On August 7, 2012, the United States Court of Appeals for the Sixth Circuit in Summit Petroleum Corp. v. United States EPA, et al., Case Nos. 09-4348/10-4572, dealt the United States Environmental Protection Agency ("EPA") a major setback in its efforts to aggregate multiple, often disperse, emitting units in the oil and natural gas industry as a single stationary source - thus subjecting them to more stringent controls under the Clean Air Act ("CAA"). EPA had concluded that Summit Petroleum Corporation's ("Summit") natural gas sweetening plant and approximately 100 production wells spread out over approximately forty-three square miles should be "aggregated" to constitute a single stationary source subject to the CAA Title V permitting program as a "major source." Despite the physical separation of multiple emission sources, EPA concluded that Summit's activities were "adjacent" based on a theory of functional relatedness - relying on factors such as the "nature of the relationship between the facilities" and the "degree of interdependence between them." The Sixth Circuit agreed with Summit that EPA's reliance on functional relationship to define the term "adjacent" was unreasonable and contrary to the plain meaning of the term and remanded the matter to "EPA to determine whether Summit's sweetening plant and sour gas wells are sufficiently physically proximate to be considered 'adjacent' within the ordinary, i.e., physical and geographical, meaning of that requirement."

The CAA regulations relevant to the “aggregation” determination cite the following factors to consider in determining what emission units should be aggregated as a single stationary source: (1) whether the activities belong to the same industrial grouping; (2) whether the activities are under common control of the same person or entity; and (3) whether the activities are located on one or more contiguous or adjacent properties. 40 C.F.R. § 52.21(b)(6). The first two factors do not usually generate much debate. However, EPA’s reliance on evaluating the functional relationship to determine “continuous” or “adjacent” has pushed the limits of common sense – and at least in this case, EPA pushed too far.    

The facts of the Summit decision teed up the adjacency prong of the aggregation determination perfectly. There was no dispute that Summit owned the sweetening plant and all of the production wells and the subsurface pipelines that connected the wells to the plant. Nor was it disputed that all of the activities belonged to the same industrial grouping. The only issue was whether the wells were adjacent or contiguous. The facts of the case also highlight the importance of the issue to industry. According to the decision, aggregating one additional production well with the sweetening plant would have pushed the sweetening plant over the 100 ton per year threshold and would have qualified the sweetening plant as a major source and subject it to Title V. As indicated earlier, the wells were dispersed over approximately forty-three miles and as far as eight miles. Summit did not own the property between the individual well sites or the property between the wells and the plant, and none of the well sites shared a common boundary with each other or the sweetening plant. EPA acknowledged that the facilities were not located on contiguous surface sites, yet determined it needed more information to “evaluate the adjacency” of the wells to the plant.

The timeline of events associated with Summit’s effort to obtain an applicability determination as to whether the wells should be aggregated with the sweetening plant illustrates how politics and a change in Administration influence EPA’s interpretation and administration of the CAA. In January 2005, Summit and the Michigan Department of Environmental Quality sought an applicability determination from EPA on Summit’s sweetening plant and wells as to whether they constituted a single stationary source and subject to Title V. Over two years later, in April 2007, EPA responded that since the wells supplied the gas to the gas sweetening plant, “the sites meet the common sense notion of a plant,” but also requested additional information including a map of the facilities and a schematic of the process. The primary reason for requesting the additional information was a memorandum from the then Acting Assistant Administrator for the EPA under President George W. Bush, William Wehrum, indicating that physical proximity was the most informative factor in making the adjacency determinations for the oil and gas industry. In April 2008, Summit provided the requested information. In July 2009, under a new Administration, EPA responded that it still did not have enough information; that physical proximity was not the only factor in adjacency determinations; and resorted to a “functional interrelationship” analysis. Summit and EPA participated in a subsequent call in July 2009. EPA issued its applicability determination on September 8, 2009 – concluding that EPA considered the sweetening plant and production wells a single stationary source. EPA’s determination lacked any substantive basis other than referring to previous correspondence. On September 22, 2009, the EPA’s Office of Air and Radiation Assistant Administrator under President Barack Obama, Gina McCarthy, issued a memorandum specifically withdrawing the Wehrum memorandum, stating that relying on physical proximity for the adjacency determination was no longer appropriate. Summit filed its initial Petition for Review with the Sixth Circuit on November 4, 2009. Additional information was submitted to EPA subsequent to the filing, but to no avail, and a second Petition for Review was filed on October 18, 2010.

At trial, Summit argued that the term “adjacent” relying on physical proximity and as used in EPA’s Title V permitting program is unambiguous. The Sixth Circuit agreed that “both the dictionary definition of etymological history of the term ‘adjacent,’ as well as applicable case law support Summit’s position.” EPA argued that dictionary definition of “adjacent” is incomplete and that one must understand the “purpose” for which two activities exist in order to determine if they are adjacent. The Court characterized EPA reasoning as an “impermissible and illogical stretch.” The Court also found that EPA’s interpretation of “adjacent” runs contrary to its plain meaning and inconsistent with the regulatory history of the Title V permitting program and EPA-issued guidance documents. In addition, the Court cited a relatively recent Clean Water Act case before the Supreme Court, Rapanos v. United States, 547 U.S. 715 (2006), to support the conclusion that “adjacency relates only to physical proximity.” While the Court determined that EPA’s reliance on its definition of “adjacent was unreasonable and contrary to the plain meaning of the term,” it did not determine whether the wells were in fact adjacent to the sweetening plant and remanded that issue back down to be determined by EPA, consistent with the Court’s decision. In light of the 2-1 split on the three member appellate panel that heard the case, it is likely EPA will petition for a rehearing before the entire panel of Sixth Circuit judges.

While the decision is only binding in the Sixth Circuit (Kentucky, Michigan, Ohio and Tennessee), its impact will be felt across many industries and is having an immediate impact in Pennsylvania. On August 14, 2012, Pennsylvania’s Environmental Hearing Board (“EHB”) cited the Summit decision in its opinion and order resolving competing motions for summary judgment as not binding but “persuasive.” That case involves an Air Quality Plan approval granted to Laurel Mountain Midstream Operating, LLC (“Laurel Mountain Operating”) for the installation of three gas-fired compressor engines and one turbine at the Shamrock Compressor Station. The environmental group, Group Against Smog and Pollution (“GASP”), appealed the plan approval, arguing that 21 wells operated and permitted by two entities with contractual relationships with Laurel Mountain Operating should have been included with the engines and turbine as a single stationary source. Despite the persuasive nature of the Summit decision, the EHB seemed concerned with the timing of the decision, i.e., the decision had just come out and the parties did not have time to fully consider the ramifications of the decision, and ultimately determined that there were factual issues relevant to determining if the wells were “adjacent” to the compressor engines and turbine and denied Laurel Mount Operating’s motion for summary judgment. On August 24, 2012, counsel for Laurel Mountain Operating filed a petition for reconsideration asking the EHB for permission to submit limited briefs regarding the implications of the Summit decision on the parties’ arguments regarding whether the 21 wells are “adjacent” to the compressor engines and turbine.

The Summit decision is very good for the oil and gas industry and it is encouraging that the EHB has looked favorably upon the reasoning of the decision. The Sixth Circuit’s reasoning adopted a common sense definition of “adjacent” – with a particular emphasis on physical proximity. Such reasoning is also consistent with the Pennsylvania Department of Environmental Protection Agency’s (“PADEP”) October 12, 2011 Guidance for Performing Single Stationary Source Determinations for Oil and Gas Industries that states “the proximity focus of the analysis should guide the permit reviewer in determining whether two sources should be treated as one plant” and that “properties located beyond . . . [a] quarter-mile range may only be considered contiguous and adjacent on a case-by-case basis.” Both the PADEP recent guidance and the Sixth Circuit decision provide hope that regulators and judges will continue to exercise common sense in interpreting statutes and regulations that are clear on their face and not engage in creative, if not distorted, interpretations of simple words to advance a particular agenda.