The Sixth Circuit Court of Appeals Rejects U.S. EPA’s Functional Interrelatedness Test for Air Aggregation
Posted: September 27th, 2012Author: All4 Staff
On August 7, 2012, the United States Court of Appeals for the Sixth Circuit, in a 2 to 1 decision,  vacated the United States Environmental Protection Agency’s (U.S. EPA) final determination that Summit Petroleum Corporation’s (Summit) commonly owned natural gas production wells and processing plant, located over a 43 square mile area, were a single major stationary source for Title V permitting purposes.  The Court also remanded the case to U.S. EPA for a determination of whether these facilities “are sufficiently physically proximate to be considered ‘adjacent’ within the ordinary, i.e., physical and geographical, meaning of that requirement.”  In so doing, the Court unqualifiedly rejected U.S. EPA’s functional interrelatedness test for determining whether facilities are “adjacent” for air aggregation purposes.  Under the functional interrelationship test, which is neither a regulation nor guidance, but an agency interpretation of a regulation, multiple sources can be combined and treated as a single source regardless of the physical distance separating them if they are “functionally interrelated.”
The Court’s decision is important for industry because the aggregation or combination of emissions from multiple facilities can result in the aggregated source being subject to the stringent permitting requirements of the Prevention of Significant Deterioration (PSD), Nonattainment New Source Review (NNSR) and Title V permitting programs of the Clean Air Act (CAA). Industry is well advised to track the progress of the case to determine if the Sixth Circuit grants U.S. EPA’s anticipated Motion for Rehearing en banc.  Industry should also closely monitor the progress of the case on remand. U.S. EPA could apply the definition of “adjacent” as directed by the Court, abandon its functional interrelatedness test or take other significant action to be determined. Although the decision is not binding outside the Sixth Circuit,  it is a very significant legal authority that courts and administrative agencies will no doubt consider , in making or reviewing source aggregation determinations. Lastly, all industry in general should take note of the decision because U.S. EPA has used the same “functional interrelatedness” test rejected by the Sixth Circuit in Summit to make many source determination decisions in industries other than natural gas production. In light of the Court’s decision in Summit and other possible future developments, the validity of these decisions may at some point be called into question. 
Summit owns natural gas production wells and a natural gas sweetening plant located over a 43 square mile area primarily in the territory of the State of Michigan’s Saginaw Chippewa Indian Tribes Isabella Reservation. The distance between the wells and the plant varies from one-half mile to eight miles. Summit does not own the land between the wells or the land between the wells and the plant. Summit also uses flares to burn off natural gas waste. The closest flare is one-half mile from the plant and the remaining flares are each over one mile away.
The plant, the wells, and the flares emit sulfur dioxide (SO2) and nitrogen oxides (NOX). The plant emits just under 100 tons of each per year. However, if the emissions of the plant are combined with the emissions of one well, the combined emissions would exceed 100 tons per year.
In January of 2005, Summit, with the Michigan Department of Environmental Quality (MDEQ), submitted a request to U.S. EPA for a determination of whether Summit’s combined facilities could be deemed a single major source for Title V Operating Permit purposes.
On October 18, 2010, nearly six (6) years after the initial request and following several requests for information from U.S. EPA and responses by Summit, U.S. EPA issued its final determination that Summit’s plant, wells, and flares worked together as a single unit that “together produced a single product”  and that Summit had failed to provide any evidence to demonstrate that the emission sources were not “truly interdependent”. In sum, U.S. EPA concluded the combined facilities were a “major source” and that a Title V Operating Permit was required.
Under Title V of the CAA, owners and operators of “major sources” are required to obtain Title V operating permits. 42 U.S.C. §7661a(a). The term major stationary source means, “any stationary facility or source of air pollutants which directly emits, or has the potential to emit, one hundred tons per year or more of any air pollutant . . .” 42 U.S.C. §7602(j). The emissions from multiple emissions activities can be combined or aggregated for purposes of determining whether Title V operating permit thresholds are met only if: (1) they are located on one or more contiguous or adjacent properties; (2) they are under common control of the same person (or persons under common control); and (3) belong to a single major industrial grouping. 40 C.F.R. §71.2.  If emissions activities fail to meet any one of these three requirements, they cannot be combined or aggregated. 
In 1978, U.S. EPA promulgated initial PSD regulations that contained a different definition of “stationary source” than the current PSD regulations.  In its initial decision considering the validity of those regulations, the United States Court of Appeals for the District of Columbia Circuit, in Alabama Power Company v. Costle,  rejected U.S. EPA’s source definition and held that U.S. EPA’s discretion in defining the term “stationary source” was controlled and limited by §111(a)(3) of the Clean Air Act, 42 U.S.C. §7411(a)(3), which defines that term as, “any building, structure, facility or installation which emits or may emit any air pollutant…”.
In its second opinion considering the validity of the initial PSD regulations, the Court in Alabama Power Co. v. Costle,  commented that to permit an entire plant or other grouping of emissions activities to be considered a single unit, U.S. EPA should define the terms, “building, structure, facility or installation” with consideration of criteria such as, “proximity and ownership.” Id. 397.
In September of 1979, U.S. EPA had proposed modifications to its initial PSD regulations including an identification of aggregation criteria that was limited to considerations of proximity and ownership. , However, in January of 1980, after the D.C. Circuit’s second opinion in Alabama Power, U.S. EPA solicited public comment on whether a third criterion in addition to proximity and ownership should be added.  EPA rejected the two prong approach (i.e., proximity and ownership) suggested by the Court in Alabama Power because U.S. EPA believed that such approach would result in the aggregation of activities which did not fit within “the common sense notion of plant” or the ordinary meaning of, “building,” “structure,” “facility” or “installation.” 
Notably, through the process, U.S. EPA expressly considered and decisively rejected functional interdependence as a criterion for determining whether emissions from multiple emitting activities should be aggregated. U.S. EPA concluded that the administration of such a requirement would be burdensome on the Agency and, “would have embroiled the Agency in numerous, fine grained analyses.” 45 Fed. Reg. at p. 52695. Ultimately, U.S. EPA settled on the two digit SIC Code which is found in its regulations today as its criteria for determining if a functional relationship exists between emissions activities or facilities.
In contradiction of the above express and unqualified rejection of functional interdependence as a criterion for use in source determinations, U.S. EPA in the years following 1980 began using the criterion, which as mentioned, is neither a regulation nor guidance but an agency interpretation, in source aggregation determinations extensively.  As stated, U.S. EPA uses functional interrelatedness to determine if sources are “adjacent” within the meaning of the aforesaid regulations and can conclude that emissions activities, regardless of distance can be considered “adjacent” if they are functionally interdependent. 
On January 12, 2007, then-Acting Assistant Administrator for U.S. EPA’s Office of Air and Radiation, William L. Wehrum, announced that U.S. EPA would take a different approach concerning aggregation decisions in the oil and gas industry.  While functional interdependence might have been considered, it would not drive the determination.
“Given the diverse nature of the oil and gas activities, we believe that proximity is the most informative factor in making source determinations for these industries. We do not believe that it is reasonable to aggregate well site activities, and other production field activities that occur over large geographic distances, with the downstream processing plant into a single major stationary source. Aggregation of such geographically-dispersed activities defies the concept of contiguous and adjacent.” Wehrum Memorandum at pp. 3-4.
On September 22, 2009, Gina McCarthy, Assistant Administrator for the U.S.EPA Office of Air and Radiation, withdrew the Wehrum Memorandum, criticizing it as being overly simplistic and stating that single source determinations should be made on a case-by-case basis utilizing the aforementioned three regulatory criteria.  Significantly, the McCarthy Memorandum did not endorse functional interdependence as a test for adjacency and expressly acknowledged that, “after conducting the necessary analysis, it may be that, in some cases, ‘proximity’ may serve as the overwhelming factor in a permitting authority’s source determination decision.” 
At the outset the Court noted that the parties agreed that U.S. EPA properly exercised jurisdiction over the tribal lands involved, that the emissions activities were not contiguous (i.e., abutting), and that the facilities were commonly owned. Noting those facts, the Court stated the sole issue before it was, “whether Summit’s facilities are ‘adjacent’ to one another, thus converting them into a stationary source, and a major source, under Title V.” 
Having framed the issue, the Court went on to conclude that the use of “adjacent” in U.S EPA’s Title V regulations  is unambiguous, basing its conclusion on the dictionary definition of the term, the etymology of the word and applicable case law.  The Court then stated that U.S EPA’s interpretation of the regulation as permitting it to consider the functional interrelationship between emissions activities or contextual relationship was not consistent with the plain meaning of, “its unambiguous regulation…” “We conclude that the EPA’s interpretation of the requirement . . . that activities can be adjacent so long as they are functionally related, irrespective of the distance that separates them, undermines the plain meaning of the text, which demands, by definition, that would-be aggregated facilities have physical proximity.” (Emphasis added).  Further, the Court afforded U.S. EPA’s interpretation of it regulations no deference because it found that the term “adjacent” was unambiguous and rejected U.S. EPA’s argument that its interpretation was entitled to “heightened deference” because it was long-standing. “We conclude that an agency may not insulate itself from correction merely because it has not been corrected soon enough, for a long-standing error is still an error.” 
Next, the Court stated that even if it had afforded U.S. EPA’s interpretation of its regulations deference it would nonetheless have reached the same conclusion concerning U.S. EPA’s decision.  The Court found that U.S. EPA’s interpretation was plainly inconsistent with the regulatory history of source determination criteria described above (“the EPA’s decision not to employ a functional relatedness test was categorical and unqualified”)  and EPA’s regulatory guidance concerning source determination (i.e., the Wehrum and McCarthy Memoranda, also described above).
In the dissenting Opinion, Circuit Judge Moore essentially concluded that the word “adjacent” as used in U.S EPA’s Source Determination Regulations is ambiguous because U.S. EPA has not specified the distance beyond which sources cannot be considered “adjacent,” and further that as a result, U.S. EPA’s use of the functional interrelatedness test to construe that term was reasonable and entitled to deference.
As stated Summit is an important decision for industry. As a result industry should monitor the progress of the case closely including how U.S. EPA interprets the holding of the Court on remand. Industry should also monitor the decisions of courts and agencies including the PaDEP that make aggregation determinations to further determine how the case will be interpreted and if any such courts or agencies reach different conclusions concerning EPA’s functional interrelatedness test. Lastly, and as also mentioned, depending on future developments the case may have significant implications for industries other than natural gas and those industries should be attentive to future developments.
One final note, on September 10, 2012, a federal appellate court granted the U.S. EPA additional time to file its appeal of the Sixth Circuit’s vacatur of the Summit Petroleum Corporation final determination on source aggregation. The U.S. Court of Appeals for the 6th Circuit has granted U.S. EPA’s motion for an additional 30 days, until October 22, 2012, to appeal the Court’s decision to vacate.
About the Author: Ronald S. Cusano is a partner in the law firm of Schnader Harrison Segal & Lewis LLP, a member of its Energy and Environmental Practice Groups and has extensive experience in environmental permitting and litigation.
Note: This article is published for informational purposes only. It does not dispense legal advice or create an attorney-client relationship with those who read it. Readers should obtain professional legal advice before taking any legal action.
 Summit Petroleum Corporation v. United States Environmental Protection Agency, Nos. 09-4348; 10-4572 (6th Cir. Aug. 7, 2012).
 42 U.S.C. §7471 et seq.
 Summit, slip op. at 2.
 Id. at 22-23.
 The Sixth Circuit has granted a request by EPA for additional time to file its Motion for Rehearing by the Court en banc. Appellee’s Mot. Extend Time to File Pet. Reh’g En Banc (Sep. 4, 2012); Order Granting Mot. (Sep. 10, 2012).
 The Sixth Circuit has jurisdiction over federal district courts in Kentucky, Michigan, Ohio, and Tennessee.
 In Group Against Smog Pollution v. Commonwealth of Pennsylvania, DEP, EHB Docket No. 2011-065-R the Pennsylvania Environmental Hearing Board described the Sixth Circuit’s decision in Summit as “persuasive.”
 On October 12, 2011, the Commonwealth of Pennsylvania, Department of Environmental Protection (“PaDEP” or “Department”) issued interim guidance for performing single stationary source determinations for the oil and gas industry. Like the Sixth Circuit in Summit the Department rejected EPA’s functional interrelatedness test for single source determinations.
 Indeed, the court in Summit discusses EPA’s use of the functional interrelatedness test without regard for physical proximity and cites numerous examples from a number of industries. Slip op. at 16-17.
 Letter from Cheryl Newton, Director, Air and Radiation Division, EPA, to Scott Huber, Summit Petroleum Corp. at 6 (Oct. 18, 2010), available athttp://www.epa.gov/region7/air/title5/t5memos/singler5.pdf .
 Stationary sources are considered to belong to the same major industrial grouping if they share a two-digit Standard Industrial Classification (“SIC”) Code. 40 C.F.R. §71.2.
 The PSD and NSR programs of the Clean Air Act utilize similar definitions and criteria for determining whether or not permits under those programs will be required.
 In the 1978 PSD Regulations, EPA defined “source” as “any structure, building, facility,equipment, installation, or operation (or combination thereof).
 606 F.2d 1068 (1979).
 636 F. 2d 323, 395 (1979).
 In September of 1979, EPA proposed to define “building, structure, facility and installation” for PSD purposes as “any grouping of pollutant-emitting activities which are located on one or more contiguous or adjacent properties and which are owned or operated by the same person (or persons under common control). 45 Fed. Reg. No. 154 at p. 52693.
 In the preamble to the final 1980 PSD Regulations, which have remained largely unchanged through the years, EPA explained the limitations it believed were placed on its discretion in identifying aggregation criteria by the D.C. Circuit’s second opinion in Alabama Power, as follows:
In EPA’s view the December opinion of the Court in Alabama Power sets the following boundaries on the definition for PSD purposes of the component terms of ‘source’: (1) it must carry out reasonably the purposes of PSD; (2) it must approximate a common sense notion of ‘plant’; and (3) it must avoid aggregating pollutant-emitting activities that as a group would not fit within the ordinary meaning of ‘building”, “structure”, “facility”, or “installation”. 45 Fed. Reg. 52695.
 45 Fed. Reg. 6803.
 45 Fed. Reg. 52695.
 See fn. 10.
 See Summit opinion.
 See William L. Wehrum January 12, 2007 Memorandum to Regional Administrators I-X.
 See Gina McCarthy September 22, 2009 Memorandum to Regional Administrators Regions I through X.
 McCarthy Memorandum at 2.
 Slip op. at 11.
 Id. at 11-12 .
 Id. at 15.
 Id at 18.
 Id at 18-19.
 Id. at 21.