On Tuesday, August 18, 2015, the U.S. Environmental Protection Agency (“EPA”) issued a package of four proposals to control methane emissions from the oil and gas industry. By far, EPA’s proposed New Source Performance Standards (“NSPS”) have garnered the most attention. And, in many respects, the attention is warranted. The NSPS would require the aggressive deployment of costly controls and monitoring requirements.

EPA’s response to the issue of defining “adjacency” for oil and gas sources, on the other hand, is receiving distinctly less attention in the press.  EPA has commenced two rulemakings in response to a recent D.C. Circuit decision: EPA has proposed to “clarify” how the Agency will evaluate the “sources” subject to Clean Air Act (“CAA”) permitting requirements and controls, and has proposed a revision to its Regional Consistency regulations for CAA implementation. Even though these two proposed rulemakings contain no direct control requirements, they arguably could have an even greater impact on the oil and gas industry than the NSPS.

The CAA requires permits to construct or modify “major” stationary sources under “Nonattainment New Source Review (“NNSR”) if sources are located in areas designated as in “nonattainment” with ambient air quality standards, and under the Prevention of Significant Deterioration (“PSD”) program if the sources are located in attainment areas or areas that are unclassifiable. “Major” stationary sources must also obtain operating permits under Title V of the CAA. Stated very simply, multiple parts of the CAA draw distinctions between “major” and “minor” sources, and these distinctions matter because major sources are generally subject to stricter permitting requirements.

“Major” sources are defined differently throughout the CAA, but are always based on an evaluation of whether the “source” triggered certain thresholds for emissions or potential to emit (“PTE”). In order to measure a facility’s emissions or PTE against the CAA’s major source thresholds, the permitting authority must first identify “the source.” Sometimes, where a facility has a single or discrete number of emissions points, source identification can be straightforward. Often, however, source identification is complicated by differences in ownership within a larger industrial complex or by functional relationships between “inside the fence line” sources and “outside the fence line” sources. EPA requires the emissions from these “sources” to be aggregated to meet major source thresholds if they are adjacent, under common control, and part of the same industrial grouping.

Aggregation of sources in the upstream oil and gas industry, where potentially hundreds of wells and processing facilities are connected through pipes and gathering lines, is about as complex as it gets. “Adjacency” was not defined, and EPA, for a time, used a “functional relatedness” test to determine whether sources were adjacent. Summit Petroleum Corporation challenged a 2010 EPA determination that its natural gas production wells, natural gas sweetening plant, and flares—spread over a 43-square-mile area—were adjacent simply because they were tied together by gathering lines (i.e., functionally related). The U.S. Court of Appeals for the Sixth Circuit determined that EPA erred in defining “adjacency” based on functional relationships and by reading out of the plain meaning of “adjacent” any consideration of physical proximity.

In response to the Sixth Circuit’s invalidation of its functional relatedness test, EPA promptly issued its “Summit Directive,” which sought to limit the effect of the Sixth Circuit’s decision to those states within the court’s jurisdiction. Under the directive, EPA would stop utilizing the functional relatedness test in Kentucky, Ohio, Michigan, and Tennessee, while continuing to use it for all other states outside of the Sixth Circuit.

The National Environmental Development Association’s Clean Air Project challenged the Summit Directive arguing that it gave facilities in the Sixth Circuit a competitive advantage and that it violated EPA’s Regional Consistency regulations. In 2014, the D.C. Circuit agreed, holding that EPA’s Regional Consistency regulations prohibited the Agency from purposely creating regional inconsistency to blunt the impact of an adverse court ruling.

This past month, EPA has proposed two rules to address both the Agency’s invalidated “adjacency” test and the Agency’s invalidated attempt to cabin the impact of the adverse “adjacency” decision. On August 18, 2015, EPA proposed two options for defining the term adjacent” as they apply to the oil and gas industry for CAA permitting decisions. Unsurprisingly, these two proposals are: (1) to define “adjacent” in terms of physical proximity; and (2) to define “adjacent” to signify activities that are either close together or are related by function. Under the first option, which EPA says is “currently preferred,” sources would be considered adjacent if they are located on the same site or on sites that are within a quarter-mile of each other. Under the second option, EPA would consider sources adjacent if they are near each other or if they are functionally related, such as being connected by a pipeline.

The definitions offered by EPA are strangely delineated, suggesting that the Agency is not considering an option limiting aggregation to sources which are proximate and which have some relationship or connection to each other (other than ownership or control). While the Summit decision prohibited EPA from defining “adjacency” in terms of functional interdependence, it did not prohibit EPA from amending its regulations to require that sources bear some relationship to each other in order to be aggregated. Aggregating sources based purely on ownership and proximity may be somewhat more straightforward, but it could result in the aggregation of sources that have no functional ties at all. If EPA is proposing to amend its regulations, it should consider a broader suite of options to truly limit aggregation to those sources that reflect the common sense notion of the facility. Comments are due 60 days following the proposal’s publication in the Federal Register.

Additionally, on August 5, 2015, EPA proposed to revise its Regional Consistency regulations to provide EPA an exception to its consistency requirements where Federal court decisions concerning the CAA have regional or local applicability. For example, Summit’s original suit brought in federal district court in Michigan over a permitting decision specific to its facility would not have had nationwide effect under EPA’s suggested revision. EPA would allow nationwide challenges to CAA policies that are filed in the D.C. Circuit, and decisions from those suits would be effective throughout the nation.

Importantly, this proposal is not limited to the oil and gas industry, and could be applied by the Agency whenever EPA received an adverse district court decision. To be clear, the proposal does not compel EPA to limit the impact of district court decisions. Instead, it seems to allow EPA to pick which decisions it will follow nationally and which it will limit—presumably without the opportunity for notice and comment.

The outcome of this rulemaking is certain to impact how facilities construct their challenges to permitting processes or decisions, and the courts in which they file those challenges. Additionally, if the proposed change is made, CAA permitting decisions in different states and regions could potentially follow substantially different guidelines. Comments on the rulemaking are due October 19, 2015.