Summary
The Clean Air Act (“CAA”) mandates that facilities that emit air pollution are subject to permit regulations based on the source’s potential level of emissions. Under certain circumstances, multiple facilities can be aggregated into a single “source,” thereby increasing the likelihood that regulatory burdens will apply. Although EPA has long used a “functional relationship” test in determining whether facilities should be aggregated, a recent court decision has invalidated this approach and instead directed EPA to focus on the distance between facilities. EPA has resisted this approach in recent years, but may now be induced to undergo a rulemaking procedure to consider and perhaps implement nationally the court’s decision. Environmental groups, on the other hand, continue to fight any reduction of the use of the functional relationship test.
Background
Under Title V of the CAA, every “major source” of air pollution must obtain an operating permit. Major sources are also subject to new source review (“NSR”) permitting requirements. Under Title V, Major sources are those that have the potential to emit (“PTE”) one hundred (100) tons per year (“tpy”) of any pollutant; for NSR, some categories of sources are not major unless they have the potential to emit 250 tpy. A major source can consist of either a single facility or an aggregation of multiple facilities, which is then considered, for purposes of the statute, to be a single source.2 Major sources are subject to more burdensome regulation, including more stringent pollution controls.
Aggregation of multiple facilities into a single source is of particular importance to the oil and gas industry. Often resource extraction takes place in the form of centralized facilities servicing multiple, widespread production wells. While neither the plant nor the specific wells may individually produce enough air pollutants to be considered a major source, if viewed collectively, these facilities may exceed the major source threshold.
Under EPA regulations, multiple pollutant-emitting activities are to be aggregated into a single source when they are (1) under common control; (2) located on one or more contiguous or adjacent properties; and (3) belong to the same major industry classification.3 EPA’s interpretation of “contiguous or adjacent” has changed over time. Based on a decision of the U.S. Court of Appeals for the D.C. Circuit, Alabama Power Co. v. Costle, 636 F.2d 323 (D.C. Cir. 1979), EPA decided against including “functional relationship” as a factor in addition to the three factors above.4 However, soon after issuing the 1980 rules rejecting “functional relationship” as a factor for aggregation, EPA began using functional relationship as a factor for determining whether facilities met the “contiguous or adjacent” prong for stationary source. EPA used functional relationship inconsistently over the decades following the 1980 rules and used it for each of the three factors in different determinations. As oil and gas operations began to draw the attention of environmental groups, the idea of applying “functional relationship” in an expansive way to aggregate oil and gas operations was raised in several permitting actions. In response, in 2007, EPA issued an interpretation (the “Wehrum Memorandum”) applicable to the oil and gas sector.5 Because many oil and gas operations potentially subject to air permitting meet the other two prongs of stationary source, the Wehrum Memorandum focused on interpretation of the “contiguous or adjacent” criterion. For this industry, EPA recognized that focusing on whether multiple activities were operationally or functionally related would potentially lead to results that would not adhere to the common sense notion of a plant; for example, multiple pumping stations along a pipeline.6 Instead, the Wehrum Memorandum stressed that physical proximity was most important in evaluating adjacency and making source determinations.7 Two years later, under the new administration, the agency issued a new interpretation (the “McCarthy Memorandum”) which revoked the Wehrum Memorandum and reportedly allowed EPA to rely again on functional relationship for aggregation decisions.8
In recent years, therefore, EPA has relied on the McCarthy Memorandum in making aggregation decisions. However, a recent decision from the United States Court of Appeals for the Sixth Circuit could significantly alter EPA’s approach.
Summit Petroleum Corp. v. EPA
The facilities at issue in Summit Petroleum Corp. v. EPA, --- F.3d ----, 2012 WL 3181429 (6th Cir. Aug. 7, 2012), are in many ways typical of oil and gas industry operations. Summit operates a natural gas sweetening plant and about 100 sour gas production wells located within an area of approximately 43 square miles. The wells are up to eight miles away from the plant, and do not share common boundaries. The dispute focused solely on whether the plant and wells, scattered across a large area of land, could be considered contiguous or “adjacent.”
Relying on a broad view of functional relationship, as directed by the McCarthy Memorandum, EPA concluded that Summit’s production wells and plant worked together as a single unit, and together produced a single product. Given this functional relationship, the agency aggregated the plant and wells into a single, major source, subject to regulation under Title V.
The Court in Summit flatly rejected this approach to aggregation. Instead, it found that “adjacency” is an unambiguous term that can be evaluated without resorting to additional factors. EPA’s interpretation “that activities can be adjacent so long as they are functionally related, irrespective of the distance that separates them, undermines the plain meaning of the text, which demands, by definition, that would-be aggregated facilities have physical proximity.”9 In other words, adjacency relates solely to geographic location, not contextual relationship or the purpose for which two activities exist.10
Thus, the Court scrapped EPA’s primary reliance on functional interrelationship for purposes of aggregation. In essence, the Sixth Circuit directed EPA to return to the Wehrum Memorandum’s focus on proximity as the chief determiner of adjacency, without regard to how dependent the facilities are on each other.
EPA sought rehearing of the Summit decision, as was expected in light of the long-standing nature of the practice that was invalidated and the novelty of the Court’s decision. Rehearing was denied. Although the court did not explain why, several factors decreased the likelihood of rehearing. Since this was the first time EPA's aggregation policy had been judicially challenged, the Circuit was unlikely to view this as a pressing legal question. Also, Summit was decided by two judges who are on opposite ends of the political spectrum. Their agreement helps show that the case was not decided on ideological grounds. Although EPA may now appeal the case to the Supreme Court, these same considerations make it unlikely EPA will decide to do so.
Next Steps and Implications
Rather than appeal the Summit decision, EPA is likely to undertake a rulemaking to clarify the role a distance threshold has in determining adjacency. A distance threshold could purportedly replace the functional relationship test, but such a test is hard to completely do away with. Assuming common ownership and same industry code, EPA may establish that facilities within the distance threshold are presumptively aggregated, while those farther apart are presumptively not. However, the agency may still consider functional relationship for overcoming those presumptions; for example, facilities that are within the set distance, but not functionally interrelated, would not be aggregated. Depending on the extent of EPA’s use of the test, permitting decisions could still run afoul of the court’s reasoning in Summit.
EPA also seems concerned that a distance threshold would create unintended negative consequences for industry. In its petition for rehearing, EPA argued that at times industry wants to aggregate far-flung facilities into a single source so as to take advantage of net emission calculations. Although EPA may be exaggerating the frequency of industry’s desire to aggregate, this issue is likely to come up within a rulemaking context. EPA will not want to undermine its past permitting decisions, but still leave enough flexibility that a distance threshold does not become the sole factor in determining adjacency. Environmental groups involved in the process will also surely fight attempts to rely first and foremost on distance measurements.
Summit is the only court decision on the issue and is only binding in the Sixth Circuit (Michigan, Ohio, Kentucky, and Tennessee). Regardless, in addition to a potential rulemaking, the case may have a broader impact on EPA’s actions in other Circuits. Although Title V source determinations are usually made by state agencies, EPA generally retains such authority on Native American lands. EPA Region 8 is the home to 27 Tribal Nations and widespread O&G activity (including in Utah, Colorado, and Wyoming). In 2010 and 2011 EPA was sued by environmental groups alleging that the agency failed to properly aggregate sources for Title V permits. In order to settle these suits, EPA agreed to undertake a pilot program in Region 8 to study and streamline source determinations.11 After Summit, EPA is now on notice that its use of the functional relationship test is vulnerable to legal challenge. This may make EPA more hesitant to use the test in its Region 8 pilot program, instead making source determinations based on proximity factors. If such an approach is followed in this pilot program, it may also spread to EPA aggregation decisions elsewhere. A new EPA rule could also have immediate impacts on the Region 8 pilot program, particularly in Indian lands, which are generally regulated by EPA, not states.
The Summit decision and EPA rulemaking may also lend support to state efforts to promote geographic proximity as the most important factor in determining adjacency. Since states issue most Title V permits, this is particularly significant. Pennsylvania’s Department of Environmental Protection recently finalized a new rule applying a distance threshold to its aggregation decisions - sources located within a quarter mile are presumptively aggregated, while those farther away are evaluated on a case-by-case basis.12 Now, with the support of the Sixth Circuit, more states may be inclined to follow Pennsylvania’s lead. Courts and administrative boards may also find Summit’s reasoning compelling. For example, the Pennsylvania Environmental Hearing Board has already cited the Summit case as persuasive.13
The issue of how properly to aggregate facilities, however, is not yet settled. EPA may still triumph in the appeals process, and other Circuits may decline to follow the Sixth. Environmental groups also continue to fight approaches that lead to fewer operations being classified as major sources subject to Title V, including, specifically, aggregation decisions. Clean Air Council, for example, an environmental non-governmental organization (NGO) based in Pennsylvania, is challenging Pennsylvania’s quarter-mile proximity threshold. EPA has also said that it disagrees with Pennsylvania’s approach. NGOs may also challenge individual permits or a State Implementation Plan for failing to adequately protect against violations of the National Ambient Air Quality Standards, premised on the argument that failing to aggregate sources leads to such violations.
Environmental groups recently won a victory in Pennsylvania that may make it easier to challenge CAA permitting decisions. In Citizens for Pennsylvania’s Future v. Ultra Resources, Inc.14, an NGO is disputing whether Ultra Resources obtained proper permits before constructing a major facility. Notably, the NGO neglected to participate in the public comment stage of the state permitting decision and also bypassed the state administrative appeals process, instead filing a complaint directly in federal district court. Nonetheless, the District Court retained jurisdiction, holding that the CAA did not require the plaintiff to participate in or exhaust the state appeals process.15 The case has not yet reached a decision on the merits, including whether an appropriate aggregation decision was made. After Summit, however, momentum is growing to remove the functional relationship test from the “contiguous or adjacent” determination.
1 42 U.S.C. § 7661a(a).
2 Source aggregation concerns the spatial evaluation of whether multiple facilities should be combined into a single CAA “source.” This is distinct from project aggregation, which is a temporal evaluation of whether increased air emissions from successive modifications to an existing source should be combined into a single “major source modification.” The latter is the subject of an ongoing EPA rulemaking process and does not relate to the issues discussed herein.
3 40 C.F.R. § 71.2.
4 45 Fed. Reg. 52676, 52694 (Aug. 7, 1980).
5 Memorandum from William L. Wehrum, Acting Assistant Adm’r, to Reg’l Adm’rs I-X (Jan. 12, 2007), available at http://www.epa.gov/region7/air/nsr/nsrmemos/oilgas.pdf (last visited Sept. 13, 2012).
6 Id. at 3.
7 Id.
8 Memorandum from Gina McCarthy, Assistant Adm’r, to Reg’l Admr’s I-X (Sept. 22, 2009), available at http://www.epa.gov/region7/air/nsr/nsrmemos/oilgaswithdrawal.pdf (last visited Sept. 13, 2012).
9 Summit, 2012 WL 3181429, at *10.
10 Id. at *8.
11 See, e.g., 76 Fed. Reg. 71027 (Nov. 16, 2011).
12 See PA DEP, “Guidance for Performing Single Stationary Source Determinations for the Oil and Gas Industries,” Doc. No. 270-0810-006 (Oct. 6, 2012), available at http://tinyurl.com/cpawmae (last visited Oct. 15, 2012).
Although Pennsylvania has created this new rule-of-thumb, it remains to be seen how strictly it will conform to it. PA DEP recently determined that two plants 17 miles apart should be considered a single source, a determination which was requested by the plant operator. This aggregation decision is being challenged in Clean Air Council v. Pennsylvania Dep’t of Environmental Protection, PA EHB No. 2012-165-L (Sept. 26, 2012).
13 Group Against Smog Pollution v. Pennsylvania, EHB Docket No. 2011-065-R (Aug. 14, 2012).
14 2012 WL 4434465 (M.D.Pa.).
15 Id. at *7.
This article was originally published by Bingham McCutchen LLP.