Introduction to Environmental Law:
What Energy Companies Need to Know
Texas Lawyer’s In-House Counsel Summit
May 17, 2012
Daniel D. Pipitone
Jacqueline T. Coyne
1200 Smith Street, 14th Floor
Houston, Texas 77002
Telephone: (713) 654-9637
An Introduction to Environmental Law: WhatEnergy CompaniesNeed to Know
Environmental law is an area of law that is inextricably intertwined with energy law. Regulating everything from the reduction of pollution to natural resource planning and management, environmental law impacts energy decisions at every turn.[1] Yet, a cursory review of these two fields demonstrates that “energy law and environmental law do not work together,”[2] and this lack of integration poses tremendous economic constraints andregulatory hazardsfor companies operating within the energy industry.
The environmental regulation of the energy industry occurs through federal and state regulatory agencies, as well as federal and state statutory schemes. State regulation, however, has become increasingly preempted by an evolving federal environmental law “infrastructure” focusing on regulatory agencies and complex statutory schemes.[3]This increasing federalization of environmental law has resulted in piecemeal legislation that “is ‘so voluminously complex’ that its laws are now ‘compartmentalized and wieldy.’”[4] Accordingly, “[e]nvironmental law today envelopes a vast array of subjects—everything from national parks to ‘toxic chemical threats,’ from ‘rat bites’ to ‘lead poisoning in urban slums.’”[5]
With few specific statues or agencies that clearlyapply to each energyfield,energy companies are left to sift through the dozens of statutes that comprise the general environmental statutory scheme in order to determine which regulations apply to them, and which agencies in turn regulate their activities. Accordingly, energy companies are faced with the challenge of navigating a complex minefield of detailed environmental law.
Civil penalties for the failure to abide by these environmental regulations are often expensive and difficult to predict, as many of them are calculatedusingformulasthat are applied on a case-by-case basis.These formulas often take into account the number of days the violation has occurred, the magnitude of environmental harm, and the economic benefit to the company as a result of the violation.[6] As such, these penalties can be financially devastating. For example, an energy company in Kansas recently settled a claim by the Environmental Protection Agency (“EPA”), which alleged that its power plant was violating the Clean Air Act, by agreeing to pay $3 million in civil penalties,and agreeing to spend another $500 million to reduce its air pollution and $6 million on environmental mitigation projects.[7]Clearly, the penalties associated with the violation of environmental regulations can be exceedingly high.
However, compliance can likewise be costly for companies. This is because in order to comply with environmental regulations, companies are forced to install abatement equipment, hire engineers, and so on to comply with the ever-changing regulatory rules.[8] For example, pollution control equipment alone accounts for 30% of the costof building a power plant.[9]Costs for permits, plans, monitoring, and cleanup must also be included in an energy company’s budget. This cost of compliance is especially pronounced in small companies of 20 persons or less, as it costssmall businesses 364% more than large firms to comply with environmental regulations.[10]
In sum, compliance with and violation of environmental regulations is a steep cost of conducting business in the energy field. Thus, a solid understanding of the environmental agencies, statutes, and issues isnecessary tosuccessfully operatein thisindustry.
Environmental Regulatory Agencies: The Main Players
In order to gain a basic comprehension of environmental law in the energy industry, it is integral to understand the key agencies that regulate and enforce environmental law in the energy field. The EPAis the predominant agency responsible for enforcing and regulating federal environmental law statutes.[11]As a general matter, the EPA is concerned with the development and enforcement of regulations regarding air, water, land and cleanup, waste, toxic substances, pesticides, and environmental emergencies.[12]Should the EPA discover a violation, it will issue an administrative compliance order setting forth the violation and the penalties associated with non-compliance.[13] If the party fails to comply with the order, the EPA will then bring an enforcement action in court seeking daily penalties for the violation of the statute, as well as the violation of the compliance order.[14]In conjunction with its enforcement power, the EPA also has the statutory authority to create its own regulations.[15]
In addition to the EPA, many other agencies alsoimplementenvironmental law within the energy industry. These agenciesinclude:
(1)The Federal Energy Regulatory Commission (“FERC”). The FERC oversees oil pipelines, natural gas transportation, electric utilities, and hydropower licensing.[16]
(2)The Nuclear Regulatory Commission (“NRC”). The NRC provides licenses for radioactive waste disposal, uranium processing, and atomic reactors,[17]and strictly regulates the nuclear power industry.[18]
(3)The Department of Interior. The Department of the Interior is considered the watch-guard to federal lands.[19]
(4)The Department of Energy (“DOE”). The DOE focuses on technology development through the tax code as well as research and development programs, although it has other responsibilities as well.[20]
(5)The U.S. Fish and Wildlife Service (“FWS”) and the U.S. National Oceanic and Atmospheric Administration (“NOAA”). The FWS and the NOAA are the main federal agencies charged with enforcing the Endangered Species Act.[21]
In sum, multiple agencies oversee the environmental law regime that constrains the energy industry, and it is imperative that companies properly identify those that will monitor their activities. These agencies issue the mandatory permits and licenses, and ultimately set and monitor the standards for the activities conducted by energy companies. As such, familiarization with the environmental agencies is imperative to successfully operating within the energy field.
General Environmental Statutes
Energy companies must also be familiar with the environmental statutes that apply to them. Although there are dozens of environmental statutes on the books, energy companies will likely have to contend with many of the “general” environmental statutes in the daily course of operations. Accordingly, a summary of the key environmental statutes is set forth below:
(1)National Environmental Policy Act (“NEPA”).[22]NEPArequires federal agencies to integrate environmental values into their decision-making processes by considering the environmental impacts of their proposed actions and reasonable alternatives to those actions.To meet NEPA requirements, federal agencies prepare detailed statements known as an Environmental Impact Statements (EISs). The EPA reviews and comments on EISs prepared by federal agencies, maintains a national EISfiling system, and assures that its own actions comply with NEPA.[23]
(2)Clean Water Act (“CWA”).[24]The CWA establishes the basic structure for regulating the discharge of pollutants into Unites States waters, and regulation of quality standards for surface waters.[25]For example, under the CWA, it is unlawful to discharge any pollutant from a point source into navigable waters, unless a permit from the National Pollutant Discharge Elimination System (“NPDES”)is obtained.[26]A point source is defined as a discrete conveyance, such as a pipe or man-made ditch.[27]Ultimately, the CWArequires municipalities and major industries to meet performance standards to ensure pollution control, and charges states with setting specific water quality criteria appropriate for their waters and developing pollution control programs to meet them.[28]The CWA further gives the EPA the authority implement pollution control programs to set wastewater standards for industry as well as water quality standards for all contaminants in surface waters.[29]It is important to note that it remains unclear exactly which waters fall under the jurisdiction of the CWA.[30]
(3)Clean Air Act (“CAA”).[31]The CAArequires major stationary sources, such as refiners, processors, and manufacturers, to install pollution control equipment, meet specific emissions limitations, and obtain operating permits.[32] It also gives the EPA the authority to establish National Ambient Air Quality Standards (“NAAQS”), which limit certain air pollutants and set limits on how many pollutants can be in the air anywhere in the United States.Further, the CAA provides the EPA with the authority to limit emissions of air pollutants coming from sources such as chemical plants, utilities, and steel mills. It is important to note that individual states may have stronger, but not weaker, air pollution limits than those set by EPA.[33]
(4)Endangered Species Act (“ESA”).[34] Under the ESA, species listed as endangered are protected from both government and private actions that will “take” the species.[35] Taking includes killing, harassing, or harming an endangered species.[36]Private companies can, however, apply for an incidental take permit when the taking is incidental to an otherwise lawful activity of the private company.[37]
(5)Resource Conservation and Recovery Act (“RCRA”).[38]The RCRA governs the disposal of solid and hazardous waste.[39] It creates three separate programs, which address the disposal of municipal solid waste, the generation, transportation, storage, and disposal of hazardous waste, and the regulation of underground storage tanks containing hazardous substances and petroleum products.[40] There are very strict penalties for violating the RCRA.[41]
(6)Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).[42]Commonly known as Superfund, CERCLAprovides broad Federal authority to respond directly to releases or threatened releases of hazardous substances that may endanger public health or the environment.[43]Ultimately, CERCLA provides regulations for closed and abandoned hazardous waste sites, provides for liability for those responsible for the release of hazardous waste at these sites, and establishes a trust fund that provides for cleanup when no responsible party can be identified.[44]CERCLA is regulated and enforced by the EPA.[45]
(7)Atomic Energy Act (“AEA”). The AEA regulates almost every aspect of the construction and operation of nuclear power plants.[46]The AEA ultimately provides the EPA with the authority to issue generally applicable environmental radiation standards,to develop guidance for federal and state agencies containing recommendations for their use in developing radiation protection requirements, and to work with states to establish and execute radiation protection programs.[47]
Current Issues In Environmental Law: Problems at Every Turn
Regardless of the type of industry, environmental law issues plague energy companies on all levels. From pollution stemming from fracking in the oil and gas industry,[48] to the impact thatwind turbines have on flying species in the wind energy industry,[49] special interest groups, the media, and federal regulatory authorities keep environmental law issues at the forefront of the energy industry, impacting the day-to-day decisions of energy companies, as well as the industry as a whole. In order to grasp the breadth of environmental law challenges facing energy companies, a brief overviewof the key issues is helpful, and is set forth below.
- Oil and Gas Industries
In recent years, the oil and gas industry has been forced to comply with ever-stringent and ever-changing environmental regulations. Large-scale environmental disasters, such as the Exxon Valdez oil spill and the recent Deepwater Horizon oil spill, have helped to perpetuate the proliferation of many of these regulations. Yet, many of the issues that are currently plaguing oil and gas companies have arisen not from these disasters, but instead from the actions of environmental watch groups, private citizens, and the media.[50]
- Fracking: Pollution of the Water Table
Hydraulic fracturing, or fracking, is a process used by drilling companies to ease the extraction of natural gas, petroleum, and other substances.[51]Fracking involves the injection of water and sand mixed with chemicals into deep rock formations, thereby breaking the formations and unlocking reservoirs below.[52]Although touted asenvironmentally safe, there is a growing concern among scientists, environmentalists, and residents living close to drill sitesthat fracking may contaminate groundwater. To complicate matters, over the past few years, scientific studies geared at resolving this issue have yielded conflicting results.[53]For example, in 2004, the EPA conducted a study whichconcluded that there was no definitive link between coal bed methane fracking operations and the contamination of drinking water.[54] However, a new preliminary study released by the EPA in 2011concluded that hydraulic fracturing had been linked to groundwater contamination in Wyoming.[55]Not surprisingly, this 2011 study has since been the subject of intense criticism and debate within the scientific community.[56]
As a result of this growing concern, private citizens have started filing lawsuits against fracking companies alleging the contamination of their groundwater.[57] Further,the EPA has also started initiating enforcement actions against companies engaged in frackingacross the country, alleging that the methods used have resulted in the contamination of nearby groundwater of local residents.[58] For example, in 2010 the EPA accused a Texas drilling company, Range Resources,of causing natural gas to seep into water wells near some of its drilling operations in the Barnett Shale field in north Texas. It thereafter issued a compliance order, and then filed an enforcement suit.[59] However, after the Texas RailroadCommission conducted a study in response to the EPA’s allegations,concluding that the gas likely seeped into the wells from shallow pockets of gas nearby and not from the drilling operations in the Barnett Shale, the EPA subsequently dropped the suit.[60]
Although new the EPA has yet to promulgate new or specific regulations regarding fracking and groundwater contamination, the growing concern among environmental groupsand local residents coupled with the EPA’s sudden enforcement activity and scientific studies indicates that new regulations could be imminent. Until then, energy companies must be ever watchful and prepared for the potential suits and EPA probes that may come their way.
- Fracking: New EPA Air Emissions Regulations
In addition to the concern over litigation and EPA enforcement actions based upon the possible contamination of groundwater, drilling companies engaged in fracking must also contend with a new set of EPA CAAemissions regulations. On April 18, 2012, the EPA announced a new set of fracking regulations that will require oil and gas companies to capture toxic and climate-altering gases from wells, storage sites, and pipelines, using “green completion” technology currently on the market.[61]Although these regulationsdo not take full effect until2015, in the interim the EPA will begin to impose other requirements, such as gas flaring, to reduce air pollution created by the fracking process.[62]Notably, these standards were proposed “in response to complaints from citizens and environmental groups” over escaped methane resulting from the fracking process.[63]
Originally set to take full effect in 60 days, intense lobbying from groups such as the American Petroleum Institute and the Western Energy Reliance, which argued that there are currently too few green-completion companies to meet the increased demand from drillers,has resulted in aconcession from the EPA, as oil companies now have a transition period of three years instead of the proposed 60 days.[64]Thus, oil and gas companies will be able to continue their drilling activities while procuring and installing the required abatement equipment.[65]
However, despite the delayed enforcement date,the new regulations remainproblematic. Although oil and gas companies will be able to sell the captured emissions for a profit, the procurement and installation of new equipment is very costly. Further, many energy insiders argue that these new rules are not flexible enough to allow for new exploration in areas with little to no infrastructure.[66] As small businesses predominately operate in such conditions, these regulations could make exploring in new areas cost-prohibitive.[67]
In sum, oil and gas companies must stay perpetually aware of evolving environmental regulations, as well as potential lawsuits and regulatory probes resulting from their activities.
- Nuclear Power Industry
Nuclear energy accounts for roughly 20% of the total net electricity generated in the United States.[68]Generally considered a cleaner energy source because it produces very few emissions,[69]the nuclear industry is nevertheless fraught with environmental law issues that impact daily and long-term operations. This is primarily due to the environmental dangers associated with fission reactions as well as the radioactive waste generated by the nuclear process. As such, nuclear power companies must navigate a highly-regulated and complex statutory scheme that is strictly regulated by the NRC.[70]