A Connected Well Is Not Necessarily an Adjacent Well

On August 7, 2012, in Summit Petroleum v. EPA, the United States Court of Appeals for the Sixth Circuit struck down the U.S. Environmental Protection Agency’s broad interpretation of the word “adjacent” in its regulations. In its remand back to EPA, the court directed EPA to determine whether the emission sources at issue are “sufficiently physically proximate to be considered ‘adjacent’ within the ordinary, i.e., physical and geographical, meaning of that requirement.” That is, EPA cannot define the word “adjacent” to mean “inter-related.” Contiguity and distance matter.

Where such adjacency comes into play is in the realm of source determination for air permits, also known as “aggregation.” Aggregation involves the grouping of two or more pollutant-emitting activities together as a single source of emissions. Smaller emitting units that ordinarily would not trigger regulations could, if aggregated, constitute a “major” source subject to tougher regulatory requirements (most notably, “New Source Review” (pre-construction) and Title V (operating) permit requirements). Thus if an entity can avoid having its individual emitting units considered to constitute a single source, it likely can escape the more stringent regulations that apply to major sources.

Over the years, source determination – and in particular, the meaning of “adjacency” – has become fraught with fact-intensive analyses, with the end result being that sources separated by significant distances often are considered to be part of one source. Since 1980, individual emitting units not next to each other, but connected and viewed as operating together, have been considered “adjacent” and, therefore, constituting a single source. Such single sources have included facilities 1.8 miles apart connected by a pipeline (neither facility produced products independently); plants one mile apart but connected by a railroad and operated together; and a farm and brewery separated by six miles, because the farm was “integral” to the brewery’s operation. Such determinations can subject a source – i.e., the entity in need of regulatory approvals – to years of uncertainty. For example, BP filed for a Title V air permit for its Prudhoe Bay processing facility in 1997, an application which initiated drawn-out negotiations and wrangling involving BP, EPA, the Alaska Department of Environmental Conservation and interested parties regarding what should be considered part of the source (with one commenter arguing that all sources within a 300-square mile area should be counted). It was not until 2010 that the issue was put to rest with a court decision finally affirming EPA’s grant of a Title V permit.

And the issue often varies depending on the political party in power. In 2007, in an attempt to simplify the analysis, EPA’s top air official at the time, Bill Wehrum, announced that the proximity of the various emitting units would be given particular emphasis in determining whether the units should be considered one source. But in September 2009, EPA’s then top air official, Gina McCarthy, issued a memorandum withdrawing the proximity-laden approach and stressed that, instead, the agency would be considering equally three regulatory factors: whether the activities are under common control; whether they are located on one or more contiguous or adjacent properties; and whether they belong to the same industrial grouping. (And we all know that what happened between 2007 and 2009 is that the occupant of the White House changed.)

Such a change in approach is not limited to the federal government. For example, late in 2010, Pennsylvania issued technical guidance for source determinations, urging Department of Environmental Protection personnel to consider aggregating sources where appropriate. But the guidance was abruptly rescinded in February 2011. And in October 2011, the Pennsylvania DEP issued draft “Aggregation Guidance” in which it set one-quarter-mile as the distance between shale gas facilities that should be the major criterion for determining if facilities should be considered as individual sources or as one single source of air pollutants. EPA Region 3 immediately criticized that bright line approach, and the Clean Air Council has petitioned the EPA to find that the DEP is failing to implement the Clean Air Act because of its aggregation approach. (Why the change in Pennsylvania’s stance between 2010 and 2011? Someone new sat in the Governor’s Mansion.)

But back to the Sixth Circuit’s recent decision. At issue before the court was Summit Petroleum’s sweetening plant in Michigan (which removes hydrogen sulfide from gas), and also wells, associated flares and pipelines connected to that plant. Some of the wells are as much as eight miles away from the plant. In January 2005, Summit had requested that EPA determine whether its facilities met the definition of a Title V major source of air pollution. After much back and forth (and after much supplemental information provided by Summit), in 2010, EPA found that the facilities constituted a single source. Among other things, the Region noted the importance of evaluating “the nature of the relationship between the facilities and the degree of interdependence between them in determining whether multiple non-contiguous emissions points should be considered a single source.” According to EPA, Summit also had not shown that the farthest well points could provide product to any processing plants other than the processing plant at issue. Summit appealed that decision.

The Sixth Circuit’s decision on that appeal, as explained above, rejected EPA’s complicated interpretation of adjacency. The court found that EPA’s approach to determining adjacency – assessing “the purpose for which two activities exist in order to consider whether they are adjacent to one another” – runs counter to the plain meaning of “adjacent,” which unquestionably includes the concept of physical proximity. Nor was the court swayed by EPA’s argument that its approach reflected a longstanding policy. To that line of argument, the court explained 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.” But the decision was only by two judges on the three-judge panel, with the third judge authoring her own dissent. In light of the split among the panel, it would not be surprising if EPA were to petition for rehearing en banc. Thus how – and even whether – the EPA reconsiders its interpretation of “adjacency” to include the concept of physical proximity may remain to be seen for quite some time.

The Sixth Circuit’s decision follows a settlement agreement between EPA and WildEarth Guardians in February 2012, which resolved WildEarth Guardian’s discontent with EPA’s handling of a Title V permit renewal for Kerr-McGee/Anadarko Frederick Compressor Station (issued by the Colorado Department of Public Health and Environment) and also BP’s Florida River Compressor Station Title V permit renewal (issued by EPA Region 8). In that settlement, EPA Region 8 committed to undertaking a pilot program “for the purpose of studying, improving, and streamlining [oil and gas] source determinations in new or renewal Title V permits.” Stay tuned to see how that pilot program plays out.

Meanwhile, administrative appeal boards (particularly in shale-rich country) and courts continue to grapple with the issue. As one example, still pending in federal district court in Pennsylvania is Citizens for Pennsylvania’s Future v. Ultra Resources, in which Penn Future argues that Ultra has violated the Clean Air Act while operating under state air permits that failed to aggregate sources. Thus what remains in the air source determination world is still a fair amount of uncertainty and protracted litigation.

The Sixth Circuit’s recent Summit Petroleum decision injects some clarity into what has become the ever-murkier question of source aggregation. Per the court’s wisdom, a mere connection between one air emitting source and another does not mean those two sources are adjacent. And for the operators busily tapping into the Marcellus and Utica shale plays of Pennsylvania, West Virginia and Ohio, such clarity is good news. Let’s just hope that clarity is long-lasting and far-reaching.