Federal Court Strikes Down EPA's Policy on Source Aggregation

On August 7, 2012, the United States Court of Appeals for the Sixth Circuit (Court) ruled against EPA regarding the interpretation of the criteria for which major stationary source status is to be evaluated under the Title V permitting program.  Summit Petroleum Corporation (Summit) challenged EPA’s determination that a natural gas sweetening plant and associated sour gas production wells constituted a major stationary source under the Federal Title V permitting program.  The Court’s ruling vacates EPA’s final determination that Summit’s plant and wells constitute a single stationary source and remands the case to EPA for re-evaluation of the major source determination.

As required by the Clean Air Act (CAA), EPA has established the Title V permitting programs which require every “major source” of air pollution to obtain a Title V operating permit.1  With regard to pollutants “subject to regulation” under the Title V permitting programs, the definition of a major source is any stationary source that emits or has the potential to emit 100 tons per year (tpy) or more of any individual pollutant “subject to regulation”.2   A stationary source is then defined as “any building, structure, facility, or installation that emits or may emit any regulated air pollutant … .”3   Under the Title V permitting programs, several stationary sources may be grouped together to be considered a single source for which major source status is evaluated.  This practice is commonly known as “source aggregation.”  The pollutant emitting activities or stationary sources may be aggregated as a single source only if all of the following criteria are met:4

  1. The stationary sources are located on one or more contiguous or adjacent properties
  2. The stationary sources are under common control
  3. The stationary sources belong to the same major industrial grouping (i.e., all activities have a Standard Industrial Classification (SIC) code beginning with the same two digits)

PSD Aggregation_smallIn Summit’s particular case, the dispute centers around whether the individual wells and associated sweetening plant are considered to be “adjacent” according to the first criterion above.  As a result of the ruling, the term “adjacent” has been clarified for major source determinations involving source aggregation.  Historically, common practice has been to evaluate the adjacency of sources by considering the distance separating the sources as well as the functional relatedness of such facilities.  As described in the August 7, 2012 Court majority opinion, adjacency should only be established using proximity or distance as a basis with no consideration for the functional relatedness of the sources.

Overview of Summit’s Case

Summit owns and operates a natural gas sweetening plant in Rosebush, Michigan.  Sweetening is the process of removing hydrogen sulfide from field gas so that it meets the specifications of pipeline quality natural gas prior to distribution to end users.  The sweetening plant processes gas from approximately 100 production wells surrounding the plant.  Each production well is directly connected to the sweetening plant by subsurface pipeline.  Summit owns and operates all the production wells, subsurface pipelines, and the gas sweetening plant.  The wells are located over an area of approximately 43 square miles and at distances ranging from 500 feet to eight miles from the sweetening plant itself.  While Summit owns the wells and associated infrastructure, Summit does not own property between individual well sites or between wells and the sweetening plant.  Similarly, none of the production well sites have a common boundary with another well or the sweetening plant. 

The sweetening plant and wells primarily emit sulfur dioxide and oxides of nitrogen.  The sweetening plant by itself does not have the potential to emit over 100 tpy of any regulated pollutant.  Furthermore, each of the wells does not have the potential to emit over 100 tpy of any regulated pollutant.  However, if potential emissions from the production wells are aggregated with the potential emissions from the sweetening plant, the combined potential to emit is greater than 100 tpy for sulfur dioxide.  Therefore, if the wells and sweetening plant are aggregated as a single source, then the collection of stationary sources would be considered a major source under EPA’s Title V permitting programs.  Conversely, if the wells and plant were not aggregated, then none of the individual stationary sources would be considered major sources.  Thus, source aggregation plays a crucial role in determining Summit’s compliance obligations under the CAA.

The Rosebush sweetening plant is located within an area where EPA has the authority to implement CAA programs applicable to Summit’s operations.5   In January 2005, Summit and the Michigan Department of Environmental Quality (MDEQ) submitted a request to the EPA to determine whether Summit’s sources met the definition of a major source under the Title V programs.6   Between 2005 and 2010, Summit and EPA corresponded regarding the major source status of Summit’s operations.  During this time, EPA issued a final determination and two memorandums containing information about procedures to use when evaluating the major source status of a stationary source or group of sources.  In the correspondence, EPA and Summit agree that the sweetening plant and production wells are under common control and share the same major industrial grouping.  Thus, both parties fully concur that two of the three criteria for source aggregation are satisfied.  Further, EPA and Summit agree that the sweetening plant and production wells are not located on contiguous properties.  Therefore, it is clear that the single disputed issue of the determination is that of adjacency.

Summit argued that aggregation of its sources would not be appropriate because the production wells are “located at great distances” from the sweetening plant and on “entirely different tracts, leases and surface sites.”7   Summit also noted that EPA’s regulations for hazardous air pollutant (HAP) emissions specifically state that source aggregation is not appropriate for production wells and facilities in the oil and gas industry.8   EPA stated that while proximity is the primary mechanism through which adjacency is evaluated, historically, source interdependence has been taken into account when determining whether sources are adjacent.  EPA maintained that there was little evidence to demonstrate that the sources were not “truly interdependent” and subsequently found that this “functional interrelationship” supported the conclusion that the sources should be aggregated for the purpose of a major source determination under the Title V permitting programs.9

Following EPA’s final determination issued in late 2010, Summit challenged the determination and filed a Petition for Review to the US Court of Appeals.  The result of that petition is the subject of this article.  In its ruling, the Court stated that the term “adjacent” implies physical proximity and that historical cases have arrived at the same conclusion.  From this notion, the Court found that it is unreasonable to consider the purpose for which activities exist (i.e., their functional interrelatedness) when evaluating whether sources are considered “adjacent.”  Since EPA had included functional interrelatedness in its evaluation of Summit’s sources under the adjacency criterion, the Court found that EPA had evaluated the adjacency of Summit’s sources inappropriately.  The Court vacated EPA’s final determination that Summit’s sweetening plant and production wells constituted a major source and remanded the case to EPA.  EPA was directed 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.”10

In response to the Court’s decision issued August 7, 2012, EPA filed a petition for panel rehearing on October 22, 2012.  A week later, the Court ordered that the petition be denied, thereby formally vacating EPA’s major source status determination for Summit’s operations.  On October 31, 2012, the Court issued a mandate which formally remanded the case back to EPA thereby requiring EPA to issue a new major source status determination using physical proximity as the sole basis for establishing adjacency.  The recent denial of EPA’s motion to rehear the case and the subsequent mandate reinforce the Court’s August ruling regarding the use of adjacency in major source determinations and source aggregation. 

Current Relevance of EPA’s Historical Guidance for Source Aggregation

As part of EPA’s argument supporting the consideration of functional relatedness in the evaluation of sources’ adjacency, EPA stated that it had used functional relatedness in previous determinations to justify the aggregation of individual sources of emissions.  Below are some historical examples of instances in which consideration for functional relatedness of sources is included in guidance documents or determinations:

  • Determination provided to Don Smith at the Minnesota Pollution Control Agency from Pamela Blakley of EPA Region V (March 23, 2010).  Two sources separated by three miles were determined to be adjacent because a significant amount of material is transported between them on a daily basis.
  • Guidance letter written to Clyde Eller at EPA Region IX from Edward Reich of EPA (May 16, 1980).  Two sections of a refinery approximately two miles apart were determined to be adjacent because neither section produces products independently due to a connection via pipeline between them.
  • Determination provided to Richard Long of EPA Region VIII from Robert Kellam at EPA’s Office of Air Quality Planning and Standards (August 27, 1996).  A landfarm and a brewery are located approximately 6 miles apart.  The landfarm disposes of the brewery’s wastewater and is connected to the brewery via pipeline.  The brewery and landfarm were determined to be adjacent because the operation of the landfarm is integral to the operation of the brewery.
  • Proposed permit review comments provided to Dennis Meyers at the Colorado Air Pollution Control Division from Richard Long of EPA Region VIII (April 20, 1999).  A mine and processing plant are separated by approximately 35 miles but are connected by a pipeline.  The two sources were considered to be adjacent because of their clear functional interdependence.

The Court rejected EPA’s appeal that deference is owed to its interpretation of the term “adjacent” in part because of the use of functional relatedness in its historical guidance documents and determinations.  To clarify the opinion, the Court stated that “the agency may not insulate itself from correction merely because it had not been corrected soon enough, for a longstanding error is still an error.”11   As a result of this conclusion, the Court’s finding could invalidate the basis of many historical major source determinations and guidance documents which include functional relatedness as part of an evaluation of adjacency.  

Implications of the Ruling on Past and Future Regulatory Applicability Analyses

As suggested by the previous examples, the Court’s opinion on the matter of functional relatedness may have a significant impact on future regulatory applicability analyses and major source determinations carried out by regulatory entities.  According to the Court’s decision, it appears that EPA or any other regulatory body evaluating major source status will not be able to rely on functional relatedness to support a determination that concludes two or more sources are adjacent.

In Summit’s particular case, EPA’s major source determination was issued in regard to the Federal Title V permitting program under 40 CFR 71.  The criteria for determining major source status under the State Title V permitting program (40 CFR 70) are identical to those under the Federal Title V permitting program (40 CFR 71).  Therefore, it is expected that the Court’s decision will affect major source interpretations and determinations made under each program in the same way. 

Major source determinations are also made when evaluating the applicability of the federal New Source Review (NSR) programs.  The criteria for determining major source status under the Title V permitting programs are nearly identical to those in place for the federal NSR programs (Prevention of Significant Deterioration (PSD) under 40 CFR 52.21 and Nonattainment New Source Review (NNSR) under 40 CFR 52.24).  Inherent to the definition of major source under the federal NSR programs is the definition of “stationary source.”  The following definitions pertinent to “stationary source” apply to the federal PSD and NNSR programs [emphasis added]:12

Stationary source means any building, structure, facility, or installation which emits or may emit a regulated NSR pollutant.

Building, structure, facility, or installation means all of the pollutant-emitting activities which belong to the same industrial grouping, are located on one or more contiguous or adjacent properties, and are under the control of the same person (or persons under common control) except the activities of any vessel. Pollutant-emitting activities shall be considered as part of the same industrial grouping if they belong to the same “Major Group” (i.e., which have the same first two digit code) as described in the Standard Industrial Classification Manual, 1972, as amended by the 1977 Supplement (U. S. Government Printing Office stock numbers 4101–0066 and 003–005–00176–0, respectively).

As shown, the definition of “building, structure, facility, or installation” contains the same three basic criteria for source aggregation under the federal NSR programs that are evaluated for source aggregation under the Title V programs, with the largest difference being which edition of the SIC code manual is used when determining a source’s industrial grouping(s).  Consequently, it is reasonable to expect that the Court’s decision and conclusions will affect major source determinations for NSR major source status (Part 52) in a similar manner as that of the Title V permitting programs (Parts 70 and 71).

Going forward, the procedure for evaluating source aggregation will likely only change for the adjacency criterion as a result of the Court’s ruling.  In short, the procedure for determining whether certain sources should be aggregated when evaluating major source status is summarized below:

  1. Determine if the individual sources belong to the same major industrial grouping.  The first two digits of a facility’s SIC code are considered to be its major industrial group.  Thus, if the sources share first two digits of their SIC code obtained from the appropriate edition SIC Manual, then those sources belong to the same major industrial grouping.13
  2. Determine if the individual sources are under “common control.”  Common control is a notion that has not been clearly defined by EPA.  However, EPA has issued guidance regarding what constitutes common control.  In this guidance, EPA considers key characteristics such as ownership, decision making authority, service contracts, or business dependency.14
  3. Determine if the individual sources are located on one or more contiguous or adjacent properties.  Contiguous properties are those that share a common property line or are in another way connected to each other.15  Following the August 7, 2012 ruling by the Court, it appears that adjacency may not be evaluated using functional relatedness but rather only by considering physical proximity or distance separating sources in question.

In order for sources to be aggregated, all three criteria above must be satisfied (i.e., the result of each step above is affirmative).  The outcome of Summit’s case is especially pertinent to major sources which may only meet the Title V major source emissions thresholds (e.g., potential to emit greater than 100 tpy of any criteria pollutant) due to the aggregation of certain sources when determining the source’s total potential to emit.  In these cases, sources may choose to re-evaluate the applicability of Title V requirements to particular operations.  It is important to note that oil and gas exploration and production operations have an exceptionally strong opportunity to do so because the Summit case deals specifically with the aggregation of production wells and an associated processing plant.  Finally, and perhaps most importantly, by more clearly and more narrowly defining the term “adjacent,” the Court’s decision seems to provide companies with more complete and definite regulatory information to consider when determining where to strategically locate future operations.

1 The State and Federal Title V Operating Permit programs are codified at  40 CFR 70 and 40 CFR 71 respectively. 
2 Pollutants that are subject to regulation include (but are not limited to): CO, SOx, NOx, Ozone (regulated as NOx and VOC), Pb, PM, PM10, PM2.5, and greenhouse gases (GHGs).  Note that for GHGs to be subject to regulation, the stationary source must also have the potential to emit 100,000 tpy or greater of CO2 equivalent emissions.  Major source status can be triggered at other, lower emissions thresholds for other pollutants such as Hazardous Air Pollutants (HAPs) and radionuclides.  Furthermore, lower thresholds may apply for pollutants that are subject to regulation in areas that are not in attainment with one or more National Ambient Air Quality Standards (NAAQS).
3 40 CFR 70.2 and 40 CFR 71.2
4 Ibid.
5 Per 73 FR 53366.  It is most common for a Title V permitting program to be implemented by the state under 40 CFR 70.  Note that a Title V permitting program implemented by EPA is regulated under 40 CFR 71.
6 Summit Petrol. Corp. v. US EPA, Nos. 09-4348 and 10-4572, at *5 (6th Cir. Aug. 7, 2012).  Available at http://www.ca6.uscourts.gov/opinions.pdf/12a0248p-06.pdf
7 Ibid.
8 40 CFR 63.761
9 Summit Petrol. Corp. v. US EPA, Nos. 09-4348 and 10-4572, at *9 (6th Cir. Aug. 7, 2012).  Available at http://www.ca6.uscourts.gov/opinions.pdf/12a0248p-06.pdf.
10 Summit Petrol. Corp. v. US EPA, Nos. 09-4348 and 10-4572, at *16 (6th Cir. Aug. 7, 2012).  Available at http://www.ca6.uscourts.gov/opinions.pdf/12a0248p-06.pdf.
11 Summit Petrol. Corp. v. US EPA, Nos. 09-4348 and 10-4572, at *18 (6th Cir. Aug. 7, 2012).  Available at http://www.ca6.uscourts.gov/opinions.pdf/12a0248p-06.pdf.
12 Per 40 CFR 52.21(b) and Appendix S to 40 CFR 51
13 Note that in certain cases, a source may be deemed to be a “support facility” to a “primary facility.”  A support facility may have a different SIC code than the primary facility but the two may be treated as if they are part of the same major industrial grouping.  Per 45 FR 52695, “Each source is to be classified according to its primary activity, which is determined by its principal product or group of products produced or distributed, or services rendered.  Thus, one source classification encompasses both primary and support facilities, even when the latter includes units with a different two digit SIC code.  Support facilities are typically those which convey, store, or otherwise assist in the production of the principal product.”
14 Per guidance letter from Steven C. Riva (EPA Region II) to Michael L. Rodburg signed November 25, 1997 (http://www.epa.gov/region7/air/title5/t5memos/2-jntven.pdf).  Further guidance is available in the “William Spratlin Letter” dated September 18, 1995 (http://www.epa.gov/region07/air/policy/control.pdf).
15 Letter from Joan Cabreza (EPA Region X) to Andy Ginsberg (Oregon Department of Environmental Quality) on August 7, 1997 (http://www.epa.gov/region7/air/title5/t5memos/util-at2.pdf).