How Local Drilling Regulations May Impede Business Development in WV

by Spilman Thomas & Battle, PLLC
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As published in West Virginia Executive magazine, spring 2014

As governor, Senator Joe Manchin famously declared West Virginia to be “Open for Business.” Whether motivated by environmental or other concerns, however, some groups believe that, when it comes to the natural gas industry, West Virginia should be anything but. Forsaking the traditional avenue to policy change through Charleston, these groups have turned to local government to advocate additional regulation, moratoria, and even bans. Use of this tactic to oppose natural gas development is hardly unique to West Virginia. Numerous local governments throughout Pennsylvania, Colorado, and Ohio have sought to regulate, suspend, or ban natural gas development within their jurisdictions.
 
Local government regulation of natural gas development raises an important question, though. Is it legal? The answer to this question naturally is of great interest to the natural gas industry. However, the answer also should interest the business community, generally. Businesses considering a capital investment project, such as the development of a Marcellus Shale well, expect (if not demand) stability and predictability. Ambiguous or inconsistent rules and regulations reduce stability and predictability, increase risk, and diminish a project’s attractiveness. Additionally, any rule that permits local government to regulate, suspend, or ban natural gas development would apply equally to almost any other industry.
 
Northeast Natural Energy, a Charleston-based oil and gas development company, experienced firsthand local government attempts at regulation when, in 2011, the City of Morgantown passed an ordinance that banned horizontal drilling and fracking within city limits and a mile thereof. Although written to apply generally, the Morgantown ordinance clearly was intended to prohibit two wells that Northeast had planned to drill in an industrial park outside city limits and in which it had a significant financial investment. Accordingly, despite having obtained all necessary permits, Northeast’s plans were blocked by Morgantown’s ordinance, and it was forced to file suit.
           
Northeast’s case was decided in late Summer 2011 by Judge Susan Tucker of the Monongalia County Circuit Court.  Judge Tucker determined that the Morgantown ordinance was invalid and, in the process, reached important conclusions regarding local government authority. The City of Morgantown had argued that it was given the right of self-government by a 1936 Home Rule Amendment to the West Virginia Constitution. Judge Tucker, however, concluded that municipalities are creatures of the state and only have those powers that are granted by the legislature or that are necessarily or fairly implied or essential or indispensable. In fact, if any reasonable doubt exists as to whether a municipality has a power, the power must be denied. Just as significantly, if there are any inconsistencies between a municipal ordinance and state law, the municipal ordinance must yield. In Northeast’s case, because West Virginia has a comprehensive, statewide scheme for the regulation of natural gas development, the Morgantown ordinance was inconsistent and invalid.
 
Judge Tucker’s decision in the Northeast case was not appealed, and so the state Supreme Court of Appeals, as the final authority on West Virginia law, has not had an opportunity to address this issue. Nonetheless, Judge Tucker’s decision is consistent with more than 100 years of West Virginia law and, since Morgantown’s ordinance was declared invalid, no other West Virginia municipality has attempted to ban or regulate oil and gas development.
 
The natural gas industry cannot always rely on precedent and prior victories, though. In Pennsylvania, for instance, which has approximately ten times as many municipal and local governments as West Virginia, the natural gas industry was presented with a patchwork of local government regulation despite two 2009 state supreme court decisions defining its limits. Those local government regulations increased costs and delays, and the natural gas industry accordingly sought a legislative solution. This solution came in the form of House Bill 1950, which was signed into law in 2012 as Act 13. In addition to enhancing Pennsylvania’s environmental regulations, Act 13 placed express limitations on the ability of local government to regulate natural gas. In exchange for those limitations, the natural gas industry agreed to an impact fee that would provide local governments with millions of dollars in revenue. Following a legal challenge from Pennsylvania local governments, however, those limitations were declared unconstitutional by the Supreme Court of Pennsylvania in December 2013. The Pennsylvania natural gas industry now must contend with both the impact fee and the local government regulation against which it was intended as an inducement.
 
Colorado, which like West Virginia is home to a thriving energy industry, similarly has experienced attempts at local government regulation. Several Colorado local governments have passed bans or moratoria on natural gas development despite a 1992 state Supreme Court decision preserving regulation with the state. The most well-known of these Colorado local governments is Boulder, which passed a five year moratorium, but the most significant are the bans of the cities of Fort Collins and Lafayette. Both Fort Collins and Lafayette are currently being sued by the Colorado Oil & Gas Association in state trial courts. In the interim, an organization called the Colorado Community Rights Network is advocating a constitutional amendment that would permit local government to regulate any for-profit business entity.
 
Even in Ohio, where the legislature passed successively stronger bills between 2004 and 2010 to preserve sole and exclusive authority over natural gas development with the Ohio Department of Natural Resources, local governments have sought to impose additional regulation. The most prominent example is the City of Munroe Falls, just north of Akron, which passed ordinances that require additional permitting requirements, performance bonds, and public hearing requirements. Munroe Falls then sued Beck Energy Corporation, an Ohio-based company, to enforce its requirements. The case is now before the Supreme Court of Ohio, and a decision is expected in late Spring or Summer 2014.
 
Attempts at local government regulation in Pennsylvania, Colorado, and Ohio are part of a broader trend, and it is only a matter of time before another West Virginia local government considers taking part. The natural gas industry – and the business community, generally – must be prepared to directly confront these challenges and keep West Virginia “Open for Business.”

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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