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Sixth Circuit Rejects EPA’s Aggregation of Air Emissions, Easing Permit Burden for Oil and Gas Industry

August 23, 2012

In a split opinion, a federal appellate court has rejected EPA’s long-standing practice of requiring oil and gas producers to aggregate emissions from dispersed production wells, flares, and processing facilities. EPA’s practice of aggregating emissions from smaller sources often brings them within the “major source” category of the Clean Air Act and triggers Title V permitting requirements. EPA has reasoned that widely-dispersed emission sources may nonetheless be “adjacent” (and subject to aggregation) when they are “functionally related” and fit within the “common sense notion” of a single facility.

Summit Petroleum, an oil and gas producer, successfully challenged that practice in Summit Petroleum Corp. v. EPA, --F.3d--, 2012 WL 3181429 (6th Cir. Aug. 7, 2012). While the Sixth Circuit’s opinion does not clarify the geographic limitations on when dispersed emission sources are “adjacent,” it does clarify that EPA may no longer primarily rely on the “functional relationship” between emission units when making a major source determination. This should reduce the permitting burden on oil and gas projects, which are often spread out over large geographic areas, as well as other industrial activities with widely-dispersed emissions sources.

I. Statutory Background

Enacted as part of the 1990 Clean Air Act amendments, Title V established a program whereby certain stationary sources (generally speaking, those emitting more than 100 tons per year of a regulated pollutant) must obtain an air operating permit. The Title V program does not impose new substantive emission limitations, but instead, requires major stationary sources to obtain a permit that ensures compliance with applicable requirements under the Clean Air Act.

EPA’s regulations define “stationary source” as “any building, structure, facility, or installation which emits or may emit a regulated [air] pollutant.” 40 C.F.R. § 52.21(b)(5). EPA’s regulations further provide that dispersed sources may be considered a single “stationary source” if, and their emissions may be aggregated when, they: (1) are under common control; (2) are located on one or more contiguous or adjacent properties; and (3) belong to the same major industrial grouping (i.e. SIC code). 40 C.F.R. § 71.2. At issue in Summit Petroleum was the second factor: whether certain wells, flares, and a production facility were on “adjacent” properties.

II. Factual Background

Appellant Summit Petroleum owns and operates over 100 natural gas production wells in central Michigan, which are connected via subsurface pipelines to a natural gas processing facility.[1] The wells are spread out across a 43 square mile area at varying distances from the processing plant (from 500 feet to eight miles). Summit does not own the property between the individual wells sites, or the property between the well sites and the processing plant. Furthermore, the wells do not share a common boundary with the plant. Summit’s facilities also include a series of flares (intended to reduce pressure on gas collection equipment) that are located at various distances from the processing facility.

The processing plant, production wells, and flares emit sulfur dioxide and nitrous oxide, which are regulated pollutants under the Clean Air Act. None of individual sources emit (or have the potential to emit) regulated pollutants in amounts exceeding 100 tons per year – the threshold for qualifying as a “major source” for purposes of obtaining a Title V operating permit. But when the emissions from the processing plant, production wells, and flares are aggregated, the emissions exceed the relevant thresholds and Title V requirements are triggered.

In 2005, Summit and the Michigan Department of Environmental Quality (MDEQ) asked EPA to determine whether Summit’s facilities qualified as a “major source” for purposes of Title V. Summit observed that the production wells and plant were scattered over a large area and were not on contiguous or adjacent parcels. In response, EPA referenced a 2007 interpretive memorandum (the Wehrum Memo), which identified the procedures EPA used for determining whether oil and gas facilities constituted a single stationary source:

(1) Identify the surface sites,

(2) Evaluate whether each individual surface site qualifies as a separate stationary source, or if the emissions activities should be grouped together to form a stationary source (i.e., if their emission activities are under common control, belong to the same major industrial grouping, and are contiguous or adjacent), and

(3) Aggregate two or more stationary sources if they are under common control and are located in proximity of each other.

EPA found that Summit’s facilities were under common control and part of the same industrial grouping, but that they were not located on contiguous surface sites. EPA concluded that it must determine whether the wells and plant were “adjacent,” observing that the sites meet the “common sense notion of a plant” and that the Wehrum Memo “makes clear that proximity is the most informative factor in making a source determination involving oil and gas activities.” EPA requested additional information from Summit to facilitate its adjacency determination.

In a subsequent correspondence, EPA indicated that, under the Wehrum Memo, physical proximity was not the only factor in an adjacency determination. EPA indicated that it “determines whether two facilities are ‘adjacent’ based on a ‘common sense’ notion of a source and the functional interrelationship of the facilities.” (Emphasis added).

In September 2009, EPA issued a determination that Summit’s production plant and wells constituted a single stationary source, and because the aggregate emissions exceeded 100 tons per year of certain regulated pollutants, the facility was a major source subject to Title V permitting. EPA’s determination relied, in part, on a new interpretive memorandum (the McCarthy Memo). The McCarthy Memo withdrew the Wehrum Memo on grounds that it overly focused on proximity in the source determination analysis. The McCarthy Memo instructed permitting authorities to determine whether emissions should be aggregated on a case-by-case basis in reliance on three regulatory criteria: (1) whether the activities are under the control of the same person (or person under common control); (2) whether the activities are located on one or more contiguous or adjacent properties; and (3) whether the activities belong to the same industrial grouping. 40 C.F.R. § 52.21(b)(6). Even though the McCarthy Memo rejected the Wehrum Memo’s focus on proximity, it provided that “in some instances, ‘proximity’ may serve as the overwhelming factor in a permitting authority’s source determination decision.”

Summit subsequently filed a petition seeking review of EPA’s determination. EPA and Summit agreed to stay the deadline for obtaining a Title V permit in order to allow Summit to submit additional information to EPA. The initial petition for review was also held in abeyance by agreement of the parties.

In October 2010, EPA responded to Summit’s additional information. EPA explained that when it was determining whether facilities were “adjacent,” it would rely on factors such as the “nature of the relationship between the facilities” and the “degree of interdependence between them.” EPA concluded that the wells, flares, and plant “together produced a single product,” and that Summit had failed to demonstrate that the facilities were “truly independent.” Summit subsequently filed a second petition seeking review of EPA’s October 2010 letter.

III. Analysis

 A. Majority Opinion

On appeal, the sole disputed issue was whether the wells, flares, and plant were “adjacent” and therefore a single stationary source. If so, the aggregated emissions would exceed the applicable thresholds and the facility would be a “major source” subject to Title V permitting. EPA argued that the term “adjacent” was ambiguous and that its reliance on the functional or contextual (rather than proximate) relationship between facilities was reasonable. Summit argued that EPA’s interpretation of the term “adjacent” was inconsistent with the term’s plain and ordinary meaning. The court sided with Summit, holding that EPA’s interpretation of the term “adjacent” was inconsistent with the term’s common definition and applicable case law.

Consulting dictionary definitions, the court first rejected EPA’s contention that the term “adjacent” was ambiguous. The court observed that “EPA does not cite, nor could we locate, any authority suggesting that the term ‘adjacent’ invokes an assessment of the functional relationship between two activities.” The court also noted that EPA’s position was inconsistent with the term’s etymology, which implies a physical rather than functional relationship. The court concluded that “[w]hether the distance between two facilities enables a given relationship to exist between them is immaterial to the concept of adjacency.”

The court next held that EPA’s interpretation was inconsistent with applicable case law, particularly the Supreme Court’s holdings in Rapanos v. United States, 547 U.S. 715 (2006). In Rapanos, the Supreme Court rejected the Corps of Engineers’ position that a “sometimes saturated” parcel of land was “adjacent to” navigable waters for purposes of conferring jurisdiction under the Clean Water Act, even though it was located eleven to twenty miles away from actual navigable waters. The Supreme Court refused to defer to the Corps’ interpretation, holding that the terms “adjacent” and “adjoining” had previously been used interchangeably and that a wetland was adjacent to a navigable waterway when it actually abutted such a waterway.

Like the Supreme Court in Rapanos, the Summit Petroleum court rejected EPA’s expansive definition of the term “adjacent” as inconsistent with the plain and ordinary usage of that term. The court also held that EPA’s interpretation of the term “adjacent” was not entitled to deference, even though the agency had a long history of supplementing the term’s ordinary meaning with an evaluation of the activities’ functional relationship. The court observed that EPA’s historic reliance of the functional relationship between activities was “entrenched executive error” that was owed no deference: “we conclude that an agency may not insulate itself from correction merely because it has not been correct soon enough, for a longstanding error is still an error.”

The court went on to hold that, even if the term “adjacent” was ambiguous, EPA’s interpretation was inconsistent with the regulatory history of Title V. The court observed that EPA expressly rejected including a “functional relationship” criteria in the definition of “building, structure, facility, or installation” when it developed its 1980 amendments to the PSD rules. The court observed that EPA rejected a “functional relationship” criteria on grounds that such an assessment would be “highly subjective” and would make “administration of the definition substantially more difficult, since any attempt to assess those interrelationships would have embroiled the Agency in numerous, fine-grained analyses.” The court held that EPA’s prior condemnation of “functional relationship” criteria “cuts heavily against” EPA’s disputed interpretation of the term “adjacent.”

The court finally explained that EPA’s interpretation was inconsistent with its own guidance memorandums. Specifically, the court observed that the Wehrum Memo expressly rejected the notion that geographically distant oil and natural gas activities could be considered “contiguous” or “adjacent.” As the Wehrum Memo stated:

[W]e do not believe determining whether two activities are operationally dependent drives the determination as to whether two properties are contiguous or adjacent, because it would embroil the Agency in precisely the fine-grained analysis we intended to avoid, and it would potentially lead to results which do not adhere to the common sense notion of a plant.

The court also noted that while the McCarthy Memo replaced the Wehrum Memo, it also directed EPA to rely foremost on the three regulatory factors for making source determinations: (1) common control; (2) contiguous or adjacent parcels; and (3) same industrial grouping. The McCarthy Memo also clarified that proximity may well be the overwhelming determinative factor.

Having rejected EPA’s interpretation, the court remanded the matter back to EPA for a reassessment of Summit’s Title V source determination “in light of the proper, plain-meaning application of the requirement that Summit’s activities be aggregated only if they are located on physically contiguous or adjacent properties.”

B. Dissent

Circuit Judge Karen Nelson Moore dissented, writing that neither the plain meaning of the term “adjacent”, the regulatory history of the Clean Air Act’s aggregation determinations, nor policy considerations should prevent the court from deferring to EPA. Judge Moore first contended that the majority either “misunderstands or mischaracterizes” EPA’s position on “adjacency.” Judge Moore noted that EPA did not rely exclusively on “functional relationship” when making its aggregation decision, but simply included that factor along with considerations of absolute distance.

Judge Moore also disagreed with the majority’s reliance on Rapanos, arguing that the Supreme Court’s holdings were specific to the context of that case – namely, determining whether a wetland was “adjacent to” navigable waters. Judge Moore contended that “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.”

Judge Moore next argued that EPA had not, as the majority stated, categorically rejected a “functional relationship” test when it promulgated its PSD regulations. According to Judge Moore, EPA rejected “interrelatedness” as a stand-alone factor, but that position did not preclude considering “interrelatedness” when determining “adjacency.” As Judge Moore explained, “nothing in the Preamble forecloses the possibility that interrelatedness could be relevant in a specific aggregation determination or otherwise rejects interrelatedness as a criterion that could be considered within the adjacently analysis.”

Finally, Judge Moore argued that, at least in the instant case, EPA would not be required to engage in a “fine-grained” or “highly subjective” analysis because each well supplied gas only to Summit’s processing plant, and that plant received gas only from Summit’s wells. Thus, according to Judge Moore, the facilities were clearly interrelated.

IV. Conclusion

Summit Petroleum will likely result in widespread changes to EPA’s Title V major source determinations, particularly in the oil and gas industry, but also with respect to other industries with widely-dispersed emission sources. While it is unclear how far apart facilities can be and still be “adjacent” for purposes of aggregation, it is clear that EPA may no longer determinatively rely on a “functional relationship” criteria when making major source determinations.

For more information, please contact any member of Marten Law’s Air Quality practice group.

[1] The processing facility “sweetens” natural gas by removing hydrogen sulfides.

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