Thursday, February 19, 2015

Gorillas, Elephants and Local Regulation of Hydraulic Fracturing

The Supreme Court of Ohio weighed in this week on state versus local control of oil and gas operations, in a case, Morrison v. Beck Energy Corp, that included 3 separate dissenting opinions, one of which invoked gorillas and another of which invoked elephants in colorfully making their case. The concurring opinion likely means that the court raised more questions as opposed providing very many answers. However, the panoply of arguments in the opinions generate, at least to me, some fascinating thoughts on the line between zoning and state regulation of oil and gas operations, the topic of my recent law review article. I wish this decision had been released prior to the completion of my article!

Ohio R.C. Chapter 1509 gives the state government "sole and exclusive authority" to regulate the permitting, location, and spacing of oil and gas wells and production operations. The question raised is whether the Home Rule Amendment to the Ohio Constitution grants the city of Munroe Falls the power to "enforce its own permitting scheme atop the state system". The court ruled that it does not.

Ohio R.C. 1509.02 preserves local authority in two categories: control of public highways, streets, avenues, alleys, sidewalks, public grounds, bridges, aqueducts, and viaducts; and the power to grant permits to operate certain heavy vehicles on highways within the locality. However, these powers cannot be exercised in such a way as to discriminate "against , unfairly impede, or obstruct oil and gas activities and operations regulated" under the state code. The state regulations address well spacing, setbacks, proximity of the well to other wells and private dwellings, safety of the operation, protection of the public and private water supply, fencing and screening, waste containment and disposal, access roads and noise mitigation. Note that many of these issues are commonly addressed by zoning ordinances (see, e.g., Richardson, Local Regulation of Hydraulic Fracturing, 117 W.Va. L. Rev. 593 (2104).

Beck's permit contained 67 different conditions that related to, among other things, the designation of the site as a municipal wellhead protection area and "urbanized areas" protections, like noise mitigation and parking. Again, the "urbanized areas" conditions appear to be very much zoning provisions.

Soon after Beck began drilling, the city issued a stop-work order and filed a complaint for injunctive relief, alleging that Beck's operations violated multiple city ordinances. Five of those ordinances are at issue. The first requires a "zoning certificate" issued by the zoning inspector under the general zoning ordinance. The other four fall under an ordinance specifically regulating oil and gas drilling. However, even these ordinances relate back to zoning, with one requiring a conditional zoning certificate. The other three relate to the filing fee ($800), performance bond ($2,000 deposit required upon filing) and a required public hearing (at least three weeks prior to drilling), associated with the conditional zoning certificate.

Beck argued that the ordinances conflict with the state statutory scheme. The trial court granted the injunction and required Beck to comply with the ordinances. The court of appeals reversed, rejecting the city's argument that the Ohio Constitution's Home Rule Amendment allows it to impose separate permit requirements on oil and gas operations.

Are the ordinances a valid exercise of home-rule power (a consistent theme among oil and gas local regulation cases)? The amendments gives local governments in Ohio "broadest possible powers of self-government in connection with all matters which are strictly local and do not impinge upon matters which are of a state-wide nature or interest" [emphasis added].  However, the amendment does not allow local ordinances to conflict with general laws. The court set out the test of when a local ordinance must yield to a state statute as containing three prongs: (1) the ordinance is an exercise of police power, not local self-government; (2) the statute is a general law; and, (3) the ordinance is in conflict with the state statute. The city conceded that the ordinances are exercises of the police power.

Four conditions are required to classify a statute as a general law: (1) the statute must be part of a statewide and comprehensive legislative enactment; (2) the statute must apply to all parts of the state alike and operate uniformly throughout the state; (3) the statute must set forth police sanitary, or similar regulations, rather than purporting to grant or limit legislative power of a local government to prescribe regulations; and, the statute must prescribe a rule of conduct upon citizens generally. The city disputed only the second requirement, arguing that only the eastern part of the state has economically viable quantities of oil and gas. The court found that similar arguments had been rejected in earlier cases and rejected this argument.

Using the standard definition of conflict as meaning that the "ordinance permits or licenses that which the statute forbids and prohibits, and vice versa", the court found that the ordinances conflict with the state statute. The court found two types of conflicts. First, rejecting the city's argument that the ordinances and statute regulate "two different things", the court ruled that the ordinances prohibit what the statute allows. Secondly, the court found that the language of the state statute expressly preempts the local ordinances at issue. The judgment of the Court of Appeals was, therefore, affirmed.

A thoughtful concurring opinion seems to remove any force that the majority opinion would otherwise possess. The concurring opinion emphasizes "the limited scope of [the] decision", expressly limiting the decision to the five ordinances at issue. According to the concurrence, the appeals does not "present the question of whether [the state statute] conflicts with local land use ordinances that address only the traditional concerns of zoning laws, such as ensuring compatibility with local neighborhoods, preserving property values, or effectuating a municipality’s long-term plan for development, by limiting oil and gas wells to certain zoning districts without imposing a separate permitting regime applicable only to oil and gas drilling.". I'm not sure that I agree with this assertion. The ordinances at issue in this case sound a lot like zoning to me.

The concurring opinion presents a fascinating argument on preemption. Namely, the opinion states that "location" and "spacing" have specialized, technical meanings in oil and gas law, citing 1 Summers, The Law of Oil & Gas, Section 5.1, at 268 (3d Ed. 2004). These terms relate to maximizing efficiency and protecting correlative rights in the oil and gas realm. Interestingly, these are the state interests that I identified in my law review article as state interests that bans conflict with. I also acknowledge Alex Ritchie's excellent article, "On Local Fracking Bans: Policy and Preemption in New Mexico", 54 Nat. Resources J. 255 (2014), which also recognizes these concerns. I relied some of Professor Ritchie's cogent analysis (contained in an earlier version of his article) in my law review article. 

Justice O'Donnell goes on to reason that, since the state government's notion of "location" and "spacing" are based on different considerations than the local zoning ordinance's notion of "location" and "spacing" that both can co-exist without conflict. I'm not sure that such a fine line can be drawn, or that the state legislature considered this distinction in crafting the state statutes. However, the notion is intriguing. I'll have to think on this one more.

Justice Pfeifer dissented, opining that the state statute "leaves room for [local governments] to employ zoning ordinances that do not conflict with the statute". Justice Lanzinger also dissented, joined by Pfeifer and O'Neill, similarly thinking that the actual ordinances at issue do not clearly conflict with the state statute, and that zoning can co-exist with the state regulation. This dissent cites cases in New York, Pennsylvania and Colorado as supporting the dissent. Lanzinger's conclusion is notable, so I set out that paragraph in full.

"There is no need for the state to act as the thousand-pound gorilla, gobbling up exclusive authority over the oil and gas industry, leaving not even a banana peel of home rule for municipalities. I would reverse the judgment of the court of appeals and remand to that court for further proceedings."

Justice O'Neill's dissent is set out in full below. 

"I join Justice Lanzinger’s well-written dissent. Let’s be clear here. The Ohio General Assembly has created a zookeeper to feed the elephant in the living room. What the drilling industry has bought and paid for in campaign contributions they shall receive. The oil and gas industry has gotten its way, and local control of drilling-location decisions has been unceremoniously taken away from the citizens of Ohio. Under this ruling, a drilling permit could be granted in the exquisite residential neighborhoods of Upper Arlington, Shaker Heights, or the Village of Indian Hill—local zoning dating back to 1920 be damned."

Like the majority opinion in Robinson, which made a similar argument with respect to Act 13, I respectfully submit that Justice O'Neill's assertion may be possible in theory, but not in practice. As pointed out by dissenters in Robinson, the state statute has setbacks and the state agency imposes conditions. In this case conditions pertaining to "urbanized areas" were imposed. The parade of horribles here would never happen in reality. And, "to be clear", the wealthy residents of the neighborhoods listed by Justice O'Neill would never be subjected to oil and gas operations "in their backyards".

So what does this case mean? I'm not sure, but perhaps not much. The arguments may further blur the lines between local zoning regulations and state oil and gas regulation. I'm looking forward to pondering the opinions further and trying to figure it out.

Jesse Richardson

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