Category Archives: Hydraulic Fracturing

Appointments to Environment/Energy Commissions Violated N.C. Constitution

February 1, 2016. On January 29, 2016, the N.C. Supreme Court issued a decision in McCrory v. Berger — a lawsuit filed by Governor Pat McCrory to challenge the constitutionality of two recent state laws that created new executive branch commissions dominated by legislative appointees. The ruling in the Governor’s favor means the three commissions cannot act until the General Assembly changes the statutes governing commission appointments.

Background. The lawsuit concerned appointments to the Coal Ash Management Commission, the Oil and Gas Commission, and the Mining Commission. The Coal Ash Management Act of 2014 gave the Coal Ash Management Commission authority to (among other things) make final decisions on closure of coal ash impoundments. The 2014 Energy Modernization Act eliminated the Mining and Energy Commission (created in 2012) and divided its regulatory responsibilities between a new Oil and Gas Commission and a reconstituted Mining Commission. In each case, the legislature gave itself the power to appoint a majority of the commission members.

The lawsuit filed by Gov. McCrory argued the legislative appointments violated the N.C. Constitution. In March of 2015, a special panel of three superior court judges ruled in the Governor’s favor, concluding that the N.C. Constitution bars legislative appointments to commissions that have executive authority. “Executive authority” generally means authority to implement existing laws as distinct from legislative authority to adopt new laws. See an earlier post on the superior court decision.

N.C. Supreme Court opinion. The N.C. Supreme Court opinion disagrees with the superior court decision on one key point — the Supreme Court ruled that the N.C. Constitution does not entirely bar the legislature from making appointments to executive branch commissions. The court interpreted the Constitution’s “appointments clause” to allow the legislature to make appointments to statutorily-created offices including commission seats. The court ruled, however, that legislative appointments to the Coal Ash Management Commission, Oil and Gas Commission and Mining Commission violated the separation of powers clause in Art. I, § 6 of the N.C. Constitution, which requires that “[t]he legislative, executive, and supreme judicial powers of the State government shall be forever separate and distinct from each other.”

The court concluded that the appointments scheme for the three executive branch commissions interfered with the Governor’s constitutional duty to insure that state laws are faithfully executed:

In light of the final executive authority that these three commissions possess, the Governor must have enough control over them to perform his constitutional duty. The degree of control that the Governor has over the three commissions depends on his ability to appoint the commissioners, to supervise their day-to-day activities, and to remove them from office.

The court pointed to three factors that combined to create an unconstitutional legislative interference with the Governor’s executive powers and responsibilities:

1. Each commission has authority to take final executive action (i.e., the Coal Ash Management Commission has the final authority to prioritize coal ash ponds for closure and approve final closure plans);

2. The legislature appointed a majority of the members to each commission; and

3. The legislature limited the Governor’s ability to remove commission members by allowing removal only for cause (such as misconduct).

The implication of the decision is that a separation of powers violation has occurred when all three conditions exist. The court included a footnote specifically suggesting that the outcome may be different with respect to a body like the Rules Review Commission that exercises a different kind of authority.

The court refused to address another separation of powers issue raised in the case. The Governor argued that the legislature also violated separation of powers by statutorily directing the Coal Ash Management Commission (CAMC) to operate “independently” of the executive department where it is housed. (Legislation creating the CAMC placed the commission under the Department of Public Safety.) The Supreme Court held the issue had been mooted by the portion of its decision ruling appointments to the CAMC unconstitutional. The issue could come up again if the legislature changes the appointments statute in response to the court’s decision, but leaves the “independence” provision in place.

Implications. The three commissions directly named in the case cannot act until the legislature changes the unconstitutional appointment provisions and new appointments are made. The Coal Ash Management Commission (CAMC) began meeting in 2014, but has not met since the March 2015 superior court decision that first ruled appointments to the CAMC unconstitutional. In the meantime, other pieces of the Coal Ash Management Act have moved forward; a newly appointed CAMC will need to catch up. The Oil and Gas Commission took over implementation of state laws on oil and gas development from the Mining and Energy Commission, so the court’s ruling could delay decisions related to hydraulic fracturing.

Two other pending lawsuits raising similar separation of powers issues may be affected by the McCrory v. Berger decision. The N.C. State Board of Education sued to challenge Rules Review Commission authority over rules adopted by the Board. The Board of Education raises several constitutional issues, including a separation of powers violation based on the fact that all Rules Review Commission members are legislative appointees. The McCrory v. Berger footnote about the Rules Review Commission seems to caution against assuming the court would also find RRC appointments to violate separation of powers. The footnote suggests that the Rules Review Commission’s specific function — to review and object to rules adopted by executive branch agencies — may put it in a different category than the commissions addressed in McCrory v. Berger.

Another pending separation of powers case in Wake County Superior Court challenges the constitutionality of appointments to the Mining and Energy Commission (MEC). The MEC seems to fit the McCrory v. Berger template: the commission had authority to take executive actions; the legislature made a majority of commission appointments; and the Governor only had the power to remove a commission member for cause. But the case also presents an additional question: Are actions taken by an unconstitutionally appointed commission void? Over a two-year period, the MEC developed and adopted state rules for hydraulic fracturing. Plaintiffs in the MEC case (Haw River Assembly and a Lee County property owner) have asked the Wake County judge to rule appointments to the MEC unconstitutional and void the rulemaking actions already taken by the commission. The superior court judge had delayed hearing the MEC case until the N.C. Supreme Court issued a decision in McCrory v. Berger. While the Supreme Court decision now provides a roadmap for addressing the separation of powers issue, it doesn’t provide any guidance on how a separation of powers violation affects past commission actions.

2015 in Review — Legislation

January 12, 2016. Some trends in environmental legislation:

Limiting Local Government Authority. After several years of legislation limiting the regulatory authority of state environmental agencies, the General Assembly turned to local government.

♦ Senate Bill 119 (Session Law 2015-264) may have the practical effect of eliminating local government authority to regulate shale gas operations under zoning, land use, stormwater, health, and sedimentation control ordinances. In 2014, Session Law 2014-4 preempted local ordinances that “would prohibit or have the effect of prohibiting oil and gas exploration, development, and production activities, or use of horizontal drilling or hydraulic fracturing for that purpose”. But the 2014 law created a presumption that local zoning and land use ordinances applicable to other types of development (such as zoning, setbacks, buffers and stormwater standards) could also apply to shale gas operations.

Senate Bill 119 rewrites the 2014 provision to completely preempt local ordinances. The new Oil and Gas Commission (replacing the Mining and Energy Commission) now has power to preempt the application of local development ordinances even if the ordinance would not preclude shale gas development or conflict with state standards. Although the presumption in favor of zoning and land use ordinances still appears in the law, the 2015 amendments direct the Commission to preempt a local ordinance at the request of the shale gas developer if the drilling operation has received state/federal permits and the Commission finds that exploration and development

…will not pose an unreasonable health or environmental risk to the surrounding locality and that the operator has taken or consented to take reasonable measures to avoid or manage foreseeable risks and to comply to the maximum feasible extent with applicable local ordinances.

In effect, the Oil and Gas Commission can set aside any local ordinance and substitute its judgment about risk for that of local elected officials. Preemption of local ordinances could have several implications —

1. Complete preemption of local ordinances may leave gaps in basic regulation of shale gas activities since state standards do not address a number of issues normally dealt with by local government such as noise, traffic, solid waste disposal (trash — not drilling waste), and open burning.

2. The law potentially allows preemption of local stormwater ordinances needed to meet state water supply watershed protection standards; comply with federal stormwater permits; or minimize flooding. The Environmental Management Commission has adopted stormwater rules for shale gas operations, but those rules expressly recognize that additional stormwater standards may apply to a particular operation and reserve the right to apply those standards — whether implemented by DEQ or by a local government. The new preemption language in Senate Bill 119 does not recognize the possibility that local stormwater ordinances may be required under state or federal law.

3. The provision raises a question about implementation of sedimentation control requirements through local sedimentation programs. The state’s Sedimentation Pollution Control Act allows cities and counties to take over implementation of the sedimentation program. In areas with local programs, sedimentation control requirements are set and enforced through local ordinances. Nothing in Senate Bill 119 prevents the Oil and Gas Commission from preempting a local sedimentation ordinance.

♦ House Bill 44 included two provisions limiting local government authority to adopt or enforce other types of development ordinances —

Section 2 bars local governments from enforcing a “voluntary” state environmental rule, but defines “voluntary” rule in a creative way to include any state rule that has been repealed; has been adopted, but is not yet in effect; or has been “temporarily or permanently held in abeyance”. The last category would cover the Jordan Lake water quality rules that have been delayed by legislative action. Preventing local enforcement of existing Jordan Lake stormwater ordinances may have been the main purpose of the provision, but it could also raise questions about the enforceability of other local ordinances. No one has attempted to catalog all of the local ordinances that include requirements that once appeared in a now-repealed state rule or are proposed to be included in a new state rule that has not yet been adopted. The House Bill 44 provision seems to assume that local environmental ordinances always follow state regulatory action; it ignores direct grants (by the General Assembly) of local government authority to adopt ordinances to protect public health and the environment. For more on the implications of this provision, see an earlier post.

Section 13 limits local government authority to adopt riparian buffer requirements. The bill defines “riparian buffer” to mean any setback from surface waters — which could include a setback imposed for flood control. (The definition seems broader than other language in the provision specifically referring to riparian buffers for water quality protection.) Under the bill, a local government cannot adopt and enforce a riparian buffer ordinance for water quality protection that goes beyond requirements of state or federal law or the conditions of a state or federal permit unless the EMC approves the ordinance.

Shielding Evidence of Possible Environmental Violations

♦ House Bill 765 (the Regulatory Reform Act of 2015) creates a new legal privilege for information contained in an environmental audit report. (Companies use environmental audits to identify compliance problems; opportunities for waste reduction; and operational changes to reduce environmental impacts.) Information covered by the privilege does not have to be shared with regulators and cannot be used by regulatory agencies to document an environmental violation in a civil enforcement case. The privilege does not apply in a criminal case, but the vast majority of environmental enforcement actions rely on civil rather than criminal penalties. See the section on environmental audit privilege/self-disclosure immunity in this earlier post for more on the scope of the privilege.

♦ House Bill 405 allows an employer to take legal action against an employee who 1. enters a “nonpublic” area of the workplace; 2. takes photographs, makes recordings, or copies records without permission; and 3. uses those documents “against the interest of the employer”. The employer can sue the employee for monetary damages, including legal fees and a $5,000 per day penalty. Animal rights activists referred to House Bill 405 as the “Ag-Gag” bill — a term used for legislation targeting activists who go undercover on farms and in processing facilities to document animal cruelty violations. But House Bill 405 is not limited to agricultural workers or documentation of animal cruelty. The bill could also be used to punish an employee who documents illegal dumping of hazardous waste and shares the evidence with regulators or the media. See an earlier post for more on House Bill 405.

Lessening the Consequences for Some Environmental Violations.

♦ House Bill 765 grants immunity from civil penalties and fines for environmental violations that are voluntarily disclosed to state regulators. The bill defines “voluntary” disclosure; immunity would not apply to violations documented through information the company has a legal duty to report under state or federal law, for example. The bill limits how often a person (or company) can claim self-disclosure immunity — no more than once every two years; twice in a five-year period; and three times in a ten-year period. The bill never defines “civil penalties and fines”, leaving a question about the breadth of the immunity. For example, the bill is silent on whether “civil penalties and fines” includes natural resource damages such as fish kill damages assessed for a wastewater spill. For a more detailed comparison to past state and present U.S. Environmental Protection Agency enforcement policies on self-disclosed violations, see an earlier post.

♦ A provision in the budget bill (S.L. 2015-241) limits the total civil penalty for ongoing violations of the Sedimentation Pollution Control Act to $25,000 if: 1. the violator had not previously been assessed a penalty for a sedimentation violation (which does not necessarily mean the person has not previously violated the law); and 2. the violator addresses damage caused by the violations within 180 days. Previously, the law allowed the Department of Environmental Quality to assess a maximum penalty of $5,000 per violation, per day for continuing sedimentation violations. The fact that the meter on civil penalties could run until the violator addressed the problem created a powerful incentive for quick response — even though DEQ rarely assesses the maximum penalty. Quick action to correct a violation translates to less stream damage from uncontrolled erosion and sedimentation. The recent amendments have the somewhat perverse effect of assuring the violator that sedimentation violations can go uncorrected for nearly six months without resulting in an increased penalty. The provision also means that committing numerous sedimentation violations on the development site will result in the same penalty as a single violation. The new cap on continuing violation penalties also applies to penalties assessed by local sedimentation programs.

♦ House Bill 765 amends existing state laws to allow broader use of “risk-based” cleanup of environmental contamination. In a risk-based cleanup, the person responsible for environmental contamination is not required to fully restore contaminated soil and groundwater. A risk-based cleanup plan relies on a combination of limited remediation and land-use controls (such as deed restrictions) that prevent exposure to contamination remaining on the site after the partial cleanup. Groundwater cleanup costs represent a significant consequence of violating environmental laws — often exceeding penalties assessed by regulators — so allowing a more limited cleanup reduces the cost of violating the law. (It also means the groundwater may remain contaminated and unusable for a very long time.)

House Bill 765 extends the benefits of lower cost, risk-based cleanup to several categories of contaminated sites that had been excluded under the state’s 2011 law allowing risk-based remediation of industrial contamination. Two of those categories broaden the use of risk-based remediation in ways that may undermine incentives for present environmental compliance:

— New contamination incidents. House Bill 765 repeals statute language limiting use of risk-based remediation to contamination reported before the 2011 risk-based remediation law went into effect. In 2011, allowing risk-based cleanup of industrial sites was seen as an incentive for remediation of properties with longstanding contamination — often resulting from activities that had been lawful at the time. Remediation costs remained a significant incentive for present-day compliance with environmental standards. Removing the date restriction means that a risk-based cleanup will now be an option for new contamination incidents resulting from activities violating current environmental laws.

— Sites contaminated by petroleum releases from above-ground storage tanks (ASTs). There has long been a risk-based cleanup program for petroleum underground storage tanks (USTs), but UST operators also have to meet extensive regulatory standards to prevent future pollution incidents. House Bill 765 gives AST owners the benefit of risk-based cleanup without regulatory standards to prevent future releases.

Eliminating or Streamlining State Permit Requirements for Environmental Infrastructure

♦ The state budget (S.L. 2015-241) includes a provision that changes landfill permitting, allowing issuance of a single “life of site” permit to cover construction and operation of a landfill that often has a 30-year lifespan. State rules had previously required review and approval of the entire landfill site before construction, but also required each 5 or 10-year phase of the landfill to have a construction and operation permit. Landfill construction will continue to be done in phases for economic and practical reasons, but the “life of site permit” eliminates state compliance review for each new phase of the landfill. The change also seems to close the door on new permit conditions for construction or operation of later landfill phases in response to scientific or technological developments. The budget provision does not set minimum landfill inspection requirements in place of the 5 and 10-year phased permit reviews.

♦ House Bill 765 creates a new private permitting option for septic systems and other small on-site wastewater systems now permitted by local health departments. The provision allows a property owner to hire an engineer and soil scientist to approve the location and design of the system. The local health department will receive information about the system, but the engineer’s approval substitutes for a permit. It isn’t clear that the laws allows the health department to prevent construction of an engineer-certified system based on inconsistency with state siting and design standards.

Skepticism about State Water Quality Rules. The 2015 General Assembly continued to focus on water quality rules and particularly those affecting real estate development activities — such as stormwater standards, wetland and stream mitigation requirements, and riparian buffer protection rules.

♦ The state budget includes a special provision further delaying implementation of the Jordan Lake water quality rules for another 3 years or one year beyond completion of the Solar Bee pilot project (whichever is later). See an earlier post here on the 2013 legislation creating the pilot project. The rules had been developed by the state’s Environmental Management Commission to address poor water quality caused by excess nutrients reaching the lake in wastewater discharges and runoff from agricultural lands and developed areas. Since adoption of the rules, the legislature has taken repeated steps over several legislative sessions to delay compliance deadlines in the rules. This session, the legislature also barred local government enforcement of stormwater ordinances adopted to comply with the Jordan Lake rules.

♦ House Bill 765 limits regulatory authority and mitigation requirements for isolated wetlands and intermittent streams. (Isolated wetlands are wetlands that fall outside federal permitting jurisdiction under the Clean Water Act because the wetlands lack a connection to “navigable waters”.) These provisions continue a several-year legislative trend toward limiting protections for wetlands and waters to the minimum required under federal law.

♦ Some proposals to significantly roll back other water quality rules (particularly stormwater and riparian buffer rules) failed this session, but became the subject of legislatively mandated studies. Among the studies required before the April 2016 legislative session: a study of coastal stormwater rules; a study on the feasibility of entirely exempting linear utility projects (such as pipelines) from environmental standards; and an Environmental Review Commission study of the state stormwater program.

Expanding Use of Erosion Control Structures on Ocean and Inlet Shorelines

♦ A provision in the budget bill (S.L. 2015-241) changes state rules on use of sandbag structures on the oceanfront. Rules adopted by the N.C. Coastal Resources Commission have limited use of protective sandbag structures to situations where a building faces an imminent erosion threat. (These sandbag structures are substantial in size and can have many of the same long-term impacts as permanent seawalls; the rules do not apply to sandbags used to prevent water from entering a building during a flood event.) The budget bill changes the standards to allow an oceanfront property owner to install a sandbag structure to align with an existing sandbag structure on adjacent property without showing an imminent erosion threat to a building on their own property.

♦ The budget bill also increases the number of terminal groin structures that can be permitted at the state’s ocean inlets from four to six and identifies New River Inlet for location of two of the additional structures. See an earlier post for more on earlier legislation allowing construction of terminal groins as a pilot project. The latest provision continues a several-year trend of reducing regulatory requirements for approval of terminal groin projects and increasing the number of projects that can be permitted.

N.C. Environmental Legislation 2015: The Bills

October 12, 2015. The legislative session finally ended in the wee hours of September 30 and changes to state environmental laws continued to be in play until the very end. Several of the provisions discussed below were enacted as part of House Bill 765 (the Regulatory Reform Act of 2015) which has not yet been signed by the Governor. H 765 contains too many pieces to completely catalog here; some have been very controversial. The other bills referenced in the post have already become law.

Not a complete list, but some of the most significant changes affecting the environment:

“AG-GAG” LEGISLATION. House Bill 405 allows an employer to take legal action against an employee who: a. takes photographs, makes recordings, or copies records; b. in a nonpublic area of the workplace; c. without permission; and d. uses those documents “against the interest of the employer”. H 405 allows the employer to sue the employee for monetary damages, including legal fees and a $5,000 per day penalty. Animal welfare activists have characterized these kinds of bills as “ag-gag” legislation intended to prevent documentation of animal cruelty at agricultural operations. House Bill 405, however, does not just affect agricultural workers or documentation of animal cruelty. The restrictions could also affect employee efforts to document ongoing environmental violations such as improper disposal of hazardous substances. See an earlier post for more on the implications of H 405. Note: Governor Pat McCrory vetoed H 405, but the General Assembly overrode the veto to allow the bill to become law.

FRACKING. One of the final bills of the session, Senate Bill 119, severely limits local regulation of hydraulic fracturing (“fracking”) operations. First, a little background. 2014 legislation prevented local governments from banning fracking altogether, but G.S. 113-415.1 allowed cities and counties to continue to apply ordinances applicable to all development in the jurisdiction — such as zoning and stormwater ordinances — to fracking operations. The state’s Mining and Energy Commission had authority to override a local ordinance that had the effect of precluding natural gas exploration and development.

Senate Bill 119 rewrites the 2014 law to invalidate all local ordinances that directly regulate fracking, preempting ordinances that go beyond or conflict with state standards for hydraulic fracturing operations. The bill also allows the oil and gas operator to challenge the application of more general local ordinances (such as zoning and stormwater ordinances) to fracking operations. These challenges go to the state Oil and Gas Commission (which has replaced the Mining and Energy Commission in regulating oil and gas operations). The Commission will decide “whether or to what extent to preempt the local ordinance to allow for the regulation of oil and gas exploration, development, and production activities”. The 2015 amendments clearly give the Oil and Gas Commission very broad power to preempt even general development ordinances. Preemption does not require a finding that the ordinance precludes natural gas exploration and development or conflicts with state standards. As long as the natural gas operator has received state/federal permits, the bill seems to direct the Commission to preempt application of general development ordinances to fracking operations if the Commission finds that fracking

…will not pose an unreasonable health or environmental risk to the surrounding locality and that the operator has taken or consented to take reasonable measures to avoid or manage foreseeable risks and to comply to the maximum feasible extent with applicable local ordinances.

STATE ENVIRONMENTAL POLICY ACT. For over 40 years, the State Environmental Policy Act (SEPA) has required environmental review of projects involving expenditure of public funds or use of public lands. An earlier post provides some background on SEPA. House Bill 795 limits environmental review under SEPA to projects that: 1. involve expenditures of $10 million or more in public funds; or 2. affect 10 acres or more of public lands and result in permanent changes to the landscape. The new thresholds mean many public projects with potentially significant impacts will be exempt from SEPA review. For projects that still require SEPA review, House Bill 795 narrows the scope of review to direct project impacts — excluding indirect impacts and the combined effects of similar projects. The final version of the bill made some exceptions to these changes as applied to interbasin transfers (the movement of water from one river basin to another for water supply). All interbasin transfer proposals will continue to require SEPA review without regard to the amount of public money or public land involved and the scope of review will include direct, indirect and cumulative impacts.

In an ironic twist, H 795 requires the Department of Environmental Quality (DEQ) to create a new environmental review process for water/wastewater infrastructure projects that receive loans from the Drinking Water Revolving Loan Fund or the Clean Water Revolving Loan Fund. Federal rules require those projects to go through an environmental review equivalent to review under the National Environmental Policy Act. Eliminating SEPA review for smaller revolving loan projects had the unintended effect of shifting the projects back into a lengthier federal environmental review process. In short, legislators liberated the projects from SEPA only to create a SEPA-like environmental review process to avoid the still worse fate of federal review. The entire debate over H 795 indicated a lot of confusion about how SEPA works and the likely impact of the bill. See another post for more on the misconceptions about SEPA that seemed to shape H 795.

LOCAL ENVIRONMENTAL ORDINANCES. The legislature also took aim at local environmental ordinances. Section 2 of House Bill 44 includes a somewhat opaque provision barring local governments from enforcing “voluntary” state environmental rules. The words “voluntary” and “rule” do not generally exist in the same space; a rule, by definition is not voluntary. The provision may really be intended to stop local implementation of stormwater ordinances adopted to comply with the Jordan Lake water quality rules. Section 2 applies not just to local implementation of the elusive “voluntary” state rule, but also to implementation of state rules that have been repealed; rules that have been adopted, but are not yet in effect; or rules that are “temporarily or permanently held in abeyance”. The Jordan Lake rules fall into the last category as a result of earlier legislation delaying state implementation of the rules.

The new provision affects both issuance of new development permits and enforcement of conditions on permits that have already been issued. Barring enforcement of conditions on previously issued permits has implications for both developers and local governments. The questions that immediately come to mind (using the Jordan Lake stormwater requirements as an example): Can development already permitted under the Jordan Lake stormwater standards move ahead without meeting any stormwater requirements? or Will the development require a modified permit to reflect stormwater standards that might have applied prior to local adoption of the Jordan Lake stormwater ordinances?

Section 13 of House Bill 44 limits local government authority to adopt riparian buffer requirements. The bill defines “riparian buffer” to mean any setback from surface waters — which could include a setback imposed for flood control. But much of the provision has been written to refer specifically to riparian buffers for the protection of water quality. Under the bill, a local government cannot adopt and enforce a riparian buffer ordinance for water quality protection that goes beyond requirements of state or federal law (or the conditions of a state or federal permit) unless the Environmental Management Commission approves the ordinance.

The bill also requires riparian buffers affecting residential lots to be shown on the subdivision plat. And an unusual provision addresses development projects that meet riparian buffer requirements by designating buffers as common area or open space:

When riparian buffers are placed outside of lots in portions of a subdivision that are designated as common areas or open space and neither the State nor its subdivisions holds any property interest in that riparian buffer area, the local government shall attribute to each lot abutting the riparian buffer area a proportionate share [of the buffer area] ….for purposes of development-related regulatory requirements based on property size, including, but not limited to, residential density and nonresidential intensity calculations and yields, tree conservation purposes, open space or conservation area requirements, setbacks, perimeter buffers, and lot area requirements.

Allocating buffers designated as common area to adjacent property owners for purposes of meeting development standards may create some complications for developers. Instead of allowing common area buffers to be used to offset density limits (or other requirements) for the development as a whole, the bill requires the benefits to go to individual lot owners. For example, a lot owner may be able to build on a greater percentage of the platted lot because a proportional share of the adjacent buffer would be counted toward the lot area. But whatever flexibility the lot owner gains will be lost to the developer who can no longer use the riparian buffer common areas to offset built-on area (for example) throughout the development as a whole.

ENVIRONMENTAL AUDIT PRIVILEGE/SELF-DISCLOSURE IMMUNITY. Two of the most important changes to state environmental law can be found in House Bill 765 (the Regulatory Reform Act of 2015). The bill creates a new privilege for information a company gathers on its own environmental violations, preventing use of the information in a civil case. (The privilege does not apply in a criminal prosecution.) The bill also grants immunity from civil penalties and fines for environmental violations voluntarily disclosed to state regulators. Supporters of the bill believe these protections will encourage companies to conduct environmental audits to identify and correct environmental violations more quickly.

The bill excludes certain types of information from the audit privilege (such as data required to be reported under state and federal law). Although the bill creates some exceptions to the audit privilege, most of the exceptions require state regulators to show the violator deceptively withheld information or failed to correct violations in a timely way — which may be difficult without access to the audit information itself. H 765 protects environmental audit information from use in both civil penalty cases and in actions to compel cleanup of environmental contamination.

Although less clear, the bill may also shield environmental audit information from a private plaintiff seeking compensation for personal injury or property damage caused by an environmental violation. The section of the bill creating the audit privilege says flatly that the audit information “is privileged and, therefore, immune from discovery and is not admissible as evidence in civil or administrative proceedings”. That section of the bill does not limit the privilege to environmental enforcement cases brought by the state. On the other hand, the section of the bill on revocation of the audit privilege has been written only to allow the “enforcement agency” to ask a court to revoke the audit privilege. The bill needs to be clarified in one direction or the other — either the privilege applies only to state enforcement actions or it applies to other civil actions and the opportunity to ask for revocation of the privilege should be broader.

The self-disclosure immunity provisions in H 765 grant immunity from civil penalties and fines based on voluntary disclosure of the violation. The bill sets conditions that must be met to make a self-disclosure “voluntary”. The final version of the bill also put limits on how often a person (or company) can claim self-disclosure immunity — no more than once every two years; twice in a five-year period; and three times in a ten-year period. The bill never defines “civil penalties and fines”, leaving some questions about the breadth of the immunity being granted. For example, the bill is silent on whether “civil penalties and fines” includes natural resource damages. (An example would be fish kill damages assessed as a result of a wastewater spill.)

For a more detailed comparison to past DENR and present U.S. Environmental Protection Agency enforcement policies on self-disclosed violations, see an earlier post. Note: EPA has long opposed statutory audit privilege out of concern that withholding information from regulators will hamper effective environmental enforcement.

RISK-BASED REMEDIATION. House Bill 765 also makes changes to state laws allowing the person responsible for environmental contamination (the “responsible party”) to do a partial cleanup of groundwater and soil contamination by relying on land-use controls to limit future exposure to contamination that remains on the site. The biggest changes:

♦ Sites where contamination has migrated onto adjacent properties would become eligible for risk-based cleanup. Existing law requires contamination that has migrated off the property where it originated to be remediated to “unrestricted use standards” — meaning levels safe for any possible land use without reliance on land use controls to prevent exposure to contamination. That effectively means remediation of contaminated groundwater to meet state groundwater standards. Risk-based cleanup of contamination on adjacent properties had not been allowed because of the additional complications of managing exposure to those contaminants on property the responsible party does not control. H 765 makes a risk-based cleanup on adjacent property possible with the property owner’s permission. The cleanup would have to meet the same remediation standards applied to the source site with an additional stipulation that the remediation plan cannot cause contaminant levels on the adjacent property to actually increase.

♦ The bill removes statute language that had limited risk-based remediation to contaminated sites reported to DENR before the risk-based remediation law went into effect in 2011, allowing lower-cost, risk-based remediation as an option for future pollution events.

♦ H 765 adds new categories to an existing statutory list of sites excluded from these particular risk-based remediation provisions. The new exclusions cover coal ash disposal sites and animal waste management systems.

♦ The bill creates a separate risk-based remediation program for above-ground petroleum storage tanks (ASTs). The AST program closely follows the model of the basic risk-based remediation statute, but imposes lower fees on the person responsible for cleanup.

WHAT DIDN’T HAPPEN AFTER ALL. Other high profile (and controversial) changes came and went as the legislation session wound down. Among the proposals discarded for now:

♦ Broad changes to riparian buffer rules. Proposals to significantly roll back riparian buffer requirements for nutrient sensitive waters fell away in negotiations between the House and Senate. Instead, House Bill 44 requires a study of the buffer rules, including ways to reduce regulatory burden on owners of property platted before their adoption. The legislature did enact a few limited changes to buffer requirements. House Bill 44 directs the Environmental Management Commission to allow case-by-case modification of the requirement to maintain woody vegetation in riparian buffers if the landowner shows that alternative measures will provide equal or greater water quality protection. House Bill 765 alters state stormwater rules to (among other things) allow more intensive development in riparian buffers along shellfish waters, outstanding resource waters and high quality waters if stormwater from the development is collected, treated and discharged through the vegetated buffer. The provision doesn’t put any upper limit on the amount of impervious surface allowed in the area previously known as a buffer, so it isn’t clear how much vegetated buffer will remain to discharge the stormwater through.

♦ Repeal of state fees supporting electronics recycling programs. The repeal proposed by the Senate turned into a legislative study of electronics recycling.

♦ Repeal or significant rollback of the state’s Renewable Energy Portfolio standard. Efforts to freeze the REPS standard at 6% of retail sales failed. (Although not before popping up in multiple bills.)

♦ LImits on the state Environmental Management Commission’s authority to adopt federal air quality standards. The proposal could have put North Carolina’s delegated Clean Air Act program at risk. In the end, the General Assembly settled for a provision prohibiting the state air quality program from enforcing federal standards for wood heaters. The provision doesn’t have any real effect since EPA has never delegated enforcement of the standard for wood heaters to the states.

The next session of the N.C. General Assembly convenes on April 25, 2016.

2015 Environmental Bills — Part II

April 17, 2015. A continuation of the previous post. Not a complete list, but hopefully most of the significant bills.

Amend Environmental Laws. In the category of you just can’t have too many — there are actually three “Amend Environmental Laws” bills this session (so far). As noted in the previous post, House Bill 157 (Amend Environmental Laws) has already been enacted into law and House Bill 593 (Amend Environmental Laws-2) amends laws allowing reimbursement for third-party damage claims as a result of leaking petroleum storage tanks. I missed House Bill 576 (Amend Environmental Laws-1); at the moment, the bill amends solid waste laws to allow the white goods tax (currently used by local governments to manage discarded refrigerators and other large appliances) to also be used for programs to manage discarded electronic devices. Amend Environmental Laws-1 may also pick up additional provisions as it moves through committee.

Contaminated Sites. House Bill 748 (Establish Contamination Source Removal/Disposal Bd) creates a new full-time (salaried) board to take over DENR’s responsibility for cleanup of contamination at pre-1983 landfills and other contaminated sites. The “pre-1983 landfills” are unlined waste disposal sites — in some cases, simply dumps –that stopped operating before 1983 to avoid having to comply with federal standards for waste disposal facilities. Many have groundwater contamination. A 2007 state law gave DENR responsibility for assessing and remediating the sites. Many of the landfills had been operated by local governments, so the 2007 legislation freed local governments of the potential environmental liability in return for a state solid waste disposal tax to fund cleanup. House Bill 748 expresses concern about the slow pace of remediation. It will be interesting to get more of the back story on the bill. The concern may be as much about unspent funds earmarked for the cleanup as it is about unremediated contamination; a pot of money always attracts attention. Reality is that contaminated sites require a lot of assessment work before actual cleanup can begin. Most state-funded remediation programs have had a slow start up before making significant outlays for remediation.

Also, a note that House Bill 639 (Risk-based Remediation Amends) proposes the same amendments to remediation laws that appear in the Senate regulatory reform bill. You can find a description of those provisions in an earlier post.

Fracking. House Bill 773 would strengthen requirements for public disclosure of chemicals used in hydraulic fracturing fluid.

Riparian Buffers. House Bill 760 is the House regulatory reform bill. The environmental provisions include significant changes to state laws allowing use of riparian buffers to protect water quality. It isn’t clear exactly how broad the bill’s restrictions on local government buffer ordinances are intended to be. The bill amends a law written to allow state delegation of riparian buffer programs under the nutrient sensitive waters (NSW) rules to local government, but some of the bill language could be interpreted to prohibit local adoption of riparian buffer ordinances for any other purpose:

Units of local government may impose restrictions upon the use of riparian areas as defined in 15A NCAC 02B.0202 only within river basins where riparian buffers are required by the State.

Local riparian buffer ordinances are sometimes adopted in response to other state/federal water quality mandates — such as Phase II stormwater permit conditions, water supply watershed regulations and endangered species management plans. So a local buffer ordinance may be needed to meet a water quality standard or permit condition, but not specifically required under state rules applicable to the entire river basin. Assuming the bill did not intend to prohibit use of riparian buffer ordinances to meet other state and federal water quality mandates, it would be helpful to make that clear.

In areas covered by the NSW buffer rules, the bill exempts residential lots platted before the buffer rules went into effect — even if the property could be developed for its intended purpose in compliance with the buffer requirement. (There are already exemptions and variances that cover previously platted lots that cannot be developed in full compliance with the buffer requirement.) The buffer rules are part of broader water quality strategies designed to meet federal Clean Water Act requirements. The Clean Water Act requires the state to adopt a Total Maximum Daily Load (TMDL) –in effect, a cap — for any pollutant causing impaired water quality. A number of state water bodies, including the Neuse River and Falls Lake, have impaired water quality due to excess nutrients — particularly nitrogen and phosphorus. The nutrient management rules provide the regulatory underpinning for TMDLs that set nitrogen and phosphorus reduction targets for those rivers and lakes. The rules include riparian buffer requirements as a critical tool in reducing the amount of nitrogen and phosphorus that runs off the land into surface waters. One question may be whether such a broad exemption from the buffer rules will allow the state to meet the federally-approved TMDLs.

The bill would also require that riparian buffers on shorelines bordered by coastal wetlands or marshland be measured from the waterward edge of the wetland. The term “coastal wetland” includes both wetlands that regularly flood on the tides and wetlands that flood on wind tides and seasonal high tides. Under the provision, the “buffer” would often consist of wetlands with a frequent, direct connection to coastal waters; in some cases, the buffer would effectively be in the water. The change would seem to defeat the purpose of having a buffer to allow polluted runoff to infiltrate through the soil rather than go directly into the water.

Stormwater. On the face of it, House Bill 141 (Stormwater/Flood control) authorizes cities to use existing stormwater management programs to address flood risk by purchasing properties at high risk of flooding, elevating existing structures, and retrofitting structures to reduce flood risk. The bill seems intended to allow cities in more populated counties to expand the purpose of existing stormwater programs to include flood management as well as water quality protection. (The bill would limit the new authority to cities in a county with a population of 910,000 or greater and at least one city with a population of 500,000 or greater.) One possible pitfall — the bill could be interpreted as limiting the authority of other North Carolina towns and cities to take similar actions through flood hazard mitigation projects. For example, the small coastal town of Belhaven has done a major flood hazard mitigation project to elevate structures in areas repeatedly flooded due to hurricanes. House Bill 141 may need to be clarified to avoid undermining cities and towns’ existing authority to reduce flood hazards.

N.C. General Assembly: 2015 Environmental Bills

April 15, 2015. The final bill introduction deadline fell yesterday for bills that don’t affect finance or appropriations, so it is a good time to look at the environmental bills introduced and awaiting action. The General Assembly can also amend environmental laws in the budget bill or by completely rewriting a bill on an entirely different subject, but with that warning in mind:

House Bill 795 SEPA Reform would greatly limit the number of projects requiring an environmental impact statement (EIS) under the state’s Environmental Policy Act (SEPA). Adopted in 1971, SEPA requires an EIS for projects that potentially have a significant environmental impact, need a state approval (such as a permit), and involve either the use of public funds or use of public lands. Unlike its federal counterpart (the National Environmental Policy Act or “NEPA”), the state law has never applied to privately funded development projects no matter how significant the environmental impact. To require an EIS under the state law, there must be public investment ( which could mean either state or local government funding) or use of public land. Typical projects requiring an EIS in the past would be a new wastewater treatment plant; a county landfill; a major development project on state-owned submerged lands; or activities on state parkland.

House Bill 795 proposes to limit SEPA review to projects involving $20 million or more in public funding or land-disturbing activity affecting 20 acres or more of public land. It is difficult to know what percentage of projects required to do an EIS in the past would avoid SEPA review under the amended law, but it is reasonable to assume that many public projects fall below the $20 million threshold. Controversial proposals for use of state parks and tidelands could also avoid SEPA review because — whatever the other impacts of the project — an EIS would only be required for land-disturbing activity that permanently alters the landscape and affects 20 acres or more. For projects that exceed the new size and funding thresholds, House Bill 795 provides additional SEPA exemptions for projects receiving certain types of state approvals. Some of the approvals listed in the bill, such as a certificate of convenience and necessity for a public utility infrastructure project, do not involve any environmental review. (That particular exemption also doesn’t seem to serve a purpose; the “public utilities” that need a certificate of convenience and necessity are by definition not owned or operated by a governmental entity and don’t involve public funds.)

For projects that would still require an EIS under the amended law, the bill also limits the scope of the EIS. Under the bill, the EIS would only describe direct project impacts — eliminating consideration of indirect and cumulative impacts.

Projects exempted from the EIS requirement would still need any necessary environmental permits, but permit reviews tend to be more narrow than an EIS. The EIS looks beyond one set of permitting standards to evaluate the environmental impacts of the project as a whole — which can include consideration of noise, traffic, endangered species, historic sites, and effects on minority and low income communities as well as natural resource impacts. Projects that require a federal permit could still trigger NEPA review; what the state may lose is an opportunity for the same comprehensive review and public input on projects that do not require a federal permit — which may include some landfill projects and inter-basin transfers.

THE OMNIBUS BILLS (AMEND ENVIRONMENTAL LAWS AND REGULATORY REFORM)

In every recent legislative session, the General Assembly has enacted an Amend Environmental Laws bill and a Regulatory Reform bill. Both bills become vehicles for multiple changes to environmental laws. See an earlier post for a description of Senate Bill 453, the Regulatory Reform Act of 2015.

At the moment, House Bill 593 (Amend Environmental Laws-2) only contains provisions amending state law on reimbursement of third-party damage claims by the state’s petroleum underground storage tank (UST) trust funds. (The UST trust funds can reimburse UST owners for up to $1,000,000 in third-party claims for property damage or personal injury resulting from a petroleum release.) The amendments require the UST owner to provide specific documentation of the third party damage claim; add definitions of “third party”, “bodily injury” and “property damage”; and provide more direction on how to calculate compensation for property damage.

It is the nature of both the Regulatory Reform and Amend Environmental Laws bill to pick up baggage as the session goes along. Expect new versions of each bill as the bills move through committee.

Note: This bill is Amend Environmental Laws-2 because House Bill 157 (Amend Environmental Laws) has already been enacted into law as Session Law 2015-1. H 157 generally made uncontroversial and technical changes to solid waste laws, the Coal Ash Management Act and other environmental laws. The one provision in H 157 that created some controversy amended a state law requiring the Environmental Management Commission to adopt air toxics rules for hydraulic fracturing sites.The bill replaced the requirement with language authorizing the EMC to adopt air toxics standards for fracking sites if necessary to protect public health, safety, welfare and the environment.

AIR QUALITY

Senate Bill 303 Protect Safety/Wellbeing of N.C. Citizens prohibits state enforcement of any federal standards for wood heaters used for home heating. The bill is interesting as an example of state legislation intended to nullify a federal standard. In February, EPA adopted updated performance standards for wood heaters. Federal air quality rules have included standards for wood heaters since 1988; the new rule updates the standards to reflect changes in technology and to regulate wood-burning boilers and wood-burning furnaces as well as wood stoves. The revised standards only apply to newly manufactured wood heaters, phase in over several years and do not affect fireplaces (at all) or wood heaters already in use. An EPA fact sheet provides an overview of the rule. Generally, N.C.’s delegated authority to implement Clean Air Act programs requires the state to adopt and enforce federal new source performance standards, but EPA has not delegated enforcement of the wood heater rule to the states.

House Bill 169 Limit Motor Vehicle Inspections eliminates motor vehicle emissions inspections in six counties (Burke, Granville, Haywood, Rutherford, Surry and Wilkes). Forty-eight of N.C.’s 100 counties require annual emissions inspections as part of the state’s plan to meet the federal ozone standard under the Clean Air Act. Recently, the Department of Environment and Natural Resources (DENR) issued a report concluding that emissions inspections could be eliminated in as many as 28-31 counties without violating either the current ozone standard or the stricter ozone standard EPA will finalize by the end of the year. Given the DENR report, expect the number of counties the bill removes from the emission inspection program to increase. Since the emissions inspection program has been used to meet a federal air quality standard, any change by the General Assembly must have EPA approval.

House Bill 172 Fracking – Protecting the Public requires the Environmental Management Commission to adopt rules establishing best management practices and leak detection and repair standards to minimize air emissions from natural gas operations. The bill approaches the related problems of wasted natural gas and air pollution by focusing on ways to minimize unintended releases resulting from leaky equipment or inefficient practices during exploration, development, production, processing and compression of the natural gas.

House Bill 571 Implementation of Carbon Dioxide Regulations requires DENR to begin work on a plan to comply with new federal regulations reducing carbon dioxide (CO2) emissions from power plants. EPA’s Clean Power Plan rule sets a CO2 reduction goal for each state, but states have flexibility in the mix of power plant emission reductions, renewable energy generation, and energy efficiency measures used to meet the goal. Find more background on the federal rule here. Each state must submit a plan for meeting its CO2 reduction goal by June 2016, although EPA can extend the deadline if the plan needs legislative approval or relies on a multi-state strategy. DENR does not appear to have any effort underway to develop a plan. Instead, DENR has both questioned the legal basis for the federal rule and urged EPA to delay implementation until lawsuits challenging the rule have been resolved. House Bill 571 appears to be intended to push DENR to begin work on a CO2 reduction plan and do it in a way that provides for input from both stakeholders and the public.

COAL ASH

House Bill 448 Extend Coal Ash Structural Fill Moratorium The Coal Ash Management Act of 2014 put new, stricter standards in place for large projects using coal ash as structural fill . ( “Large” means > 8,000 tons per acre or > 80,000 tons total). But the law made few change to existing standards for smaller structural fill projects. Instead, the 2014 bill put a moratorium on permitting smaller structural fill projects until August 1, 2015 to allow time for DENR and the Environmental Management Commission to study the standards for those projects. The law required a report back to the General Assembly by January 15, 2015. The EMC discussed an interim report in January, but the interim report didn’t address the adequacy of existing structural fill standards for small projects. The interim report indicated that a final report would be released in April; it doesn’t appear that a final report has been issued yet. In the absence of a report on the adequacy of the existing structural fill standards and recommendations, House Bill 448 would extend the moratorium on permitting smaller projects until August 1, 2016.

COASTAL ISSUES

House Bill 151 Property Insurance Ratemaking Reform is not strictly speaking an environmental bill, but deals with use of models projecting catastrophic losses as a result of a hurricane or other natural disaster in setting property insurance rates. The bill would continue to allow use of models, but would require the results of more than one model to support a property insurance rate change. The bill is interesting given the longstanding tension between the economic benefits of coastal development and the externalized costs of building in natural hazard areas.

House Bill 302 Strengthen Oyster Industry requires the Division of Marine Fisheries to study the state’s shellfish lease and franchise programs and make recommendations for changes necessary to increase shellfish aquaculture on the North Carolina coast. The bill also expands on existing law requiring DMF to plan and construct oyster sanctuaries in the Albemarle and Pamlico Sounds; sets new civil penalties for interference with oyster cultivation; and makes other changes designed to increase oyster production. State funding for creation of oyster habitat has seen a steep decline in recent years; some additional resources will likely be needed to make the oyster sanctuary program a reality.

House Bill 346 Counties/Public Trust Areas extends to counties the authority to enforce local ordinances in public trust areas and particularly on the state’s ocean beaches. Municipalities already have this authority.

CONTAMINATED SITES

Senate Bill 301 DOT/Purchase of Contaminated Land would exempt the N.C. Department of Transportation from a law enacted in 2013 that effectively prohibited state agencies from purchasing property with environmental contamination. As noted in a earlier post about the 2013 law, the General Assembly may not have realized the far-reaching effects. Environmental contamination is widespread and state policies allowing polluters to do limited, “risk-based” remediation of groundwater contamination mean the contamination will persist well into the future. The 2013 law exempted the UNC system campuses from the restriction; NCDOT has asked for the same exemption — presumably because the law makes acquisition of property for highway construction more difficult.

INFRASTRUCTURE

Senate Bill 397 Open and Fair Competition Water and Wastewater would prevent a state or local government from “preferring” one type of piping material for use in a water, sewer or stormwater infrastructure project receiving state funds. I don’t know the story behind the bill, but usually legislation attempting to change a state agency’s policy about use of a particular product or system has been introduced in response to complaints by a vendor.

RENEWABLE ENERGY

The General Assembly’s internal debate over renewable energy development continues. In 2013, the Republican majority in the General Assembly split over attempts to repeal both the Renewable Energy Portfolio Standard (REPS) and the state’s tax credit for investment in renewable energy projects. In the end, a bipartisan majority declined to repeal the incentives for renewable energy development — in large part, because renewable energy had become one of the bright spots in the state’s economic recovery. See an earlier post on the end of the 2013 fight over the REPS.

This session, one focus is on the scheduled sunset of the renewable energy tax credit on January 1, 2016. There are bills in both the House and the Senate to extend the tax credit; House Bill 454 extends the tax credit until January 1, 2021 and Senate Bill 329 extends the tax credit to January 1, 2020. Opponents of the tax credit have introduced a bill, Senate Bill 372, that essentially retains the existing January 1, 2016 sunset, but provides a “safe harbor” for investors who have made substantial outlays on projects not in service by the sunset date. Those taxpayers would have an additional year (until January 1, 2017) to claim the tax credit.

UPDATE: House Bill 681 would sunset the REPS requirement early, ending in 2018 with a standard requiring 6% of retail sales of electricity to be generated from renewable sources. The current law requires that electric public utilities generate 12.5% of retail sales from renewable energy source by 2021 and thereafter.

2014 Shale Gas Legislation

Note: The original post has been updated to reflect the fact that a new bill draft presented in committee today added a section authorizing the issuance of permits for hydraulic fracturing effective July 1, 2015.

May 20, 2014: In what has become an annual rite of spring, the N.C. Senate has introduced another bill on oil and gas exploration and development. Some highlights of Senate Bill 786 (Energy Modernization Act):

Fracking Rules. The bill extends the deadline for adopting rules on hydraulic fracturing from October 1, 2014 to January 1, 2015. The extension gives the Mining and Energy Commission (MEC) more time to consider public comment on draft rules and finalize the standards. The bill also exempts the fracking rules from Administrative Procedure Act provisions that would otherwise prevent the rules from going into effect until mid-June 2016. The changes would allow the rules to become effective in 2015 (assuming the legislature approves the rules) .

Allow Issuance of Permits for Hydraulic Fracturing Beginning July 1, 2015. A new version of the bill presented in committee today added a section authorizing the Dept. of Environment and Natural Resources to begin issuing permits for natural gas production using horizontal drilling and hydraulic fracturing on July 1, 2015. Shale gas legislation enacted in previous legislative sessions had prohibited issuance of permits until the state had rules in place to regulate hydraulic fracturing. This provision authorizes DENR to begin issuing permits on a date certain without regard to the status of the proposed rules.

Trade Secrets. The Senate wades back into the controversial issue of “trade secrets”. In 2013, oil and gas industry giant Halliburton lobbied both the Mining and Energy Commission (MEC) and the legislature to allow the industry to withhold “trade secret” information about chemicals used in hydraulic fracturing from state regulators unless needed to respond to an emergency. Earlier posts describe the previous (failed) attempts to legislatively resolve the tension between protecting trade secrets and making timely information available to doctors and first responders in an emergency.

Senate Bill 786 would require oil and gas companies to disclose all of the chemicals used in hydraulic fracturing fluid to DENR, but protect trade secret information from public disclosure. The trade secret information would be maintained by the State Geologist (a position in DENR) and protected from public disclosure under confidentiality provisions in the N.C. Public Records Act. The bill would allow the State Geologist to provide the information to emergency or medical personnel if needed to respond to an emergency. Up to this point, the bill follows a common approach to balancing protection of trade secret information with emergency response needs.

The new controversy concerns penalties in the bill for unauthorized disclosure of oil and gas industry trade secrets. First, the bill allows the owner of the trade secret to require a doctor or fire chief receiving the information for emergency response purposes to enter into a confidentiality agreement that may set out remedies for breach of the agreement including “stipulation of a reasonable pre-estimate of likely damages”. Without any further explanation of how the stipulation would be used, it sounds like a stipulated penalty that could make it unnecessary for the company to establish actual economic damages in court.

The bill also makes unauthorized disclosure of an oil and gas industry trade secret by any person a Class I felony if the person knew the information was a trade secret. (Class I felonies carry a presumptive sentence of 4-6 months — but you may be eligible for community service or supervised probation.) By contrast, current state law protecting trade secrets does not impose a criminal penalty for unauthorized disclosure, unauthorized acquisition or even unauthorized use of trade secret information. G.S. 66-154 provides civil remedies and allows recovery only of “actual damages…measured by the economic loss or the unjust enrichment caused by misappropriation of a trade secret”. Aside from questions about the reasonableness of the penalties proposed in Senate Bill 786, it is clear that the bill creates much more severe penalties for disclosure of oil and gas industry trade secrets than state law imposes for unauthorized disclosure or use of other types of trade secrets.

Well Drilling Fees. The bill reduces the well drilling fee from $3,000 per well to $3,000 for the first well and $1500 for additional wells on the same well pad.

Notice of Oil and Gas Activity. Section 11 of Senate Bill 786 adds a new requirement that the company holding lease rights for oil and gas must provide 30 days notice to the owner of the surface property before starting exploration, development and production activity.

Pre-Drill Water Testing/Presumption of Liability for Contamination. Section 12 of the bill would amend the law requiring pre-drilling tests of water supply sources located within 5,000 feet of the proposed wellhead by limiting the testing to water supplies within a one-half mile (2,640-foot) radius around the proposed wellhead. A corresponding change to G.S. 113-421 would reduce the area where a presumption of oil/gas operator liability for water supply contamination would apply — from the current 5,000 feet to the same 1/2 mile radius around the wellhead.

Restrictions on Local Ordinances Prohibiting Oil and Gas Activity. Section 13 of the bill repeals any past local acts or resolutions of the General Assembly prohibiting well siting, horizontal drilling or hydraulic fracturing in specific localities. The bill then preempts local ordinances that have the effect of prohibiting oil and gas exploration and production, horizontal drilling and hydraulic fracturing. An oil/gas operator could challenge a local ordinance as preempted under the law by filing a petition with the Mining and Energy Commission. The bill creates a presumption that general development conditions in local zoning and land use ordinances (such as buffers, setbacks and stormwater requirements) will continue to be valid unless the MEC finds otherwise. To preempt a local ordinance, the MEC would have to find that: 1. The ordinance would prohibit oil and gas activities; 2. The oil/gas operator has received all necessary state and federal approvals (unless the only reason for denial was inconsistency with the local ordinance); 3. Local residents and elected officials had an adequate opportunity to participate in the permitting process; and 4. The oil and gas activities will not pose “an unreasonable health or environmental risk” to the surrounding locality, the operator will take reasonable measures to reduce foreseeable risks, and the operator will comply with local ordinances to the maximum extent feasible. This section of the bill seems to be modeled on a similar preemption law concerning the siting of hazardous waste facilities.

Ban on subsurface Injection of drilling wastes. The N.C. Senate has previously proposed to amend an existing state law prohibiting underground injection of waste to allow subsurface disposal of oil and gas drilling waste. The earlier proposals ran into strong opposition from members of the Mining and Energy Commission as well as the public. In Section 14, Senate Bill 786 abandons the effort to authorize subsurface disposal of drilling waste and instead reinforces the existing prohibition on underground injection of waste found in G.S. 143-214.2.

Compliance review for oil and gas permit applicants. Section 14 also creates an environmental compliance review for oil and gas permit applicants. The compliance review will cover at least the previous five years. For business entities, the compliance review will extend to any parent company, subsidiary, or other affiliated entity; a partner, officer, director, member or managing director; and any other person with a direct or indirect interest in the company (other than a minority shareholder in a publicly traded corporation). The bill allows DENR to deny an oil and gas permit based on a past history of significant or repeated violation of statutes, rules, orders or permit conditions.

Trespass. The bill protects workers collecting seismic or other geophysical data from trespass claims as long as they do not physically enter private land without consent. Seismic surveys use sound waves to characterize subsurface geology and identify potential oil and gas reserves. The survey team generates sound waves on one side of the target area (by setting off small explosive charges or using trucks specially outfitted to create vibrations); geophones record the waves on the other side of the target. The intent of the bill is to prevent trespass claims based on movement of the seismic waves under surface properties the workers do not physically enter. The company conducting the seismic testing would still be liable for any physical or property damage caused to the surface property.

Severance Tax. Section 16 of the bill creates a new severance tax for oil and gas. Others with expertise in severance taxes and oil/gas industry revenues will have to provide the in-depth analysis. One quick observation: The bill appears to prohibit cities and counties from imposing any taxes on the oil and gas industry other than property taxes.

Miscellaneous. In a provision unrelated to oil and gas, the bill caps city and county property tax revenue at an 8% increase over revenue received the previous year.

The bill requires a number of new studies, including a feasibility study for a liquified natural gas export terminal on the N.C. coast.

Delayed Discussion of Fracking Chemical Disclosure Rule

October 18, 2013. According to staff in the Department of Environment and Natural Resources, the October 25, 2013 meeting of the Protection of Trade Secrets and Proprietary Information Study Group has been cancelled. The study group will next meet in November.

As mentioned in an earlier post, the study group has been working to resolve the controversy over a draft Mining and Energy Commission (MEC) rule on disclosure of chemicals used in hydraulic fracturing fluid. Last spring, the MEC’s Environmental Standards Committee approved a draft rule requiring drilling operators to disclose all chemicals used in hydraulic fracturing fluid to DENR, but limiting the amount of information provided to the public on trade secret chemicals. The controversy arose because oil and gas industry representatives objected to routine disclosure of trade secret information even to state regulators. The industry preferred alternative language allowing the drilling operator to withhold specific information on trade secret chemicals unless DENR needed the information to respond to a threat to the environment or public health.

You can find more about the controversy over the disclosure rule and existing state law on protection of trade secret information here and here.

N.C. Fracking Disclosure Rule: Update

October 8, 2013. The state’s Mining and Energy Commission (MEC) has still not moved forward with a rule requiring disclosure of chemicals used in hydraulic fracturing fluid, although the commission’s Environmental Standards Committee approved a draft rule in the spring. The draft rule requires a drilling company to give the Department of Environment and Natural Resources (DENR) specific information identifying all chemicals used to hydraulically fracture a natural gas well. The draft rule also requires public disclosure of fracking chemicals, but allows information about any chemical legitimately designated as a trade secret to be kept confidential and identified to the public only by chemical “family”. (The draft rule allows more specific information to be requested by a health professional or by emergency response personnel to diagnose and treat a health condition or respond to an emergency.)

A recap of the controversy around the draft rule. Following committee approval of the draft rule, the Mining and Energy Commission delayed consideration of the rule because of oil and gas industry opposition. Industry representatives objected to including trade secret chemicals in the disclosure to DENR staff. The industry preferred an earlier rule draft that allowed drilling companies to withhold information on trade secret chemicals from state regulators as well as the public unless DENR needed the information to respond to environmental damage or a specific health concern. See an earlier post for more on the MEC decision to delay consideration of the disclosure rule. The important thing to remember — the conflict over the draft rule has to do with providing complete information on hydraulic fracturing chemicals to state environmental regulators. Every draft of the chemical disclosure rule has allowed drilling companies to withhold trade secret information from the public.

The oil and gas industry’s objection to routine disclosure of trade secret chemicals to DENR staff comes in part out of concern about the department’s ability to keep the information confidential. The N.C. Public Records Act generally requires state agencies to provide agency records to any citizen on request; information submitted to DENR by a drilling company would be considered a “public record” under the law. The Public Records Act, however, has existing provisions to protect the confidentiality of trade secrets and other DENR programs have successfully used those provisions to withhold trade secret information from the public. You can find an earlier post about the N.C. Public Records Act protection for trade secrets here.

Legislative intervention. During the legislative session, the N.C. Senate moved to resolve the chemical disclosure issue in favor of the oil and gas industry position. A Senate committee approved language allowing drilling companies to withhold information on a trade secret chemical used in hydraulic fracturing fluid from DENR unless the Secretary of Environment and Natural Resources requested the information to “respond to a situation that endangers public health or the environment”. Senators added the language to House Bill 94 (Amend Environmental Laws), which had already passed the House and was moving through the Senate. In response to a backlash from both the public and the Mining and Energy Commission itself, the Senate amended the bill to allow DENR staff to review — but not receive — information on trade secret chemicals used in hydraulic fracturing. You can find earlier posts on the two different Senate proposals here and here. In the end, House Bill 94 died and the General Assembly did not adopt any legislation on disclosure of hydraulic fracturing chemicals.

Back at the Mining and Energy Commission. When the MEC delayed consideration of the draft chemical disclosure rule, the commission created a new Protection of Trade Secrets and Proprietary Information Study Group to look into the issues around disclosure of trade secret information to DENR. Legislative activity overtook the study group’s work for awhile, but failure of the Senate legislation puts the issue back in the hands of the MEC without any particular legislative direction. The MEC will need to resolve on its own the tension between the oil and gas industry’s desire to withhold trade secret information from environmental regulators and DENR’s need for information that may be critical to understanding the environmental impacts of hydraulic fracturing. The next meeting of the study group has been scheduled for October 25, 2013 following the MEC meeting.

Mineral Rights May Include Authority to Build Waste Disposal Pits On Site

September 30, 2013. The federal appeals court for the Fourth Circuit issued a decision on September 4, 2013 concluding that West Virginia common law gives the owner of mineral rights authority to build pits for disposal of drilling waste without permission from the property owner. The decision in Whiteman v. Chesapeake Appalachia, L.L.C., 2013 U.S. App. LEXIS 18359, 43 ELR 20205, 2013 WL 4734969 (4th Cir. W. Va. 2013), may have implications beyond West Virginia since the Fourth Circuit Court of Appeals also decides cases from North Carolina and other mid-Atlantic states.

The Facts. Chesapeake Appalachia, L.L.C. owns the mineral rights under 101 acres of farmland owned by the Whitemans. Ownership of the property comes through two deeds. When Mr. Ellis O. Miller sold the property that is now the Whiteman farm, each deed retained “the oil and gas within and underlying the above-described parcels as well as all of the coal not heretofore conveyed, and all other minerals within and underlying the above described property, with the necessary rights and privileges appertaining thereto.” The deeds did not mention retaining any uses of the surface property. Chesapeake Appalachia ultimately acquired the mineral rights retained by Mr. Miller.

Chesapeake has three natural gas wells on 10 acres of the Whiteman property. When Chesapeake applied for state drilling permits, the company indicated that drilling waste (including drill water, flow back, and formation cuttings) would be disposed of by land application. After drilling on the Whiteman property, Chesapeake put the drill cuttings into open pits located near the wellheads. At the end of the drilling process, Chesapeake removed the plastic liners from the waste pits, mixed the drilling waste with clean dirt and compacted and covered the pits.

The Whiteman Lawsuit. The Whitemans sued to force Chesapeake to remove the waste pits, arguing that Chesapeake’s ownership of the mineral rights did not give the company authority to put waste disposal pits on the property. Although the Whitemans admitted that the pits had not caused a significant financial hardship, the family had concerns about possible future liability associated with the waste. The lawsuit originally included a number of claims under West Virginia common law; the only claim that survived to reach the Fourth Circuit Court of Appeals alleged that Chesapeake trespassed by building the waste pits without the Whitemans’ permission.

The Legal Issue. Common law trespass means entering another person’s property without lawful authority. Leaving a structure (such as a waste pit) on the property without lawful authority would be considered a continuing trespass. Under West Virginia common law, the owner of mineral rights only enters the property unlawfully if, under a “reasonable necessity” standard, the mineral owner goes beyond the mineral rights that have been granted and intrudes on the rights of the surface owner. So the Fourth Circuit Court of Appeals described the legal issue in the Whiteman case as: “whether Chesapeake’s permanent disposal of drill waste upon the Whitemans’ surface property is “reasonably necessary” for the extraction of minerals.” If creation of the waste disposal pits was reasonably necessary for extraction of the natural gas, Chesapeake did not need the Whitemans’ permission.

The Decision. The Whitemans argued that building a waste pit on site was not reasonably necessary to extract natural gas because Chesapeake had other waste disposal alternatives. The Fourth Circuit admits that Chesapeake could have used a “closed loop” waste system and offsite disposal of the solid waste instead of open pit disposal. (A closed loop system keeps all liquid drilling waste in pipes or tanks to avoid contact with the ground.) Although the technique was relatively new when the Whiteman wells were drilled in 2007 and 2009, Chesapeake had begun using closed loop systems in Texas and Oklahoma as early as 2004-2005. But the Fourth Circuit concluded that open pit waste disposal could still be “reasonably necessary” to extract natural gas on the Whiteman property for two reasons: 1. open pit waste disposal was the most common waste disposal technique used in West Virginia at the time Chesapeake drilled the Whiteman wells; and 2. state environmental standards allowed use of open pit disposal. (This part of the court’s analysis led to the kind of statement only a lawyer could love — “reasonably necessary” does not mean “necessary”.) As a result, the court concluded that Chesapeake’s ownership of the mineral rights gave the company authority to dispose of drilling waste on the Whiteman property even though the original reservation of mineral rights made no mention of that use of the surface property.

The Whiteman decision has to be troubling for surface owners. Many cases have recognized that ownership of mineral rights includes authority to access the property to extract the minerals (by putting in roads, for example). The Whiteman decision suggests that ownership of mineral rights also gives a drilling company authority to use the surface property for any number of auxiliary processes associated with oil and gas extraction. Such an expansive interpretation of mineral rights virtually eliminates the surface owner’s power to negotiate with the drilling company over surface impacts.

Another concern is that the Fourth Circuit decision relied on common use of open waste pits in West Virginia and consistency with state environmental standards to recognize a right to build waste pits without the surface owner’s permission. The court does not make a particularly strong case for allowing a drilling operator to impose a use on the surface owner simply because the practice is common and has not yet been prohibited by the state. Given the pressures on environmental programs — particularly in states that rely on revenue from oil and gas– state acquiescence in a practice should not be sufficient reason to force it on the surface owner.

Implications for North Carolina. North Carolina common law on trespass is very similar to West Virginia law, but North Carolina has few court decisions on the scope of mineral rights. (With no oil, gas and coal mining to speak of, there have been few controversies between surface owners and the owners of mineral estates.) But in 2012, the North Carolina General Assembly provided some additional protection to surface owners by statute. G.S. 113-423.1 requires an oil or gas operator to accommodate the surface owner by minimizing intrusion on and damage to the surface. That means “selecting alternative locations for wells, roads, pipelines, or production facilities, or employing alternative means of operation that prevent, reduce, or mitigate the impacts of the oil and gas operations on the surface, where such alternatives are technologically sound, economically practicable, and reasonably available to the operator.”

But the N.C. law goes on to say that it should not be interpreted to “prevent an operator from entering upon and using that amount of the surface as is reasonable and necessary to explore for, develop, and produce oil and gas…” [Emphasis added]. We now know what the Fourth Circuit Court of Appeals believes “reasonably necessary” means in the context of a drilling operator’s construction of a waste disposal pit on a West Virginia drilling site. The question is whether the first half of the new North Carolina law –requiring minimization of surface impacts — may lead to a different decision about what will be considered “reasonable and necessary” here.

Legislative Wrap-Up II: Energy

August 2, 2013: Highlights of energy legislation.

Shale Gas/Hydraulic Fracturing. This is one area where the big news may be the legislative proposals that failed. The Senate adopted two controversial shale gas provisions, but neither passed the House. Legislation adopted in 2012 effectively put a moratorium on hydraulic fracturing by prohibiting issuance of permits until the Mining and Energy Commission adopted rules and the General Assembly acted to specifically allow permitting. The N.C. Senate had always wanted to set a specific date for permitting to begin and tried again this year in Senate Bill 76 (the Domestic Energy Jobs Act). The version of the bill that came out of the Senate repealed the 2012 language and authorized the Department of Environment and Natural Resources to begin issuing permits for hydraulic fracturing on March 1, 2015 without any further legislative action. The House had concerns about the change. After back and forth on alternative language and intensive lobbying in the last days of the legislative session, the final bill kept the permitting moratorium in place.

The other controversial Senate proposal had to do with disclosure of information on chemicals used in hydraulic fracturing fluid. The Senate intervened on behalf of the oil and gas industry when energy giant Halliburton expressed concern about a chemical disclosure rule drafted by the Mining and Energy Commission. The commission’s draft rule requires drilling companies to disclose all chemicals used in hydraulic fracturing fluid to the Department of Environment and Natural Resources, but allows DENR to keep any trade secret information confidential. You can find more about the chemical disclosure rule and trade secret protection in this post. In an effort to make the rule more acceptable to the oil and gas industry, the Senate adopted language directing the Mining and Energy Commission to revise the rule to allow drilling operators to withhold information on trade secret chemicals unless DENR needed the information to respond to environmental damage or a specific health problem. In the face of significant opposition, the Senate modified the language to allow state regulators to review information on trade secret chemicals at the same time the drilling company disclosed other chemicals used in the fracturing fluid. The revised language did not allow DENR to actually receive information on trade secret chemicals — the department could only review information that remained in the drilling company’s possession. In the final days of the legislative session, the bill containing the Senate language died and the restriction on chemical disclosure died with it. Failure of the legislation allows the Mining and Energy Commission to move ahead with the original draft rule on chemical disclosure.

The final version of Senate Bill 76 signed by the Governor included a number of less controversial changes related to shale gas and hydraulic fracturing:

– Rules adopted by the Mining and Energy Commission are exempted from the requirement for a fiscal analysis. State law generally requires every proposed rule that has an economic impact of $1 million or more (based on the total impact on everyone affected by the rule) to be accompanied by a fiscal analysis.

– Minor changes in the makeup of the MIning and Energy Commission.

– Three new studies to look at: 1. creation of a coordinated permitting process that will allow issuance of a single environmental permit for all oil and gas exploration and production activities; 2. the appropriate level of severance tax for oil and gas resources; and 3. implementation of the 2012 registration requirement for people involved in purchase or lease of property for oil and gas exploration and development.

– Technical amendments to an existing law allowing the state to limit the total amount of oil and gas produced in the state (G.S. 113-394).

– New criteria for setting the amount of the reclamation bond required for oil and gas activities and a process for either the drilling company or the property owner to appeal the bond amount.

LEED Certification. House Bill 628 (Protect/Promote Locally Sourced Building Materials) was signed into law after a major rewrite in the Senate. The original House bill would have prohibited state building projects from seeking Leadership in Energy and Environmental Design (LEED) certification under U.S. Green Building Council standards because few North Carolina forestry operations meet standards necessary to earn LEED credit for sustainable wood products. You can find more explanation of the controversy over sustainable forest practices and the LEED standard here. The Senate rewrote the bill to allow construction of state projects under “green” building standards that give credit for use of local building materials — which LEED standards do. The final bill also calls for study of the energy efficiency standards for state buildings that were adopted in 2007.

Renewable Energy. Legislation to repeal the state’s Renewable Energy Portolio Standard died. With the support of a number of conservative political organizations — including Americans for Prosperity — House Bill 298 and Senate Bill 365 (both titled the Affordable and Reliable Energy Act) proposed to repeal the 2007 state law requiring major electric utilities to generate an increasing percentage of power from renewable energy sources. An earlier post talked about the politics of the renewable energy standard and the practical problem the bill presented for Republican legislators. The tension between the practical (jobs) and the political (conservative opposition to subsidies for renewable energy) played out in both the House and the Senate. In the end, neither bill got all of the committee approvals needed to get to a floor vote.

The General Assembly adopted legislation setting up a permitting program for wind energy projects (House Bill 484). The bill largely responds to concerns about the potential impact of wind turbines on military training activities in the coastal area. Two onshore coastal wind projects already proposed for the coastal area had generated questions about interference with radar and risk to pilots flying low-level military training routes. Aside from establishing environmental criteria for permitting wind turbines, the bill requires DENR to provide notice of the permit application to commanders at nearby military installations and to the Federal Aviation Administration. The bill makes interference with military operations a basis for denying a wind energy permit.

The final budget for 2013-2015 eliminated state funding for the N.C. Biofuels Center. The General Assembly created the Biofuels Center in 2007 to encourage biofuels production in N.C. using non-food crops. The Biofuels Center set a goal of replacing 10% of the state’s imported petroleum with homegrown biofuels. To develop biofuels production, the Biofuels Center made grants to support biofuels research and to develop pilot projects. Late in July, the N.C. Biofuels Center board decided that it would not be practical to continue operations without state funding; the Center will close by the end of October and unused grant money will be returned to the state.

Offshore Energy. Senate Bill 76 also addressed offshore energy production. One section of the bill creates a plan for allocating revenue from offshore energy production off the N.C. coast. The first $250 million in royalties to the state would go into an Offshore Emergency Fund to be used for emergency response and cleanup in case of an offshore oil or gas spill. Any royalties to the state beyond the first $250 million would go largely to the General Fund (75%); the remaining 25% would be divided among the Highway Trust fund (5%), the Community College System (5% for programs to train students in fields related to energy development), DENR (5% for coastal projects), the UNC system (5% for energy-related research and development); State Ports Authority (3% for ports infrastructure associated with energy production); and Department of Commerce (2% to recruit energy-related industries to the state).

Note: Offshore oil and gas production would almost certainly occur in federal waters beyond the three-mile limit of state jurisdiction. North Carolina will not receive any royalties from offshore production in federal waters unless Congress specifically authorizes revenue-sharing with the state.

The bill also encourages the Governor to negotiate a regional energy compact with the states of Virginia and South Carolina to develop a regional strategy for offshore energy production in the three-state region. The General Assembly directs Governor McCrory to work with his counterparts in those states to encourage the U.S. Department of Interior to amend the national 2012-2017 Five Year Leasing Plan to include leasing for oil and gas exploration and development in waters of the Atlantic Ocean off the VA-NC-SC coast.

Energy Policy Act. Senate Bill 76 makes significant changes to the state’s Energy Policy Act (the Act begins at G.S. 113B-1). The changes generally run in the direction of reducing the emphasis on energy efficiency and renewable energy and increasing the emphasis on job creation. The amended Energy Policy Act has more to say about expanding development of all energy sources – including natural gas and nuclear power — and much less about energy conservation. The bill changes the makeup of the Energy Policy Council (an advisory board created to guide state energy policy) along the same lines:

– The seat on the Council for a person with experience in alternative fuels or biofuels becomes a seat for a representative of an investor-owned natural gas utility.

– The seat designated for a person with experience in energy efficient building design or construction becomes a seat for an energy economist.

– The seat on the Council for a person with experience in renewable energy becomes a seat for an industrial energy consumer.

The General Assembly also consolidated state energy programs in the Department of Environment and Natural Resources. The budget bill moves the State Energy Office (which has largely carried out federally funded energy efficiency programs) from the Department of Commerce to DENR. Senate Bill 76 moves the Energy Policy Council, which had also been under the Department of Commerce, to DENR. The Council will be staffed by the Division of Mineral, Energy and Land Resources.

SmithEnvironment Blog

Environmental Law and Policy from a North Carolina Point of View