Court says it means ‘next to’
The oil and gas (O&G) industry believed it scored a significant victory in April 2012 when the U.S. Court of Appeals for the 6th Circuit vacated an EPA decision to require a single Title V air permit for a gas sweetening plant and various sour gas production wells and flares spread out over 43 square miles on the Saginaw Chippewa Indian Tribe’s Isabella Reservation near Rosebush, Michigan. But the victory is far from absolute.
The decision in fact only orders the Agency to “reassess” the appropriateness of the Title V permit in light of what the court writes about a key term in EPA’s Title V permitting plan. The dissenting judge in the 2 to 1 decision notes that the EPA is free to reach the same conclusion—i.e., require a single Title V permit—as long as the Agency “bases that conclusion on the considerations that the majority deems appropriate.”
While the EPA has yet to come up with a response to the 6th Circuit’s ruling, the Agency has issued a memo that affirms the “longstanding practice” that led to the contested Title V decision. Essentially, the memo instructs the Agency’s regional air directors to continue to make Title V permitting decisions based more on the “interrelatedness” of facilities than on the distances between them. These instructions apply to all areas of the country except Michigan, Ohio, Tennessee, and Kentucky, the four states in the jurisdiction of the 6th Circuit.
If the Agency decides to repeat its permitting decision in these states and continue its policy everywhere else, the outcome could be a permitting morass slowing new O&G plans. In light of the 6th Circuit’s split opinion, there is significant potential for copycat suits throughout the country.
100-ton threshold
In the case, Summit Petroleum Corporation challenged EPA’s requirement that the company obtain a Title V permit for its operations on the Isabella Reservation. As described by the court, the company’s sweetening plant receives gas from production wells via underground pipelines also owned by the company. Flares also work as part of the plant operations by burning off natural gas waste to relieve pressure on the gas collection equipment. The wells and flares are between 500 feet and 8 miles from the central plant. All the facilities emit sulfur dioxides and nitrous oxides, air pollutants subject to regulation under the Clean Air Act (CAA).
The sweetening plant alone emits, or has the potential to emit, just under 100 tons of these pollutants per year. Each flare and each well site emits, or has the potential to emit, much lower amounts of pollutants. However, if the emissions of sulfur dioxide from the plant and any one production well were to be combined, they would exceed 100 tons of pollutants per year, triggering the requirement for a Title V permit.
In September 2009, after several years of back and forth communications with Summit, the EPA stated that activity on the reservation constituted a single stationary source for Title V permitting purposes. The decision was based on three regulatory criteria the Agency uses to determine if a collection of emissions sources should be aggregated for permitting purposes.
- Whether the activities are under the control of the same person (or person under common control),
- Whether the activities are located on one or more contiguous or adjacent properties, and
- Whether the activities belong to the same industrial grouping.
If the pollutant-emitting activities fail to satisfy any one of these three criteria, they are considered separate stationary sources and their emissions cannot be aggregated to meet the major source threshold for which a Title V permit is required. The case focused on the “contiguous or adjacent” phrase in the second criterion. Neither party disputed that no one facility shared a common boundary with any other facility; thus, contiguity was not present. However, according to the EPA, the Summit plant, wells, and flares worked as a single unit that together produced a single product. Furthermore, the Agency said that Summit had failed to provide any evidence that the emissions were not truly interdependent. Given this functional interrelationship, the EPA concluded that Summit’s facilities should not be considered separate emissions sources.
Physical proximity necessary?
The 6th Circuit majority opinion began by looking at several dictionary definitions of adjacent as well as the word’s etymology, concluding in each case that physical proximity is an essential component of the definition. According to the majority, two activities may indeed be interrelated, as the EPA claims, regardless of the distance between them; however, those activities cannot be adjacent if there is no physical proximity.
To support this contention, the majority refers to the U.S. Supreme Court’s decision in Rapanos v. United States. In that case, the Army Corps of Engineers asserted authority over wetlands that were adjacent to navigable waters of the United States and their tributaries. The Corps further defined adjacency to include sometimes saturated parcels of land 11 to 20 miles from the navigable waters. The Supreme Court disagreed, stating that a wetlands must actually abut a U.S. water to be considered adjacent.
“Together with the ordinary and dictionary definitions of the term ‘adjacent,’ the Rapanos decision, and similar case law, points clearly toward the conclusion that the regulatory requirement that aggregated activities be “located on contiguous or adjacent properties” is unambiguous in the context in which it is here considered,” wrote the majority. “For the foregoing reasons, we adopt this position.”
The EPA sought rehearing of the court’s decision, but that request was denied.
Interrelated operation
In her dissent, Judge Karen Nelson Moore emphasized the reasonableness of EPA’s contention that factors in addition to “absolute physical distance” can be relevant in determining whether two objects that are a given distance apart are close enough to be considered adjacent. For example, Moore notes that even when separated by miles, two facilities can be considered next to each other if they are part of a sequence and if they contribute to the same interrelated operation and only to that operation.
“In Summit’s case, functional interrelatedness has a physical dimension,” states Moore. “Each stationary source is connected via a dedicated pipeline. The operation is thus not only functionally interrelated but physically interconnected. Each source (gas well, flare, and sweetening plant) is a stop along a single physically connected process; each well is ‘next to’ and ‘immediately precedes’ the following well, for example. Nothing outside of this process either physically or functionally interrupts the traverse of gas from an underground field through the gas wells and past the flares to the sweetening plant. The properties on which each well or flare are located are likewise connected to each other and to the property on which the plant is located. The EPA’s position thus comports with the plain meaning of the word ‘adjacent’ as a description of the geographical relationship between two objects.”
Regarding the use of adjacent in Rapanos, Moore notes that the Supreme Court was working with a different statute and also did not purport to provide a general definition of adjacent. The Supreme Court did indeed state that a wetlands must abut a navigable waterway to be subject to regulation under the Clean Water Act, but that condition is necessary, wrote Moore, because only abutting wetlands could reasonably constitute “waters” at all. “Different factors are relevant when the question is how close multiple stationary sources must be to each other to qualify as an aggregated major source,” wrote Moore.
Critically for the O&G sector in general, Moore’s dissent endeavors to underline the appropriateness of EPA’s decision for the industry. “Different industries are structured differently,” she writes. “In the oil and gas industry, activities that in other contexts might be housed within a single building may instead be spread out across different parcels of land. Viewing the distance between two facilities in a drilling operation in light of their functional interrelatedness thus serves the purpose of identifying the operations that reflect the ‘common sense notion of a plant.’”
EPA’s memos
The EPA has in fact issued a number of memos on making source determinations for the O&G industry. In 2007, a memo from Acting Assistant Administrator William Wehrum instructed that “proximity can be the most informative factor in determining whether two activities are contiguous or adjacent.”
Next, in 2009, Assistant Administrator Gina McCarthy “withdrew” the Wehrum memo to “reemphasize the fundamental criteria for making source determinations.” According to McCarthy, the Wehrum memo attempted to simplify determinations by focusing on only one of the three determination criteria (whether activities are adjacent or contiguous). Instead, the McCarthy memo stated that there was nothing simple about such determinations, particularly in the O&G sector, and it was often necessary to conduct in-depth case-by-case analyses of ownership and operational issues.
“I find individual facts warrant a closer examination of all three criteria identified in those regulations to arrive at a reasoned decision, and therefore, the simplified approach provided in the memorandum should not be relied on by permitting authorities as a sufficient endpoint in the decision-making process,” McCarthy wrote.
The December 2012 memo by Stephen D. Page, director of EPA’s Office of Air Quality Planning and Standards, directly replies to the 6th Circuit majority opinion by noting that the EPA may no longer consider interrelatedness in determining adjacency when making source determination decisions in its Title V or new source review permitting decisions in states in the 6th Circuit’s jurisdiction. Page notes that the Agency is still assessing how to implement this decision in its permitting actions in the 6th Circuit. However, Page adds that outside the 6th Circuit the EPA has no intention of changing its “long-standing practice of considering interrelatedness in its permitting actions … and will continue to make source determinations on a case-by-case basis using the three factor test.”
As noted, the 6th Circuit’s majority decision appears to offer hope that the EPA may be compelled to return to the narrow use of the three determination criteria outlined in the 2007 Wehrum memo. But the Agency seems highly motivated not to take that road. EPA’s eventual response to the 6th Circuit’s ruling should provide more insight into how combative the Agency will be on this major issue for the O&G sector.
Click here for the 6th Circuit’s opinion in Summit Petroleum Corp. v. EPA.
Click here for the Page memo.
William C. Schillaci
BSchillaci@blr.com