On January 24, 2017, a federal district court judge in Minnesota enjoined the Army Corps of Engineers (Corps) and Environmental Protection Agency (EPA) from asserting Clean Water Act (CWA) jurisdiction over 150 acres of isolated peat wetlands. The decision is the final chapter in the long saga of the Hawkes case, which was remanded by the Supreme Court to the district court last year. The Supreme Court’s 2016 decision held that Corps’ Jurisdictional Determinations (JDs) constitute final agency action and are judicially reviewable under the Administrative Procedure Act.

On the heels of this development—and in light of the recent change in presidential administration—this Legal Alert provides an update on several key issues related to the CWA 404 program, under which the Corps and EPA regulate the discharge of dredged or fill material into “waters of the United States,” including wetlands.

The recent ruling in Hawkes offers regulated entities some hope that the concept of “isolated” wetlands not being subject to federal regulation under the CWA 404 program still has some teeth. At issue in Hawkes was a plan to mine peat from 150 acres of wetlands located 90 river miles and 40 aerial miles from the nearest navigable water, the Red River. To establish a hydrologic connection, water from the peat wetlands must flow under a county road via two culverts, onto neighboring wetlands, through a linear drainage feature, into an upland man-made ditch, into an unnamed seasonal tributary, before finally reaching the Middle River, which then flows into the Red River, some 90 miles away. Despite this circuitous path, the Corps twice found a “significant nexus” between the wetlands at issue and the Red River not demonstrating of any actual chemical, physical, and biological connection between the wetlands and the Red River. Relying on the Corps’ own Administrative Appeal Decision, the district court held there was insufficient evidence to support the Corps’ significant nexus finding. The court took the Corps to task for its “transparently obvious litigation strategy” of delay and highlighted the continued concern about the uncertain reach of the CWA, its draconian penalties, and the fact “most property owners [are left] with little practical alternative but to dance to the EPA’s [or to the Corps’] tune.” This decision should provide helpful metrics for both the Corps in supporting significant nexus determinations and the regulated community in evaluating Corps decisions.

The Hawkes decision comes amid uncertainty about the ultimate reach of the CWA. The new Clean Water Rule adopted in June 2015 (a/k/a “WOTUS” Rule)—which seeks to clarify the jurisdictional scope of the CWA—has been stayed pending resolution of litigation in various venues. Last week the Supreme Court granted certiorari to review whether federal district or appellate courts have jurisdiction to hear challenges to the rule. Just this Wednesday, the Sixth Circuit agreed to stay its consideration of the challenge pending a ruling from the Supreme Court, which is likely to come this spring. Layered on top of these judicial developments, there has been talk under the new administration of rescinding the Clean Water Rule entirely. Thus, it appears the uncertainty that surrounded the Clean Water Rule during the Obama Administration will persist. Until the Clean Water Rule challenges are resolved, it is important for regulated entities to remember that the Corps’ existing 1986 WOTUS rule and its post-Rapanos 2008 Guidance—which governed the “significant nexus” determination in the recent Hawkes decision—remain in place and is what the Corps (and EPA) will continue to rely on to make “jurisdictional determinations” and carry out the CWA 404 program.

On January 6, 2017, the Corps published its new and renewed 404 Nationwide Permits (NWPs), which authorize projects with relatively smaller impacts on CWA-regulated streams and wetlands, as it is obligated to do every five years. The NWPs, which constitute the heart of the 404 program, were scheduled to take effect on March 19, 2017, but they appear to be covered by the “60-day Regulatory Freeze Pending Review Memo” recently announced by Reince Priebus, which would suspend their effective date two days (March 21, 2017), unless the administration suspends them further. The regulated community has generally been supportive of the NWP program, because it allows projects to proceed in a streamlined manner while ensuring environmental protection. For this reason, it seems unlikely that the new administration will block the new NWPs, even though they were promulgated by the Obama Administration. The recent Executive Order expediting environmental reviews and approvals for high priority infrastructure projects would appear to support letting the NWPs go forward. If the new NWPs are suspended, however, after the current NWPs expire on March 18, 2017, arguably all projects that would have otherwise qualified for a NWP would then require an onerous “individual” 404 permit, which would create massive burdens and delays for the Corps, EPA, and the regulated community.

Notwithstanding these developments, the CWA 404 program has remained in relatively constant form since 2008—warts and all. The new Clean Water Rule is mired in litigation and could be scrapped in its entirety. Meanwhile, the existing NWPs are likely to be renewed this March, and the Corps’ existing 1986 WOTUS rule and post-Rapanos 2008 guidance remain in place to guide EPA and Corps jurisdictional determinations. Surprisingly, the courts—most recently and significantly through the Hawkes cases—have provided the only clarity to stakeholders by offering a mechanism to raise jurisdictional challenges and providing parameters for significant nexus determinations. In the end, despite the controversy that has long swirled around the CWA 404 program, it appears unlikely to change in any material fashion any time soon—the one caveat being further suspension of the recent NWP renewal rule, which as we note, seems unlikely.

If you have questions regarding any of these developments or other aspects of the CWA 404 program, please contact the authors of this alert or other members of the Davis Graham Environmental Group.

In late December, the U.S. Department of the Interior released a suite of guidance related to mitigation, particularly compensatory mitigation. First, the Fish and Wildlife Service (FWS) finalized its Endangered Species Act (ESA) Compensatory Mitigation Policy. Second, the Bureau of Land Management (BLM) finalized a manual and handbook regarding use of compensatory mitigation. Finally, the Department released an opinion from the Solicitor of the Interior (known as an “M” Opinion) outlining the BLM’s authority to address impacts of its land use authorizations through mitigation and asserting that BLM “must require public land users to mitigate impacts to the public lands that would otherwise constitute unnecessary or undue degradation of public lands, or must deny the proposed use.” These guidance materials implement a 2015 Presidential Memorandum (“Mitigating Impacts on Natural Resources From Development and Encouraging Related Private Investment”), the 2013 Secretarial Order No. 3330 (“Improving Mitigation Policies and Practices of the Department of the Interior”), and the Department of the Interior’s Mitigation Policy set forth in a chapter in the Departmental Manual (600 DM 6, Landscape-Scale Mitigation Policy) that was released in 2015.

Because the above policies, opinion, and orders are not formal rules, they may be revised or rescinded with less process than formal rules, so affected parties should closely watch to confirm whether and how they might be changed or withdrawn by the incoming administration.

The above new policies and Solicitor’s Opinion are each described further below.

Fish and Wildlife Service ESA Compensatory Mitigation Policy

On December 27, 2016, a final ESA Compensatory Mitigation Policy was published in the Federal Register. The FWS had released a draft of this policy for public review and comment in the fall of 2016. The Policy replaces 2003 guidance regarding the use of habitat conservation banks; however, the scope of the new Policy is broader than the 2003 guidance. Whereas the 2003 guidance only addressed habitat conservation banks, the Policy addresses the use of multiple mitigation mechanisms, including permittee-responsible mitigation, conservation banking, in-lieu fee programs, and other third-party mitigation mechanisms such as habitat exchanges.

This Policy establishes standards for the use of compensatory mitigation when implementing sections 7 and 10 of the ESA. Although the Policy expressly applies to species protected by the ESA, the Policy notes that at-risk and candidate species would benefit from adherence to the Policy’s standards. These standards apply uniformly to all mitigation mechanisms, regardless of whether the mitigation is performed by a project proponent or a third party (such a habitat conservation bank). The Policy expressly encourages the use of market-based compensatory mitigation programs such as habitat conservation banks. Notably, the Policy generally does not apply to actions previously approved; however, it applies to amendments or modifications of approved actions and in circumstances such as when new information regarding the effects of an approved action becomes available, when levels of authorized incidental take are exceeded, and when a new species is listed or new critical habitat is designated.

The standards set forth by the Policy relate to: siting of compensatory mitigation actions; the use of consistent and equivalent metrics to evaluate impacts and benefits to species and their habitats; the requirement that compensatory mitigation be “additional” by providing benefits that are new and would not have otherwise occurred; the timing and duration of compensatory mitigation; and the durability of compensatory mitigation. In addition to these standards, the Policy establishes preferences that compensatory mitigation be sited in conservation areas identified in landscape-level conservation plans, implemented in advance of impacts, and implemented in a consolidated or programmatic nature, rather than on a piecemeal basis. The Policy also provides guidance regarding lands eligible for compensatory mitigation, including the use of public lands to mitigate impacts on private lands. Finally, the Policy provides guidance on the use of credits and debits in compensatory mitigation mechanisms, the use of compensatory mitigation to address short-term impacts such as harassment of wildlife, and various mitigation mechanisms, including criteria for third-party mitigation.

The Policy is the second of three policies related to compensatory mitigation under development by the FWS. The FWS released revisions to its 1981 mitigation policy in November 2016, which addressed mitigation of impacts to species under a suite of statutes the FWS implements, not just the ESA. Most significant, the mitigation policy adopted a mitigation goal of “net gain.” A third policy on the use of voluntary prelisting conservation measures released in draft in 2014 is anticipated to be released before the end of the Obama administration.

BLM Manual MS-1794 and Handbook MS-1794-1 Addressing Mitigation

On December 22, 2016, the BLM released Manual MS-1794 – Mitigation (Rel. 1-1782) and Handbook H-1794-1 Mitigation (P) (Rel. 1-1783) that provide policy guidance to implement the Department of the Interior’s Mitigation Policy. The Manual provides “foundational” policy and guidance on mitigation to offset impacts from public lands activities, while the Handbook expands upon the guidance in the Manual and offers examples of how mitigation should be considered and applied.

In some respects, the Manual and Handbook echo guidance of the Department of the Interior and the FWS. They direct that mitigation be: considered and implemented on a landscape level; effective for the duration of impacts (“durability”); monitored for effectiveness, as required by land use authorizations; subject to adaptive management; and subject to periodic reporting by the land user. The Handbook guides the BLM on application of the “mitigation hierarchy” (the avoidance, minimization, and compensation of impacts) and provides specific examples of its application.

The Manual and Handbook, however, also offer guidance that is unique to the BLM and different than the agency’s past practices, such as the requirement of mitigation standards and use of mitigation strategies. The Manual and Handbook direct the BLM to develop defined and measurable outcome and performance standards for mitigation for resources that are “important, scarce, sensitive, or have a protective legal mandate.” Such mitigation standards should seek to achieve a “no net loss” of or a “net benefit” for the affected resource.

The BLM may incorporate mitigation standards into its RMPs, but the Manual and Handbook also allow for the development of “mitigation strategies” that identify and communicate potential mitigation needs and measures in a given geographic area or resource. Mitigation strategies may be developed through a project-level NEPA analysis or outside of a NEPA process. The BLM has prepared a handful of regional mitigation strategies, such as for solar energy, but has not widely utilized them. Therefore, including mitigation strategies in the Manual and Handbook raise a question on the extent to which the BLM will utilize them going forward and how efficiently they may be developed.

The Manual and Handbook extensively discuss use of compensatory mitigation. The Handbook identifies restoration, establishment, enhancement, and preservation of resources as acceptable types of compensatory mitigation. The Handbook also identifies mitigation banks, mitigation exchanges, in-lieu fee mechanisms, and land user-responsible mitigation as acceptable mitigation mechanisms. Both the Manual and Handbook prefer that mitigation be secured ahead of an impact occurring, such as through a mitigation bank.

The Manual and Handbook identify some limitations on the BLM’s use of compensatory mitigation. The Manual and Handbook explain that the mitigation policy applies “to a different extent” to actions authorized pursuant to valid existing rights, such as mining plans of operations and existing oil and gas leases. For these authorizations, the BLM must consider mitigation measures in NEPA analysis, but any required mitigation must be “consistent” with the terms of existing leases and existing contracts. Neither the Manual nor the Handbook, however, offers any guidance on how to evaluate whether compensatory mitigation is consistent with these prior authorizations. The Manual and Handbook require a “reasonable relationship” between the impacts of an action and the type, nature, and amount of compensatory mitigation. The Manual and Handbook also specify that they do not apply to prior land use authorizations unless such authorizations are renewed or amended.

The Handbook provides some long-awaited guidance on how public lands may be used as sites to implement compensatory mitigation measures. Historically, public lands offered few compensatory mitigation opportunities because such mitigation was not considered “durable.” Appendix 1 of the Manual, however, outlines how to ensure the durability of compensatory mitigation sites on public lands. It specifically identifies National Conservation Lands as the most durable BLM-managed lands but also describes how to provide durability of mitigation actions on other BLM-managed lands. The Manual, however, expressly disclaims any preference that mitigation of impacts to public lands be sited on the public lands.

Notably, the Manual suggests the BLM intends to track compensatory mitigation at a national level. It directs that compensatory mitigation monitoring reports and geospatial information about impacts and compensatory mitigation be maintained by the BLM’s National Operations Center in Denver, Colorado. Because mitigation efforts often were not tracked at the State Office level let alone the national level, this direction marks a shift towards a more centralized and cohesive management of compensatory mitigation.

Solicitor’s Opinion on the BLM’s Authority to Address Impacts of Its Land Use Authorizations through Mitigation

On December 21, 2016, the Solicitor of the Interior issued an opinion addressing the BLM’s authority under the Federal Land Policy and Management Act (FLPMA) to require mitigation when authorizing uses of the public lands through oil and gas leasing, oil and gas permits, rights-of-way, grazing permits, and mining plans of operations. This opinion has been catalogued as Opinion No. M-37039. In the opinion, the Solicitor recognized the BLM generally may condition land use authorizations on requirements of mitigation, including compensatory mitigation.

Although the opinion does not direct the BLM to take any action, it outlines the legal basis for the BLM to require mitigation measures when authorizing land uses. Among the most significant conclusions, the opinion determines the BLM may incorporate mitigation standards into RMPs but that the BLM may require mitigation even when RMPs lack mitigation standards or guidelines. It also determines that FLPMA allows the BLM to require compensatory mitigation that yields a “net conservation benefit” —a conclusion that likely will be controversial because some view this standard as exceeding BLM’s authority. The opinion concludes the BLM may require mitigation not specified under the terms of existing land use authorizations, such as oil and gas leases; this conclusion suggests the BLM may have authority to require compensatory mitigation not specified in an existing oil and gas lease but does not expressly reach this conclusion. The opinion determines that impacts to public lands may be offset with compensatory mitigation on private lands.

The opinion significantly relies on the Department of the Interior’s broad discretion to manage the public lands. Although the opinion reinforces the BLM may require mitigation to avoid unnecessary or undue degradation, the opinion also heavily relies on FLPMA’s charge that the BLM manage the public lands for “multiple use” and “sustained yield” as allowing the agency to require that land users improve resources for future generations. The opinion also determines that the BLM’s broad authority over the public lands includes both land use authority akin to zoning, such as that possessed by local land use zoning boards, and regulatory authority, such as that possessed by the U.S. Environmental Protection Agency (EPA). The opinion also observes the BLM has the authority to act as a proprietor; the opinion describes the BLM as “the sovereign’s landlord” that can condition land uses on conduct or performance standards.

The opinion articulated few limits on the BLM’s ability to require mitigation. Most notably, the opinion determines that mitigation cannot be arbitrary or capricious and, therefore, the BLM must explain how mitigation avoids, minimizes, or compensates for an identified impact.

In a footnote, the opinion effectuates a change in policy by the Department. It revokes a conclusion in prior Solicitor Opinion No. M-37007, issued in 2001 by Solicitor William G. Myers III, who served under Secretary Gale Norton. This opinion interpreted FLPMA’s unnecessary or undue degradation standard in the context of the BLM’s hardrock mining regulations and the Federal Mining Law to conclude that some degradation could reasonably occur as a result of such activity expressly authorized under Federal law. In contrast, the new opinion interprets unnecessary and undue as having separate meanings and asserts that either can serve as a basis to reject proposed actions on public lands. The opinion concludes the BLM must require mitigation to prevent “undue” degradation, may assess whether resulting degradation is “unnecessary” after application of mitigation, or must deny a proposed use of the public lands. The new opinion fails to note that the BLM has promulgated specific regulatory standards in 43 C.F.R. § 3809.415 to govern how hardrock mining activities will prevent unnecessary or undue degradation.

The lasting impact of the FWS and BLM mitigation policies is unknown. Some land users have voiced strong opposition to these policies, suggesting that they may be on the incoming administration’s chopping block. Because they are policies and not formal rules, they can be set aside with less process than other formal rules. Therefore, land users should watch the Department of the Interior’s actions in the next year regarding these policies and other mitigation issues.

BLM Planning Regulations

On December 12, 2016, the Bureau of Land Management (BLM) issued sweeping new regulations regarding the procedures used to prepare, revise, and amend land use plans. Land use plans, known as resource management plans (RMPs), are the basic guidance and management plans for BLM-managed lands or resources. As described in the preamble to the new regulations, “[l]and use planning forms the basis of and is essential to, everything that the [BLM] does in caring for America’s public lands.” 81 Fed. Reg. 89,580 (Dec. 12, 2016). Under the Federal Land and Policy Management Act of 1976 (FLPMA), the BLM is required to develop land use plans in coordination with state, local, tribal governments, and the public to manage public lands in accordance with FLPMA’s multiple use and sustained yield mandate. 43 U.S.C. § 1712.

The BLM asserts that the new regulations do not fundamentally modify the existing land use planning process but instead improve a planning process the BLM characterized as “cumbersome.” 81 Fed. Reg. at 89,581. The new regulations alter the previous planning regulations in several important aspects. First, the new rules provide increased opportunity for the public to submit information and comments on a plan revision or amendment early in the process by: encouraging the submission of information by the public during the preparation of the planning assessment; requiring the BLM to conduct a preliminary review of the existing conditions within a planning area; and allowing the public to comment on the identification of the preliminary purpose and need for a plan revision or amendment and on preliminary resource management alternatives. 81 Fed. Reg. at 89,664 (to be codified at 43 C.F.R. § 1610.2-1). The new regulations leave intact the existing opportunities for the public to comment on draft RMPs and draft environmental impact statements and to submit protests regarding proposed RMPs and final environmental impact statements. Id.

Second, the new regulations are designed to provide the agency with greater flexibility regarding the geographic scope or emphasis of a planning effort. See 81 Fed. Reg. at 89,666 (to be codified at 43 C.F.R. § 1601.4). This flexibility will allow the agency to more easily develop RMPs that plan on a “landscape level” rather than a specific geographic area as is most commonly done under the former regulations. Notable recent examples of landscape level or resource-based planning efforts under the BLM’s prior planning regulations include the BLM’s planning process to provide greater protections for the sage-grouse that affected over 90 RMPS in 11 states and the BLM’s separate RMPs for wind energy, solar energy, and transmission corridors.

Third, the new regulations allow planning decisions to be removed from the state- and Field Office-level and be vested in the BLM Director. 81 Fed. Reg. at 89,662 (to be codified at 43 C.F.R. § 1601.0-4). Specifically, the new regulations authorize the BLM Director to designate the “deciding official” and the scope and scale of planning efforts, particularly when lands in more than one state are involved. Id. Similarly, the revised section 1601.0-4 allows the BLM Director to determine the geographic scale of a planning effort.

Fourth, the new planning regulations potentially diminish the importance and role of state and local land use plans. Under the old planning regulations, the BLM defined “officially approved and adopted resource related plans” to include plans, policies, and programs prepared by other federal, state, or local governments (43 C.F.R. § 1601.0-5(j)) and required the BLM to consider such plans in its RMPs (43 C.F.R. § 1610.3-2). The new regulations narrow the scope of local plans that the BLM must consider to officially adopted “resource-related” plans. 81 Fed. Reg. at 89,662 (to be codified at 43 C.F.R. § 1601.0-5).

Finally, the new regulations encourage the BLM to use “high quality information” when preparing, revising, or amending RMPs. 81 Fed. Reg. at 89,663 (to be codified at 43 C.F.R. § 1610.1-1(c)). High quality information includes the “best available scientific information” and information such as “traditional ecological knowledge.” 81 Fed. Reg. at 89599.

FLPMA requires the BLM to develop RMPs in coordination with state, local, and tribal governments. 43 U.S.C. § 1712. The BLM repeatedly states throughout the preamble to the new regulations that the regulations were developed with, and will honor the requirement for close coordination with, state, local, and tribal governments. 81 Fed. Reg. at 89,581. Nonetheless, on December 12, 2016, counties and local governments in California, Colorado, Idaho, New Mexico, and Wyoming filed litigation challenging the new rules in the District of Utah. Concerns raised in the lawsuit include coordination and cooperation with local governments.

Forest Service Planning Regulations

Additionally, on December 15, 2016, the Forest Service issued revisions to the 2012 Forest Service planning regulations. 81 Fed. Reg. 90,723 (Dec. 15, 2016). The 2012 regulations were the result of a decade-long effort to replace the Forest Service’s original 1982 planning regulations. Efforts to revise the regulations in 2005 and 2008 were met with litigation and eventual abrogation of the rules. The 2016 amendments to the 2012 planning regulations are designed to clarify how the 2012 rule’s substantive requirements (including requirements related to sustainability, plant and animal diversity, multiple use, and timber) should be utilized when amending or revising plans developed under the original 1982 regulations. The rules also provide greater discretion to the responsible planning official to determine the scope and extent of a plan revision or modification.

Last week, a federal district court in Texas enjoined the implementation of the U.S. Department of Labor’s new overtime rule, which raises the minimum salary for employees to be exempt from the Fair Labor Standards Act’s (FLSA’s) overtime requirements. The court concluded that the DOL may have overreached with the rule in light of FLSA’s overtime exemptions, which are defined by an employee’s executive, administrative, or professional duties, rather than by a minimum salary.

As a result of the decision, it appears that employers do not have to make any changes by the current December 1, 2016 deadline. However, the Texas decision might be appealed and may not be the final say on the DOL rule. On its website, the Department of Labor states that it remains “confident in the legality of all aspects of the rule” and that it is “currently considering all of our legal options.” Of course, the Department of Labor’s position may change with the incoming administration, which may abandon or reverse the new rule.

Affected employers will need to decide whether to proceed with, discontinue, or postpone changes to overtime policies and procedures (especially in the event that changes already have been announced to employees), pending an ultimate determination on the fate of the new overtime rule.

Institutional Shareholder Services (ISS) is rebranding its corporate governance rating system on November 21, 2016. The “new” rating system, Governance QualityScore (QualityScore), was previously known as Governance QuickScore. Companies can verify and update the data used to determine their score by visiting ISS’s website. Data verification for covered companies began on October 31, 2016 and continues until November 11, 2016. From November 11, 2016 until November 21, 2016 companies will not be able to verify or update their data. However, following November 21, 2016, companies will be able to verify and update their data subject to certain blackout periods.

In addition, ISS announced new factors that will contribute to a company’s QualityScore in the U.S.

Board Structure

• Proportion of women on the board of directors;
• Non-executive directors on the board of directors for less than six years and other mechanisms designed to encourage director refreshment;
• Formal CEO and key executive officer succession plan;
• Material corporate governance failures; and
• Adequate response by the board of directors to low support for management proposals.

Compensation

• Employment of at least one metric that compares the company’s performance to a benchmark or peer group.

Audit & Risk Oversight

• Tenure of the company’s external auditor.

Shareholder Rights

• Exclusive venue / forum provisions in the company’s organizational documents;
• Fee shifting provisions in the company’s organizational documents;
• Representative claim limitations or other signification litigation rights limitations;
• Proxy access bylaw provisions, including ownership thresholds, duration thresholds, caps on shareholder nominees to fill board seats and aggregation limits on shareholders to form a nominating group;
• Ability of the board of directors to implement a classified board without shareholder approval;
• Ability of shareholders to amend the company’s bylaws; and
• Ability of the board of directors to materially modify the company’s capital structure without shareholder approval.

For more information on this or other issues that affect companies, please contact any of the authors of this Legal Alert or visit the Davis Graham website at www.davisgraham.com.

On August 8, 2016, environmental groups and supporters filed their Petition for Verification of Signatures for two oil and gas ballot initiatives with the Secretary of State and claimed to have enough signatures to add the initiatives to the November ballot.

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NASDAQ is adopting a rule applicable to its listed companies that will require those companies to publicly disclose compensation or other payments by third parties to board members or nominees in connection with that person’s candidacy or service as a director. Under the new rule, NASDAQ-listed companies must disclose the material terms of all third-party compensatory agreements or arrangements for nominees and directors in proxy statements filed on or after August 1, 2016.

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On June 14, 2016, the Securities and Exchange Commission (the “SEC”) issued an order increasing the net worth threshold for “qualified clients” as defined in Rule 205-3 under the Investment Advisers Act of 1940 (the “Advisers Act”).

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On May 17, 2016, in an attempt to rein in non-GAAP reporting by public companies, the Securities and Exchange Commission (SEC) issued new Compliance & Disclosure Interpretations (C&DIs) under Regulation G and Item 10(e) of Regulation S-K regarding the use of non-GAAP financial measures.

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On May 4, 2016, environmental groups (Plaintiffs) sued EPA, alleging that it has failed to review and revise regulations for the disposal, storage, transportation, and handling of oil and gas (O&G) wastes as required by the Resource Conservation and Recovery Act (RCRA).See Environmental Integrity Project et al. v. EPA, No. 1:16-cv-842 (D.D.C. May 4, 2016). This Legal Alert discusses key issues raised by the lawsuit–namely that: 1) despite Plaintiffs’ claims, EPA has consistently reviewed the exploration and production (E&P) waste regulatory regime for many years; 2) state-specific programs can improve the management of E&P wastes in a way that a blanket federal program cannot; and 3) although the regulation of E&P wastes is distinguishable from the regulation of coal ash, the latter appears to motivate the lawsuit. If the lawsuit proves successful in narrowing or eliminating the E&P exemption, impacts to the O&G industry would be disastrous, particularly given current commodity prices.

BACKGROUND

RCRA creates the framework for proper management of hazardous and non-hazardous waste (Subtitles C and D, respectively). Although EPA sets minimum technical standards for how disposal facilities should be designed and operated, states traditionally implement RCRA waste programs.

With respect to E&P wastes, in 1980, Congress required that EPA promulgate regulations under RCRA Subtitle C or determine that such regulation was unwarranted. In 1988, EPA published its Regulatory Determination for Oil and Gas and Geothermal Exploration, Development, and Production Wastes (Regulatory Determination), 53 Fed. Reg. 25,446 (July 6, 1988). The Regulatory Determination concluded that regulation of E&P wastes as hazardous under Subtitle C was unwarranted because, among other things, existing state and federal programs were generally adequate. Id. The Regulatory Determination also included detailed lists of E&P wastes determined to be non-exempt and exempt, the latter including (but not limited to) drilling fluids, drill cuttings, produced water, and well stimulation fluids. Id. at 25453-54. Although E&P wastes are generally of lower toxicity than other RCRA-regulated hazardous wastes, the Regulatory Determination did not conclude that these wastes could never present a hazard to human health and the environment if improperly managed. Rather, EPA determined that the chemical constituents typically present in E&P wastes, combined with where E&P wastes are normally located and how they are managed, does not pose significant risk to human health and the environment warranting full Subtitle C regulation. EPA has issued numerous guidance documents further refining the scope and effect of the E&P waste exemption, always maintaining this core determination.

The Environmental Integrity Project lawsuit challenges this longstanding Regulatory Determination, placing the E&P waste exemption in substantial jeopardy. Specifically, Plaintiffs allege that EPA failed to timely review and revise the Subtitle D regulations for E&P wastes in accordance with Section 2002(b) of RCRA and further allege that EPA has not timely reviewed and revised the guidelines for state solid waste management plans in accordance with Section 4002(b) of RCRA.

PRACTICAL CONSIDERATIONS FOR O&G OPERATORS

Requirements for Review and Revision

Plaintiffs assert that RCRA requires EPA to review and revise the Subtitle D regulations for E&P wastes, as well as state solid waste management guidelines, every three years under Sections 2002(b) and 4002(b) of the Act, and that the last time EPA undertook such review and revision was in 1988 and 1981, respectively. While Section 2002(b) includes a reference to review and revision of regulations, that reference is specific to “each regulation promulgated under [RCRA],” and revision is only required “as necessary.” Similarly, Section 4002(b) requires that guidelines for state solid waste management plans be revised “as may be appropriate.” Thus, among other things, Plaintiffs must demonstrate the Regulatory Determination is a regulation, and, more importantly, that it is necessary to revise it and that it is appropriate to revise the state plan guidelines. Notably, Plaintiffs appear to be modelling their claims for regulatory revision on Appalachian Voices v. McCarthy, which resulted in a court-ordered deadline for EPA to review its RCRA regulations relating to coal ash disposal following a high-profile release. 989 F. Supp. 2d 30, 55 (D.C. Cir. 2013). In fact, plaintiffs in Appalachian Voices brought their claims under the same RCRA provisions as the Environmental Integrity Project Plaintiffs. Yet, the regulation of coal ash is much different than E&P waste, not only in terms of its history and the applicable regulatory regime, but also from an environmental-risk perspective.

Moreover, EPA has repeatedly reviewed and revised the E&P waste program since 1980. For example, EPA clarified the Regulatory Determination’s scope in 1993. 58 Fed. Reg. 15284 (March 22, 1993). In 2002, EPA solidified its interpretation and application of the E&P exemption, publishing an information booklet concerning the same. In March 2014, EPA reviewed the waste-related provisions of state statutes and regulations for O&G waste pits and storage tanks for multiple gas producing states. Further, EPA has tracked state, federal, and voluntary initiatives to develop and update legislation, regulations, and best management practices pertaining to E&P waste management.

State v. Federal Programs

The lawsuit assumes that any state “patchwork” of E&P waste regulations is problematic for the environment, resulting in the ability for O&G operators to “venue shop” for the least stringent regulatory controls. We question whether there is any empirical evidence to support such a claim. Moreover, state regulators have a wealth of knowledge and expertise in addressing state-specific issues that allows for programs tailored to each states’ unique geography, climate, ecology, and geology, all of which directly impact O&G drilling and production. Further, EPA is on-record in support of “individual, tailored regulations at the State and local level for the management of [E&P] wastes.” 53 Fed. Reg. at 25450 In fact, state implementation is integral to administration of many aspects of the federal RCRA program. For example, EPA generally delegates the primary responsibility of implementing RCRA’s waste programs to individual states, a process which promotes national consistency while also providing much-needed flexibility to states in implementing key aspects of the federal program.

CONCLUDING THOUGHTS

Despite EPA’s documented history of closely reviewing federal and state E&P waste practices and its support for state-specific implementation of RCRA’s requirements, the outcome of the lawsuit is unknown. More stringent regulatory requirements for E&P waste, or removal of the hazardous waste exemption altogether, could cause a severe economic impact on operators of all sizes and could strain or overrun the capacity of existing commercial waste facilities to handle the influx of E&P wastes.

Attorneys at Davis Graham & Stubbs LLP are experienced in the regulation of hazardous and non-hazardous wastes, particularly those associated with O&G exploration and production. Please contact the authors of this Legal Alert with questions on RCRA, E&P waste management, or impacts of the Environmental Integrity Project lawsuit on O&G operations and management.