1. Introduction

A decision issued last week by the 6th Circuit in Summit Petroleum Corp. v. EPA rejects a significant component of the Environmental Protection Agency’s (EPA) interpretation of its own regulations on what constitutes a single emission “source” under the Clean Air Act (CAA).  This decision may have important implications for existing and future oil & gas operations, as well as impact other industries.

The issue of “aggregation” under the CAA  involves combining multiple commonly-held emission sources into a single “major” source, subjecting the sources to more onerous permit obligations under Title V of the CAA.  It has become a key issue for oil and gas operations recently because these operations often involve numerous potential sources spread out over large areas.  

The Summit decision invalidates a long-standing EPA interpretation of its own source definition regulations.  The agency has maintained that sources can be aggregated based on their “functional interrelationship,” even where the sources are not proximately adjacent.  The Sixth Circuit found that the adjacency requirement in EPA source definition regulations requires sources to be physically near or next to one another in order to be aggregated.  As such, the ruling makes it more difficult for the agency to conclude that a network of oil and/or gas operations, or any other industrial constellation of emission sources, can be treated as a single source under the CAA in the absence of physical proximity between the relevant emission units.

  1. The Summit Decision   

The 6th Circuit in this case reviewed an EPA determination that Summit Petroleum’s natural gas operations near Rosebush, Michigan—which include a natural gas sweetening plant, pipelines, wells and occasional flares spread out over a 43-square mile area—should be permitted as a single, major source under Title V. 

EPA defines a “stationary source” as “any building, structure, facility, or installation” that emits or may emit a regulated air pollutant. 40 C.F.R. § 52.21(b)(5).  Multiple pollutant-emitting activities can be aggregated together and considered a single source only if 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 (“Aggregation Factors”).

In initial correspondence with EPA about the source determination for its Rosebush operations, Summit did not dispute the applicability of Aggregation Factors (1) and (3), but argued that it was unreasonable to group together wells and production field activities, which “occur over large geographic distances,” with a downstream processing plant to make a single stationary source.  Summit, slip op., at 7.  The agency responded that physical proximity was not the only factor in adjacency determinations, stating that “generally, the EPA determines whether two facilities are ‘adjacent’ based on a ‘common sense’ notion of a source and the functional interrelationship of the facilities, rather than simply on the physical distance between the facilities,” ultimately finding that Summit’s sweetening plant and wells should be aggregated in this instance.  Summit, slip op. at pp. 7-8.

In reviewing the agency’s determination, the court looked to the dictionary definition and etymological history of the term “adjacent,” as well as case law, including the Supreme Court’s 2006 decision in Rapanos v. United States, 547 U.S. 715 (2006).  The Sixth Circuit concluded on the basis of this review that the word “adjacent” refers to objects that are “not distant,” “next to,” “close to” or “immediately preceding or following.”  Because the court concluded that the meaning of the term is unambiguous, it accorded no deference to the agency’s view that the concept of “adjacency” can encompass the functional relationship between two facilities.  The court found that EPA makes an “impermissible and illogical stretch when it states that one must ask the purpose for which two activities exist in order to consider whether they are adjacent to one another.”  Summit, slip op., at 13.

As a result, the court vacated the Summit source determination and remanded the case to EPA for reassessment “in light of the proper, plain meaning application” of the adjacency prong of the Aggregation Factors.  Summit, slip op., at 25-26.

  1. Implications

In reaching its decision, the court noted that historically the agency has “rarely, if ever” considered physical proximity to be essential for aggregation.  As such, the Summit decision will require a significant change in agency policy in this area. This change is relevant across regulated industries, but is particularly relevant to oil and gas operations, which environmental groups have recently suggested should be subject to aggregation on a more regular basis. 

The decision is now binding precedent in 6th Circuit states—Kentucky, Michigan, Ohio and Tennessee—and will no doubt have ripple effects across the country as the 6th Circuit’s arguments find their way into briefs and petitions in ongoing judicial and administrative matters related to source designations.  The agency may seek a rehearing before the 6th Circuit en banc or U.S. Supreme Court review.  In the near term, however, EPA must decide how the decision impacts its currently pending source determinations.  As a practical matter, a judicial decision will generally only impact future decisions and cases still open for review.   However, entities currently regulated under Title V should review the source designations embodied in their current permits in light of this new judicial precedent.

EPA has recently reiterated that source determinations should be made using the agency’s 2009 guidance memorandum, Withdrawal of Source Determinations for Oil and Gas Industries (the “McCarthy Memorandum”).  Importantly, the Summit court did not find fault with the McCarthy Memorandum, noting that the document “promotes a neutral and plain meaning application of the EPA’s Title V plan, directing permitting authorities to “rely foremost on the three [Aggregation Factors]” and “concedes that at the end of any case-by-case analysis, proximity may well be the overwhelming and determinative factor.”  

Regulated entities and the EPA are therefore left with the three Aggregation Factors, with the gloss of EPA’s “functional interrelatedness” analysis stripped off of the adjacency factor. 

Note that applicability of the agency’s recent New Source Performance Standards (NSPS) for the oil and gas industry, e.g. “green completion” requirements for certain gas production wells, will not be affected a change in EPA’s source designation policy following Summit because those standards apply to specified source types without regard to emission thresholds.  However, aggregation of these sources with others, e.g. pipelines and processing units, to make a single major source would layer additional Title V obligations for the affected sources on top of the new NSPS requirements.

The dissenting opinion in Summit makes the salient point that the majority’s concept of “adjacency,” while exclusively related to physical proximity, does not have a set meaning as to a specific distance.  The dissent argues that “absent a bright-line rule as to how far is too far for numerous sources to be considered adjacent,” source designations on the basis of adjacency may continue to be subjective.  While the majority’s decision does not resolve this issue, source proximity, on its face, seems to pose a far more predictable and limited question than the agency’s previous inquiries into shared source function and purpose. 

As such, the answer to the question of “how far is too far” now appears to be, in the 6th Circuit at least, not as far as it used it to be.