November 01, 2012

Court vacates EPA ‘Adjacency’ determination under the Clean Air Act

S. Lee Johnson

The U.S. Court of Appeals for the Sixth Circuit has ruled that the U.S. Environmental Protection Agency (EPA) improperly relied on a “functional interrelationship” analysis to determine that a natural gas sweetening plant and approximately 100 natural gas well sites scattered over 43 square miles constituted a single stationary source under the Clean Air Act (CAA). Summit Petroleum Corp. v. U.S. Environmental Protection Agency, 690 F.3d 733 (6th Cir. 2012). As a result, EPA may need to reconsider its longstanding position on how broadly the term “single source” sweeps, which could impact facilities far beyond the oil and gas industry.

Under CAA 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 code.

Summit Petroleum Corporation’s (Summit) natural gas plant removes sulfur dioxide from natural gas prior to sale. The removal of such compounds from natural gas is known as “sweetening.” Approximately 100 natural gas wells, located at varying distances from 500 feet to 8 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 CAA, but would be classified as a “major source” if it was aggregated with Summit’s natural gas wells and field flares.

EPA determined in an administrative decision that Summit’s 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 plant and the individual wells did not preclude finding them to be “adjacent.” Summit petitioned the Sixth Circuit to review EPA’s determination.

EPA argued that the term “adjacent” in its regulations was ambiguous because it requires some context to determine what may be considered “adjacent” and that this context is supplied by considering the functional interrelationship among the facilities. The Sixth Circuit in a 2–1 decision disagreed, finding that the term “adjacent” involves nearness or proximity and held there was no authority suggesting that an assessment of the functional relationship between two activities was inherent in the concept of adjacency. 690 F.3d at 742–43.

Moreover, the court found that, even if there was some ambiguity in the meaning of “adjacent,” 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 considered and rejected a functional relationship test as part of the definition. 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.690 F.3d at 747–48.

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 Sixth Circuit majority disagreed, finding 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.

Having found that the term “adjacent” is unambiguous, the majority opinion 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.” 690 F.3d at 750–51.

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.

S. Lee Johnson

S. Lee Johnson is a partner at the Honigman, Miller Schwartz & Cohn LLP law firm. He represented the appellant in the Summit Petroleum case.