[authors: Richard Alonso, John A. Riley and Sandra Y. Snyder]

On August 7, 2012, the Sixth Circuit Court of Appeals handed down an important decision that reined in the Environmental Protection Agency's (EPA) efforts to try to aggregate oil and gas emissions sources. In Summit Petroleum Corporation v. United States Environmental Protection Agency, No. 09-4348 (6th Cir. Aug. 7, 2012), the Sixth Circuit held that EPA's decades-long policy of determining whether sources are "adjacent" by looking at whether the sources are functionally related was unreasonable and contrary to the plain meaning of the term "adjacent." The decision's potential impact is significant - it creates a formidable barrier to future attempts by EPA or environmental groups to use aggregation principles to require oil and gas wells to obtain Title V and major New Source Review (NSR) permits, while also reversing approximately 30 years of EPA's erroneous interpretation and implementation of NSR regulations.

EPA's Aggregation Determination

Summit Petroleum Corporation owns and operates a natural gas sweetening plant located in Rosebush, Michigan. The Rosebush plant receives natural gas from over 100 production wells located across a 43-square-mile area with some wells as close as 500 feet from the plant, while others are located up to eight miles away. 

The Rosebush plant emits slightly less than 100 tons per year of sulfur dioxides (SO2) and nitrous oxides (NOx). Because the Rosebush plant's emissions are under the 100 tons per year threshold, the facility would not need to obtain a Title V operating permit unless the emissions from some or all of the wells were aggregated with the emissions from the plant. See 42 U.S.C. § 7602(j). 

EPA regulations allow aggregation of multiple pollutant-emitting activities such that they are considered a single stationary source only if all of the emission units

(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 (i.e., have the same SIC code). 

40 C.F.R. § 71.2.

In January 2005, Summit submitted a request to EPA to determine whether the Rosebush plant was a major source that required a Title V operating permit. After providing information to EPA over the course of several years, Summit finally received EPA's source determination in September 2009 that concluded that the Rosebush plant and the associated production wells were a single stationary source; therefore, according to EPA, Summit needed a Title V operating permit for this major source.

Errors in the EPA Aggregation Determination

Both Summit and EPA agreed that the Rosebush plant and its production wells were under common control and belonged to the same major industrial grouping. Therefore, the parties only disagreed about whether the Rosebush plant and the production wells were contiguous or adjacent. In particular, EPA argued that the term "adjacent" is ambiguous and the agency's interpretation of the term should be entitled to deference, especially in light of the agency's longstanding policy of assessing the functional relationship between multiple emissions activities. Summit argued that the term "adjacent" is unambiguous and that EPA's policy was not entitled to deference.

Citing to Webster's dictionary, the Sixth Circuit concluded that the plain meaning of the term "adjacent" is unambiguous.  In particular, the court rejected EPA's suggestion that the term "adjacent" requires undertaking an analysis of the functional relationship between two activities. The Court determined that asking the purpose of the activities' existence was an "impermissible and illogical stretch," particularly in light of U.S. Supreme Court case law.

The Sixth Circuit was not persuaded that EPA's interpretation should be entitled to deference merely because the agency had a longstanding policy - documented throughout the years in formal applicability determinations - of requiring an assessment of the interrelatedness of the activities.  Instead, the court chastised EPA by saying that "[A]n agency may not insulate itself from correction merely because it has not been corrected soon enough, for a longstanding error is still an error."

Conclusion

The Sixth Circuit's decision greatly clarifies - at least in the Sixth Circuit states of Ohio, Michigan, Kentucky, and Tennessee - what has become an unnecessarily complicated and unpredictable issue for the oil and gas industry over the last several years. Although this case is not binding precedent in other jurisdictions, its impact should not be limited to the four states in the Sixth Circuit. The Summit case will undoubtedly act as guidance to state permitting authorities across the country and will be a persuasive defense to oil and gas permitting challenges filed in other states. 

In addition, the direct and implied significance of this case is not limited to the oil and gas industry or single stationary source determinations in other industries. EPA has used applicability determinations as authoritative policy and precedent in many permit decisions and enforcement matters. The Summit court clearly concluded that EPA applicability determinations should not be given any deference when they are based on policies or interpretations that are contrary to the plain language provided in the Clean Air Act and its implementing regulations. As a result, the Summit case puts EPA on notice that if a policy is contrary to the plain meaning of a regulation, courts may not hesitate to strike down that policy - regardless of that policy's duration.

Bracewell has experience successfully defending clients in aggregation permit challenges. For example, in 2011, the West Virginia Air Quality Board granted a directed verdict and dismissed an appeal challenging whether two compressor stations and their related wells were a single source. More information about this case can be found at: http://www.bracewellgiuliani.com/news-publications/updates/west-virginia-dismisses-challenge-marcellus-oil-and-gas-developme.