The U.S. Court of Appeals for the Sixth Circuit and the D.C. Circuit recently offered some regulatory relief to oil and gas operators under the Clean Air Act (CAA) with respect to aggregating sources for the purposes of CAA permitting.  On February 23, 2015, the District Court for the Middle District of Pennsylvania issued an opinion that, consistent with the Sixth Circuit and D.C. Circuit opinions, held certain oil and gas operations should not be aggregated, while indicating that the question of interrelatedness (a concept rejected by the Sixth Circuit) could be appropriate in determining the scope of a stationary source.

Historically, EPA and certain states have directed companies to aggregate emissions from sources dispersed over multiple square miles of operation for purposes of permitting under the CAA.  Specifically, EPA’s regulations require treatment of sources as a single stationary source when facilities are (1) under common control; (2) belong to the same industrial group (e.g., oil and gas production); and (3) “are located on one or more contiguous or adjacent properties.”  In 2012, the Sixth Circuit issued a seminal decision in Summit Petroleum v. EPA (Summit Petroleum) holding that EPA should only determine whether sources are “contiguous” or “adjacent” based on physical proximity and not based on functional interrelatedness.  Following the Summit Petroleum decision, EPA issued the Summit Directive to all EPA Regional Offices.  The Summit Directive declared EPA’s intent to apply theSummit Petroleum decision in all states within the Sixth Circuit only, and apply its “longstanding practice of considering interrelatedness” in all other jurisdictions. 

In 2014, an association of resource extraction and manufacturing companies petitioned the United States Court of Appeals for the District of Columbia for review of the SummitDirective.  In National Environmental Development Association v. EPA (NEDA)—a decision that applies nationwide—the D.C. Circuit vacated the Summit Directive on the basis that it plainly violated EPA’s “Regional Consistency” regulations by applying different and more stringent tests in different jurisdictions.  Thus, in the wake of NEDA and Summit Petroleum, it would be unlawful for EPA or states to use the “functionally interdependent” test to determine whether equipment and facilities are “adjacent” or “contiguous” for purposes of CAA stationary source permitting determinations.  Notwithstanding what appeared to be clear decisions from both the Sixth and D.C. Circuits, the Middle District for the District of Pennsylvania left open the potential for using the functional interdependency test in determining the scope of a stationary source.

At issue in Pennsylvania’s Future v. Ultra Resources, Inc.(PennFuture) was whether Ultra Resources, Inc.’s (Ultra) eight compressor stations within an approximately five-square-mile area each constituted a separate facility or should have been aggregated as a single facility for air permitting purposes.  While none of Ultra’s compressor stations individually had the potential to emit more than 100 tons per year (tpy) of oxides of nitrogen (NOx), collectively, the eight stations had potential to emit over 100 tpy of NOx.  The Pennsylvania Department of Environmental Protection (PADEP) issued Ultra a general permit for each of the eight compressor stations as individual NOx emitting facilities, rather than aggregating the facilities.  Citizens for Pennsylvania’s Future (Citizens) filed suit, arguing that the compressor stations should have been aggregated because the compressor stations were both physically proximate and functionally interrelated, and should thus have been subject to major source permitting.

Importantly, following the Sixth Circuit’s Summit Petroleumdecision in 2012 (but pre-dating the D.C. Circuit’s NEDAdecision in 2014), PADEP issued final guidance (PADEP Guidance) for determining when sources should be considered “contiguous or adjacent.”  While the PADEP Guidance specifically states that “the plain meaning of the terms ‘contiguous’ and ‘adjacent’ should be the dispositive factor when determining whether stationary sources are located on contiguous or adjacent properties,” the PADEP Guidance also states that “interdependence may be considered when conducting a single source determination.”  Following this guidance, in PennFuture, the Middle District of Pennsylvania upheld the PADEP’s issuance of general permits to each of the eight compressor stations, but in so doing, departed from the Circuit Court’s precedent analysis. 

The District Court declared that in certain circumstances, it would be appropriate for a regulatory agency to also apply the functional interrelatedness test:

We agree with the majority in Summit Petroleum that the plain meaning of ‘contiguous’ and ‘adjacent’, when applied, should normally operate to allow a determination as to whether stationary sources should be aggregated.  However, we recognize that to strictly limit that determination so as to never consider functional interrelatedness would run afoul of PADEP's Guidance and could very likely lead to the anomalous situation wherein emitting sources which are clearly functionally related are able to avoid the more stringent standards applicable to ‘major’ sources under the CAA and state law because of a wooden and inflexible definition of adjacency.

Ultimately, the Middle District of Pennsylvania found that Ultra’s compressor stations were neither physically proximate nor functionally interrelated so as to require aggregation, raising the question of whether this discussion of interrelatedness is dicta. 

Despite the clear parameters laid out in Summit Petroleum andNEDA, the federal district court in PennFuture cited to language in a state guidance document to retain the notion that functional interrelatedness might be an appropriate evaluation for determining whether sources are “contiguous” or “adjacent,” particularly in circumstances where the sources are attempting to avoid a more stringent permitting regime.  It is doubtful that this decision would provide EPA ammunition to enforce aggregation based on interrelatedness because the D.C. Circuit’s judgment in NEDA prohibits the Agency from departing from the Summit Petroleum test of physical adjacency, at least until EPA attempts to amend its regulations to address NEDA

The question is whether states and environmental groups could continue to push for functional interrelatedness in assessing aggregation.  While Section 116 of the CCA preserves, under certain circumstances, state authority to impose more stringent emissions requirements, 42 U.S.C.  § 7416, several states have enacted laws that prohibit state and local environmental laws from being more stringent than federal law requires.  Thus, assessing the risk for any particular project requires careful consideration of applicable state permitting law, among other things.  Environmental groups may continue to file aggregation citizen suits, citing to the language in PennFuture to muddy the waters on whether functional interrelatedness survives as an independent test of aggregation.  But the clear judicial trend is to adopt physical adjacency as the aggregation test and to find that geographically dispersed upstream oil and gas wells, compressor stations, and other facilities are separate emissions sources.  Nothing in PennFuture indicates that trend will change anytime soon.