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Ohio’s New Brownfield Regulatory Reform Legislation

Posted in Environment

On June 16, 2020, Governor DeWine signed House Bill 168 into law.  The bill is designed to encourage brownfield redevelopment and reinvestment in the State of Ohio by enhancing liability protection to brownfield purchasers.

Predominantly, the bill adopts from federal law an affirmative defense, the “Bona Fide Purchase Defense,” to purchasers who conduct appropriate environmental due diligence.  The standard for environmental due diligence adopted is the “All Appropriate Inquiries” (“AAI”) standard from the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980.  The affirmative defense will be available retroactively to properties acquired after January 11, 2002 that followed the AAI standard.

In addition, the bill, which was unanimously passed out of the State Legislature in May 2020 on support of testimony by Vorys, Sater, Seymour and Pease LLP environmental partner Kristin Watt, strengthens Ohio EPA’s Voluntary Action Program (“VAP”).  Under the VAP, Ohio EPA can provide a “Covenant Not to Sue” (“CNS”) to volunteers who follow the criteria of the program.  The bill strengthens these covenants by eliminating the VAP’s “automatic CNS voidance” for the failure to strictly adhere to a CNS’s  covenants use restriction terms.  The bill prescribes that the voiding of a CNS may only come through an Order at the discretion of the Director of Ohio EPA.

The law will become effective on September 14, 2020.  Please contact David Edelstein at dmedelstein@vorys.com or Kristin Watt at klwatt@vorys.com about this bill.

U.S. EPA Proposes Rule Governing Cost Benefit Analysis for Significant CAA Regulations

Posted in Energy, Environment

On June 4, 2020, U.S. EPA proposed a rule to improve the consistency and transparency of benefit cost analyses (BCAs) for all “significant” proposed and final regulations under the Clean Air Act (CAA). The proposed rule, developed in response to comments on U.S. EPA’s June 12, 2018 Advance Notice of Proposed Rulemaking and Administrator Wheeler’s May 13, 2019 memorandum outlining certain principles for increasing consistency and transparency in U.S. EPA’s consideration of benefits and costs in the rulemaking process, would codify the procedural requirements governing the development of BCA, including risk assessments used as inputs to the BCA, for significant rulemakings conducted under the CAA, and would establish additional procedural requirements to increase transparency in the presentation of the benefits resulting from significant CAA regulations.

U.S. EPA’s proposal consists of three key elements:

1. U.S. EPA will prepare a BCA for all future “significant” proposed and final regulations under the CAA. The proposal defines a “significant regulation” as a proposed or final regulation that is determined to be a “significant regulatory action” pursuant to E.O. 12866 Section 3(f) or is otherwise designated as significant by U.S. EPA. In its proposal, U.S. EPA notes that such regulations are generally those having the largest annual impact on the economy (i.e. greater than $100 million).

2. The BCA will be developed using the best available scientific information and in accordance with best practices from the economic, engineering, physical, and biological sciences. Under U.S. EPA’s proposal, the key elements of a regulatory BCA include: 1) a statement of need; 2) an examination of regulatory options; and 3) to the extent feasible, an assessment of all benefits and costs of these regulatory options relative to the baseline (no action) scenario.

3. Procedural requirements will be followed to increase transparency in the presentation of the BCA results, while maintaining the standard practices of measuring net benefits consistent with E.O. 12866. Specifically, U.S. EPA proposes that BCA of significant CAA regulations include, at a minimum, a detailed explanation of the overall results of the BCA, how the benefits and costs were estimated, all non-monetized and non-quantified benefits and costs of the action, and the primary sources and potential effects of uncertainty. U.S. EPA also proposes to make the information that was used in the development of the BCA, including data and models, publicly available (to the extent permitted by law).

A pre-publication version of U.S. EPA’s proposed BCA rule for significant CAA regulations (40 CFR Part 83) can be viewed here. Comments must be submitted within 45 days after the proposed rule is published in the Federal Register.

U.S. EPA Finalizes Amendments to Rules Governing CWA 401 Water Quality Certification Process

Posted in Energy, Environment

On June 1, 2020, U.S. EPA finalized amendments to the rules governing the Clean Water Act (CWA) Section 401 water quality certification (WQC) process, which had not been updated since 1971. The final amendments establish a more robust framework for the WQC process which is intended, in large part, to ensure that certifying agencies take action on a certification request “within a reasonable period of time…which shall not exceed 1 year from receipt” of the request, as required under the CWA. The final amendments have implications for any project triggering the WQC requirement (e.g. construction projects requiring a CWA 404 wetland permit).

Ambiguities in the previous WQC rules often caused significant delays in the certification process. In an effort to remedy those ambiguities and provide more regulatory certainty, U.S EPA’s amendments create several new provisions in the WQC rules (40 CFR Part 121), including rules that specify when a certification is required; require a project proponent to request a pre-filing meeting with the certifying agency at least 30 days prior to submitting the certification request; enumerate specific project details and other information that must be included in a certification request; define the scope of and time frame for the certifying agency’s review of a certification request; and clarify other procedural aspects of the WQC process. The final amendments also define new terms including, “certification request,” “discharge,” “reasonable period of time,” “receipt” (of a certification request), and “water quality requirements.”

A pre-publication version of the final amendments to the CWA 401 WQC rules is available here. The amendments become effective 60 days after publication in the Federal Register.

Sixth Circuit Rules for Producer in Royalty Dispute

Posted in Energy

On May 21, 2020, the Sixth Circuit Court of Appeals ruled for a lessee in an oil and gas lease dispute, finding that the lessee properly considered post-production costs when calculating the landowners’ royalties.  See Henceroth v. Chesapeake Exploration, LLC, 6th Cir. No. 19-3942.

The lessee, Chesapeake Exploration (Chesapeake), produced oil and gas from the plaintiff-landowners’ property, which it sold at the wellhead to its affiliate, Chesapeake Marketing (Marketing).  Marketing then prepared the products for sale downstream.  This involved arranging for pipeline transportation and processing natural gas into methane and natural gas liquids.  Once downstream, Marketing sold the finished products to third parties at prices that reflected the added value of these post-production services.  Marketing paid Chesapeake based on the prices it received from these third parties, less Marketing’s post-production costs.  Chesapeake, in turn, paid the landowners on the amounts it received from Marketing.  The landowners sued Chesapeake, claiming it underpaid their royalties because the royalties were based on the amounts Chesapeake received from Marketing, rather than on the higher downstream prices that Marketing realized on its sales to third-party purchasers.

The Sixth Circuit found that Chesapeake properly paid the landowners according to the terms of their leases.  Those leases provided that Chesapeake would pay royalties on gas and oil “produced and marketed from the Leasehold.”  Thus, “the first sale price is the proper royalty base.”  Chesapeake extracted, i.e., “produced,” the raw products from the ground and immediately sold, i.e., “marketed,” the products to Marketing.  “And all of this happens at the property (‘from the Leasehold’), not downstream.”  The court disagreed with the landowners’ claim that Chesapeake did not “market” the oil and gas and that the only actual marketing occurred when the products were sold to unaffiliated third parties.  Citing a recent Ohio appeals decision involving similar leases, the court noted that the dictionary “definition of ‘market’ is ‘to expose for sale in a market’ or to ‘sell’ . . . which is what happens when [Chesapeake] sells oil and gas to [Marketing].”

Read the decision here.

 

Ohio Appellate Court Holds that Words of Inheritance are Required to Reserve Oil and Gas Interests

Posted in Energy

Recently, in Peppertree Farms v. Thonen, 2020-Ohio-3043, Ohio’s Fifth Appellate District considered whether certain ancient royalty and fee oil and gas reservations terminated upon the grantor’s death. The Court held that they did because the grantors failed to include words of inheritance in their reservation clauses. As a result, each grantor’s reserved oil and gas interest did not transfer to his heirs and assigns.

Prior to enactment of Section 8510-1 of the General Code (now R.C. 5301.02) in 1925, words of inheritance were required to convey real property in perpetuity. Failure to include words of inheritance limited the duration of the estate conveyed to the grantee’s life (or, in the case of reservations, the grantor’s life). However, Ohio courts have applied this rule differently to “exceptions” and “reservations.” If the language used in the deed constituted an “exception,” words of inheritance were not required because the grantor was deemed to be retaining a portion of his former estate. If the language used in the deed constituted a “reservation,” words of inheritance were required because the grantor was deemed to be creating a new property interest.

In Peppertree, the Court held that each of the deeds created “reservations.” Notably, it even held that the fee oil and gas reservation was a “reservation.” In so holding, the Court relied, in part, on the Ohio Supreme Court’s decision in Chesapeake Exploration, L.L.C. v. Buell, 144 Ohio St.3d 490, to find that whenever minerals are severed from the surface, two new and separate estates are created – a surface estate and a mineral estate. Thus, although the grantor had title to the oil and gas at the time he executed the subject deed, his reservation was deemed to be a “reservation” because the severance created a new oil and gas estate.

The Peppertree decision appears to be in conflict with Ohio’s Seventh Appellate District’s decision in Headley v. Ackerman, 2017-Ohio-8030, which seems to analyze this issue under a different lens. We will update this blog post in the event of an appeal to the Ohio Supreme Court.

 

 

Update Regarding Ohio Land Professional Registrations

Posted in Energy

The Ohio Department of Commerce, Division of Real Estate & Professional Licensing, recently reached out to Ohio’s “land professionals” (i.e., oil and gas landman registered with the Division) concerning renewing their registerations. Ohio law requires land professionals to renew their registrations annually on or before April 30. However, in light of House Bill 197, land professionals now have additional time to renew their registrations. House Bill 197 extends the deadline for land professionals to renew registrations to either ninety days after the emergency order ends or December 1, 2020 – whichever is sooner. Further, during this time period, a land professional’s registration will remain active even though it has not been renewed.

 

U.S. Supreme Court: Indirect Discharge Into Groundwater Covered Under Clean Water Act

Posted in Energy, Environment

On April 23, 2020, the U.S. Supreme Court, in a 6-3 decision, held that a permit is required for either “a direct discharge of pollutants from a point source into federally regulated navigable waters, or when there is the functional equivalent of a direct discharge.” County of Maui, Hawaii v. Hawaii Wildlife Fund et al., Case No. 18-260 (April 23, 2020). The decision focused on whether the Clean Water Act (CWA) regulates groundwater and thus has implications for sites with contaminated groundwater and the use of CWA citizen suits. The Court majority fashioned a 7 factor test to determine whether groundwater is regulated under the CWA. The case was on appeal from the 9th Circuit Court of Appeals.

At issue in the case was whether the County of Maui’s (Maui) unpermitted injection of wastewater into deep underground wells that then seeped into groundwater and, via groundwater transport, ultimately discharged into the Pacific Ocean, violated Section 301 of the CWA, which prohibits the discharge of any pollutant into the navigable waters of the United States. 33 U.S.C 1311(a). The Court, based on an analysis of three key terms expressly defined under the CWA – “pollutant”, “point source”, and “discharge of a pollutant”, rejected Maui’s means-of-delivery test under which a permit is required only if the point source itself (e.g. a pipe) delivers the pollutant to navigable waters. Justice Breyer, who authored the majority opinion, noted that if Maui’s interpretation were accepted, a pipe owner could “simply move the pipe back, perhaps only a few yards, so that the pollution must travel through at least some groundwater before reaching the sea.”

The Court also rejected the 9th Circuit’s analysis which held that a permit is required when the pollutants are “fairly traceable” from the point source to navigable waters. The Court held that the “fairly traceable” standard was too broad, citing the “power of modern science” to detect pollutants years after their release in minute quantities. Recognizing that the “functional equivalent” standard lacks specificity, the Court identified seven factors that may be relevant in determining whether the “functional equivalent of a direct discharge” has occurred: (1) transit time, (2) distance traveled, (3) the nature of the material through which the pollutant travels, (4) the extent to which the pollutant is diluted or chemically changed as it travels, (5) the amount of pollutant entering the navigable waters relative to the amount that leaves the point source, (6) the manner by or area in which the pollutant enters the navigable waters, and (7) the degree to which the pollution has maintained its specific identity. The Court further explained that “functional equivalent” decisions should not create serious risks of undermining state regulation of groundwater or of creating loopholes that undermine the CWA’s basic federal regulatory objectives.

The three dissenting justices (Gorsuch, Thomas and Alito), held that a permit is only required for direct discharges into navigable waters.

U.S. EPA and Army Corps Publish Final Navigable Waters Protection Rule

Posted in Energy, Environment

On April 21, 2020, U.S. EPA and the Army Corps of Engineers published the final Navigable Waters Protection Rule amending the definition of “Waters of the United States” (the “2020 WOTUS Rule”). Under the 2020 WOTUS Rule, four categories of jurisdictional WOTUS are subject to regulation under the Clean Water Act (CWA):

1. The territorial seas and traditional navigable waters,
2. Perennial and intermittent tributaries to those waters,
3. Certain lakes, ponds, and impoundments, and
4. Wetlands adjacent to jurisdictional waters

The 2020 WOTUS Rule also identifies 12 categories of water features that are excluded from the definition of WOTUS, including ephemeral features, groundwater, and several ditches. In an effort to provide clarity and maintain consistency with the express language of the Clean Water Act, the 2020 WOTUS Rule revises the definition of several key terms and includes newly defined key terms. Some of the new and revised key terms defined under the final 2020 WOTUS Rule include: “tributary”; “adjacent wetlands”; “upland”; “waste treatment system”; “perennial”; “intermittent”; and “ephemeral”.

The 2020 WOTUS Rule is effective on June 22, 2020. Once effective, the 2020 WOTUS Rule replaces the October 2019 “Step One Rule,” which repealed the 2015 WOTUS Rule and re-codified the pre-2015 rules. Litigation surrounding the 2015 WOTUS rule was plentiful and contentious. The 2020 WOTUS Rule is expected to face similar legal challenges.

Sixth Circuit Refuses to Toll Statute of Limitation in Oil and Gas Royalty Case

Posted in Energy

The United States Court of Appeals for the Sixth Circuit recently ruled that a certain group of landowners were not entitled to have Ohio’s 4-year oil and gas royalty statute of limitation tolled against Chesapeake Appalachia, LLC, finding that Chesapeake did not engage in fraudulent concealment.

In Lutz v. Chesapeake Appalachia, L.L.C., No. 19-3315, certain landowners sued Chesapeake claiming that the company improperly calculated gas royalty payments. The landowners did not sue until 2009. However, they alleged that Chesapeake started miscalculating gas royalty payments as far back as 1993. Ohio has a 4-year statute of limitation with respect to oil and gas royalty claims. Thus, unless an exception applied, the landowners would not be able to potentially recover royalties that were payable before 2005.

The landowners claimed that the Court should toll the statute of limitation because Chesapeake fraudulently concealed the basis for the landowners’ pre-2005 royalty claims. After extensive discovery, the trial court ruled that the landowners failed to substantiate their claim. In particular, the landowners admitted two key facts. First, the landowners admitted that they did not confirm the information in their royalty check stubs (e.g., pay rate, market price, deductions). Second, the landowners admitted that they did not reach out to Chesapeake with questions about their royalty payments. The landowners’ admissions undermined their claim that Chesapeake fraudulently concealed the alleged underpayments to prevent their discovery.

The landowners appealed and the Sixth Circuit Court of Appeals affirmed the trial court’s decision. In order to toll the statute of limitation on grounds of fraudulent concealment, the landowners had to prove four elements:  (1) a factual misrepresentation; (2) that the misrepresentation is misleading; (3) that the misrepresentation induced actual reliance that was reasonable and in good faith; and (4) that it caused detriment to the relying party. Even if the landowners established the first two elements, the Court found that the landowners failed to establish the last two elements. Certain landowners admitted that they did not read the royalty check stubs they received. Others admitted that they only read the net amount. Based on these admissions, the Court found the landowners failed to establish that they relied upon any purported misrepresentation in their royalty check stubs. Finding no reliance, the Court also found that the figures in the landowners’ royalty check stubs had no detrimental effect on the landowners’ behavior. “All told, it was not the stubs that ‘kept [the landowners] from timely brining suit.’ It was their own conduct.”

The landowners countered that it was reasonable for them to do nothing with respect to their pre-2005 royalty claims. They alleged that there was nothing in the royalty check stubs to suggest to a reasonable person that wrongdoing was afoot. However, the Court rejected this proposition noting the availability of public information concerning gas prices and production and the fact that the landowners undertook no investigation to confirm the information in their royalty check stubs.

You can read the Court’s decision here

USEPA Releases Draft Guidance which would allow additional construction activities in advance of obtaining a pre-construction permit

Posted in Environment

On March 25, 2020, USEPA released draft guidance regarding its interpretation of “begin actual construction” under the regulations implementing the New Source Review (NSR) permitting program.

Those regulations provide that “[n]o new major stationary source or major modification to which the requirements of paragraphs (j) through (r)(5) of this section apply shall begin actual construction without a permit that states that the major stationary source or major modification will meet those requirements.” 40 CFR § 52.21(a)(2)(iii) (emphasis added).

Under USEPA’s current interpretation of this regulatory definition, it largely considers almost every physical on-site construction activity that is of a permanent nature to constitute the beginning of “actual construction,” even where that activity does not involve direct construction “on an emissions unit.”  For example, in USEPA’s 1995 Seitz Letter, it stated that, “[p]rohibited (permanent and/or preparatory) preconstruction activities . . . would include any construction that is costly, significantly alters the site, and/or [is] permanent in nature.”

The Draft Guidance would change this interpretation, and under USEPA’s revised interpretation:

a source owner or operator may, prior to obtaining an NSR permit, undertake physical on-site activities – including activities that may be costly, that may significantly alter the site, and/or are permanent in nature – provided that those activities do not constitute physical construction on an emissions unit, as the term is defined in 40 CFR §52.21(b)(7). Further, under this revised interpretation, and in contrast to the 1986 Reich Memorandum, an “installation necessary to accommodate” the emissions unit at issue is not considered part of that emissions unit, and construction activities that involve an “accommodating installation” may be undertaken in advance of the source owner or operator obtaining an NSR permit.

Draft Guidance at 11-12.

This revised interpretation would allow a wide range of construction activities to occur, although USEPA expressly notes that any construction “may be wasted should the owner or operator be required to re-do or revise work already completed in order to obtain a permit or should it ultimately be the case that no permit is issued or if the permit review agency determines that design changes (e.g., stack height, emission unit location, etc.) are needed ….”  Draft Guidance at 12.

Finally, the Draft Guidance notes that permitting agencies and sources “will still have to make case-specific determinations regarding the scope of the emissions unit in question.”  Draft Guidance at 20.  Detailed guidance on the scope of an emission unit is expressly beyond the scope of the Draft Guidance.  Draft Guidance at 20.  That said, the Draft Guidance notes that:

a source or permitting authority would be acting contrary to the purpose and intent of EPA’s interpretation of “begin actual construction” set forth here were that source or permitting authority to take an unduly broad or otherwise unreasonable view of the scope of an emissions unit that fails to recognize a distinction between an emissions unit and the major stationary source.

Draft Guidance at 22.

The USEPA Draft Guidance, if finalized in its current form, is not expressly applicable to state or local permitting agencies, though they may look to it for guidance as well.

USEPA is accepting comments on the draft guidance through May 11, 2020.  Comments can be submitted on-line here, or by email to draft_permitting_guidance@epa.gov.

Please contact Vorys environmental attorneys Anthony Giuliani at ajgiuliani@vorys.com, Ryan Elliott at rdelliott@vorys.com, or Mac Taylor at mwtaylor@vorys.com if you have questions about the applicability of the Draft Guidance or NSR requirements more generally.