Babst Calland: Plain Meaning Prevails - 6th Circuit Overturns EPA's Single Source Determination. What's EPA's Next Step?

Babst Calland: Plain Meaning Prevails - 6th Circuit Overturns EPA's Single Source Determination. What's EPA's Next Step?

On August 7, 2012, the U.S. Court of Appeals for the Sixth Circuit published a decision that appears to be a victory in terms of how permitting authorities must decide which air permitting requirements apply to the oil and gas industry. However, a closer look at the Sixth Circuit's decision suggests that the source aggregation issue has not yet been finally resolved.

The Sixth Circuit's decision overturned a determination by the United States Environmental Protection Agency (EPA) that Summit Petroleum Corporation's (Summit) natural gas sweetening plant and approximately 100 gas wells scattered across a 43-square-mile area in Michigan should be treated as a single source for Title V permitting purposes. Summit Petroleum Corporation v. EPA, Case Nos. 09-4348; 10-4572 (August 7, 2012). The Court, in a 2-1 decision, determined that the plain meaning of the term "adjacent" is not ambiguous and therefore held that functional relatedness cannot be used to satisfy the "adjacency" prong of the three-prong aggregation analysis.

In general, the Title V permitting program under the Federal Clean Air Act, requires all "major sources" (including those that emit, or have the potential to emit, 100 tons per year of any pollutant) to obtain a Title V operating permit. See 42 U.S.C. § 7661a(a). Under EPA's Title V regulations, the individual sources that must be aggregated to determine whether the source is a "major source" are those that: 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. In Summit, there was no dispute that Summit's sweetening plant, gas wells, flares and pipelines connecting the wells to the sweetening plant were all under Summit's control and belonged to the same industrial grouping. The issue in Summit was whether EPA properly concluded that the various gas wells, flares and gas sweetening plant were located on "adjacent properties" based on EPA's determination that the individual sources were functionally related.

Summit argued, and the majority agreed, that the term "adjacent" is not ambiguous, that an adjacency analysis should be limited to the plain meaning of the term, and that establishing adjacency through mere functional relatedness is unreasonable and contrary to law. Citing the American Heritage Dictionary of the English Language, the court determined that two entities are "adjacent" when they are "close to; lying near . . . next to, adjoining." While the defined terms do not refer to any specific distance, the court highlighted the fact that "EPA does not cite . . . any authority suggesting that the term 'adjacent' invokes an assessment of the functional relationship between two activities."

The court ultimately concluded that EPA's interpretation "undermines the plain meaning of the text, which demands, by definition that would-be aggregated facilities have physical proximity." In doing so, the court rejected outright EPA's plea for deference based on the principle that EPA has historically considered functional relatedness in its adjacency analysis, stating that "an agency may not insulate itself from correction merely because it has not been corrected soon enough, for a longstanding error is still an error." The court also indicated that, even if the term "adjacent" was ambiguous, EPA's interpretation would be inconsistent with the regulatory history and EPA-issued guidance on the subject. The court remanded the case back to EPA for a reassessment of Summit's Title V source determination.

While this decision is seemingly a victory for the oil and gas industry, the dissenting opinion in the case highlights the potential limited impact of the decision. The court remanded the matter to EPA to reassess Summit's single source determination. On remand, the EPA cannot consider the functional interrelatedness of the sources at issue. However, it remains to be seen how EPA applies the unambiguous phrase "adjacent" in making a determination as to which sources are "adjacent." In the end, the EPA will likely need to decide the issue based on the proximity or distance between the sources. Historically, the EPA has refused to establish any bright line distance to define "adjacent." It will be interesting to see how the EPA decides on remand or whether EPA appeals the decision. It should also be noted that, although this case addressed the aggregation of sources under the Title V permitting program, the same adjacency analysis applies to the permitting of new major sources or major modifications at existing major sources under the Prevention of Significant Deterioration and New Source Review permit programs.

If you have questions about the court's decision or other air-related issues associated with natural gas exploration and production, please contact Chester R. Babst III at 412-394-5407 or cbabst@babstcalland.com, David E. Northrop at 412-394-6590 or dnorthrop@babstcalland.com, or Michael H. Winek at 412-394-6538 or mwinek@babstcalland.com.

Copyright 2012• Babst, Calland, Clements and Zomnir, P.C. • Two Gateway Center, Pittsburgh, PA 15222 • 412-394-5400 • Administrative Watch is privately distributed by Babst, Calland, Clements and Zomnir, P.C., for the general information of its clients, friends and readers. It is not designed to be, nor should it be considered or used as, the sole source of analyzing and resolving legal problems. If you have, or think you may have, a legal problem or issue relating to any of the matters discussed in the Administrative Watch, consult legal counsel.

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