By Michael Krancer
Follow me @MikeKrancer
The Environmental Hearing Board (“EHB” or the “Board”) issued a major and long-awaited decision on June 20, 2013 on the issue of “air aggregation”—or did it? It was certainly long-awaited, but we question whether it is, in fact, a major decision.
The case is Clean Air Council v. Commonwealth, EHB Docket No. 2011-072-R. The Board denied MarkWest’s motion to preclude the Clean Air Council (“CAC”) or the Department of Environmental Protection (“DEP”) from introducing any evidence on the issue of “functional interrelationship” among MarkWest’s eleven different facilities over a 40-square mile area. The CAC had appealed the DEP’s decision to not aggregate all of these facilities as a “single source” for air permitting purposes.
Plaintiff NGOs and others have been waging a comprehensive attack on Pennsylvania’s administrative procedures for evaluating “air aggregation” (aka “single source determinations”). Upstream and midstream operators need to be vigilant in monitoring projects and legal developments involving air aggregation issues as well as in planning their projects and litigating in support of such, when their projects are challenged.
The “air aggregation” issues started when the DEP, in February 2011, rescinded a very vague and lengthy so-called “Interim Guidance” that had been issued in the very last days of the Rendell administration. The DEP ultimately issued a revised technical guidance document that was clearer and more faithful to the statutory and regulatory scheme of the Clean Air Act and case law.
There is near universal agreement that the test for whether sources are to be aggregated, or treated as a single source, for air permitting purposes boils down to answering three questions:
1) Are the facilities under common control or ownership?
2) Are they contiguous or adjacent?
3) Are they within the same SIC code?
If the answer to all three questions is “yes,” then the sources should be aggregated. The only real issue is the second question—the meaning of the terms “contiguous or adjacent,” particularly the term “adjacent.” Sometimes the “adjacency” evaluation can be addressed by asking the following question: Do the various facilities fit within the common sense notion of a single plant? If so, then the sources are aggregated and considered a single source.
The DEP’s revised Guidance on the subject, which was promulgated in October 2012 after public comment, is premised on the not so startling notion that the terms “contiguous or adjacent,” by their plain meaning, refer to spatial distance, which is the preeminent factor in making air aggregation decisions. (See “Guidance for Performing Stationary Source Determinations for Oil and Gas Industries” issued on October 6, 2012). The Environmental Protection Agency (“EPA”) gave that rather common sense notion its “walking papers” in September 2009 in the now famous (or infamous to some) “McCarthy Memorandum” in which the EPA turned its preeminent focus on whether the different facilities, even though many miles apart, are, in any sense, functionally interdependent. The McCarthy Memorandum did not provide any rationale or legal analysis for this EPA about-face, nor did the agency provide any meaningful substantive guidance on how to analyze the basic question of when facilities should be treated as a “single source.” As DEP Secretary Krancer said when the DEP issued its updated Guidance, “The EPA’s approach ‘is not supported by the [governing] court decision, the EPA’s or state’s regulations.’”
The DEP’s Guidance provides a “rule of thumb” that if facilities are located within a quarter-mile or less apart, the facilities should be considered contiguous or adjacent. The Guidance points out that this “rule of thumb” comes from the model of how several other states, including Texas, Louisiana, and Oklahoma, have approached this same question. The DEP’s Guidance does not disallow consideration of functional interdependence but, unlike the EPA’s analysis, this sole factor is not the “litmus test” for making air aggregation decisions. Some have observed that the EPA allowed the functional interdependence test to become the “tail that wags the dog” in air aggregation decisions, and further, that this use of the test is not consonant with what the law says on the subject. In fact, this is exactly what the DEP’s Guidance was aimed to do—to get the air aggregation decision-making analysis back in conformance with the statute, regulations, and case-law on the subject.
The CAC complained bitterly to the EPA about the DEP’s Guidance. Even before the DEP’s Guidance was final, the CAC filed a petition with the EPA in February 2012 requesting a determination that Pennsylvania is not implementing its State Implementation Plan (“SIP”) nor enforcing its Clean Air Act Title V permitting program. Then, the CAC filed a “Notice of Intent” to sue the EPA on May 30, 2013. The CAC’s contention is that the DEP is not providing a “legally adequate and complete single source determination for the oil and gas industries.” According to the CAC’s view of the world, if any number of facilities, even if miles apart, are in any way functionally interdependent or have any connection to each other, they must be aggregated or considered as a single source for air permitting purposes. The CAC’s litigation against MarkWest and the DEP in this permitting case is yet another of its flotilla of litigations on this topic.
On an ironic note, the CAC, more litigious than consistent, sued the EHB over the joint decision of the DEP, EPA, and Philadelphia Air Management Services’ decision to aggregate, in the Sunoco refinery case, the Philadelphia refinery and the Marcus Hook refinery, located eighteen miles apart but operated in many ways as one plant, as a single source. This aggregation determination was the joint decision by federal, state, and city environmental regulators, which will end up reducing overall air emissions in the area, and saved America’s East Coast oil refining capabilities, 1,200 union refinery jobs, and tens of thousands of indirect jobs in Southeastern Pennsylvania. (See “Temple Center on Regional Politics, Taking Care of Our Own, How Democrats, Republicans, Business, and Labor Saved Thousands of Jobs and Our Refineries,” January 2013 (http://www.cla.temple.edu/corp/files/2012/12/Refinery-story-011113.pdf.) Not surprisingly, the CAC quietly exited that litigation via settlement.
In the MarkWest case, the CAC contended that the DEP erred by not aggregating into one source for permitting analysis a processing facility and ten separate compressor stations spread over a 40-square mile area of southwestern Pennsylvania. Since, according to the CAC, those facilities have some functional relationship to each other (i.e., they are connected to each other via pipeline), they must, without more, be considered as a single source. This CAC conclusion is apparently irrespective of whether the eleven facilities ever actually have any product flowing between them.
The en banc oral argument of MarkWest’s motion for summary judgment was held in early April before the EHB. This fact itself is noteworthy because the EHB very rarely holds arguments on motions and almost never hears en banc oral arguments. The judges had numerous questions for all counsel during the argument. MarkWest argued that the Board should preclude any evidence of functional interdependence. The Board treated this as a motion for partial summary judgment. In essence, MarkWest contended that facilities located so far apart could not, as a matter of law, be considered either contiguous or adjacent. It argued that the functional interdependency of the various facilities is irrelevant and that this issue cannot factor into the decision of whether to aggregate at all. The DEP is defending its permitting decision, but opposed granting MarkWest’s motion since, under the DEP’s Guidance, the functional relationship is a factor that warrants consideration. In other words, the DEP’s assessment is that MarkWest’s motion “goes a bridge too far.” The CAC, of course, opposed MarkWest’s motion and contends that the DEP erred and should have aggregated the eleven facilities.
MarkWest’s view had strong support in the federal courts. In April 2012, the Sixth Circuit Court of Appeals decided the case of Summit Petroleum Corp. v. EPA, 2012 WL 3181429 (6th Cir. Aug. 7, 2012). In a strongly worded opinion, the Sixth Circuit took the EPA to the woodshed for, in essence, torturing the definition of “contiguous and adjacent” to mean functional interdependence. The Sixth Circuit said point-blank that it was “illogical” for the EPA to “state[ ] that one must ask the purpose for which two activities exist in order to consider whether they are adjacent to one another.” (emphasis in the original.) It is our understanding that the EPA has taken the curious and somewhat questionable position that it will ignore the Summit Petroleum decision, with the exception of Ohio, Kentucky, Michigan, and Tennessee.
In any event, the EHB, in a broadly worded decision written by Chief Judge Renwand, denied MarkWest’s motion. The Board acknowledged the Summit Petroleum case, but noted that the decision was not binding on it. Interestingly, Chief Judge Renwand had written in a previous opinion in a different case that the Summit Petroleum case was “persuasive.” GASP v. DEP and Laurel Mountain Midstream Operating, LLC, 2012 EHB 329, 340. Then, the Board virtually embraces the dissent in Summit as a guidepost. The Board also commented, in dicta, that “there is no explanation of the cutoff at the one-quarter mile.” This statement is surprising as the body of the Guidance itself describes where this geographic linchpin comes from with footnote references to the authority from other states.
Judge Beckman wrote a very interesting concurring opinion that confesses his discomfort with the majority opinion. He senses that the broad wording of the majority opinion could be read to mean that the Board has concluded that the functional relationship will be taken into account at trial. He specifically says that he has “some concerns” with the majority opinion, as well he must in order to have written a concurrence. His main point is that he would modify the majority opinion to say that the Board will determine at trial the weight that the functional interdependence should be given, if any. He leaves open the possibility that the MarkWest motion did not “go a bridge too far.” How the taking of evidence on the topic will allow Judge Beckman to decide whether it was legally permissible for the DEP to have considered functional relationship is hard to explain. But he also says that if it turns out that the functional relationship was not an appropriate factor to consider, he will then remand the case to the DEP for a new determination, which would exclude the consideration of that factor. That seems hard to square since it would seem that, in such case, the DEP’s consideration of the functional relationship would have been a harmless error since the DEP decided not to aggregate anyway.
Several other “air aggregation” cases are pending. In another very recently filed litigation, the Group Against Smog and Pollution (“GASP”) appealed on May 28, 2013 two permits to the EHB that the DEP issued to XTO Energy, Inc. for two compressor stations in which it did not aggregate. GASP asserts that the two stations should be considered major air-emitting sources for hazardous air pollutants, and that neither XTO nor the DEP has shown the lack of “Best Available Technology” that would support emission rates less stringent than those set forth in the DEP’s General Permit 5 for natural gas facilities. GASP argues that the facilities must comply with additional air permitting requirements applicable to major sources.
The question has to be asked: Did the Board’s MarkWest decision really decide anything? In a limited sense, the answer is “yes” in that the evidence of “functional interdependence” will be considered at the trial of this case. The decision may or may not hold on eventual appeal if an appeal is filed. This part of the decision, however, is exactly what the DEP Guidance says. Unfortunately, it is still very unclear exactly what “functional interdependence” will mean to the Board, how this factor will be considered, and what weight it will carry relative to spatial adjacency. The DEP Guidance describes how functional interdependence fits relative to spatial distance, but the Board’s June 20th opinion does not. Not only are the litigants in this case left in the dark on this issue, but all other permit applicants and the DEP are, as well. Not much was really decided by the Board, nor did it provide guidance on the ultimate merits of the DEP’s permitting decision here.
Accordingly, we do not believe that this particular decision is as “major” as some may think. To peek around the corner though, the Board has correctly said many times that the DEP’s reasonable interpretation of regulation is entitled to deference. This is a classic case where the DEP’s Guidance and its application of that Guidance on the ground level, with this permitting decision, was more than just reasonable—both were compellingly correct under the facts and the law.
In the meantime, permitting uncertainty will remain. Clients would be well advised to seek good counsel on this issue at the planning stages of projects and, of course, at the litigation stage.
(thanks to Peg Hill and Louis Abrams of our Environmental Practice Group for helping write this).