In a 2-1 opinion issued August 7, 2012, in the case of Summit Petroleum Corp v. EPA, No. 10-4572, slip op. (6th Cir. Aug. 7, 2012), the Sixth Circuit appears to have struck a substantial blow to the U.S. Environmental Protection Agency’s (“EPA” or “the Agency”) approach to single source aggregation under the Clean Air Act (“CAA”). While the decision will be binding only for facilities within the Sixth Circuit, the strongly worded opinion may, in fact, cast a much wider net, carrying significant implications not only for the oil and gas industry, but for many other industries faced with CAA source aggregation issues.

Factual Background – Summit Petroleum’s Natural Gas Operations

Summit Petroleum is a natural gas producer that owns and operates a natural gas sweetening plant, nearly 100 production wells, and subsurface pipelines that connect each of the wells to the sweetening plant in and near Rosebush, Michigan. Much of Summit Petroleum’s operations are located within the territory of Michigan’s Saginaw Chippewa Indian Tribe’s Isabella Reservation. As a result, EPA asserted jurisdiction over the regulation of Summit’s operations.

Summit’s production wells are located over an area of approximately 43 square miles, at distances varying from 500 feet to eight miles from the sweetening plant. None of the well sites share a common boundary with each other or with the sweetening plant. The sweetening plant alone emits, or has the potential to emit (“PTE”), just under 100 tons per year (“tpy”) of sulfur dioxide (“SO2”) and nitrous oxides (“NOx”), placing the plant under the CAA “major source” threshold. However, if the emissions of SO2 or NOx from the plant and any one production well were to be combined, the major source threshold of 100 tpy would be exceeded.

The Issue – EPA’s Finding of Aggregation Based on Functional Interdependence

In January 2005, Summit and the Michigan Department of Environmental Quality submitted a request to EPA for a determination of whether Summit’s facilities (as described above) met the definition of a “major source of air pollution” under Title V of the CAA, 42 U.S.C. §§ 7661-7661f. The applicable regulatory criteria for making such determination are found in longstanding EPA regulations promulgated under its Prevention of Significant Deterioration (“PSD”) program, as well as various guidance issued over the past 30 years. The well-known regulatory criteria are: (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 group. As the Summit court noted, “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.” Summit slip op. at 4.

Summit’s 2005 request to EPA advanced several familiar arguments, including the fact that the wells were located at significant distances on entirely different tracts, leases, and surface sites making them neither “contiguous” nor “adjacent” to one another. Following nearly five years of discussions between the parties, EPA Region 5, without explanation, issued its determination in September 2009 declaring that Summit’s sweetening plant and gas wells constituted a single stationary source. Following additional negotiations between the parties, EPA justified its determination on “functional interdependence” grounds (as opposed to physical proximity) stating that the Agency considered “the nature of the relationship between the facilities” and the “degree of interdependence between them” to determine if they are “truly interrelated.” Summit slip op. at 9.

The Sixth Circuit’s Opinion – EPA’s Interpretation of “Adjacency” is Unlawful

The majority opinion struck down EPA’s ruling applying two distinct legal rationale. First, the court found the term “adjacent” to be unambiguous, and as such, under well-established U.S. Supreme Court case law, afforded EPA’s interpretation no deference. Summit slip op. at 10-11. Applying two dictionary definitions, the court found that “adjacent” requires an assessment of geographic proximity and not, as EPA argued, “an assessment of the functional relationship between two activities.” Summit slip op. at 12. Relying on prior case law, most notably Rapanos v. United States, 547 U.S. 715 (2006), the court similarly found that “adjacency” requires physical proximity, and not necessarily (if ever) functional interdependence. Id. (noting that in Rapanos, the Supreme Court struck down the U.S. Army Corps of Engineer’s expansive definition of “adjacent,” finding it to have been extended beyond reason).

This portion of the opinion is particularly noteworthy for calling out the long history of EPA’s seemingly arbitrary, and according to the court incorrect, source determinations relying on functional interdependence factors fashioned by EPA Regional air program staff over many years. Summit slip op. at 16 (citing EPA’s long list of adjacency findings, ranging from as close as 0.9 miles apart all the way up to 35 to 40 miles apart). In perhaps the most strongly worded portion of the opinion, the court wrote:

Like Rapanos, we conclude that an agency may not insulate itself from correction merely because it has not been corrected soon enough, for a longstanding error is still an error. We thus reject the EPA’s argument to the contrary and have little hesitation in taking this opportunity – the first our Court has been given in the EPA’s own history of ‘entrenched executive error’ – to vacate the agency’s unreasonable interpretation of its Title V permitting plan.

Summit slip op. at 18.

Second, the court found that even if the term “adjacent” was deemed ambiguous and the Agency was therefore afforded deference by the court, EPA’s interpretation is still unlawful, relying on the regulatory history of EPA’s PSD rules promulgated in 1980. The court noted that the Agency’s “refusal to include a functional relationship test in its single stationary source analysis [under the PSD rules]” runs directly counter to “its current position that its analysis cannot be completed without it.” Summit slip op. at 19. Indeed, as noted by the court, EPA’s rejection of the functional interdependence test in the PSD rules was “categorical and unqualified,” and grounded in the rationale that such test “would be highly subjective” and would “make administration of the definition substantially more difficult” burdening “the Agency in numerous, fine-grained analyses.” Id. slip op. at 22. The irony of EPA’s past rationale was not lost on the Sixth Circuit here. The court specifically noted that since Summit’s first request for determination five years had passed without resolution.

The court remanded the case to EPA “to determine whether Summit’s sweetening plant and sour gas wells are sufficiently physically proximate to be considered ‘adjacent’ within the ordinary, i.e., physical and geographical, meaning of that requirement.” Summit slip op at 25. In a rather curious dissenting opinion, Judge Moore attacks the majority’s rationale for not deferring to EPA’s interpretation of the “adjacency” requirement, arguing that adjacent is an ambiguous term, attempting to distinguish Rapanos’ analysis of the term, and even suggesting that producing wells separated at the land surface by miles are contiguous because they draw gas from the same producing formation. Id. at 28-34, n.2.

What Are the Implications From The Summit Decision?

The Sixth Circuit’s decision may have far-reaching impacts on CAA single source determinations for the oil and gas industry, and also other industries and source categories. The core holding is that “adjacency” under a CAA single source determination analysis requires assessment of the physical or geographical proximity of the facilities, and not whether the facilities are functionally interdependent. In essence, the court struck down EPA’s argument, which it has been making with increased frequency relative to oil and gas facilities, that “proximity and functional relatedness are one in the same.” Summit Petroleum slip op at 21. This is particularly poignant for the oil and gas industry where, like in the Summit case, production wells, connecting pipelines, and storage or other treatment facilities are typically located some distance apart and often on separate, non-contiguous, non-adjacent tracts of land. Summit makes a strong argument that on similar facts source aggregation would not be appropriate.

How the Sixth Circuit constructed and supported its opinion, however, may turn out to be just as important as the actual result. While the case creates binding precedent only for lands and facilities within the Sixth Circuit, the reasoning supporting the decision may lend itself to broader application. To this end, the opinion is noteworthy in several respects. First, the court relied on prior U.S. Supreme Court case law to justify much of its decision, making it harder to overturn should it ever reach appeal. Second, the court arrives at the same conclusion regardless of the level of deference extended to EPA’s interpretation. This will make it more difficult for EPA to argue in other jurisdictions that the Sixth Circuit did not give EPA the appropriate level of deference or that the opinion should not be followed. And finally, the court held that EPA’s current interpretation of “adjacency” not only contradicts the plain meaning of the term, but has more or less been arbitrary and capricious for over 30 years. As the court stated, “an Agency may not insulate itself from correction merely because it has not been corrected soon enough, for a longstanding error is still an error.” It will be a difficult burden for EPA to overcome this finding, regardless of the venue.

Taken together, Summit marks a significant and favorable turning point in one of the most important and closely watched CAA issues facing the oil and gas industry. Going forward, it will be important to watch how EPA decides the issue on remand, how the Agency addresses the decision in other pending source aggregation cases in other jurisdictions, whether EPA will draft new guidance, and whether the opinion affects the states as they continue to make single source determinations and draft source aggregation policies in the course of their air quality permitting decisions.