Category Archives: Energy

Environmental issues related to energy development and production, including hydraulic fracturing.

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 V: Miscellaneous

August 14, 2013. Bits and pieces of environmental legislation (air quality, coastal development, sedimentation, renewable fuels tax credit). Many of the provisions discussed below were adopted as part of House Bill 74 (Regulatory Reform Act of 2013), which the Governor has not yet signed into law. The Governor has until August 25th to sign or veto  a bill adopted at the end of the legislative session; if the Governor takes no action, the bill becomes law without his signature.

Appeals of  Air Quality and Water Quality Permits

House Bill 74 (Regulatory Reform Act of 2013) includes two separate provisions that shorten the time for a third party  to appeal an air quality or water quality permit from 60 days to 30 days. (See Section 29 and Section 53.) The time for an applicant to appeal a permit decision has always been 30 days, but a third party (such as  a neighbor, local government or community organization) fell under the  60-day appeal period set in the state’s Administrative Procedures Act . The challenge for third parties is that the appeal period begins to run when the applicant gets notice of the permit decision — not when the third party receives notice.

Air Quality

Local Transportation Mitigation Ordinances.  House Bill 74 ( Regulatory Reform Act)  prohibits local governments from  using a fine or penalty to enforce  certain types of ordinances to reduce the air quality impacts of commuting by car. Section 10.1(a) of the bill adds a new statute section, G.S. 160A-204  (entitled Transportation impact mItigation ordinances prohibited):

“No city may enact or enforce an ordinance, rule, or regulation that  requires an employer to   assume financial, legal, or other responsibility for of the impact of his or her employees’ commute or transportation to or from the employer’s workplace , which may result in the employer being subject to a fine, fee, or other monetary, legal, or negative consequences.”

Section 10.1(b) adds a new G.S. 153A-145.1 that applies the same prohibition to counties.  A  Durham  ordinance requiring large employers to have a plan to reduce commuter miles traveled by employees may be an example of the kind of ordinance the legislation would  affect. The Durham ordinance allows the employer to choose a number of different approaches to reduce commuting by car, including: work-at-home policies; incentives for car-pooling; creation of company van pools; and shower facilities for employees who bike to work.

There was little discussion of the provision as House Bill 74 moved toward adoption,  but the same language appeared in a different House bill titled  Local carbon footprint ordinances (House Bill 677). The  title suggests that lawmakers  linked transportation mitigation ordinances to climate change policy.  In reality, these ordinances mostly have to do with reducing ozone pollution to  meet federal air quality standards.  As much as 70% of the ozone pollution in urban areas comes from motor vehicle emissions and reducing vehicle miles traveled is one way to keep motor vehicle emissions down.  The Durham ordinance talks specifically about the need to reduce nitrogen oxide emissions that contribute to high ozone levels.  Many of the state’s urban areas will be hard-pressed to meet tighter federal air quality standards for ozone while continuing to grow. Failing to meet the ozone standard (“nonconformity” in Clean Air Act language) has significant economic consequences, including loss of federal highway funds and inability to permit new industrial development.  The language in House Bill 74 does not  eliminate the authority for these kinds of  ordinances,  but it  will  make the ordinances difficult to enforce and possibly reduce their effectiveness as a tool to maintain ozone  conformity  in the state’s major metropolitan areas.

Repeal of Heavy Duty Diesel Rules for 2008 and Later Vehicles. Section 25 of House Bill 74 directs the Environmental Management Commission to repeal rule 15A NCAC 02D.1009 (Model Year 2008 and Subsequent Model Year Heavy Duty  Vehicle Requirements) by December 1, 2013. The rule was adopted  by the Environmental Management Commission in 2004 and required model year 2008 and later heavy-duty diesel vehicles to meet California emissions standards. The U.S. Environmental Protection Agency has allowed California to adopt more strict motor vehicle emissions standards than those in federal rules and a number of states have adopted California standards by reference. The EMC adopted the California heavy duty diesel standard because lawsuits delayed the federal standard for several years.  With a final  federal standard  for heavy duty diesel engines in place,  the state rule has become unnecessary. (The final  federal  standard turned out to be  nearly identical to the California standard that the EMC adopted by reference in 2004.)

Open Burning.  Section 28 of House Bill 74 makes a significant change to rules for open burning. Until now, open burning for land-clearing or right of way maintenance has only been allowed on the site being cleared unless the debris was taken to be burned in an air curtain burner,  (Air curtain burners or “fireboxes” provide better control of  smoke and particulate pollution than open burning of woody debris.) The new provision allows land-clearing debris to be transported off-site for open burning and allows that burn site to be used  up to  four times a year. The bill  requires an off-premises open burn to maintain the same setback distance from occupied structures as an  on-site open burn — 500 feet.  The impact on  nearby residents and building occupants may be different, however, if  the off-premises open burn site is used  more often.  The bill also exempts these off-site open burning locations from requirements that would otherwise apply to waste disposal site for land-clearing debris.

Air Quality Permit Terms. Section 29 of House Bill 74 sets the permit term for  most state-issued air quality permits  at eight years.   The term for  an air quality permit issued under Title V of the Clean Air Act  continues to be no more than  five years as required by federal law.

Coastal Development

Ocean and Inlet Erosion Control.  For over thirty years, state coastal policies  generally barred use of hard erosion control structures (like seawalls, jetties and groins) on ocean and inlet shorelines.  In  2011, Session Law 2011-387  made the first significant change in that policy by authorizing  DENR to permit  a limited number of   “terminal groins” under strict conditions.  A terminal groin is an erosion control structure built perpendicular to the shoreline and at the end of a section of beach. Terminal groins are sometimes used to stabilize an inlet shoreline. This year, Senate Bill 151  made several changes to the 2011 law. One of the most significant is a change in the definition of  ”terminal groin” to include projects that involve installation of “one or more” groin structures  or a single groin with  ”a number of smaller supporting structures”.

Although Senate Bill 151 keeps the 2011 limit on the total number of terminal groin projects permitted coast-wide (four), the new definition of “terminal groin” no longer matches the definition used by the U.S. Army Corps of Engineers. Expanding the term to include multiple groins as part of a single project means the law potentially authorizes projects well beyond the scope of a “terminal groin”. Senate Bill 151 also makes it easier  to get a terminal groin  permit by eliminating the need for the applicant to show that: 1.  the project is necessary to protect imminently threatened structures;  and 2. other shoreline stabilization measures  would not be successful. More background on the terminal groin issue and S.L. 2011-387 can be found here.

Local Authority in Public Trust Areas. Another section of Senate Bill 151 clarifies  local government authority to address nuisance conditions on the beach and prevent (or remove) obstructions in public trust areas of the beach. The clarification became necessary because of  a N.C. Court of Appeals decision in Town of Nags Head v. Cherry  that held only the state can take action to  remove a structure on the public trust beach. See an earlier post for background on the Nags Head case.

Notice of CAMA Minor Development Permits.  Section 30 of House Bill 74 eliminates the requirement for newspaper notice of Coastal Area Management Act (CAMA) minor development permits. Notice will still be provided to any person or organization requesting notice of permit applications and by posting a notice at the site of the proposed development. Note: Under CAMA, “minor development”   can still be a significant  construction project.   CAMA  defines “major development”  to include any project that  requires another state or federal approval; occupies an  area of more than 20 acres; involves drilling for or excavating natural resources; or  occupies a structure(s) with a footprint of 60,000 square feet or more. All other development projects are considered “minor development”. As a practical matter, most projects that disturb an acre or  more will be “major development” because of the need for a sedimentation plan approval.

Note: As of  now, Senate Bill 151 has not been signed by the Governor and so has not yet become law.

Sedimentation Act

Local Sediment Programs. The Sedimentation Pollution Control Act  allows  DENR to delegate enforcement of the law to approved local sedimentation programs and many cities and counties have local programs. Section 33 of House Bill 74 resolves a recent question about  the role of the state’s Office of Administrative Hearings (OAH) in appeal of a civil  penalty assessed by a local program for violation of the Sedimentation Act. The bill makes it clear that those appeals  will be decided by the local government  under  the appeal process set out in the local sedimentation program ordinance. Appeals will not go to the Office of Administrative Hearings.

Tax Credit for Renewable Fuel Processing Facilities

House Bill 112 (Modifications to 2013 Appropriations Act)  extends  the tax credit available for facilities built to process renewable fuel. The sunset date for the renewable fuel processing tax credit, G.S. 105-229.16D,  had already been extended several times. Last year, the General Assembly extended the tax credit to facilities in service by January 1, 2014.  Section 11.2 of  House Bill 112 extends the tax credit to facilities in service by January 1, 2017 as along as the developer  signs a letter of commitment with the N.C. Secretary of Commerce by September 1, 2013 and begins construction by December 31, 2013.

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.

N.C. Senate Tries to Quiet Controversy over Disclosure of Fracking Chemicals

July 2, 2013: Earlier today, the Senate  took a first vote on  the Senate version of House Bill 94 (Amend Environmental Laws).  The Senate version already looked significantly different from the bill that came over from the House, but senators approved several more floor amendments before voting on the bill. One amendment attempts to calm a controversy over new language  on disclosure of fracking chemicals that senators added to House Bill 94 in committee.  The new language allowed drilling companies to withhold information on “trade secret” chemicals from state regulators; those chemicals would only be identified if  needed  to address an environmental emergency or health hazard. An earlier post talked about the disclosure language and some of the problems with after-the-fact disclosure of fracking chemicals.

The proposed limits on chemical disclosure were not well-received.  Members of the state’s  Mining and Energy Commission —  many appointed by legislative leaders — objected strenuously to the bill language. The commission had already drafted a disclosure rule that required drilling companies to fully disclose the chemicals used in hydraulic fracturing to staff in the Department of Environment and Natural Resources (DENR), but protected trade secret information from disclosure to the public. Because of objections from Halliburton lawyers, the Commission had delayed action on the draft rule to allow more time for DENR to  address concerns about trade secret protection.

The Senate bill language clearly caught members of the Mining and Energy Commission by surprise. Although DENR had signed off on the new legislative language, no one had consulted the MEC.  On behalf of the Mining and Energy Commission, Chair James Womack delivered a letter to legislators  expressing concern  about allowing an energy company to  unilaterally decide to withhold information from the state by labeling it a trade secret. The letter also noted that the bill would be inconsistent with the way trade secret information is normally handled under the state’s  Public Records Act.  Full text of the MEC letter here:  H94 Concerns_MEC Memo_30Jun2013 (1).

In an effort to quiet the controversy, the Senate amended the bill on the floor to revise the disclosure language again.  The amended language requires the Mining and Energy Commission to adopt a chemical disclosure rule that will do two things:

1.  The rule would allow  DENR and the MEC  to  “review” information on chemicals used in fracking fluid, but not  actually “take possession or ownership” of trade secret information. The amended language seems  intended to prevent creation of a public record that might become the focus of a lawsuit over disclosure. State regulators could see information on fracking chemicals,  but could not receive the information in writing and keep it on file with other information on the fracking operation. While that approach may make the industry more comfortable, it will make it very difficult for  DENR staff to have the information needed  to provide adequate oversight for drilling operations– a problem that would be compounded over time by staff turnover.  Allowing a DENR staff person to see the  list of  fracking chemicals  when fracking begins does not ensure the availability of that information to staff five years later.

It also isn’t clear whether the state would have any recourse if the information provided for review turned out to be inaccurate or misleading. Generally, state agencies can take enforcement action if a permit applicant submits inaccurate or misleading information; under the new Senate language, the information would be made available for review but never actually submitted to the agency.

2. The disclosure rule would also require public disclosure of the chemical family for each fracking chemical through an online chemical registry such as FracFOCUS. The draft MEC rule had similar language, except that the draft rule required disclosure of each specific fracking chemical unless the chemical constituted a trade secret.  Under the rule, disclosure of the chemical family in place of the specific chemical would only be allowed for chemicals designated as trade secrets.

The Senate has to take one more vote on the new version of House Bill 94. Once approved by the Senate, the bill goes back to the House for concurrence in the Senate’s changes.

N.C. Senate Intervenes in Fracking Issue

June 25, 2013: In May, the state’s Mining and Energy Commission (MEC) held up a draft rule requiring disclosure of  chemicals used in hydraulic fracturing  because of objections from lawyers representing energy contracting giant  Halliburton. The draft rule approved by the MEC’s Environmental Standards Committee would have required drilling companies to disclose all of the chemicals used in fracking fluid to staff in the Department of Environment and Natural Resources.  Consistent with the state’s Public Records Act, the rule protected trade secret information from disclosure to the public.  Halliburton wanted the ability to withhold trade secret information even from DENR staff unless the information was needed to respond to natural resource damage or a health threat. An earlier post talked about the controversy over disclosure of hydraulic fracturing chemicals and trade secret protection in more detail.

Today, the Senate’s Agriculture and Environment Committee approved a new version of House Bill 94 (Amend Environmental Laws) that resolves the issue in Halliburton’s favor. DENR Assistant Secretary Mitch Gillespie indicated DENR’s support. The new language, in Section 7 of the revised bill (not yet available on the General Assembly website), allows anyone covered by the shale gas legislation to withhold information on a chemical  used in hydraulic fracturing fluid by simply claiming that  the information is a trade secret. Once the drilling operator or supplier claims trade secret protection, DENR can only obtain the  information by request of the Secretary to “respond to a situation that endangers public health or the environment”.  The bill allows the trade secret claim to be challenged in the N.C. Business Court by the Department , another state agency,  a local government emergency response official, or the owner of the well site or property immediately adjacent to the well site.

There are at least two risks in withholding information on the chemicals used in hydraulic fracturing fluid from state regulators until after a problem has arisen: 1. In a real-time emergency — such as a major spill or fire –  it may be difficult to  get the necessary information from the drilling company (or its supplier) quickly enough; and 2.  the length of time between completion of the well and discovery of a hidden  problem (such as groundwater contamination) may make it difficult to get accurate information at all. With respect to groundwater contamination, it is not clear how the state can have an effective water quality monitoring program for hydraulic fracturing operations if the industry can  unilaterally withhold information on the chemicals used in the fracking  fluid.

The  trade secret protection provided for fracking chemicals in House Bill 94 also goes beyond the confidentiality provisions in the state’s Public Records Act. The Public Records Act already requires state agencies to keep  trade secrets confidential and G.S. 62-152(3) provides a definition of “trade secret”.  Although the Public Records Act protects trade secrets from disclosure to the public, it does not allow a business or industry to withhold trade secret information from state regulators. By authorizing drilling companies to withhold information from regulators, House Bill 94 allows  the natural gas industry a degree of  secrecy that appears to be unprecedented under the N.C. Public Records Act.  The House Bill 94 language also restricts challenges to  a trade secret claim by limiting who can bring a challenge.  The Public Records Act allows anyone to challenge a claim that information must be kept confidential as a trade secret; the House Bill 94 language appears to bar challenges by news media, nonprofit organizations, nearby (but not immediately adjacent) property owners and  any number of other interested parties. Another early post discussed the state’s Public Records Act and existing protection for trade secrets.

Compromise on LEED Certification

The bill proposing to prevent state construction projects  from   seeking  “green building” certification  under LEED  standards  (House Bill 628) appears to be moving toward a compromise.  An earlier post described the controversy over  LEED standards for wood products.  Yesterday, the Senate Agriculture and Environment Committee approved a  new – and entirely rewritten – version of  House Bill 628.  You can find the new bill draft here. The Senate version of House Bill 628 does two things:

  1.  The bill adds entirely  new  language on  energy efficiency standards for state construction projects. The Senate bill  would  change existing law to only require state construction projects to meet more aggressive energy efficiency standards adopted by the General Assembly  in 2008  if the result would be a net savings in construction and operating costs.  To calculate “net savings”, the bill uses construction costs added to operating costs for the first ten years after completion (as compared to building the same structure without meeting the energy efficiency standards).   The committee heard some concerns about using ten years of operating costs to calculate net savings.  Apparently most energy efficiency construction contracts use 15-20 years as the time period for recovery of costs and calculation of net savings.  Senator Tommy Tucker, who offered the amended bill language in committee, said that he would be willing to consider a different time period as long as it is reasonable.
  2. The bill completely replaces the original House Bill 628 language on acceptable  “green” building certification.  The Senate version would allow state construction projects to  use any energy efficiency/environmental design rating system that  “(i) provides certification credits for, (ii) provides a preference to be given to, (iii) does not disadvantage, and (iv) promotes building materials or furnishings, including masonry, concrete, steel, textiles, or wood that are manufactured or produced within the State”.   The LEED rating system seems to meet that requirement by  providing  specific credits for use of  regional  materials. You can find the list of LEED credits available for new building construction/major renovation projects here.    A new commercial building must meet basic  LEED  requirements  and earn a minimum of 40 points on a 110-point  rating  scale to get  LEED certification. Use of wood products meeting  Forest Stewardship Council standards  can provide one  point, but use of regionally sourced  building materials can provide  two  points  (if 20% of the building materials meet the regional material standard).

A footnote on the issue of LEED certification and  use of N.C.  wood products: There has been an ongoing fight over what should count as “sustainable” forestry. (See the earlier post  on a recent complaint filed with the Federal Trade Commission about  “green” labelling for wood products.) Setting that aside,  concerns about the  impact of LEED certification on use of N.C. wood products  may   also come  from  the  way architects translate LEED standards into specifications for individual construction projects   The  House bill sponsor, Representative Michele Presnell,  used an example of major renovations at Tryon Palace (a colonial era building in New Bern) where the material specifications required use of wood products meeting Forest Stewardship Council  standards. Although major wood producers are located within a stone’s throw of Tryon Palace,  Representative Presnell said  they were closed out of bidding because none of those producers operate under FSC  standards.   I don’t have any direct knowledge of the specifications for the Tryon Palace project, but if that happened it seems to be an unnecessary result even under LEED standards. With a 110-point rating system, there are many different ways to reach the  40 points needed for LEED certification.  It is possible to reach  LEED certification without relying on the one point for wood products at all. (And the wood products credit only requires that 50% of the permanent wood products used in the building meet the FSC  standard.)

A conversation between the N.C. forest products industry and the state chapter of the American Institute of Architects about how specifications for LEED projects can be written to support use of N.C. products might benefit the industry even more than legislation.

House Bill 628 is on the Senate calendar today and will then go to a conference committee to work out the differences between the House and Senate versions.

Back to Shale Gas

June 5, 2013 –The House Committee on Commerce and Job Creation  approved a new version  of Senate Bill 76  (the 2013  bill on  shale gas production and offshore energy development); you can find the House bill draft here.  This post focuses on the shale gas provisions; a separate post will talk about changes dealing with offshore energy development.

The biggest change affecting shale gas development is that the House joins the Senate in backing away from  the current law (adopted just last year) that delays permitting of  hydraulic fracturing and horizontal drilling until the General Assembly acts to remove a moratorium on those activities. Like the Senate bill, the House bill draft allows the Department of Environment and Natural Resources (DENR)   to start issuing permits for hydraulic fracturing on March 1 2015. The difference is that the House  version  would require another action by the General Assembly to make those permits effective.   It isn’t clear what benefit comes from issuing permits but  requiring legislative action to make the permits effective – except that it may provide employment for  lots of lawyers. The problems:

— Rules for horizontal drilling and hydraulic fracturing may not be in effect by March 1 2015 and nothing in the bill  requires  all of the rules to be in effect before DENR starts issuing permits. (Note:The final Senate version of the bill allowed DENR to delay  issuance of permits  until all rules were in effect, but without further action by the General Assembly.)  Even if the Mining and Energy Commission (MEC) adopts all of the rules for shale gas development by October 1 2014 (as required under the 2012 legislation),   state law requires several more steps before the rules can go into effect.  First, rules   have to be approved by the Rules Review Commission (RRC); even if a rule receives RRC approval, any legislator  can  introduce a bill to disapprove a controversial rule.  Those steps could delay rules for many months after adoption by the MEC. The worst case (in terms of timing) —  rules that do  not get  Rules Review Commission  approval by the end of  December 2014   may not go into effect until  the  summer of 2016.    The bill needs to clearly explain  whether permits will be issued even  if all of the rules are not actually in effect on March 1 2015.  If that is not the intent, the bill should give DENR authority to deny permits or defer permit decisions until the rules go into effect.

— If the General Assembly intends for DENR to start issuing permits under rules that have been adopted but are not yet in effect, what does the permit holder have?  Will the permit holder be able to claim a legal right to operate under the permit  — even if the permit was issued under rules that never go into effect as originally adopted? The new bill  draft doesn’t say what happens if the legislature changes some of the rules for shale gas development after the permit has been issued but before the permit goes into effect.

— State law only allows 60 days to file a permit  appeal with the Office of Administrative Hearings and the clock begins to run as soon as DENR provides notice of the permit decision. Permits can be appealed by third parties  such as neighbors, local governments, and environmental organizations. Permit applicants sometimes  appeal  permit conditions. Does the clock on an appeal start when DENR issues the permit or when the General Assembly makes the permit effective?

Issuance of permits without all of the hydraulic fracturing rules actually  in effect  creates a significant risk of  confusion, uncertainty and legal conflict.  That  is probably  not the desired result. If the General Assembly intends to go down the road of permitting hydraulic fracturing without  final rules in effect, the bill needs to  resolve  the questions that follow from that decision.

Other changes made  in the House draft:

The House bill draft removes Senate language that would have allowed underground injection of wastewater from hydraulic fracturing operations.

The bill restores the registration requirement for “landmen”  (people who handle real estate transactions related to oil and gas drilling sites). The Senate bill proposed to drop the registration requirement  enacted in  2012.

The bill makes several changes and clarifications to bonding requirements.

The bill also adds still more studies to the three already required under the 2012 legislation – including a study on the appropriate amount of severance tax  for shale gas extraction and a study on creation of a restitution fund to cover damage to property owners  as a result of fraud or misrepresentation.

The bill  makes minor changes to the Mining and Energy Commission appointment statute. It eliminates the seat for the Assistant Secretary for Energy in Commerce —  most likely in anticipation of the energy program  moving  to DENR as proposed by Gov. McCrory.  The bill would also add a seat for a  landowner in the Triassic Basin (to be appointed by the Governor)  and eliminate language requiring that the  Commission for Public Health member who serves on the MEC must have  knowledge of waste management.

Both the Governor’s Office and DENR  indicated  support for  the House version of Senate Bill 76. The bill next goes to the House Environment Committee.

Note: The original post has been  modified to make it clear that the version of Senate Bill 76 adopted by the Senate allowed DENR to delay issuance of permits for hydraulic fracturing and horizontal drilling until all rules were in effect.

House Bill 628 : It’s Not Easy Being “Green”

May 7, 2013:  I just learned of  House Bill 628 (Protect/Promote N.C. Lumber)  today and set out to understand why the N.C. General Assembly would  want to stop  state construction projects from trying to  meet energy efficiency and environment sustainability standards. The short answer may be a perfect symbol of the  current environmental moment — an industry has asked the state legislature to do something to influence  a private nonprofit organization’s voluntary  environmental sustainability standards  because those standards set a higher bar than the industry wants to meet  to get credit for being “green”.

First, House Bill 628 really protects and promotes the particular type of “green” certification for  wood products supported by the N.C. Forestry Association. Certification of products and buildings as energy efficient and environmentally sustainable has become both an environmental movement and a marketing tool.  “Green” labels on consumer products appeal to environmentally conscious consumers. A green building certification appeals to those same consumers and to large institutions (public and private) interested in  environmental protection or cost savings from energy and water efficiency.  That consumer appeal gives a “green” label economic power and a war is currently raging over the kind of forestry practices that should get credit toward green product labels and green building certification.

House Bill 628 wades into the green building controversy. The U.S. Green Building Council, a nonprofit organization,  has developed the most widely known and accepted standards for environmentally sustainable and energy efficient construction.  The Green Building Council’s  program gives credit toward LEED (Leadership in Energy and Environmental Design) building certification for use of wood products that meet standards set by  the Forest Stewardship Council. You can find more information on LEED certification standards here.

The American  Forest and Paper Association created its own set of sustainable forestry standards in the 1990s.  The Forest and Paper Association’s  Sustainable Forests Initiative has since separated from the industry organization and operates as an independent nonprofit that maintains voluntary standards for sustainable forestry practices and  certifies  forestry operations meeting those standards.  The forest products industry has pushed the U.S. Green Building Council to give credit toward LEED certification for use of wood from a forestry operation certified by the Sustainable Forests Initiative, but the Green Building Council has resisted the change.

One afternoon has not been enough to fully understand the differences between certification under the Sustainable Forests Initiative versus the Forest Stewardship Council, so I am not going to try to resolve the controversy over their relative merits.  For purposes of understanding the political fight, conservation organizations believe the Forest Stewardship Council standards used for LEED certification do a better job of protecting endangered species and old growth forests and are less likely to result in clear-cutting.  The forest products industry prefers the Sustainable Forests Initiative standards as less costly and sustainable enough.

What does House Bill 628 do?

●   It prevents any future state construction projects from seeking LEED Certification.  (The bill only allows state projects to seek green building certification from a program that gives credit under the Sustainable Forests Initiative and uses standards approved by the American National Standards Institute.  The LEED program does not meet either of those requirements.) The move away from LEED certification for state buildings  will likely set back efforts to push state construction projects to greater energy and water efficiency and a smaller environmental footprint.

●   Ironically, the bill may hurt other North Carolina industries that benefit from LEED standards encouraging use of local materials.  A representative from Nucor Steel (a North Carolina-based company that produces steel from recycled   materials)   spoke against the bill in the House Agriculture Committee meeting today  and noted the value of  LEED standards as an incentive to use of domestic steel in construction.

Is there an offsetting benefit to the North Carolina lumber industry? That is not clear. Nothing the N.C. General Assembly does can compel the U.S. Green Building Council to change  LEED standards; it is entirely possible that House Bill 628 will order the state to abandon LEED certification for state construction projects without achieving any change in LEED standards for wood products.  It also isn’t clear that the LEED standard for wood represents a real barrier to use of North Carolina lumber.  The LEED standard for wood represents a very small part of the LEED green building certification. A commercial building must meet basic  LEED  requirements  and earn a minimum of 40 points on a 110-point  rating system scale for  LEED certification. Meeting the wood standard  just provides one point.   The wood standard itself is modest —  a builder can earn that one point by using only 50% (based on cost) of wood-based materials and products certified by the Forest Stewardship Council for permanent building components( such as framing and floors); temporary construction materials do not count against the percentage.

It is also difficult to argue that the LEED standards disadvantage N.C.  products, when each  N.C. forestry operation can choose to meet  the  voluntary Forest Stewardship Council certification standards that  receive credit  toward  LEED certification. The real issue is that N.C. wood producers want the benefits of a “green” product label — but also want to set the standards for being “green”.