Reality Check on the Auditor General’s Report on DEP’s Oversight of Oil and Gas Operations

By Michael Krancer
Follow: @MikeKrancer 

The expected chorus of politically driven indignation is raining down in response to the Auditor General’s report released this Tuesday on the DEP’s performance in monitoring potential impacts to water quality from shale gas development, 2009-2012.

I’m in the process of digesting the Report which is lengthy (118 pages), along with the DEP’s 27-page response which, per standard procedure, is appended to the Report itself.  A few things strike me as notable though off the bat.

First, of the 15 “case studies” of water complaints the Auditor General looked at, 4 of the 15 were unrelated to oil and gas operations at all.  That’s 27% of the investigation that had nothing to do with what was supposedly being investigated.  Of the remaining 11 matters, 10 had full water replacement or restoration from the responsible operator.  That’s a 91% rate of success on resolution.  The 11th matter has a water replacement plan under review right now by the DEP.  That raises the resolution rate to 100% of the matters reviewed by the Auditor General.

In another case the Auditor General highlighted, where animals had supposedly gotten sick, the matter was determined to be unrelated to oil and gas operations.

Second, the Auditor General also focuses quite a bit on the DEP’s technology and personnel capabilities, alleging shortages and deficiencies.  But it was under the Rendell and Hanger regime that 183 bodies were axed from the DEP in the 2009-2010 budget, mostly impacting IT (information technology) and clerical functions.  Also, the report conveniently ignores completely the brand new oil and gas fee program that the administration brought into fruition.  The fee increases on shale wells will result in revenue of $4.7 million.  This will support new technology, including things like electronic review, mobile digital inspections, reporting system upgrades, and modernized forms and databases.  It will also support the hiring of about 25 new personnel, many of whom will be inspectors.

Third, I would agree with the Auditor General that the General Assembly should review whether the current 45-day clock for resolution of water impact investigation is realistic.  Earlier this year we wrote about Fred Baldassare’s report that methane from deep shale formations, like the Marcellus, has been found as a natural condition in the shallow drinking water aquifer system of the Northeastern Pennsylvania region.  One takeaway for me on that report, and my own experience as DEP Secretary, is that these investigations are long and complicated and putting unrealistic time frame expectations on them is not a good thing.

Lastly, despite the Auditor General’s and the chorus’ protestations to the contrary, the Report is a shot at the dedication and efficaciousness of hard working DEP personnel, especially inspectors.  In one particular case for example, the Auditor General rips an inspector for being too “conciliatory” where that inspector had successfully achieved compliance and a restored water supply and the DEP issued a fine of over $145,000 to boot.

Of course the Auditor General’s Report will, unfortunately, be used as a political football.   It will most certainly be referenced in this year’s gubernatorial race and perhaps in one down the road by the Report’s author.  As veteran Harrisburg reporter Don Gilliland put it in his insightful article about the Report in this morning’s Patriot News: “[t]here is a long tradition in Pennsylvania of audits being vehicles for the political ambition of the Auditor General, and [this] promised investigation of the Department of Environmental Protection’s oversight of Marcellus Shale drilling is no exception.”

I will continue my review of the Report and the DEP’s responses and I may chime in with more as time goes by.

EPA’s Clean Air Act Litigation Scorecard and What It Portends for Carbon Emissions Reduction Regulations

By Michael Krancer
Follow: @MikeKrancer 

The Environmental Protection Agency (“EPA”) is running the table in the courts on its key Clean Air Act initiatives: (1) the MATS Rule; (2) the Transport Rule; and (3) the Soot Rule.

  • On April 15, 2014, the D.C. Circuit upheld the 2012 Mercury and Air Toxics Standards (“MATS” Rule) in White Stallion Energy Center LLC v. U.S. Environmental Protection Agency, No. 12-1100.
  • On April 29, 2014, the U.S. Supreme Court reinstated the Cross-State Air Pollution Rule (“Transport Rule”) in U.S. Environmental Protection Agency v. EME Homer City Generation, LP, No. 12-1182.
  • On May 9, 2014, the D.C. Circuit affirmed the EPA’s discretion to tighten standards on particulate matter from coal power plants, refineries, manufacturers, and vehicles (“Soot Rule”) in National Association of Manufacturers (NAM) v. EPA, No. 13-1069.

The MATS Rule. The D.C. Circuit, by majority decision, upheld MATS, which requires coal- and oil-fired power plants to reduce emissions of mercury, arsenic, chromium, and other air pollutants.  The court gives wide latitude to the EPA’s discretion to act under the Clean Air Act.

The Transport Rule.  The “Good Neighbor Provision” of the Clean Air Act requires the EPA and individual states to prohibit upwind states from significantly contributing to the nonattainment of National Ambient Air Quality Standards (“NAAQS”) in downwind states.  42 U.S.C. § 7410(a)(2)(D)(i).  The D.C. Circuit, in a 2 to 1 decision with a vigorous dissent, vacated the Transport Rule on several technical grounds.  Per Justice Ginsburg, the Supreme Court reversed.  The court gives a very wide berth to the EPA’s discretion and judgment calls under the Clean Air Act in accordance with the landmark Chevron U.S.A. Inc. v. NRDC decision.  The court plainly rebukes the two-judge majority of the D.C. Circuit for not doing so.

The Soot Rule.  The D.C. Circuit upheld the EPA’s decision to revise the annual standard for particulate matter in order to address what the EPA believes to be a public health threat.  After considering NAM’s arguments, the court again decided in the EPA’s favor, basing its decision on the wide discretion that courts must give to the EPA in its decision-making under the Clean Air Act, especially when making science-related judgments.

With the EPA’s two big greenhouse emissions reduction rules on the brink of coming out, i.e., the final rule for new power plants and the proposed rule for existing power plants, what do we think the courts might do?  In the investment industry, it is said that “past performance is no indication of future results.”  In the legal business, it’s the opposite.  The challengers are starting this series down three games to none—and arguably down by two goals in the first period of game four.  First, the Supreme Court and D.C. Circuit have sent clear messages that the EPA will be given wide deference when it comes to the Clean Air Act.  Second, the new greenhouse gas rules come with the backdrop of the Supreme Court having already ruled in Massachusetts v. EPA that greenhouse gases are “contaminants” under the Clean Air Act, along with the D.C. Circuit having already upheld the EPA endangerment finding (with that decision now pending for review in the very Supreme Court that decided the Transport Rule case)—thus compelling the EPA to act on greenhouse gases.

Odds, anyone?

Read about the three recent Clean Air cases and what they mean in more detail in Blank Rome’s Client Alert by clicking here.

“Fracturing” In Pennsylvania: The Uncoordinated Threatened & Endangered Species Review Process for Environmental Permitting

By Michael Krancer
Follow me @MikeKrancer 

Some of the major and sensible changes in how Pennsylvania conducts threatened and endangered (“T&E”) species review for environmental permitting—which began when I was Secretary at DEP—are seemingly coming to fruition in the state legislature right now. 

Even before I took office, permit applicants voiced their frustrations over the cumbersome, non-transparent, and time-consuming nature of the review process.  These frustrations are born out of 1) the secretive ways in which the Game Commission and Fish & Boat Commission treat T&E information, and 2) how the review processes of both commissions are siloed, disorganized, disjointed, and excruciatingly drawn out.

To put it simply, the system is hopelessly fractured.  Moreover, after studying up on this problem when I was Secretary, it became clear that the current system does not even do an optimal job of protecting T&E species.

All of this is aggravated by the elephant in the room—the fiefdom mentality of the Game Commission and Fish & Boat Commission, where protecting turf and power prerogatives permeates.  Unfortunately, despite our best efforts, the Executive Branch could only do so much to bring order to the situation.  Legislation was needed.

We now have two parallel bills in the House (HB 1575) and the Senate (SB 1047), both called the Endangered Species Coordination Act, which were introduced this summer and may see action this coming fall.  The co-sponsorship of both bills is remarkably bipartisan and geographically diverse.  The bills, among other things, would standardize the process for listing T&E species, require coordination, and grant more transparent access to information so planners can maximize conservation efforts for their permitted activities.  Also, the bills would finally require the two commissions to do what every other agency of the commonwealth government does: follow constitutional due process and the Commonwealth Documents Law in promulgating regulations and decision making.

Predictably, both commissions have expressed their opposition with the overstated claims that protection will be reduced.  In reality, protection will be enhanced and they know that.  The opposition really boils down to their objection of having to follow the law in decision-making, being transparent, and having their decisions be subject to review.  In other words, they would have to give up unchecked, unshared, and in many cases, unreviewable power.  We need to remember, though, what Madison said in the Federalist Papers: “… government must be obliged to control itself.”

This will be a heavy lift in the legislature because both commissions will get their backs up to protect their turf and stoke up advocacy groups to fight the bills full bore under the guise of protecting T&E species.  But at the end of the day, the Endangered Species Coordination Act is a common-sense law aimed at increasing transparency, reducing territoriality of government agencies, coordinating requirements and communications, having agencies live by the law and comply with due process, and increasing protections. 

This is one moratorium on “fracturing” that would well serve the Commonwealth.

Click here to read HB 1575, and here to read its sponsorship memorandum.  Click here to read SB 1047, and here to read its sponsorship memorandum.

Where is Compliance with Your Air Permit Considered Tortious Conduct? In the Third Circuit.

By Michael L. Krancer, Margaret Anne Hill and Louis Abrams

Comply with your air permit and be sued anyway.  That is what the Third Circuit has just held in Kristie Bell et al. v. Cheswick Generating Station et al., No.12-4216 (3d Cir. Aug. 20, 2013).

My colleague Peg Hill, partner and environmental litigation practice group leader at Blank Rome, and I have spent time discussing the court’s decision yesterday that, in brief, determined that the federal Clean Air Act does not preempt state common law property damage tort claims—even where the facility is in compliance with its air permit!

The importance of this breathtaking decision to permitted entities cannot be overstated.  A clear message has been delivered: the federal Clean Air Act and state Clean Air Acts are no longer in complete control of determining compliance with air emissions.

Peg and I have to ask ourselves, and our readers, whether this decision creates the Clean Air Act-version of “no good deed goes unpunished.”  The floodgates of air litigation are now open in the Third Circuit—even against the good guys.

For further details, please click here to read our just-released alert, “Where is Compliance with Your Air Permit Considered Tortious Conduct? In the Third Circuit.”

Litigation “Air War” About DEP’s Air Aggregations Decision Continues

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).