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D.C. Circuit Court Strikes Down EPA “Summit Directive,” Voids Attempt to Apply Differing Aggregation Policies Across the Country

Beveridge & Diamond, P.C., June 6, 2014

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Summary and Implications

On May 30, 2014, the District of Columbia Circuit struck down the United States Environmental Protection Agency’s (“EPA’s”) “Summit Directive,” preventing EPA from adopting conflicting air permit aggregation policy in different parts of the country depending on where federal courts have upheld or overturned that policy, resolving a challenge brought by the National Environmental Development Association’s Clean Air Project (“Clean Air Project”). In the short term, National Environmental Development Association’s Clean Air Project v. EPA (D.C. Cir. May 30, 2014) means that it will be unlawful for EPA to use the “functionally interrelated” test to determine whether equipment and facilities are “adjacent” for purposes of CAA stationary source permitting determinations, including in natural gas shale plays across the country and with regard to facilities in other industry sectors with dispersed physical assets that are in close proximity. 

“Functionally Interrelated” Test

For many years, EPA has applied a continually evolving concept of what equipment and facilities must be included in an air permitting analysis to determine whether new source review and major source operating permit thresholds are triggered. EPA’s rules require the application of a three-part test, involving a determination of common ownership, common industrial groupings, and whether the equipment and facilities are contiguous or adjacent. 

Summit Petroleum Corporation (“Summit”) owned a natural gas sweetening plant and various sour gas production wells in Michigan, all separately located within an area of approximately forty-three square miles.  In determining that these operations constituted a single, major source for CAA permitting purposes,  EPA evaluated the Summit operations under the three part test, and decided that the Summit natural gas compressor stations and plant constituted a single source.  EPA used a “functionally interrelated” test, i.e., whether the units had a sufficient degree of interdependence among them, to determine that the Summit properties were adjacent.

In Summit Petroleum Corp. v. EPA, 690 F.3d 733 (6th Cir. 2012), the 6th Circuit reversed EPA’s permitting determination that the Summit facilities constituted a single major source on the basis that the plants were not contiguous or adjacent under the third prong of the major source test.  In striking down EPA’s “functional interrelationship” interpretation of that regulatory language, the Court found that the plant and the wells were not “contiguous” because the properties on which they were located did not touch each other, and that in order for them to be adjacent there must be “physical proximity.” This decision substantially narrowed the expansive reach that EPA sought to apply to its aggregation evaluations.

Following the 6th Circuit decision, EPA issued the Summit Directive, which stated that:

EPA may no longer consider interrelatedness in determining adjacency when making source determination decisions in its Title V or NSR permitting decisions in areas under the jurisdiction of the [Sixth] Circuit… [But], [o]utside the [Sixth] Circuit, at this time, the EPA does not intend to change its longstanding practice of considering interrelatedness in the EPA permitting actions in other jurisdictions.  In permitting actions occurring outside of the [Sixth] Circuit [other than in Kentucky, Michigan, Ohio and Tennessee] , the EPA will continue to make source determinations on a case-by-case basis using the three factor test in the NSR and Title V regulations at 40 C.F.R. 52.2(b)(6).

Summit Directive 1.  The Clean Air Project appealed the Summit Directive to the D.C. Circuit.

The D.C. Circuit’s Reasoning in Clean Air Project v. EPA 

In Clean Air Project v. EPA, the D.C. Circuit began by ruling against EPA’s procedural arguments for dismissal.  Regarding EPA’s claim that petitioner Clean Air Project lacked Article III standing because the injury in question was entirely speculative, the D.C. Circuit ruled that petitioner’s members included oil and gas and manufacturing companies located outside of the 6th Circuit, and that the relative regulatory obligations and costs for these companies would be higher than for companies located in the 6th Circuit, creating injury in fact.  The Court also rejected EPA’s position that the Summit Directive did not have binding legal effect, ruling that vacating the Summit Directive could address petitioner’s injury because it would remove the binding legal rule that had subjected its members to unequal treatment.

EPA also argued that the Summit Directive was not final agency action because EPA was still “assessing what additional actions may be necessary,” and “EPA’s deliberations surrounding the matter are ongoing.”  The D.C. Circuit disagreed with EPA, finding that the Summit Directive:

provides firm guidance to enforcement officials about how to handle permitting decisions.  It therefore clearly reflect[s] a settled agency position which has legal consequences for [regional agency] officials administering their permit programs and for companies. . .who must obtain Title V permits. Appalachian Power Co., 208 F.3d at 1023. 

Slip Op. at 11. The Court then cited an EPA 2013 permit discussion that specifically relied on the Summit Directive to support the EPA’s position that the 6th Circuit’s version of the adjacency test did not apply outside the 6th Circuit.

Finally, the Court ruled against EPA’s argument that the case was not ripe because the outcome of individual permit decisions applying the Summit Directive was unknown.  The D.C. Circuit reasoned that given the “purely legal question” before the Court, it was unnecessary to wait for the Summit Directive to be applied to determine its legality. Slip Op. at 13-14.

After disposing of EPA’s procedural claims, the D.C. Circuit then addressed whether the Summit Directive violated (1) EPA’s regulations, or (2) the CAA.  The Court agreed with the Clean Air Project that the Summit Directive violated EPA’s “Regional Consistency” regulations.  The Court stated that “[a]ny problems that EPA now faces as a result of Petitioner’s action are attributable to the agency’s decision to issue a directive that is plainly contrary to the agency’s own “Regional Consistency” rules.”  Slip Op. at 17.  These regulations state, among other things, that it is EPA’s regulatory policy to “[a]ssure fair and uniform application by all Regional Offices of the criteria, procedures and policies employed in implementing and enforcing the [Clean Air] [A]ct,” 40 C.F.R. § 56.3(b), and that it is the duty of EPA regional officials to assure that actions taken under the Clean Air Act “[a]re carried out fairly and in a manner that is consistent as reasonably possible with the activities of other Regional offices.” 40 C.F.R. § 56(a)(2).  Reading these provisions in conjunction with other 40 C.F.R. Part 56 “Regional Consistency” regulations, the D.C. Circuit found that “[t]hese regulations, taken together, strongly articulate EPA’s firm commitment to national uniformity in the application of its permitting rules.”  Slip. Op. at 17.  Thus, the Court struck down the Summit Directive as contrary to these regulations.  Because the Court found that the Summit Directive was inconsistent with current EPA regulations, it did not reach the question as to whether the Summit Directive violated the CAA itself.

The Court did address EPA’s potential options moving forward.  The Court suggested that EPA could seek to amend its substantive CAA regulations, and explicitly replace, through rulemaking, the “physical proximity” adjacency test with a “functionally interrelated” test.  Slip. Op. at 18.  In the alternative, the Court suggested that EPA could seek to modify its “regional consistency” regulations to account for regional variances created by a judicial decision like the 6th Circuit’s Summit decision. Id. Until EPA takes such action, however, and recognizing that state permitting requirements need to be evaluated and considered, facility operators across the country should not be subject to a “functionally interrelated” test when determining the scope of their stationary sources for purposes of evaluating emissions for new source review and major source operating permits.

Beveridge & Diamond, P.C. represents companies in a variety of industrial sectors, including in the upstream and midstream sectors in natural gas shale plays across the United States, in CAA permitting and enforcement matters.  For additional information on the National Environmental Development Association’s Clean Air Project v. EPA decision or on EPA’s aggregation analysis in air permitting, please contact Don Patterson at dpatterson@bdlaw.com, Steve Richmond at srichmond@bdlaw.com, or David Friedland at dfriedland@bdlaw.com.