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March 10, 2015 Practice Points

Obama Vetoes Keystone XL Pipeline Bill; Senate Fails to Override

Republicans have stated that they plan to add Keystone XL to another bill that may be more difficult to veto.

By Courtney Scobie – March 10, 2015

Fracking supporters scored a victory on February 17, 2015, when the Ohio Supreme Court ruled that a city ordinance aimed at limiting fracking operations cannot be used to circumvent the state's authority over oil and gas drilling. Specifically, the court held in State ex rel. Morrison v. Beck Energy Corp., No. 2015-Ohio-485, that because the state had granted a permit to a drilling company under a state regulatory scheme governing oil and gas operations, the municipality could not pass ordinances setting forth additional restrictions.

The case arises out of a dispute over a permit that Beck Energy Corp. obtained from the state of Ohio to drill an oil and gas well within the Munroe Falls city limits. Beck Energy obtained its permit pursuant to an Ohio statute that (1) provided uniform statewide regulation of oil and gas production; (2) gave a state agency the sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells; and (3) required parties seeking to drill a new well to obtain a state permit. Soon after Beck Energy began drilling, however, Munroe Falls filed a lawsuit seeking an injunction to prohibit the drilling. The city argued that Beck Energy violated city ordinances requiring the company to meet certain conditions before it began drilling.

The trial court granted the city’s request for injunctive relief and prohibited Beck Energy from drilling until it complied with the city’s ordinances. The court of appeals reversed, holding that the state statute governing drilling operations prohibited the city from enforcing its ordinances. Munroe Falls sought relief from the Ohio Supreme Court.

The main issue before the Ohio Supreme Court was whether the state’s Home Rule Amendment allowed Munroe Falls to enforce its own permitting scheme on top of the state’s permitting system. The Ohio constitution’s Home Rule Amendment gives local municipalities the broadest possible powers of self-government in connection with all matters that are strictly local and do not infringe on matters that are of a statewide nature. But the amendment provides that a municipal ordinance must yield to a state law if (1) the municipality’s ordinance represents an exercise of police power, rather than of local self-government; (2) the statute is a general law; and (3) the ordinance conflicts with the state statute.

After analyzing these three factors, the Ohio Supreme Court concluded that Munroe Falls’ ordinances had to yield to the state statute. The city did not dispute—and the court agreed—that its ordinances amounted to an exercise of police power. Likewise, the court determined that the Ohio statute constituted a general law, as the law operated uniformly throughout the state.

The court then considered whether the city’s ordinances and the state statute conflicted. The court noted that a municipal-licensing ordinance conflicts with a state-licensing scheme if it restricts an activity that the state license permits. In this case, the court found that Munroe Falls’ ordinances conflicted with the state statute governing drilling in two ways. First, the ordinances prohibited what the state statute allowed: state-licensed drilling within the city’s limits. Second, the court held that the ordinances conflicted with the state statute because the state legislature intended to preempt local regulation on the subject. Thus, the court ruled that the state statute and the Home Rule Amendment did not allow for the double licensing requirements in Munroe Falls’ ordinances.

While this case will have a direct impact on drilling operations in Ohio, it also may impact the ability of local municipalities throughout the country to place restrictions on oil and gas drilling operations. The case supports the notion that state legislatures can prohibit municipalities from placing additional restrictions on drilling by creating a state regulatory scheme governing such operations. State legislatures therefore may pass legislation aimed at circumventing local restrictions on drilling operations. Additionally, energy companies likely will rely on this decision to argue that courts should strike down restrictions that municipalities have already put in place. The effectiveness of these arguments likely will depend on the current statutory scheme in each specific state.

Keywords: energy litigation, fracking, Ohio, preemption, Home Rule Amendment, Munroe Falls, Beck Energy Corporation

Courtney Scobie is with Ajamie LLP in Houston, Texas.

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