Oil and Gas Update

Pennsylvania Court Rules that DEP Applied Wrong Standard in Requiring Compressor Station and Natural Gas Well Pad to Aggregate Air Emissions for Permitting Purposes

June 16, 2017

In a decision issued on June 2, 2017, a Pennsylvania court disagreed with the conclusions of the Department of Environmental Protection (DEP) and the Environmental Hearing Board (EHB) that a compressor station and natural gas well pad owned and operated by two separate business entities should be considered a single source of air emissions regulated by a single air permit simply because they share a parent company. The Commonwealth Court of Pennsylvania ruled that “the mere presence of a common ownership interest” is not sufficient to require two separate entities to be treated as one facility for purposes of air permitting.

The DEP uses a three-part test based on federal Clean Air Act regulations to determine whether to treat multiple facilities as one source of air emissions. Under the test, two or more facilities will be treated as a single facility for air permitting purposes if they: (1) belong to the same industrial grouping (demonstrated by having the same first two digits in their Standard Industrial Classification (SIC) codes); (2) are located on contiguous or adjacent properties; and (3) are under common control. It was the third prong of the test, “common control,” that was in dispute in this case.

The DEP concluded that the two separate entities that own and operate the compressor station and well pad were under “common control” because they shared some executive officers and effectively operated as different sections of the same organization, rather than as separate organizations. This is likely true of almost all business entities that share a parent company, so under the DEP’s analysis, common ownership alone would virtually always be sufficient to require multiple facilities to be treated as a single facility.

On appeal, the EHB concluded that common ownership alone is not sufficient; rather, the common owner must have “the power to influence or direct” the behavior of the separate entities. The EHB concluded that because the parent company owns 100% of the stock of the two subsidiaries and reviews the subsidiaries’ annual budgets, the parent company has the “power to influence” the behavior of the separate entities, thus meeting the definition of “common control.” However, this too is likely true of most entities that share a parent company.

In reviewing the EHB’s decision, the court focused on the meaning of “common control” and concluded that the power to “influence” is not the same as the power to “control.” Rather, the term “control” involves the power to “direct” an entity to undertake specific tasks. Of particular concern to the court was the fact that the permit was issued to the entity that owns the compressor station, but it also imposed requirements on the air emissions from the well pad. This meant that the owner of the compressor station could be held liable for permit violations based on the actions of the owner of the well pad. But the compressor station owner had no authority to direct the actions of the well pad owner, and the court was troubled that an entity could be subject to fines or other penalties for activities that are beyond its control.

Therefore, the court vacated the EHB’s decision and remanded the case back to the EHB to apply the correct standard. The court ruled that, in order to aggregate the two facilities’ air emissions, DEP would have to demonstrate to the EHB that the parent company is directly involved in the operations of both the compressor station and the well pad, not just that the parent company has some type of influence over the facilities.

We have written on this topic before, see EPA Proposes Two Options for Aggregating Air Emissions in Oil & Gas Industry and Pennsylvania Releases Final Air Aggregation Guidance for Oil and Gas Drilling Activities

This article was authored by Jennifer L. Hughes, Jackson Kelly PLLC.