By Valerie Volcovici

Washington - The Environmental Protection Agency overstepped its authority by moving to regulate greenhouse gas emissions from power plants and industrial facilities, industry groups and representatives argued in federal court on Wednesday.

In the second day of two-day arguments on a case seeking to overturn the agency's proposed greenhouse gas regulations, challengers took on two of the EPA's proposed rules to regulate stationary sources under the Clean Air Act.

Wednesday's oral arguments centered on the so-called "tailoring rule," which the EPA issued in 2009 to shield small stationary polluters, such as schools, from having to obtain permits for greenhouse gas emissions.

The EPA "tailored" a section of the Clean Air Act, which requires any facility whose emissions exceed 250 tons per year of any pollutant, to apply for a permit from a state agency and show it is using the cleanest available technology.

Since greenhouse gases are emitted in much higher quantities, the EPA adapted the rule by raising the emission threshold to cover only the largest greenhouse gas emitters in a move to prevent political and economic upheaval.

Petitioners said this showed the Clean Air Act was not suited for regulating greenhouses gases.

Texas Solicitor General Jonathan Mitchell argued that EPA rewrote rather than reinterpreted the rule, a move he called arbitrary not reflective of Congress' intent for the Clean Air Act.

Mitchell told the three-judge panel that the court should remand the tailoring rule to send a strong message to the EPA that it has overstepped its boundaries.

"We are asking the court to hold the EPA's feet to the fire and force them, if they are going to regulate stationary source greenhouse gas emissions, to do so based on what the statue says," he said.

But Chief Judge David Sentelle interrupted Mitchell, and said that the petitioners did not have the standing to challenge the rule because they did not demonstrate the harm it would cause states and industry.

"The harm you allege is a regulatory burden. The remedy you seek is a heavier regulatory burden. That doesn't even make good nonsense," said the judge, an appointee of former Republican President Ronald Reagan.

Although the judges questioned the standing of the challengers' case, Sentelle and fellow judge David Tatel appeared open to the industry argument that the EPA could have used a different interpretation of the Clean Air Act, rather than having to use the uncommon measure of "tailoring," some experts said.

"If such a plausible alternative was available, then EPA should have chosen that alternative over an interpretation that required the agency to invoke the rather extreme measure of "tailoring" the (permitting) requirements to avoid "absurd" results," said Kyle Danish, a lawyer at Van Ness Feldman who specializes in the Clean Air Act.

"Absurd results" refers to an interpretation of a law or statute which allows courts to depart from clear legislative text when a literal reading would be considered "absurd."

On Tuesday, the three judges hearing the case appeared to resist deciding on whether the EPA's science was sufficient.

But Danish said there is a chance that the judges could send back the "tailoring" rule back to the EPA to consider an alternative interpretation while upholding the endangerment rule and its motor vehicle rules.

But any backsliding on the tailoring rule will not prevent the EPA from moving forward on other greenhouse gas regulations.

He said greenhouse gas standards the EPA is developing for new and existing power plants and refineries are covered under a different section of the Clean Air Act and would not be affected by the judges' rulings.

(Reporting By Valerie Volcovici)