level classes just to rule on one case. Right? That's something that Elena Kagan highlighted in her dissent, the fact that judges are by and large, lawyers. They're not doctors. They're not cardiologists or toxicologists or climatologists or aerospace engineers. Right. But they will now be interpreting complex regulations established by the FAA, USDA, HHS, EPA, so forth.

So, I mean, regardless, the point is there is still expected to be, you know, a good amount of deference here for some of these environmental cases. And then second, you know, there's this idea based on our research and in conversations with legal experts, is the idea that many environmental regulations are on good legal footing already and have never really relied on Chevron in court cases?

In fact, you know, one thing we came across this stat that the Supreme Court hasn't upheld an EPA rule on the basis of Chevron since 2014 and hasn't relied on the doctrine in any decision since 2016. And that's not to say we don't expect court cases against the EPA. We absolutely do. But the point is, is that we don't expect all regulations to be challenged. And there will still be deference to some degree.

Now, the areas that have been highlighted is likely to be challenged with Chevron gone are the things like the EPA's final rule in April, which basically limiting emissions from power plants fueled by coal or natural gas. That one's been highlighted as vulnerable the way the EPA implemented the standard, basically, and others have pointed things like the Renewable Fuel Standard or the Toxic Substances Control Act. Both have elements of it that will likely be challenged. And, of course, some have highlighted expected court challenges for the subject of our recent podcast, Chris. PFAS.

11:23
Chris T
Yeah, of course. So, we finally get to the PFAS subject. Why are folks concerned about this?

11:27
Tim M
Well, yeah. We have been getting a lot of calls, as you're well aware, on this, and you know, the Association of Metropolitan Water Agencies, that's a mouthful. And the American Water Works Association, so the AMWA and the AWWA, the think tanks that we discussed on our last previous call, you know, together they filed a federal challenge to the EPA's maximum contamination limit of four parts per trillion for PFAs.

And they argued that the EPA didn't use the best available data and appropriate processes in developing this regulation. And now is Chevron deference gone? It'll be up to a judge to decide whether or not that four parts per trillion limit is appropriate. And the judge in this case, it would be looking at the statutes under the National Primary Drinking Water Act.

And so, in this case, you know, when crafting drinking water standards, the EPA considers whether a contaminant, quote, may have adverse health effects, unquote. But there's a lot of ambiguity in that, right? It isn't a super clear standard from a legal point of view, may have adverse health effects. A judge could look at this as a legal interpretation issue, or they could look at it as a purely scientific determination.

We just don't know what the courts are going to do here with the recently passed MCLs. But based on our conversations with companies and legal experts, we think it's unlikely that the standard would be vacated. Many believe that the PFAS issue as it relates to water contamination statutes, fits well within the EPA's jurisdiction. And so, a maximum contamination limit is likely to stick. This is a bipartisan issue that everybody agrees must be addressed. The only question that remains is really… to what level?

But we expect all of this to take a while, probably years, to move through the courts. We do expect court challenges here.

But 4 PPT is the law of the land right now. Companies are moving forward based on this standard. And we hosted a call last week with a large firm that reaffirmed that all of their clients are moving forward with "business as usual.”

And don't forget that 25 states have PFAS regulations already in place. With eleven states that have fully established MCLs. And more states would likely follow suit if the if the Federal limit were to go away.

And the last thing I'll say here, is that Federal statutes like this are a nice backdrop. But environmental compliance is driven by more than just Federal regulations. You've got corporate risk management programs, litigation concerns, sustainability commitments, public pressure, and state and international regulations. There's a lot here driving environmental compliance.

14:56
Chris T
Okay. So then what would you say we should expect in the meantime?

15:01
Tim M
Well, yeah. In the meantime, everybody we spoke with still expects that the water utilities will move forward to address PFAS. The advisory work is still there, and the testing work will certainly need to continue to ramp. And we'll see what happens if the standard is changed. Maybe some utilities might get away with spending a bit less if they only have to remediate to 20 PPT, rather than four. But this would still underpin a very large and growing market.

And again, the experts we spoke with don't expect any change in PFAS work being done over the near term. And many of these water utilities will be receiving funds from the multi-district litigation cases that we saw last year. And probably more on the horizon. Which the utilities will spend on monitoring and controls, and ultimately remediation. Because if they don't develop plans to spend the funds, then they don't get those funds.

So ultimately, we expect this PFAS issue will get dealt with. Nobody wants this in their water streams, or in their bodies. In the meantime, a lot of testing work, advisory work will be done. Many water utilities, airports, military bases, industrial sites, etc. will still need to implement remediation systems.

And don't forget as well, that as we do more testing, we are finding that PFAS is more prolific that we first thought. And as we do more testing, we are finding more types of PFAS (particularly short chain) in our water systems. So, this isn't an issue that is just going to go away. This isn't an issue that we're just going to throw our hands up in the air and say "nevermind, we aren't going to deal with this." It's just that the Loper decision injects some noise into what we know needs to be the ultimate outcome.

17:24
Chris T
All right. And so outside of the risk of deregulation, does this ruling mean anything else for your sustainability services coverage?

17:31
Tim M
Yeah, there are a few interesting factors to keep in mind. For example, with greater uncertainty and more confusion, we typically see an increase in consultancy and advisory revenue as companies engage consultants to get a better picture of the future and help navigate the changing regulatory environment. Some of the companies we cover do that type of work.

There is also the idea that de-regulation could stimulate growth in industries that are highly regulated. For example, if some of the red tape gets cut around oil and gas companies, or chemical companies, and those industries start to grow, those industries are subject to a multitude of other environmental regulations that could kick up some extra business around site assessment, permitting, testing, advisory, and design work.

18:37
Chris T
Well Tim, this has been very helpful. Any closing remarks before we say goodbye?

18:43
Tim M
No, I think we covered it. The big picture I think is that uncertainty around the regulatory environment has certainly increased. And that is leaking into valuation multiples right now. But the outcomes are unclear at this point, so I think it is incumbent upon research analysts like myself and investors to stay on top of this to figure out whether or not these stock reactions are appropriate or if in some cases, they may perhaps be… overdone.