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EPA Determination That Natural Gas Sweetening Plant Must Be Combined With Natural Gas Wells Vacated By Federal Court

August 10, 2012
Environmental Alert
On August 7, 2012, the United States Court of Appeals for the Sixth Circuit (Court) ruled that the United States Environmental Protection Agency (EPA) improperly relied on a “functional interrelationship” analysis to determine that a natural gas sweetening plant in Isabella County, Michigan, and approximately 100 natural gas well sites scattered over 43 square miles constituted a single stationary source under the Clean Air Act. Summit Petroleum Corp. v. United States Environmental Protection Agency, Docket Nos. 09-4348 and 10-4572. S. Lee Johnson of Honigman Miller Schwartz and Cohn LLP argued the case on behalf of Petitioner Summit Petroleum Corporation (Summit). Judge Richard F. Suhrheinrich wrote the majority opinion, in which Judge Eric L. Clay joined. Judge Karen Nelson Moore delivered a dissenting opinion.

Although this decision arises in a case involving a natural gas operation, the Court’s decision could have implications for many industries in which EPA has determined that activities that are separated by some distance are nonetheless “adjacent” for purposes of the Clean Air Act.

Summit’s Natural Gas Operations

Summit’s natural gas sweetening plant removes sulfur dioxide from natural gas prior to sale. Approximately 100 natural gas wells, located at varying distances from 500 feet to eight miles from the sweetening plant, supply the natural gas. Summit owns the wells and the underground pipes that connect the wells to the sweetening plant, but does not own the property between the individual well sites and the plant. Summit’s natural gas sweetening plant is a “minor source” under the Clean Air Act, but would be a “major source” and subject to additional permitting requirements if it was aggregated with Summit’s natural gas wells and field flares.

The Regulatory Issue: What Is the Meaning of “Adjacent Properties”?

Under EPA’s Clean Air Act regulations, a group of emission sources can be aggregated into a single stationary source if they meet three criteria: (i) they are all under common ownership or operational control; (ii) they are located on one or more contiguous or adjacent properties; and (iii) they belong to the same major industrial grouping under the Standard Industrial Classification (SIC) code.

Because Summit owns the sweetening plant and all the well equipment and because the plant and wells fall within the same SIC major industrial grouping, the only issue was whether the plant and wells are “located on one or more contiguous or adjacent properties.” After more than five years of meetings and correspondence, EPA determined that Summits sweetening plant and gas wells were “adjacent” based on the “nature of the relationship between the facilities” and the “degree of interdependence between them.” Because the wells and sweetening plant together produced a single product and were thus, interdependent, EPA determined that the distances between the plan and the individual wells did not preclude finding them to be “adjacent.” Summit appealed EPA’s determination to the Court.

The Court Refuses to Defer to EPA’s Interpretation

Before the Court, EPA argued that the term “adjacent” in its regulations was ambiguous because it requires some context and, therefore, EPA’s interpretation of the term is entitled to deference from the Court. EPA argued that this context is supplied by considering the functional interrelationship among the facilities. The Court disagreed, finding that the term “adjacent” involves nearness or proximity and there was no authority suggesting that an assessment of the functional relationship between two activities was inherent in the concept of adjacency.

EPA also argued that it has a long established history of supplementing the traditional definition of adjacency with the concept of the activities’ functional relatedness. EPA cited numerous instances over the years in which it had found that facilities separated by 1.8 miles to over 40 miles were located on “contiguous or adjacent properties.” The Court rejected the suggestion that, just because an agency interpretation is longstanding, it is not subject to review by a court:

[W]e conclude 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. We thus reject the EPA’s argument to the contrary and have little hesitation in taking this opportunity – the first our Court has been given in the EPA’s own history of “entrenched executive error” – to vacate the agency’s unreasonable interpretation of its [regulations].

Accordingly, the Court refused to defer to EPA’s interpretation of “adjacent.”

EPA’s Interpretation Was Also Contrary to the Regulatory History

Even if there was some ambiguity in the meaning of “adjacent,” the Court found that EPA’s use of a functional interrelationship test was contrary to the history of the regulation. When EPA adopted regulations defining “stationary source” in 1980, EPA initially included only two criteria: common ownership and located on adjacent or contiguous properties. Concerned that a two-pronged definition would result in an overly-broad definition of “stationary source,” EPA solicited comment on potential additional criteria to include in the definition. The functional relationship test was one of the additional criteria that EPA considered and rejected after receiving comments. The EPA specifically found that assessing whether activities were sufficiently functionally related to constitute a single source would be “highly subjective” and would make administration of the rule difficult because EPA would find itself entangled in numerous fine-grained analyses. Therefore, instead of adopting functional relationship as a third test, EPA adopted the SIC major industrial grouping test as part of the definition of “stationary source.”

EPA argued that its rejection of functional relationship as a stand-alone prong of its definition of stationary source did not preclude it from considering functional relationship when assessing whether activities are adjacent. The Court disagreed, noting that if functional relationship was part of the concept of adjacent, there would have been no need to consider adopting functional relationship as a third element of the definition. The Court also found that EPA’s decision not to employ a functional relationship test was categorical and unqualified because EPA clearly indicated it wanted to avoid such a subjective test and the fine-grained analyses that it would involve. Accordingly, the Court ruled that the use of a functional interrelationship test to resolve any ambiguities in determining whether different activities are adjacent was contrary to the history of the regulation.

EPA’s Interpretation Also Contrary to EPA Guidance

The Court also found that EPA’s use of a functional interrelationship analysis for determining adjacency was contrary to prior EPA guidance. One such guidance was a memorandum written in 2007 by then-acting assistant EPA administrator William Wehrum (Wehrum Memo). The Wehrum Memo stated that EPA should avoid trying to make fine-grained analysis to determine whether activities in the oil and gas industry are functionally interdependent and should instead focus on proximity as the most informative factor in making source determinations for oil and gas industry facilities. The Wehrum Memo was replaced in 2009 by a new memorandum from assistant EPA administrator Gina McCarthy (McCarthy Memo). The McCarthy Memo rejected the Wehrum Memo’s emphasis on proximity and instead directed EPA personnel to rely on all three regulatory criteria when making source determinations. Even so, the McCarthy Memo said nothing about using a “functional interrelationship” test to determine adjacency. As the Court noted, “[i]f the McCarthy [Memo] says anything about including supplemental and unexpected factors in the... stationary source analysis, it cautions against it.” Accordingly, the Court found that EPA’s use of such a functional interrelationship analysis was contrary to its own guidance.

EPA Decision Vacated and Remanded

Having found that the term “adjacent” is unambiguous, the Court held that EPA’s reliance on functional interrelationship to determine adjacency was contrary to the plain meaning of the regulation. Accordingly, the court vacated EPA’s determination and remanded the issue to EPA with instructions to “reassess the aggregation of Summit’s facilities under the ordinary understanding of its requirement that Summit’s plant and wells be located on adjacent, i.e., physically proximate properties.”

Dissent Argues EPA Is Free to Make the Same Decision on Remand

Judge Karen Nelson Moore dissented and argued that EPA’s use of a functional interrelationship test was a permissible interpretation of the adjacency test and consistent with the regulatory history. Judge Moore also noted that the majority opinion did not set forth a bright-line test for EPA to apply to make adjacency determinations. Accordingly, Judge Moore noted, EPA would be free, on remand, to reach the same conclusion that Summit’s operations should be aggregated, so long as EPA bases that conclusion on the considerations that the majority opinion deems appropriate.

Application to Other Industries

Although this case involved a natural gas operation, EPA’s use of the “functional interrelationship” test in making stationary source determinations has not been limited to oil and gas industry sources. EPA has previously used this type of analysis when evaluating facilities in the automotive industry, the brewing industry, the mining industry, the steel industry and even a biomass-to-energy facility. Based on the ruling in this case, EPA may need to reconsider its approach to making stationary source determinations in these and other industries.