On August 7, 2012, the Sixth Circuit in a two-to-one decision vacated a determination by the U.S. Environmental Protection Agency (EPA) that a natural gas sweetening plant owned by Summit Petroleum Corporation (Summit) and various flares and sour gas production wells also owned by Summit constitute a single stationary source under EPA’s Clean Air Act Title V permitting program and remanded the case to EPA. Summit Petroleum Corporation v. EPA, Nos. 09-4348 and 10-4572 (6th Cir. Aug. 7, 2012). In vacating EPA’s determination, the Sixth Circuit rejected EPA’s interpretation of the word “adjacent” in its stationary source regulations as meaning merely “functional relatedness” without regard to physical proximity. On remand, the majority directed EPA to “reassess[ ] Summit’s Title V source determination request in light of the proper, plain-meaning application of the requirement that Summit’s activities be aggregated only if they are located on physically contiguous or adjacent properties” or “physically proximate, properties.” Id. at 16 & 25-26. For the text of the Sixth Circuit’s opinion and order, click here and here.
The case is significant because it is the first decision by a court of appeals to address EPA’s “functional relatedness” test, which if allowed would result in more determinations aggregating oil and gas sources into a single stationary source for purposes of Title V permitting. The decision is also significant for EPA’s Prevention of Significant Deterioration (PSD) preconstruction permit program because EPA uses the same test to aggregate pollutant-emitting activities into a single stationary source for purposes PSD permitting. Title V requires affected “major sources” to obtain an operating permit, whereas PSD may require a “major stationary source” to install stringent controls as well as obtain a preconstruction permit. Additionally, the decision is important for oil and gas companies with operations in Ohio because the Sixth Circuit includes Ohio, and the decision will be binding on source determinations for oil and gas air pollutant emitting activities in Ohio.
Whether or not a stationary source is a “major source” under Title V or a “major stationary source” under the PSD provisions of the Clean Air Act is important because Title V requires every “major source” of air pollution to have a Title V permit to operate and PSD requires every “major stationary source” to obtain a preconstruction permit for construction activities. 42 U.S.C. §7475(a) (PSD) & §7661(a) (Title V). A “major source” under Title V is defined as “any stationary facility or source of air pollutants which directly emits, or has the potential to emit, one hundred tons per year of any pollutant,” including nitrous oxides and sulfur dioxides which are omitted by Summit’s oil and gas activities. 42 U.S.C. §7602(j). A “major stationary source” under PSD is similarly defined although the pollutant emissions thresholds vary depending upon the source category. 42 U.S.C. §7479(1). EPA’s regulations define a “stationary source” as “any building, structure, facility, or installation which emits or may emit a regulated [air] pollutant.” 40 CFR §52.21(b)(5). EPA’s stationary source regulations further provide that multiple pollutant-emitting activities may be aggregated together and considered a single stationary source under Title V and PSD 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. 40 CFR 52.21(b)(6) (PSD) and 40 CFR 71.2 (Title V).
In Summit, approximately 100 sour gas production wells located within an area of approximately 43 square miles supply gas to the sweetening plant. The wells are located from 500 feet to 8 miles from the plant, and the plant and wells are connected via underground pipeline. In between the plant and wells are properties owned by other parties. Flares, which burn off natural gas waste, are located from one half-mile to over one mile from the plant. The plant and some of the wells and flares are located on an Indian reservation, making EPA the permitting authority, while other wells and flares are located outside the Indian reservation and subject to the jurisdiction of the Michigan Department of Environmental Quality. The plant emits, or has the potential to emit, just under one hundred tons of sulfur dioxide and nitrous oxides per year; however, if the emissions of sulfur dioxide from the plant and any one production well were to be combined, they would exceed one hundred tons of pollutants per year. Slip op. at 2-3. Therefore, the issue was whether Summit’s facilities are “adjacent” to one another within the meaning of EPA’s stationary source regulation to make them a single stationary source and a major source under Title V, requiring Summit to obtain a Title V permit. EPA determined that the Summit’s facilities satisfied the regulatory requirement of being “located on…adjacent properties” because they are “truly interrelated” or “truly interdependent”. Id. at 1 & 7-9.
The majority held that “EPA’s conclusion that Summit’s activities are ‘adjacent’ because they are ‘truly interrelated’ is unreasonable.” Id. at 11. Relying on both the dictionary definition and etymological history of “adjacent” and case law, the majority found that the term “adjacent” is unambiguous. While acknowledging that adjacency must be considered in context, the majority nonetheless found that EPA had “overextended” the “notion that adjacency expands and contracts with context,” stating “that the contextual element of the overall space within which one asks whether two things are adjacent does not fundamentally change the physical and geographical nature of the question. The EPA makes an impermissible and illogical stretch when it states that one must ask the purpose for which activities exist in order to consider whether they are adjacent to one another.” Id. at 13 (emphasis in original). The majority explained that: “the mere fact that in a limited sense, the term ‘adjacent’ is not susceptible to abstract definition does not render it unclear, for ‘however ambiguous the term may be in the abstract, ‘adjacent’…is not ambiguous between ‘[physically proximate]’ and merely ‘[functionally related]’.” Id. at 15 (citing Rapanos v. United States, 547 U.S. 715, 748 (2006)).
Finding EPA’s interpretation “unreasonably inconsistent with [the] plain meaning [of ‘adjacent’],” the majority declined to grant deference to EPA’s interpretation, which failed to consider proximity, merely because it was “longstanding”. As the majority explained, the Summit case was the “[first] opportunity [the Sixth Circuit] had 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.” Id. at 16-18 (quoting Rapanos, 547 U.S. at 752).
The majority also said that even if the term “adjacent” is ambiguous, its holding would be the same because EPA’s interpretation is inconsistent with the regulatory history of its Title V program and its own guidance memoranda. Id. at 18-24. The majority emphasized that in the 1980 amendments to its stationary source rules EPA considered and rejected the functional relationship test as one of the criteria for combining emission sources into a single stationary source and instead adopted the “industrial grouping” criterion. The majority noted that in rejecting the functional relatedness test, “EPA specifically found that assessing whether activities were sufficiently functionally related to constitute a single source ‘would be highly subjective’ and would make ‘administration of the definition substantially more difficult, since any attempt to assess those interrelationships would have embroiled the Agency in numerous fine-grained analyses.’” Id. at 20-21 (quoting 45 Fed. Reg. at 52,695). Further, the majority found that the Wehrum Memorandum, which was issued during the Bush Administration, “made clear the near-singular importance of the physical proximity of two facilities in the EPA’s stationary source analysis” and the McCarthy Memorandum, which was issued at the beginning of the Obama Administration “focus[es] on applying the regulatory text in Title V decisions.” Id. at 23-24.
Finally, the majority found support of its conclusion in the arguments made by amicus curiae American Petroleum Institute that EPA’s source determination in this case “produced exactly the ‘fine-grained and administratively burdensome result the EPA sought to avoid in its drafting of its…stationary source test.” Id. at 25. Five years elapsed from Summit’s source determination request until EPA’s decision. The process involved “at least twenty-five conference calls and…‘a small mountain of paper’,” and costs “were high in terms of both monetary and capital resources.” Id. In the words of the majority, “EPA’s source determination in [the Summit] case is an ironic showcase of the very fears that caused the agency not to adopt a functional relatedness test for source determinations in the first instance.” Id.
Circuit Judge Karen Nelson Moore dissented, advocating for “defer[ence] to the Agency’s reasonable interpretation of its own regulation.” Id. at 27. Judge Moore maintains that the functional interrelatedness test does not contradict the plain meaning of the word “adjacent”. To illustrate, Judge Moore writes that “if two properties are close enough to each other to house stationary sources that contribute to the same interrelated operation and only to that operation, those properties are more likely to be close enough reasonably to be considered adjacent. Likewise, the EPA could reasonably conclude that two or more sources that exist only as part of the same larger process or sequence will likely be close enough to each other to be considered adjacent.” Id. at 29. Judge Moore contends that distance was a factor in EPA’s determination and emphasizes that “[e]ach well supplies sour gas only to Summit’s gas-sweetening plant” and that the wells, flares, and plant were connected by a “dedicated underline pipeline and are used exclusively as part of a single, interconnected operation.” Id. at 34-35. Judge Moore concludes: “On remand,…EPA is free to reach the same conclusion that Summit’s operations should be aggregated as a major source for Title V permitting purposes, so long as it bases that conclusion on the considerations that the majority…deems appropriate.” Id. at 36.
This article was authored by Gale Lea Rubrecht, Jackson Kelly PLLC. For more information on the author, see here.