The recent United States Supreme Court decision in Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Dept. of Commerce (the Loper decision) overturned a 40-year precedent commonly referred to as the Chevron Doctrine. While the magnitude of the ruling will take years to unfold, S&P Global Ratings believe the Loper decision will likely influence the regulatory and policy landscape for U.S. public finance issuers and has several potential credit implications.

Decision Shifts Interpretation Of Ambiguous Statutes To Courts From Federal Agencies

The now overturned 1984 Chevron Doctrine directed courts to defer to federal agency interpretation to address statutory ambiguity, effectively providing them with significant influence over regulation and policy. The Chevron Doctrine has underpinned thousands of regulations under the umbrella of numerous federal agencies. Overturning Chevron limits the deference to federal agencies and shifts responsibility to the judicial system. Prior cases that relied on Chevron are subject to stare decisis (the principle that courts should mostly adhere to their past cases) and are not automatically overruled; however, this doesn't preclude relitigating past cases or using the Loper decision to overturn or challenge regulations and statutes, which we believe may occur.

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Loper Decision May Complicate Operating Environments

We believe there could be several potential credit implications from the decision, including the application of statutory decisions as well as the timing and execution of regulations and public policy. Furthermore, for complex regulations or statutes, inconsistent interpretations of statute from lower courts are likely to complicate the operating environment for issuers in sectors that operate in different states or jurisdictions.

We do not expect the Loper decision to eliminate agency engagement (such as for factual or technical determinations), but it means the courts and/or Congress will play a more significant role in resolving ambiguities. These effects will vary by sector and by issuer and could have both positive and negative credit implications.

Short-term uncertainty may lead to greater regulatory and policy stability for the infrastructure sectors

For public power and water utilities and electric cooperatives, the cost, timing, and volatility of regulations have contributed to the negative outlooks for both sectors in 2024. The nature of regulations--especially those under the Clean Water Act and Clean Air Act--shift frequently as administrations transition, often forcing management teams to pivot planning or financial resource allocations to address these changes. Limiting agency deference (and lessening ambiguity) may lead to greater regulatory and policy stability through future administrations, albeit with heightened litigation risk.

Public utilities

For example, the Environmental Protection Agency (EPA) recently published the final rule establishing national primary drinking water standards for six per- and polyfluoroalkyl substances (PFAS) as well the final rule designating two PFAS as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). There are various pending challenges to these regulations, including to both the maximum contaminant levels and the hazardous substance designation. Both appeals note several questions of statutory interpretation that could now be ripe for review, especially the use of the CERCLA designation, which has rarely been used in this manner. Loper may influence the timing and scope of these and others regulatory actions but most major water projects and permitting will still be subject to other forms of judicial deference and state law, which will remain influential. We believe state laws may become the first defense in mitigating water-related health and safety risks if lawsuits delay federal regulations.

Similarly, litigants have challenged the basket of EPA regulations governing power plant emissions and their byproducts, which were finalized by the EPA in April 2024. We expect the Loper decision will be leveraged to support these and future legal challenges. While this near-term uncertainty may affect capital planning for some utilities, we believe it will be manageable and that states will continue to serve as a critical stakeholder and thus, those legislative considerations will also drive decision-making. If courts uphold the EPA's rules and ambitious implementation dates, electric utilities might face operational and financial challenges that could negatively influence ratings and outlooks.

Transportation

The regulatory landscape affected by Loper also extends to transportation policy and infrastructure spending at all levels of government, particularly when federal dollars are involved. To the extent decision-making on project-level funding is drawn out or shortened--with environmental approvals the most obvious--overall costs will be affected. A likely first target is the Biden administration's Department of Transportation regulations requiring states and metropolitan planning organizations to establish declining targets for transportation-related CO2 emissions, which have been challenged by 22 states and overturned by a Texas court. More broadly, we anticipate the highly regulated users of transportation infrastructure--such as airlines, automakers, and shipping lines--to be more affected by Loper with future regulations (e.g. those focusing on consumer protection, competition, safety standards, fuel economy standards, new and emerging technologies such as drones, autonomous vehicles, etc.) that will directly influence operations and profitability.

Not-for-profit healthcare, higher education, and housing

Not-for-profit health care and higher education policies are largely dictated by federal legislation and agency directive and likely will be influenced by the Loper decision. For the not-for-profit acute health care sector, we expect the Loper decision to increase challenges by providers, particularly related to specific reimbursement rules and regulations from Health and Human Services (HHS) and Centers for Medicare and Medicaid Services that are tied to more ambiguous statutes to obtain additional funding. We could also see HHS and related agencies slow their use of new requirements and programs tied to certain statutes and overall, exercise more caution and details around rulemaking related to health care laws, as there will be increased scrutiny by courts under potential challenges. The legislative process could also slow, partly due to the potential for more prescriptive and detailed statutes for such a complex and dynamic sector.

Higher education, which is heavily regulated by federal agencies such as the departments of education and labor, might have greater ability to challenge rulings, which has the potential to change many areas of higher education. Last year, the Supreme Court ruling regarding Affirmative Action invalidated the use of race-conscious admissions for colleges and universities, and while many institutions were prepared for this ruling, its impacts continue to be felt across the sector. With Chevron deference overturned, we will likely see more costly legal challenges in the courts, and increased sector uncertainty as institutions navigate this new landscape.

Similarly, entities that operate within the housing sector primarily interact with the U.S. Dept. of Housing and Urban Development (HUD) and the Dept. of Agriculture and rely heavily on rulemaking authorized through legislation. While the sector enjoys broad bi-partisan support and our initial view is that it will not experience significant disruptions related to Loper, we will watch how it may change HUD funding or modify an already complicated regulatory environment.

State and local governments

The influence on state and local governments also remains uncertain and may help or hurt a government's policy agenda depending on community priorities and local politics. Where state regulations already exceed federal standards, those regulations stand. However, under Loper, state and local governments may have better standing to challenge federal statutes and regulations more easily, which provides the potential to move away from agency priorities and toward their own.

Loper Decision Raises Regulatory Uncertainty, But Likely Won't Have A Uniformly Negative Influence Across Public Finance

S&P Global Ratings expects the Loper decision may affect capital planning, litigation, and the overall operating environment for many public finance credits. In the near-term, policy and regulatory uncertainty is heightened. However, we do not believe this will result in an immediate material change to capital plans, cash flow, or credit quality for most public finance issuers. We will monitor how issuers leverage Loper in challenges to regulatory agencies' statutory interpretations and how this informs existing and proposed regulations and policy decisions.

Whether the issue is emerging contaminants, carbon emissions, or the delivery of higher education or healthcare service, post-Loper we believe agency influence will play a lesser role. This change may result in a reduction in the pace, magnitude, and in some instances consistency of certain regulatory changes, particularly those that change based on the ideological views of the federal administrations. But the decision to overturn Chevron is unlikely to paralyze the regulatory process and the Loper decision will not be uniformly negative to issuers, particularly if greater stability or more effective execution results.