On Friday, June 2, a Pennsylvania intermediate appellate court held that air emissions from a natural gas gathering system compression station and a natural gas well pad served by that gathering system could not be aggregated for purposes of air emissions permitting because they were owned by different corporations, albeit corporate affiliates.  National Fuel Gas Midstream Corp. v. Dep’t of Envt’l Prot’n, No. 116 CD 2016 (June 2, 2017).  A different result would create a practical and conceptual problem:  a permit issued to the compression station owner would implicitly (or explicitly) control emissions from the wells, and the wells are operated by a different entity.

Under the Pennsylvania Air Pollution Control Act, 35 Pa. Stat. Ann. §§ 4001-4015, and the federal Clean Air Act, 42 U.S.C. §§ 7401-7671q, major sources of air pollution require plan approvals to construct and then permits to operate.  “Minor” sources may emit under state-only permits.  The Pennsylvania regulations authorize the Pennsylvania Department of Environmental Protection to exempt certain emission sources from regulation.  25 Pa. Code § 127.14.  DEP’s Exemption 38 exempts natural gas wells under certain conditions.  DEP Air Quality Permit Exemptions, Doc. No. 275-2101-003 (Aug. 10, 2013).  The wells at issue here were exempt.  The compression station was below the emissions threshold for a state-only permit, and sought approval under what is a streamlined “general permit,” GP-5.

Under federal regulations, multiple emitting activities constitute a single aggregated source if: (i) they are within the same major industrial classification, (ii) are contiguous or adjacent, and (iii) are under the control of the same person or common control.  40 C.F.R. § 52.21(b)(6); see also Alabama v. Costle, 636 F.2d 323 (D.C. Cir. 1979).  In this case, Parent owned Subsidiaries A and B.  Subsidiary B owned Indirect Subsidiary C.  Subsidiary A owned and operated the wells.  Indirect Subsidiary C owned and operated the compression station.  DEP contended that this corporate relationship satisfied the “common control” prong of the aggregation test simply because the Parent had ownership of A and C.  The Environmental Hearing Board took a somewhat less categorical approach than DEP, but found control because the Parent had the power to “influence” the operations of A and C.

The Commonwealth Court reversed and remanded.  The test for “control” is the ability to direct operations of the facility, not just the ability to influence them.  Absent piercing the corporate veil, the court concluded that one corporate affiliate does not have the ability to direct operations of another merely because they are both owned (indirectly) by their parent, citing a federal Superfund case, United States v. Bestfoods, 541 U.S. 51 (1998).  The Indirect Subsidiary C would receive a permit for the compression station, but Subsidiary C could not direct Subsidiary A to operate A’s wells differently.  Neither Subsidiary A nor the Parent would be permittees.  Therefore, aggregation merely on the basis of the ability to influence operations, said the court, would not be correct.

To read the full opinion, please click here.