Manufactured Housing Institute v. the United States Environmental Protection Agency

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 MANUFACTURED HOUSING INSTITUTE;
AFFORDABLE RESIDENTIAL
COMMUNITIES, INCORPORATED;
TRULUCK INDUSTRIES, INCORPORATED,
Petitioners,
No. 04-1157 v.
THE UNITED STATES ENVIRONMENTAL
PROTECTION AGENCY; MICHAEL
LEAVITT, Administrator,
Respondents. 
On Petition for Review of an Order of
the Environmental Protection Agency.
Argued: October 26, 20051
Decided: October 25, 2006
Before WIDENER, MOTZ, and DUNCAN, Circuit Judges.
Petition for review denied by published opinion. Judge Widener wrote
the opinion, in which Judge Motz and Judge Duncan concurred.
1The case was argued February 2, 2005, before a panel of Judge Nie-
meyer, Judge Michael, and Judge Duncan, which did not decide the case.
It was reargued October 26, 2005, before the present panel.

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COUNSEL
ARGUED: Elizabeth Maria Richardson, BEVERIDGE & DIA-
MOND, P.C., Washington, D.C., for Petitioners. David Jay Kaplan,
UNITED STATES DEPARTMENT OF JUSTICE, Environment and
Natural Resources Division, Washington, D.C., for Respondents. ON
BRIEF: Gus Bauman, Justin A. Savage, April K. Roach, BEVER-
IDGE & DIAMOND, P.C., Washington, D.C., for Petitioners.
Thomas L. Sansonetti, Assistant Attorney General, John C. Cruden,
Deputy Assistant Attorney General, UNITED STATES DEPART-
MENT OF JUSTICE, Washington, D.C.; Caroline Wehling, UNITED
STATES ENVIRONMENTAL PROTECTION AGENCY, Office of
General Counsel, Washington, D.C., for Respondents.
OPINION
WIDENER, Circuit Judge:
This case is about federal regulation of water piped through various
publicly and privately owned systems for public use. It specifically
concerns a practice known as submetering, which, simply defined, is
property owners metering and billing their tenants for water pur-
chased by the owners but distributed to and actually used by the ten-
ants. In 2003, to encourage conservation of water, respondent
Environmental Protection Agency (EPA) reversed its long-held view
with respect to apartment houses that submetering was selling water
subject to regulation under the Safe Drinking Water Act of 1974 (the
Act) and allowed that it was not. This reversal allowed the owner of
a property such as an apartment building to submeter tenants without
triggering federal drinking-water regulations. But EPA excluded man-
ufactured housing, such as mobile-home parks, from the change. Peti-
tioners, a trade association representing a variety of interests in the
manufactured housing industry, including two owners of mobile-
home properties, now challenge EPA’s procedures and conclusions.
For the reasons that follow, we deny the petition for review.
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I.
A.
The Safe Drinking Water Act was passed to ensure that water sys-
tems met minimum national standards for protection of public health.
See 42 U.S.C. § 300f (2003). In general, the Act governs all public
water systems, which the Act defines as a system with fifteen or more
service connections or one serving twenty-five or more people. 42
U.S.C. § 300f(4)(A). Whether ownership of the system be private or
public, is not listed as a factor in the definition. The EPA tells us that
in practice, several (or many) public water systems may connect with
other systems to provide water service to consumers; in such a net-
work, water is treated by one system, which sells the water to another
system for further distribution or sale to end-users. This it calls a con-
secutive water system.
With certain variances and exemptions, the Act requires that EPA’s
regulations "apply to each public water system in each State." 42
U.S.C. § 300g; see generally 40 C.F.R., Part 141. But a public water
system is exempt from compliance with those regulations if it:
(1) . . . consists only of distribution and storage facilities
(and does not have any collection and treatment facili-
ties);
(2) . . . obtains all of its water from, but is not owned or
operated by, a public water system to which such regu-
lations apply;
(3) . . . does not sell water to any person; and
(4) . . . is not a carrier which conveys passengers in inter-
state commerce.
42 U.S.C. § 300g (emphases added). Thus, an intrastate public water
system is exempt from regulation if it obtains its water from a regu-
lated system and if it neither treats nor sells the water. The legislative
history of the exemption indicates that it was worded this way to "ex-
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empt businesses which merely store and distribute water provided by
others," and which does not sell or bill water as a separate item, such
as hotels. HR. Rep. No. 93-1185 (1974), as reprinted in 1974
U.S.C.C.A.N. 6454, 6470.
The Act is enforced by the States as well as the federal govern-
ment. States may apply for "primary enforcement responsibility" to
enforce the Act. According to EPA, 49 States have done so. The EPA
Administrator may grant such primary responsibilities if he deter-
mines that the State has adopted regulations "no less stringent" than
the federal regulations and has appropriate enforcement mechanisms
in place. 42 U.S.C. § 300g-2(a)(1) & (2). States thus are implicitly
free to adopt more stringent regulations than those of EPA. Id.
§ 300g-2(a)(1). If EPA believes a state regulatory program does not
meet its stringency requirements, the Act creates procedures to
require that State to revise or withdraw its program on pain of losing
primary enforcement authority, and for payment of civil penalties. 42
U.S.C. § 300g-3; see also 40 C.F.R. §§ 142.12(a), 142.17(a).
B.
Before 2003, EPA’s longstanding position was that submetering
was selling under the Act and those doing it therefore were subject
to regulation. This position appears not to have been codified, but
instead was set forth in policy memoranda. See JA 9-11; JA 20;
(referring to two memos). In addition, EPA’s position is evidenced by
less-formal agency actions, including threats of litigation. For
instance, EPA’s hands-on approach included admonishing North Car-
olina to continue to adhere to EPA guidance as summarized in a letter
from an EPA Regional Director, and, in response to a proposal by
Georgia to liberalize unregulated submetering beyond what EPA
would have allowed, EPA internal correspondence suggested that
EPA might consider conditioning or withholding of grants or taking
"targeted enforcement action" to ensure compliance. Notably, EPA
actually threatened such grant withholding. On the other hand, EPA
approved of an Alabama submetering plan on the ground that the
State’s commitment to water safety had ensured adequate monitoring.
There is no indication in the record of like EPA actions taken directly
against, or in favor of, individual property owners. For their part,
property owners appear to have avoided selling or submetering and
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hence regulation, by charging tenants for water via rent or a general
fee or surcharge. It is generally accepted that submetering’s triggering
of federal regulations created a disincentive to submeter, which had
the effect of discouraging water conservation. See, e.g., JA 3 (citing
H. R. Rep. No. 104-632, at 55, 134 (1996), as reprinted in 1996
U.S.C.C.A.N. 1366, 1418, 1430-31); JA 116 (same).
The particularities of state programs and private practices aside, the
parties agree that, prior to 2003, EPA had long construed the word
"sell" as used in 42 U.S.C. § 300g(3) to mean billing and demanding
payment for water provided. This interpretation accords with the
Act’s legislative history, which states that even a municipality assess-
ing water taxes, or any entity that "sells water as a separate item or
bills separately for water" would be subject to regulations under the
Act. 1974 U.S.C.C.A.N. 6469-70. In August 2003, however, to pro-
mote water conservation by tying the end-user’s cost to actual water
use,2 EPA proposed to allow unregulated submetering by owners of
"residential properties such as apartment buildings." This change,
EPA indicated, would not diminish the public health protections
established by the Act.
As specified in the Administrative Procedure Act, see 5 U.S.C.
§ 553, EPA requested public comment on the proposed change and
identified four specific topics for comment. So there may be no mis-
take about the adequacy of notice, we note that in its request for com-
ments, EPA included the following:
iii. Should EPA maintain the limitation of the draft revised
policy to residential properties such as apartment buildings,
or is it appropriate to extend the SDWA exemption for sub-
metering to other property types? 68 Fed. Reg. 51779 (Aug.
28, 2003).
2Petitioners acknowledge that EPA’s proposal would reduce water use
by anywhere from 18% to 39%, though there is conflicting evidence that
conservation might be "minimal." Petitioners do not challenge the genu-
ineness of EPA’s conservation concerns. Nor do they challenge the effi-
cacy of the adopted changes. Rather, the gist of their argument relating
to conservation is that EPA could have done even more to promote it by
allowing them, too, to submeter.
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In all, EPA received 78 comments, which compose the bulk of the
record on appeal. As to the wisdom of the proposed change as a gen-
eral matter, the vast majority of commenters were in favor of it for
the reasons explained in the proposal—i.e., severing submetering
from regulation would promote conservation and ease the regulatory
burden on property owners. A few identified concrete health concerns
that EPA had overlooked. See JA 152, 167-68 (citing legionnaire’s
disease); cf. JA 140. Several, including the State of Tennessee, ques-
tioned EPA’s authority—vis-à-vis Congress--to reverse the historical
interpretation.
Most commenters responding to this query perceived little differ-
ence among various types of properties, though they tended to state
their position in general terms. Some commenters more specifically
advocated exempting commercial buildings while others suggested
that the nature of ownership should be the dispositive factor. Petition-
ers commented as well. As we have noted, see n.2, supra, they gener-
ally supported the proposed policy. But in response to EPA’s specific
query, petitioners urged that the revised policy should include manu-
factured housing on the basis of their contention that the water distri-
bution systems of mobile-home parks are functionally the same as
those of apartment buildings. (Petitioners’ letter, like several com-
ments on both sides, appears to have been a form letter. See, e.g., JA
195 (substantively identical letter). Notably, the United States Navy
and the Department of Defense also argued in favor of extending the
proposed policy beyond apartment buildings, to military facilities,
which, like mobile-home parks, generally have underground pipes.
Several commenters opposed extending the exemption to mobile-
home parks or other, similar properties. In general terms, this opposi-
tion rested on the nature of the parks’ distribution systems, which,
unlike apartment buildings’, typically are underground. Simply put, it
was suggested that this made the water supply more vulnerable to
contaminants and attack than similar distribution systems above
ground or in apartment-building interiors.
On December 23, 2003, EPA published its final policy. 68 Fed.
Reg. 74,233. As originally proposed, the policy concluded that apart-
ment buildings and similar properties could submeter without being
deemed to "sell" water; in other words, to submeter without inviting
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regulation. The policy rejected petitioners’ position, however, and
declined to extend the same exemption to properties, which have a
large distribution system, or serves properties, such as "large mobile
home parks," and "military installations." 68 Fed. Reg. 74233.
Though refusing to codify a blanket exemption for such properties,
the policy did not categorically bar one, either, and instead would
allow item by item a State’s determinations based on the characteris-
tics of similar types of properties: "EPA agrees that submetering to
achieve water conservation may be appropriate for other property
types, which share similar characteristics to an apartment building
. . . ." 68 Fed. Reg. 74234-35. Consistent with the Act’s joint enforce-
ment mechanisms and its prior practice, EPA left such case-by-case
decisions to the States, but it listed factors that should be considered,
such as whether there might be "backflow or cross[-] connection
issues," whether the majority of the plumbing is underground, and
whether the property is owned by an individual or an association. 68
Fed. Reg. 74235.
Petitioners now seek vacation of the policy and remand to the EPA.
II.
We exercise original jurisdiction over a petition for review of any
"final action of the Administrator" under the Act. 42 U.S.C. § 300j-
7(a)(2). EPA disputes that the emergency order at issue here consti-
tutes a final action under the Act and raises other justiciability con-
cerns, so we first address our authority to consider the petition. See
Chamblee v. Espy, 100 F.3d 15, 17 (4th Cir. 1996).
EPA contends that the final policy guidance does not constitute
"final action of the Administrator" for two reasons: the policy (1) is
not the consummation of the decision making process, and (2) does
not give rise to legal rights or consequences. See COMSAT Corp. v.
Nat’l Sci. Found., 190 F.3d 269, 274 (4th Cir. 1999) (citing Bennett
v. Spear, 520 U.S. 154 (1997)). As to the former requirement, EPA
argues that the policy does not preclude an extension to petitioners
and leaves decisions to the States on a case-by-case basis. Thus,
according to EPA, the final policy is just a suggestion. Petitioners
respond that States are not free to ignore these suggestions, relying on
the past EPA threats and involvement in state decision-making. They
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also point out that this is EPA’s last word, at least for the time being,
and that EPA itself calls this the "Final Revised Policy." 68 Fed. Reg.
74233.
We are of opinion that the policy qualifies as a final action. EPA’s
threats levied against at least two States regarding their submetering
oversight programs prove that States are not free to treat this EPA
policy as a mere suggestion. And EPA’s approval of Alabama’s sub-
metering policy indicates that approval was in fact required. Nor can
EPA overcome the Act’s language mandating that EPA’s regulations
apply to "each public water system in each State," or its command
that state regulations must be "no less stringent" than the federal.
Moreover, EPA does not argue that it will consider extending the pol-
icy to petitioners in the near future, much less that it has plans to do
so. Therefore, the policy is not a step that the agency "might eventu-
ally take," Appalachian Energy Group v. EPA, 33 F.3d 319, 322 (4th
Cir. 1994), but the step that it did take.
As to whether the action gives rise to legal rights and conse-
quences, we think this is self-evident. Regardless, for jurisdiction pur-
poses we credit the affidavits by two corporate-owner petitioners that
they do not submeter for fear of subjecting themselves to EPA regula-
tions. See Sierra Club v. EPA, 292 F.3d 895, 900-01 (D.C. Cir. 2002).
EPA’s response, that petitioners are being regulated today as they
were before the policy became final, is no defense to the fact that a
realistic fear exists of being subject to the regulation.
EPA also contests on similar grounds both the ripeness of the peti-
tion and petitioners’ standing to bring it. First, it asserts, the petition
is not ripe because any adverse effects on petitioners depend on inter-
vening rulings from state agencies. In this regard, EPA suggests a
number of factors that could benefit from further development: state
decisions relating to the size and type of manufactured housing, the
water system, and soil conditions under which submetering might
occur. Moreover, EPA contends that there is no "immediate, direct,
and significant" hardship from withholding review. And EPA con-
tends that petitioners lack standing for the related reason that their
harm depends entirely on the "independent actions of third parties,"
referring to the States.
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For the reasons set forth with respect to jurisdiction, we also con-
clude that the petition is ripe for review and that petitioners have
standing. The elemental fact is, petitioners allege that they want to
submeter but that the policy’s failure to treat them like apartment-
building owners prevents them from doing so, and they have sworn
to this chilling effect. It is true that the record is silent regarding the
extent of financial cost to petitioners. But EPA’s patent regulatory
exclusion from the protected class is more than the needed "decision
as to whether review will be sought in the hands of those who have
a direct stake in the outcome." See Sierra Club v. Morton, 405 U.S.
727, 740 (1972). We are of opinion that petitioners have standing.
Their individual injuries were not merely "value preferences" under
Sierra Club, 405 U.S. at 740.
EPA’s assurances that we would benefit from decisions by state
agencies and courts—and EPA approvals or disapprovals thereof—
has little appeal. We should not encourage federal-state conflict by
insisting on state action in derogation of the federal policy. Accord-
ingly, we turn to the petition’s merits.
III.
A court must uphold EPA action taken pursuant to the Act unless
the action was "arbitrary, capricious, an abuse of discretion, or other-
wise not in accordance with law." 5 U.S.C. § 706(2); see also Mont-
gomery County v. EPA, 662 F.2d 1040, 1042 (4th Cir. 1981). Under
this highly deferential standard, we "scrutinize the EPA’s activity to
determine whether the record reveals that a rational basis exists for its
decision." Natural Res. Def. Council v. EPA, 16 F.3d 1395, 1401 (4th
Cir. 1993).
In reviewing EPA’s action, we bear in mind that the Act, like other
environmental statutes, requires balancing conflicting priorities—in
this case, water conservation, private compliance costs, state regula-
tory interests, and the safety of public water systems. Accordingly, we
do not "sit as a scientific body, meticulously reviewing all data under
a laboratory microscope." Natural Res. Def. Council, 16 F.3d at 1401.
Nor is it "for the judicial branch to undertake comparative evaluations
of conflicting scientific evidence." Natural Res. Def. Council v. EPA,
824 F.2d 1211, 1216 (D.C. Cir. 1987). Rather, EPA must "explain its
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course of inquiry, its analysis, and its reasoning," and show a rational
connection between its decision-making process and its ultimate deci-
sion. Natural Res. Def. Council, 16 F.3d at 1401; see also Natural
Res. Def. Council, 824 F.2d at 1216 ("Our review aims only to dis-
cern whether the agency’s evaluation was rational."). With this frame-
work in mind, we turn to petitioners’ challenges to EPA’s policy: (1)
that the notice and comment procedures were inadequate, and (2) that
decision to distinguish between apartment buildings and mobile-home
parks was arbitrary and capricious.
A.
Petitioners offer several reasons why EPA’s notice and comment
procedures were flawed. First, the final policy allegedly "departed
from the propos[ed]" policy, by drawing a distinction between "large
mobile home parks" not exempted from regulation, although having
been submetered, and "apartment buildings" that were so exempted.
68 Fed. Reg. 74235. Petitioners contend that they did not know such
a distinction would be made and that a 1996 Congressional report
prompted EPA to revisit the issue and led them to believe just the
opposite, that any possible change would treat apartment buildings
and mobile-home parks the same. They take issue with the creation
of what they call the intermediate category of regulation—the proper-
ties that may be excluded after state evaluation of relevant factors.
To begin with, we agree that the APA’s notice and comment proce-
dures were applicable in this case. In making this determination, the
question is whether the policy is a legislative rule, which in turn
requires us to determine whether the policy has the force of law.
United States v. Ellen, 961 F.2d 462, 465 (4th Cir. 1992). Here, again,
EPA claims that the policy has no legally binding consequences. EPA
also points out that it did not codify the policy in the Code of Federal
Regulations or internally characterize the policy as a legislative rule.
We disagree, largely for the reasons stated above with respect to our
discussion of "final agency action," ripeness, and standing. Moreover,
since EPA’s prior, binding, decades-long interpretation existed
chiefly in memorandum form, the agency’s issuance of the new pol-
icy in the Federal Register—though not a codification—indicates a
more formal agency action than anything that preceded it, and thus an
equally binding one. It certainly was nothing like an internal manual
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for agencies’ staff, as in Ellen. See 961 F.2d at 466. EPA’s position
is further undermined by the fact that the current policy is quite oppo-
site to the previous policy ("Any previous EPA statements or policy
memoranda are superceded by this memorandum.")), despite the fact
that the statutory language did not change. Last but not least, EPA’s
attempts to comply with APA notice-and-comment procedures sug-
gest that the agency believed them to be applicable, at least until this
litigation. For these reasons, those procedures were applicable.
But we are of opinion that the procedures were in fact followed.
We agree with EPA that the final policy was a logical outgrowth of
the proposed one, at least in part because the proposal asked for com-
ments on the very distinction petitioners now challenge. In fact, the
wording of the invitation to comment—"[s]hould EPA maintain the
limitation" to apartment buildings, "or is it appropriate to extend" it
to other types of properties?—may even suggest a default preference
for not extending the exemption. As a result, petitioners could not fail
to comprehend the possibility of such a distinction’s being made. And
they actually perceived that they might be excluded and argued vehe-
mently against it. Likewise, numerous other commenters on both
sides were able to discern what was at stake. Petitioners’ claim not to
have been alerted to the distinction eventually made thus is quite
without merit.
Finally, given the statutory framework and the States’ significant
role in it, we cannot concur with petitioners’ criticism of EPA for cre-
ating three categories of properties—in other words, for giving the
States latitude to experiment with allowing unregulated submetering
on a case-by-case basis. First, the new policy allows some chance—
albeit restricted—for unregulated submetering, and consequently peti-
tioners’ position has improved somewhat. Furthermore, the criteria
listed by the agency for States’ consideration are consistent with
EPA’s mandate to ensure the safety of the water supply and plainly
derive from comments received. Even petitioners recognized that
water safety may depend on "varying types of soil conditions, includ-
ing industrial areas and brownfields," though they disclaimed the
applicability of such concerns to mobile-home parks. But it is obvious
that apartment building piping is rarely, if ever, located in such soil
and that mobile-home-park piping may well be. This is sufficient to
support EPA’s creation of an intermediate category.
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In sum, the final rule’s intermediate category was a "logical out-
growth of the notice and comment[s]," balancing safety with promot-
ing water conservation, Chocolate Mfrs. Ass’n of the United States v.
Block, 755 F.2d 1098, 1105 (4th Cir. 1985), and not, as in that case,
a situation where the final rule "reaches a conclusion exactly opposite
to that proposed," 755 F.2d at 1103. We should not penalize EPA
simply because the precise contours of its incremental approach did
not develop until after the agency had reviewed the comments it
sought, including those from a number of States:
The requirement of submission of a proposed rule for com-
ment does not automatically generate a new opportunity for
comment merely because the rule promulgated by the
agency differs from the rule it proposed, partly at least in
response to submissions.
Int’l Harvester Co. v. Ruckelshaus, 478 F.2d 615, 632 (D.C. Cir.
1973).
Petitioners’ final objections to EPA’s action are that the regulation
which "categorically exempts only apartment buildings from regula-
tion under the Act but not other residential properties such as manu-
factured home communities is an impermissible arbitrary
interpretation of the phrase ‘sell water’," as used in the statute 42
U.S.C. § 300(g); and they add that EPA’s application of the statute to
submetered properties "lacks a rational basis and draws an arbitrary
and capricious distinction between apartments and other types of resi-
dential submetered properties such as manufactured home communi-
ties." Br. p.2. The very narrowness of the argument emphasizes that
it does not recognize the duty of EPA as either the principal or a co-
principal administrator of the allocation and use of the water
resources of the United States.
The statute we are most immediately concerned with is the Safe
Drinking Water Act. The purpose of the legislation is to assure that
water supply systems serving the public meet minimum national stan-
dards for protection of public health. The statute is administered by
the EPA and establishes a joint federal-state system for assuring com-
pliance with national standards. The duties of the EPA as the adminis-
trator of the statute include not only the elimination of harmful
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contaminants but also the siting requirements for new facilities so that
the EPA may "provide adequate assurance that public water systems
will be able to provide a continuous supply of healthful drinking
water." H. R. Rep. No. 93-1185 (1974), as reprinted in 1974
U.S.C.C.A.N. 6454, 6467. That quality and quantity of water should
not be distinguishable has been decided by the Court under the Clean
Water Act. PUD No. 1 of Jefferson County v. Washington Dep’t of
Ecology, 511 U.S. 700, 719 (1994), in which the Court stated
Petitioners also assert more generally that the Clean Water
Act is only concerned with water ‘quality,’ and does not
allow the regulation of water ‘quantity.’ This is an artificial
distinction. In many cases, water quantity is closely related
to water quality; a sufficient lowering of the water quantity
in a body of water could destroy all of its designated uses,
be it for drinking water, recreation, navigation or, as here,
as a fishery.
The EPA is also the administrator of the Clean Water Act, Pub. L.
95-217. The legislative history clearly designates that one of the EPA
obligations under that statute is water conservation and seeing to a
reduction of the total flow of sewage or unnecessary water consump-
tion. 1 U.S.C.C.A.N. (95 Stat.) 1573.
And we should not omit that the legislative history of the Water
Resources Research Act of 1984, which is devoted to stimulating
research and training scientists in the field of water resources, has the
finding that "The development and allocation of our scarce water
resources is an issue that will continue to plague policy makers well
in the 21st Century." 2 U.S.C.C.A.N. (98 Stat.) 302.
In the case before us, the EPA, in order to comply with its obliga-
tion to see to the furnishing of safe drinking water, quantity as well
as quality, has, because it has deemed the distribution system to be
safe from pollution in apartment houses, authorized a regulatory
exemption for apartment houses but has not authorized the same cate-
gorical exemption for manufactured homes communities because, as
a category, it could not say that the distribution system in the manu-
factured homes communities was free from pollution. That same reg-
ulatory change complained of here, however, would authorize
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exemption for manufactured homes communities on a case-by-case
basis.
We are of opinion that this is a classic case of a decision which has
been given by Congress to the EPA with respect to allocation of water
resources, and that EPA is taking reasonable action to perform both
of its duties to supply clean drinking water, free from pollution and
in sufficient quantity. We hold that the regulation in question is sup-
ported by a rational basis and is neither arbitrary nor capricious. The
same holding applies to petitioners’ claim that the EPA interpretation
of the phrase "sell water" is arbitrary.
For the foregoing reasons, the petition for review is accordingly
DENIED.
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