Rethinking Brownfield Redevelopment in Ohio: Part 4 of 4

This is the final post discussing the current state of brownfield redevelopment in Ohio.  It provides suggested changes to the regulations and incentives in Ohio to accelerate brownfield redevelopment. The prior posts in this series discussed the following:

  1. The Issues Presented by Brownfields- In particular the impact to Urban Centers
  2. The Current State of Brownfield Redevelopment in Ohio-  Including the issues of urban sprawl and the number of brownfield sites in Ohio.
  3. Progress made in Addressing Brownfields in the Twenty Years Since Ohio's Voluntary Action Program was Adopted

As discussed in these prior posts, Ohio needs to accelerate brownfield redevelopment in Ohio.  So how does that occur?  

  • Need to be Faster- The ability to address the environmental, public health and liability risks presented by brownfield properties needs to occur much faster.  A cleanup under Ohio's Voluntary Action Program (VAP) can take anywhere from 1, 2, 3 or even more years to complete.  
  • Need Lower Costs to Redevelop Brownfields-  According to the Cleveland Department of Economic Development the per acre are significant.  These costs push businesses to consider greenfield sites
    • On average it can cost $13,000 per acre to perform sampling to determine how contaminated a brownfield site may be
    • It can cost on average $66,000 per acre to remediate a brownfield site
    • Brownfield redevelopment projects currently require a minimum of 32 -35% in public subsidies 
  • Effectively Address Liability-  VAP can be effective but takes too long and costs too much. The Bona Fide Purchaser Defense under CERCLA provides no regulatory sign-off that due diligence and cleanup were adequate.
  • Broad Based Incentives-  Current incentive programs require creation of jobs or specific types of redevelopment such as manufacturing.  More value needs to be placed on simply returning idle property to productive use.
  • Cleanup Grants should Target Public Health or Catalyst Projects-  Some portion of brownfield funding should be used to address highly contaminated sites that present public health risks to local communities or catalyst projects that may attract more development.

Rethinking Ohio's Incentive Programs

The first major hurdle to a brownfield redevelopment project is the unknown cost of cleanup.  Therefore, a large portion of incentives need to fund assessment activities.  

Ohio should drop the complicated VAP automatic tax abatement.  There are too many implementation issues (discussed in the prior posts) and the abatement does not cover new structures.  In its place, Ohio should adopt a brownfield based tax credit program that allows developers to take assessment and cleanup costs as a tax credit.  Such a credit would start to even the playing field between brownfield and greenfield sites.

Rethinking Ohio's Tools to Address Environmental Liability

The VAP should remain in place with an effort to reduce the current complexity of Ohio's primary brownfield cleanup program.  The VAP is a very good program for full assessment and cleanup of a property.  However, full assessment and cleanup isn't always necessary to put property back into productive use.  

U.S. EPA's Bona Fide Purchaser Defense under CERCLA does not require a complete Phase II assessment or full remediation.  Under the program, a buyer must take "reasonable steps" to address any threats to public health or the environment.  Reasonable steps is far less than full remediation of soil and ground water.  It typically means preventing ongoing release and eliminating complete pathways for human health exposures.  Such flexibility dramatically lowers to the cost of redevelopment.

The major issue with the BPFD is that it is a legal defense with no regulatory review or sign-off.  Some purchasers are comfortable with no oversight.  However, many would prefer the comfort of knowing their assessment and cleanup strategies received regulatory sign-off.

Ohio should adopt a State version of the BFPD that includes some level of regulatory oversight.  A similar program was adopted in Michigan- Baseline Environmental Assessments (BEAs).  While Michigan's program could be improved, it has greatly accelerated brownfield redevelopment. 

According to figures provided by Joe Berlin, BLDI Environmental Engineering, here is a comparison between the Michigan BEA and Ohio VAP Programs:

  • Michigan BEA
    • 1995-2015 there has been 20,634 BEAs completed
    • Average of 1,032 per year
  • Ohio VAP Covenant-Not-to-Sue (CNS)
    • 1995-2015 there has been 527 CNS issued
    • Average of 26 per year

The proof is in the numbers.  Maybe its time Ohio look to its neighbor up north for new ideas to accelerate brownfield redevelopment.

Rethinking Brownfield Redevelopment in Ohio- Part 3 of 4

This is the third post in a series of four assessing the current state of brownfield redevelopment in the State of Ohio.  This third post will evaluate the progress Ohio has made in the last twenty years with regard to addressing brownfields.

Current Options for Addressing Environmental Liability 

As discussed extensively in the prior posts in this series, environmental liability concerns are a major disincentive for brownfield redevelopment versus greenfield development.  Many different federal and state environmental statutes can impose liability on owners of property: RCRA (hazardous waste and petroleum contamination); TSCA (PCBs), Clean Water Act (runoff, sediment, wetlands), and other federal or state statutes.

However, the law that imposes the most far reaching liability for environmental contamination is CERCLA (Superfund) which imposes joint and several liability on buyers of contaminated property. Under CERCLA, a new owner of property can have liability for preexisting contamination regardless of whether they performed activities that created the contamination.  

CERCLA's broad liability provisions act as a major deterrent to brownfield redevelopment. Ohio utilizes two principal mechanisms to address the risk associated with CERCLA legal liability:

  1. Voluntary Action Program (VAP)-  Adopted in 1996 to provide greater flexibility in cleaning up brownfield properties.  The VAP has been very successful.  No question the program provided greater and more cost effective cleanup options for brownfield properties. As detailed below, the VAP has been utilized to cleanup hundreds of brownfield properties. VAP cleanup standards are regularly referenced during due diligence as a means of evaluating environmental liability.  In fact, some developers or owners perform limited cleanups using VAP standards without seeking Ohio EPA's concurrence the cleanup was sufficient.   
  2. Bona Fide Purchaser Defense (BFPD) (i.e. "All Appropriate Inquiries" under CERCLA)-   In 2002, Congress created the Bona Fide Purchaser Defense to encourage brownfield redevelopment.  EPA adopted the "All Appropriate Inquiry" rule which established a mandatory level of environmental due diligence a buyer must perform to qualify for the liability defense.  If due diligence identifies ongoing releases or risks to human health, the buyer must take "reasonable" steps to address those issues.  However, a buyer does not need to perform a full cleanup of the property to qualify for the defense.

Issues with VAP 

Twenty years ago the VAP was considered groundbreaking.  The program allowed privatized cleanups where the company/developer's consultant completed the cleanup and submitted a No Further Action (NFA) after the cleanup was completed.  Ohio EPA reviews the NFA and, if the property meets VAP standards, the Agency will issue a legal release (i.e. Covenant-Not-to-Sue or CNS).

While the VAP provides a lower cost alternative to perform a full investigation and cleanup, the program has been underutilized.  Here are some of the reasons why:

  • Slow Process- Many real estate deals need to be completed in a few months or even shorter.  It can take 90 to 180 days just to complete the VAP investigation of the property (i.e. Phase II assessment).  A full cleanup can take one, two, three or even more years to complete.
  • Costs-  Twenty years ago the program was championed as a lower cost alternative to traditional CERCLA cleanups.  However, the cost to take property through the VAP can still be very high.  It can cost $100,000 to $200,000 for a VAP Phase II alone.  Full cleanup can cost hundreds of thousands to millions of dollars.  These costs act as a strong deterrent to entering the VAP program.
  • Complexity-  The VAP program is highly complex.  There are around ninety guidance documents alone in addition to nearly one hundred pages of rules.  

Issues with BFPD

The Bona Fide Purchaser Defense (BFPD) has been in place for a little over a decade.  The advantages of the BFPD is that is much faster and cheaper than the VAP.  In many transactions, the Phase I assessment by itself is enough to establish the BFPD if no problems are identified (i.e. a "Clean" Phase I). Even if Phase II sampling is needed, sampling can be completed in 30-60 days at a much lower cost than a full VAP Phase II.  However, the BFPD has its own set of issues: 

  • No Sign Off by Regulators-  Some like that sampling and cleanup plans do not need to be reviewed by regulators to qualify for the defense.  However, without review there is no assurance to the buyer that they qualify for the defense.  In fact, a property owner cannot even voluntarily submit sampling and cleanup plans for concurrence.  As a result, property owners only find out if the sampling or cleanup was sufficient if it stands up in court.
  • No Public Disclosure-  Mandatory disclosure laws act as a strong deterrent to completing transactions involving contaminated properties.  However, providing incentives to voluntarily disclose the results of due diligence can create more public information regarding the condition of properties. 

Current Ohio Brownfield Incentives

Paying for sampling and cleanup of brownfield properties is expensive.  As discussed in prior posts, these costs push companies to consider greenfields over brownfields.  To offset these costs and attract companies and developer to brownfield properties, Ohio has a variety of incentives available. Those programs include:

Brownfield Grants and Loans Tax Incentives

Former Clean Ohio Program

  • No Longer Active
  • Up to $300,000 Phase II grant
  • Up to $3 million cleanup grants
Ohio Historic Preservation Tax Credit

JobsOhio Revitalization Program

  • Up to $200,000 Phase II grant
  • Up to $1 million 
New Market Tax Credit
County and Municipal Grant & Loan Programs VAP Automatic Tax Credit (R.C. 5709.87)

 Issues with Grant/Loans/Tax Incentives

  • JobsOhio Revitalization Program targets a limited number of projects.  Certain brownfield redevelopment projects cannot even qualify for funding, such as retail or residential.  This narrows the range of possible projects on brownfield sites that can offset investigation and cleanup costs
  • Insufficient Funding-  Cleanup grant funding at both the state and local level is capped at around $1 million.  While this amount of grant funding may be adequate for a number of projects, more contaminated properties will not attract sufficient funding to offset cleanup costs.
  • VAP Automatic Tax Abatement-  While this is the primary brownfield tax incentive, issues with its scope and implementation are well documented in prior blog posts.  One of the biggest issues is that it doesn't cover new structures.  It also assumes property valuations already account for contamination.

Ohio's Scorecard on Brownfield Redevelopment

Let's review the number of VAP projects completed and incentives utilized to leverage brownfield redevelopment.

VAP Cleanups Completed 1995-2015

659 NFA's submitted to Ohio EPA 

132 withdrawn, denied, revoked or pending

527 VAP Covenants-Not-to-Sue have been issued

 

Clean Ohio (2001-2012)

Clean Ohio was the primary brownfield grant program in Ohio for over a decade.  More data is available to evaluate the success of the program.  According to Greater Ohio, approximately 160 Clean Ohio Revitalization Projects were completed.  In reviewing VAP projects completed by year, clearly Clean Ohio accelerated brownfield redevelopment in Ohio.

1995-2001 (Pre-Clean Ohio) approximately 17 VAP covenants were issued per year

2001-2015 (During Clean Ohio) approximately 35 VAP covenants were issues per year

Based upon a study performed by Greater Ohio, an average grant incentive per Clean Ohio project was $1.97 million.  It is worth noting that this study showed each Clean Ohio dollar spent generated $4.67 in new economic activity.

Scorecard on Brownfield Redevelopment in Ohio
Total Sites to Address under the VAP Years to Address under VAP Total Cost in Incentives
527 covenants in 20 years since VAP implemented Assuming full restoration of Clean Ohio funding Assuming Clean Ohio available
estimated 10,000 brownfield sites* 35 VAP projects per year $1.97 million on average per project
9,437 brownfield sites left to be addressed 270 Years to address all brownfields under the VAP $18.5 billion in incentives to address all brownfields under the VAP

There are a number of assumptions built in to the scorecard that anyone could challenge. Including:

  • There is no reliable inventory of brownfield sites in Ohio.  The number 10,000 was taken from a U.S. EPA estimate discussed in a prior post.
  • Not all brownfield sites are addressed by the VAP.  However, when it was adopted most thought the vast majority of brownfield cleanups would go through the program.
  • Clean Ohio no longer exists and a brownfield program of that size and scope is not currently contemplated.

While the assumptions underlying the scorecard are fair game, it still demonstrates how long and how much it would cost to address a significant number of brownfield properties under the VAP. The scorecard also suggests there may be better strategies available to accelerate brownfield redevelopment in Ohio.  

The final post in the series will include a discussion of new strategies to try an accelerate brownfield redevelopment in Ohio.

Rethinking Brownfield Redevelopment in Ohio- Part 2 of 4

This second post in the series discussing brownfield redevelopment in Ohio will provide an overview of the extent and nature of Ohio's brownfield problem.  First, the post will discuss Ohio's progress in spurring brownfield versus greenfield redevelopment.  Second, the post will provide an overview of public information regarding the number of brownfields in Ohio  

Urban Sprawl in Ohio

One issue discussed in Part 1 of this series was how failure to re-utilize urban core properties significantly contributes to the issue of urban sprawl.  The negatives of urban sprawl are well documented:  decay of inner urban areas, increase infrastructure costs, more traffic (and associated air pollution) and greater impact to wetlands and streams as development moves to greenfields.

How is Ohio doing with regard to urban sprawl?  Not well based upon an analysis performed in 2014 by Smart Growth America.  Here are the rankings of some of Ohio's largest cities:

  • Cleveland 153
  • Cleveland 138
  • Toledo 117
  • Dayton 116
  • Canton 93
  • Akron 111
  • Cincinnati 166

Cincinnati Urban Sprawl Trends

A study performed by Smart Growth America of the Cincinnati region showed that during the time period of 1196-2005 the trends on brownfield versus greenfield redevelopment were as follows:

  • Thirty (30) businesses that expanded operations moved from transit accessible areas to areas without transit (i.e. out of the urban core);
  • Eight (8) business expanded within the urban core

This is a clear demonstration of the trends that the costs to redevelop brownfields pushes many businesses to expand or relocate to the suburbs contributing to Ohio's urban sprawl issues.

Cleveland Urban Sprawl Trends

Some times a picture (or in this case a graphic) is worth a thousand words.  Here is a graphic that shows developed land in Cuyahoga County from 1948 to 2002:

 

 

 

 

 

 

 

 

 

It is worth noting that there may be a major shift in these trends due to the millennials preference for downtown living.  A recent study showed that 7 city centers outperformed their surrounding metros in the 2002-07 period, 21 outperformed the periphery in 2007-2011.  Certainly, that trend is evident right here in Cleveland where residential occupancy is above 97.8% with major new downtown residential developments planned.  

The major shift in living preferences creates a golden opportunity to accelerate brownfield redevelopment.  

How many Brownfields are in Ohio?

Ohio does not maintain a registry that provides a good inventory of all brownfield sites.  The most extensive registry maintained by Ohio EPA was referred to as the "Master's Site List."  However, after a property owner challenged its listing on the MSL, it was determined Ohio EPA did not have the legal authority to maintain the list.  Ohio EPA stopped maintaining the list in 1999.

Currently, Ohio EPA maintains the Ohio Brownfield Inventory, but listing of properties is voluntary. Typically, properties are listed in order to qualify for some brownfield redevelopment incentives. Therefore, the registry does not provide a good estimate of the actual number of brownfields.

Public information is limited on brownfields.  A review of local studies and information from local officials and U.S. EPA reveal the following statistics which provide some insight into the extent of the brownfield problem in Ohio:  

  • 119 brownfields in Lucas County (1996 estimate);
  • An estimated 62% of real estate transactions in Lucas County are encumbered by environmental issues;
  • An estimated 25% of transactions in Toledo were abandoned due to environmental issues with an average job lost of 20 jobs per lost transaction;
  • An estimated 4,623 acres of brownfields are in Cuyahoga County;
  • 350 brownfields in Cleveland with an estimated 1,000 to 2,000 condemned structures
  • 40,000 acres or 14% of Cuyahoga County's land was industrial at some point (Estimate by the Cuyahoga Planning Commission)

Statewide estimates on brownfields:

  • 417 Ohio sites are currently identified on CERCLIS (sites on or being evaluated for Superfund Listing)
  • Over 5,000 RCRA sites listed on US EPA RCRAInfo data base
  • 4,000 to 6,000 brownfield sites in Ohio (as estimated by the Government Accounting Office)
  • U.S. EPA has a higher estimate- Over 10,000 brownfield sites have been inventoried by local governments according to testimony from Joe Dufficy (U.S. EPA) before Congress in 2005

Importance of Better Information on Brownfields

A strong case can be made that Ohio needs tools to create a better inventory of brownfields.  It's current system of waiting for volunteers looking for incentives to list sites results in very limited information.  

A better inventory helps to inform public policy as well as better track progress in addressing brownfields.  Also, better information provides more public information regarding sites that have issues.

Some may argue that there should be a mandatory law requiring all brownfield sites to be listed. However, there are many issues with this concept.  Such mandatory laws discourage brownfield redevelopment or even gathering data regarding contamination on property.  This is the exact opposite of what Ohio needs to do if it wants to encourage more brownfield redevelopment.

A mandatory law exists in New Jersey and my colleagues familiar with the New Jersey market state it acts as a strong deterrent to gathering data regarding contamination as well as transactions.

A better system is one that offers strong incentives to voluntarily disclose information regarding conditions of property.  The final post in this series will discuss Michigan's Baseline Environmental Assessment program which has been highly successful in gathering public information regarding the condition of contaminated property in the state while at the same time spurring brownfield redevelopment.

Rethinking Brownfield Redevelopment in Ohio - Part 1 of 4

Two weeks ago I participated in the Ohio Brownfields Conference in Columbus, Ohio.  2016 marks the twentieth (20th) anniversary of Ohio's Voluntary Action Program (VAP) which is implemented by Ohio EPA and is the primary regulatory program for cleanup of brownfields.  

To mark the anniversary, Ohio EPA encouraged presenters to reflect on the success of the VAP and other brownfield programs in Ohio.  Presenters were also encouraged to discuss ways to accelerate brownfield redevelopment in Ohio.  

Despite twenty years of the VAP as well as some of the best incentive programs in the country, Ohio has failed to get ahead of its brownfield problem.  I believe it is time to rethink some of the tools used to greatly accelerate brownfield redevelopment.  This three part series will cover the following:

  1. Review the Brownfield Problem-  Without looking at the issues created by brownfields it is impossible to properly design policies to address them.
  2. An Inventory of Ohio Brownfields-  The second post will discuss public information regarding the number of brownfields in Ohio.  
  3. Review Ohio's Progress in Tackling its Brownfield Problem-  The second post will provide an overview of Ohio's progress using tools like the VAP, Clean Ohio, JobsOhio Revitalization Program and brownfield tax incentives.
  4. New Strategy to Accelerate Brownfield Redevelopment-  The final post will provide recommendations for ways to better utilize incentives, streamline regulatory cleanup and better address public health issues.

OHIO'S BROWNFIELD PROBLEM

What causes brownfields to occur?

Two primary forces create brownfields- market forces and fear of environmental liability.  

MARKET FORCES

  • Expansion of business-  businesses looking to expand in urban areas often find the cost of expansion significantly higher to expand in onto neighboring property versus moving to a greenfield.  One study in Ohio found the cost of developing on a brownfield property four times higher then the cost of building on a greenfield. 
  • Closure/Relocation/Consolidation of Businesses-  Businesses close for a variety of reasons. One of the hardest hit sectors has been manufacturing.  When these businesses close they often can leave behind contaminated sites.  
  • Lower Tax Rates or Incentives-  Businesses can also be lured away by either lower tax rates or incentive packages.
  • Moving to a "Better Area"- Some businesses also move because of the decay of the urban areas where they are located.  

 ENVIRONMENTAL LAWS

  • Liability-  Expansive liability provisions in environmental laws also act as a strong impediment to businesses choosing to expand on a brownfield. The law with the broadest liability provisions is CERCLA (Superfund) which contains provisions that make any "owner" liable for pre-existing contamination regardless if they created the contamination.  Many other environmental laws can also create liability concerns as well (RCRA, underground storage tanks, TSCA, etc.)
  • Financing Considerations-  Banks understandably are concerned with the risk to their borrowers should they seek to redevelop a brownfield.  These concerns can translate into extensive due diligence requirements, more complicated financing or even refusal to finance certain projects.
  • Timing/Delays-  Navigating the complex environmental liability issues and addressing contamination under regulatory cleanup programs takes significant time.  Many businesses simply don't have the time to address the issues presented by a contaminated sites.

What social issues and environmental issues do brownfields create?

SOCIAL ISSUES

  • Vacant Buildings-  Invite abuse, including stripping of parts, materials vandalism, arson and "midnight dumping." 
  • Unemployment-  Higher unemployment occurs when businesses leave areas and those areas become blighted
  • Urban Blight- Discourage investment and contribute to pervasive sense of poverty and hopelessness.
  • Infrastructure-  Investment shifts from urban core to suburbs.  As a result of urban sprawl, more infrastructure is needed to be maintained. 
  • Taxes- Revenue sources for cities to pay for services are reduced as jobs migrate away from urban core.

ENVIRONMENTAL ISSUES

  • Contaminated Sites-  Brownfields present public health risks from exposure to contaminants. Contamination can also migrate onto neighboring properties, discharge to surface water or create vapor intrusion issues.
  • Urban Sprawl-  Expanded development away from our urban cores results in more impacts to wetlands and streams.  Also, urban sprawl results in greater air pollution due to more vehicle miles traveled and less use of public transportation.

 

Water Rights & Regulation in the Utica and Marcellus Shale Plays- Part 3 of 3

This is the final post in the series discussing water rights & regulation in the Utica and Marcellus Shale Regions.  The first post discussed how oil & gas companies select water resources to supply their drilling activities.  The second post discussed the riparian water rights doctrine which is followed in the Midwest.  This final post will provide an overview of the water withdrawal and use regulations in Ohio, Pennsylvania and West Virgina.

Ohio Water Withdrawal Regulations

Ohio is divided into two watersheds- the Ohio River and Lake Erie Watersheds. The Lake Erie Water shed is governed by a complex set of relatively new water withdrawal regulations that were adopted as part of the Great Lakes Compact. However, by far the heaviest concentration of oil & gas wells is located in the Ohio River Watershed where there is very limited water withdrawal regulation.

Ohio requires all withdrawals of greater that 100,000 gallons per day to register with the Ohio Department of Natural Resources (ODNR). See, R.C. §1521.16 Any consumptive use of more than two million gallons per day (mgd), averaged over any 30-day period (i.e. 60 million gallons per month), must obtain a consumptive use permit from the Ohio Department of Natural Resources. See, R.C. §1501.33. ODNR considers the use of water in fracturing to be a 100% consumptive use.

While many water withdrawal users have registered their withdrawals, companies have strategically limited withdrawals to stay below the consumptive permit threshold to avoid the permitting requirements. To date, ODNR has not issued a single consumptive use permit. Furthermore, ODNR does not have the regulatory authority to determine whether a user’s water withdrawals are “reasonable” under the riparian rights doctrine, at best ODNR can issue advisory opinions.

As a result of the limited regulation in the Ohio River basin, water withdrawals are principally governed by the doctrine of riparian water rights. Because ODNR cannot enforce “reasonable” use of water, one holder of riparian rights must sue another before courts can evaluate the reasonableness of a water withdrawal.  A demonstration of harm is also typically required before a use can be challenged as unreasonable.

As a result of Ohio’s limited regulations on water withdrawals, litigation is the primary mechanism to resolve disputes over water use. Courts are left with a vague series of factors to determine reasonableness.

Despite limited regulations, Ohio had not seen high profile instances where water withdrawals have resulted in ecological harm or harm to other users.  Industry in Ohio, not just the oil & gas industry, has asserted that limited regulations are appropriate due to fact no significant issues have arisen.


West Virginia Water Withdrawal Regulations

West Virginia has elected to ratchet up its regulation of water withdrawals in response to the increased demand for fresh water associated with oil & gas development. The State’s efforts culminated in 2013 with the passage of a series of more stringent regulations governing water withdrawals.

Title 35, Series 8 of West Virginia’s code contain new requirements applicable to any natural gas operator developing a horizontal well that will use more than 210,000 gallons of water. Such operators must submit a Water Management Plan as part of their permit applications submitted to the West Virginia Department of Environmental Protection (WVDEP). The water management plan must contain the following:

  • Water source type and location;
  • Anticipated volume of withdrawal;
  • Dates when the withdrawal will be made (November through June withdrawals encouraged);
  • Identification of any existing water uses within one mile downstream of the withdrawal location;
  • Demonstrate that sufficient in-stream flow is maintained when a pass-by flow that is protective of the stream is preserved immediately downstream; and
  • Methods to be implemented to minimize adverse impacts to aquatic life

The most complex component of WVDEP of the Water Management Plan development process is the requirement to demonstrate the adequate pass-by flow to protect aquatic life.

WVDEP encourages plan developers to allow the Agency to estimate the volume of water that will be available for withdrawal.  WVDEP utilizes information from the nearest USGS gauge and historic flow statistics are correlated to the withdrawal location. A target withdrawal rate is calculated that will not impact aquatic life in the stream. WVDEP may require installation of a gauge or in-stream flow measuring device to measure and monitor flow.

Impoundments are commonly uses to insure availability of water. WVDEP requires a separate water management plan be developed even for impoundments.

The regulations adopted by West Virginia are specifically tailored to the oil & gas industry. The regulations require prior approval of withdrawals and monitoring to ensure adequate flows are maintained.

The State still relies on the doctrine of riparian water rights to allocate water among various users. In WVDEP guidance related to development of Water Management Plans, the Agency is careful to note “approval of the withdrawal location conveys no property or riparian rights.” However, compliance with an approved water management plan would be strong evidence that a water user withdrawals are “reasonable.”


Pennsylvania Water Withdrawal Regulations

Pennsylvania’s water regulatory scheme is unique in that the state water regulatory authority is not entirely dependent on state regulation but also dictated by two federal interstate compact commissions- the Susquehanna River Basin Commission (SRBC) and the Delaware River Basin Commission (DRBC). Water withdrawals located outside of the either Commission’s jurisdiction are governed by state regulations.

The SRBC and DRBC require water allocation permits for withdrawals of surface water or groundwater greater than 100,000 gallons per day (gpd). The Commissions also have “consumptive use” rules that limit withdrawals during times of drought or that require the payment of fess to allow for release from reservoirs during low flow. The SRBC requires approval of any new or increased consumptive water use in excess of 20,000 gpd.

In 2008, SRBC began requiring oil & gas companies to obtain approval before withdrawing any amount of water, even if the withdrawal is less than their historical thresholds that triggered permitting. SRBC has the authority to tailor regulations to specific industry if the Commission believes the industry's water-use activities could have an “adverse, cumulative adverse, or interstate effect on the water resources of the basin.”

While the SRBC and DRBC were first to adopt more stringent water management requirements for oil & gas development, by 2013 the State adopted similar water management requirements. Regardless of the basin in which water sources are located, Pennsylvania Department of Environmental Protection (DEP) requires an approved water management plan in connection with the gas well permit. 58 Pa.C.S. § 3211(m)

Water management plans in Pennsylvania are similar to those in West Virginia. Plans are required to address the following:

  • The source of the water, include the major river basin where the source is located;
  • Any water withdraw that exceeds 10,000 gpd in a 30-day period is required to register their withdraw with the State (Water Resources Planning Act);
  • Development of a water use monitoring plan, including the methods utilized to accurately monitor the amount of water withdrawn on a daily basis;
  • Methods for ensuring compliance with maximum rate limitations placed on withdrawals; and
  • Methods to ensure compliance with applicable passby flow conditions (including use of upstream or down stream gaging station)

In terms of management of maximum water withdrawals, the water management plan must include a low flow analysis. Using data, the user must calculate the 7-day, 10-year low flow for the water source (referred to as the Q7-10). Any flow that is less than or equal to 10% of the Q7-10 flow is presumed to be not significant.

Between the three states discussed in this article, Pennsylvania has enjoyed the longest and most robust oil & gas development.  Pennsylvania also has the most stringent regulations on water withdrawals by the oil & gas industry.

The Future of Water Withdrawal Regulation

This three post series has provided an overview of water use in the oil & gas industry in Ohio, Pennsylvania and West Virginia. Here are some observations regarding the future of water withdrawal regulation in those states:

  1. Industry in Ohio has strongly resisted increased regulation of water withdrawals.  It seems unlikely that additional regulations will be adopted unless there is a high profile incident involving ecological impacts or harm to other water users; 
  2. Once oil and gas prices rise again (and they certainly will), the competition for water resources will lead to more scrutiny as to impacts on water resources;
  3. With more robust regulation, riparian water rights will play a diminished role in determining what constitutes a “reasonable use” of water;
  4. Property rights aspects associated with riparian water rights will play a more important role in securing access to strategic water resources; and
  5. If the current downturn in oil & gas prices leads to consolidation within the industry, oil gas developers with investment in water infrastructure will have a strategic advantage due to the greater need for fresh water associated with consolidated and larger acreage followed by increased well development.

 

Water Rights & Regulation in the Utica and Marcellus Shale Plays- Part 2 of 3

This is the second post in a three part series which discusses water rights & regulation in the Utica and Marcellus Shale regions. The first post discussed how oil & gas companies select water resources to supply their drilling activities.  The post also reviewed two different strategies employed by companies when accessing water resources:

  1. Companies who look to access nearby water resources to reduce transportation costs; and
  2. Companies that invest upfront in significant water infrastructure to ensure access to reliable sources of fresh water over the long term.

This post provides an overview of water withdrawal regulation and water rights in the Midwest (Ohio, Pennsylvania and West Virginia).

Overview of Water Rights and Regulation

Water rights is a method of allocating water among users. Water rights in the United States is directly related to the availability of water. In states west of the Mississippi, where water is more scarce, water rights is governed by the prior appropriation doctrine (i.e. “First in time means first in line”).

In states east of the Mississippi, where water has been more abundant, water rights are based upon the principal that each holder of water rights is entitled to an equal share of water, while at the same time no landowner is guaranteed a certain amount of water.

Some states, such as Ohio, continue to rely principally on the doctrine of riparian water rights to regulate water use. Other states, such as Pennsylvania and West Virginia, have layered on top of the riparian rights doctrine specific regulations directed at the oil & gas industry designed to regulate water withdrawals.  

What has emerged in these Midwest states is a regulatory philosophy where gaps in regulation or limited regulations are back-stopped by the doctrine of riparian rights. Therefore, to understand how water withdrawals by the oil & gas industry are regulated, you must review both the specific regulations adopted by each state (the third post in the series) as well as gain an understanding of the riparian rights doctrine.

Riparian Water Rights

Ohio, West Virginia and Pennsylvania each have adopted the doctrine for water rights (i.e. riparian water rights associated with real property ownership).

The riparian water rights doctrine was in place in each state long before the resurgence in oil & gas development. These states have preserved the riparian water rights doctrine as the principal means of allocating water among users.  

What are Riparian Rights and How Does Water Get Allocated Among Water Users

Land qualifies as riparian if it fronts a stream, lake or river.  It is not just individuals who can own riparian water rights. Corporations and partnership can hold riparian rights if they own property that qualifies as riparian.

The core principle of the riparian rights doctrine is that all landowners that own property that front a watercourse have an equal right to the use of its water, provided that no one causes harm to another riparian water rights landowner. The right to use water is not absolute, but is limited by similar rights held by other riparian landowners. In other words, a riparian landowner may make any and all reasonable uses of water as long as they do not interfere with the other riparian landowners’ opportunity for reasonable use.

Basic Principals of Water Allocation under the Riparian Water Rights Doctrine

Case law has resulted in certain core principals in relation to riparian water rights.  These include: 

  • Preference is given to water uses for domestic needs;
  • A specific use of water is not unreasonable unless the use causes harm to another;
  • The fact that a use of water creates a perceptibly diminished flow of water does not automatically constitute an unreasonable use; and
  • Water transferred off the riparian land is either per se unreasonable or less favored than on land uses.

Who Decides Whether a Water Use is Reasonable?

Courts, not regulators, are the arbiters of water rights.  First, the Courts must consider the interest of the parties involved in the dispute over water.  Those interests include:

  • The interest of the person making the use
  • The interests of the person harmed by the use, and;
  • The interests of society as a whole in the use of the water.

After considering the interests of the various parties in a dispute involving allocation of water, Court then must weigh certain factors to determine if the use is "reasonable."  Some of the factors include:

  1. Purpose of the use;
  2. Suitability of the use to the watercourse;
  3. Economic value of the use;
  4. Social value of the use; and
  5. Extent and amount of harm the use causes

Riparian water rights, along with the associated factors which determine whether a use is reasonable, govern allocation of water among users. As discussed in the final post in this series, Pennsylvania and West Virginia have elected to go beyond allocations between users and have enacted specific regulations limiting water withdrawals by the oil & gas industry.

Water Rights & Regulation in the Utica and Marcellus Shale Plays- Part 1 of 3

World Water Day

March 22nd is World Water Day which was created, in part, to learn more about the issues that surround water.  This includes the importance of access to fresh water for both people and industry. In recognition of World Water day, I will be posting a three part series this week discussing the use of fresh water in oil & gas development in West Virginia, Pennsylvania and Ohio.

 

Surge in Oil & Gas Development Triggers Demand for Fresh Water

Since its inception the oil & gas industry has been a boom or bust industry. With high oil prices, national security concerns and advancements in technology, oil & gas development saw a major resurgence over the last decade. Areas of the country, such as the Midwest, which had not seen major development in many years, suddenly experienced a renaissance in energy investment.

The surge in oil & gas exploration and development in the Utica and Marcellus Shale Regions resulted in sharp increases in the demand for fresh water. Some companies addressed their needs by accessing the most readily available sources of fresh water, which out of necessity included small streams and tributaries. Other companies elected to invest millions of dollars in water infrastructure to ensure a consistent and reliable source of fresh water.

Due to the abundance of fresh water in the Midwest (as compared to other portions of the country) most states employed very little regulation of water withdrawals prior to the surge in fracking for oil & gas development. Limited regulation coupled with a spike in demand for fresh water triggered concerns regarding ecologic impacts as well as concerns pertaining to availability of water. Some states responded by adopting complex water management requirements. Other states relied principally on water allocation based upon riparian rights.

With the drop in oil prices, the Midwest has seen significant decline in oil & gas exploration in the last 12 months. The reduction in drilling activity has also lessened the demand for fresh water. However, it is only a matter of time before oil prices go back up. This temporary lull in drilling activity offers an excellent opportunity to analyze the current state of water rights and water withdrawal regulation in the Midwest.


The Need for Fresh Water in Oil & Gas Exploration

Hydraulic fracturing (fracking) is the technology that allowed oil & gas deposits in the Utica and Marcellus Shale regions to be accessible. Fracking is the process of injecting fluids, including large amounts of fresh water, under pressure into a well to create fractures in the rock that allow the gas to be released and recovered. The amount of fresh water used to develop an oil & gas well varies greatly depending upon the region, in the Midwest a typical well can utilize anywhere from 3 to 5 million gallons of water.

Which water resources are accessed for fracking is dependent on the location of the oil & gas well. Location of wells is driven by anticipated productivity. Once the oil & gas company determines the location of its well, it then tries to determine how it will source fresh water to allow for development of the well.

How the Oil & Gas Industry Selects Fresh Water Resources

Fresh water resources are largely selected based upon economics- the cost to move water from its source to the oil & gas well. The shorter the distance between the well and the fresh water resource,  the higher the strategic value of the resource. While reliability of the resource (i.e. abundance of fresh water) is an important factor, distance is still the most significant economic driver behind selecting which fresh water resources to access.

There are significant differences in the strategies employed by oil & gas operators when it comes to securing access to fresh water. Due to capital constraints, some companies are driven by short-term delivery costs and simply chose the most readily accessible resources. Other companies have elected to make long-term investments in major fresh water infrastructure to move water from large reliable sources to their operations.

As an example of the costs to move fresh water, in West Virginia it can cost $4-6 per barrel of water to truck water to the drill pad. In comparison, it may cost only .50 cents per barrel to pump water using pipes to the drill pad. However, piping typically requires large upfront capital costs that many companies find difficult to justify unless they have large and consolidated acreage under control. Furthermore, aggressive development must be planned in order to justify significant upfront investment in water infrastructure.

These distinct business strategies trigger a different array of legal issues. Companies electing to utilize the most readily available resources are more likely to access small streams and truck water when those streams are dry during summer and fall.  Companies that access the most readily available sources of water are more likely to trigger legal disputes with landowners regarding how much water is utilized or concerns regarding ecological impacts.

Those companies that elect to make major capital investments in water infrastructure face a very different set of legal concerns.  These companies must be assured that they will have uninterrupted access to an abundant water source in order to justify their expenditures. These operators are most concerned that their legal right to utilize the water is secure over the long term.

Next Post: Overview of Water Rights and Regulation
 

 

Applications Released for $20 Million Dollar Abandoned Gas Station Grant Fund

The Ohio Development Services Agency has announced that it is now accepting application for the Abandoned Gas Station Cleanup Grant Program.  Eligible activities include $100,000 for assessment and up to $500,000 for cleanup.  

The program targets abandoned gas stations and cleanup of underground storage tanks (UST).  To be eligible, the tank must be certified as a Class C BUSTR tank (i.e. abandoned).  

The first round of application are due by April 1, 2016.  A total of $3.5 million of the $20 million will be available in this round of funding.  

A review of the scoring matrix released with the application provides insight into which types of projects will score the best.  There are a total of 100 point available.  The points are awarded based on the following categories:

  1. Environmental Impact (extent of contamination, proximity to waterways or residences, etc) 15 points
  2. Community Impact (land use after cleanup and benefits to the community) 15 points
  3. Economic Impact (job creation, increase in land value) 15 points
  4. Previous planning efforts 10 points
  5. Cost to address sold waste removal- if over $5,000 get 10 points
  6. Prior recipient of a BUSTR loan 5 points
  7. Private funds invested in the property in the past 5 years -  Less than $10,000 5 points; More than $10,000 gets 10 points
  8. Previous Assessment or Fast Track grantee 20 points

The scoring matrix does look like a balance of environmental, community and economic benefit. Unlike JobsOhio Revitalization Program, projects involving heavily contaminated sites will get higher priority.  JobsOhio's program is almost entirely focused on economic redevelopment.  

Projects that have had prior planning efforts or investment in funds will also do better in this competitive grant cycle.

Potential applicants now have less than a month to get their applications in for this first round of funding. 

 

EPA Release New National Enforcement Initiatives for 2017-2019

On February 28, 2016, U.S. EPA publicly announced its priority enforcement areas (EPA National Enforcement Initiatives or NEIs) for the next three years (fiscal years 2017-2019).  The announcement provides keen insight into how EPA plans to allocate its enforcement resources in the coming years.  

 EPA describes the NEIs in the following manner:

"Every three years, EPA selects National Enforcement Initiatives to focus resources on national environmental problems where there is significant non-compliance with laws, and where federal enforcement efforts can make a difference"

EPA has elected to keep five of its current enforcement initiatives, expanding some of its efforts, as well as add two new initiatives.  This brings the total priorities to seven for fiscal years 2017-2019.  The NEIs take effect on October 1, 2016. 

A brief summary of each NEI is provided below.

Air

  • Reducing Air Pollution form the Largest Sources-  EPA's New Source Review (NSR) initiative has targeted cement, glass and acid plants.  However, its principal target has been coal fired power plants.  According to U.S. EPA statistics, from FY 2010 to FY 2015, of the 800 facilities inspected, EPA has increased the number of facilities with enhanced air pollution controls from 41% to 77%.  By maintaining this enforcement priority, EPA will likely focus on compliance with existing decrees as well as target new industries.
  • Cutting Hazardous Air Pollutants - EPA is expanding this initiative for the FY 2017-2019 to focus its efforts on two additional source categories-
    • Large product storage tanks used by refineries,chemical plants and bulk storage facilities- EPA will likely used enhanced inspection techniques, such as infrared cameras to looks for leaks of volatile organic compounds (VOCs) from these storage units;
    • Hazardous waste generator and treatment, storage, and disposal facilities-  the focus of this expanded initiative will be to address hazardous waste tanks, surface impoundments, or containers, as well as related hazardous waste treatment equipment.

Energy Extraction

  • Ensuring Energy Extraction Activities Comply with Environmental Laws

The attached chart shows the dramatic increase in the number of inspections and enforcement actions related to energy extraction.  

EPA has increased the number of inspections from 361 in FY 2011 to between 600 to 700 per year.  Interestingly, the number of enforcement actions has not significantly increased when comparing FY 2011 to subsequent years. 

It is also interesting that EPA maintained this initiative despite the recent dramatic economic downturn in the energy sector.

  

Hazardous Chemicals

  • Reducing Pollution from Mineral Processing Operations- Focus is on releases from mining operations that EPA believes threaten drinking water, surface water as well as cleanup mining sites.
  • Reducing Risks of Accidental Releases at Industrial and Chemical Facilities (NEW)-  The focus of this new initiative will be compliance with Risk Management Plan (RMP) rule.  RMPs are required for facilities that store extremely hazardous materials.  RMP is required under Section 112(r) of the Clean Air Act.  Facilities are required to have plans that inventory the materials and have a plan to implement in the event of releases or emergencies.  Plans are required to be updated every five years. It is likely EPA will look for facilities that have failed to comply with the RMP rule or those facilities with outdated plans.

Water

  • Keeping Raw Sewage and Contaminated Stormwater Out of Our Nation's Water-  EPA has largely addressed municipal wastewater treatment plants (WWTPs) with combined sewer overflows (CSOs) and/or sanitary sewer overflows (SSOs).  This initiative was renewed most likely to focus on compliance with existing consent decrees.  In many cases, cities are facing the most expensive parts of their compliance schedules.
  • Preventing Animal Waste from Contaminating Surface and Ground Water- EPA has been focused on inspections and enforcement of Combined Animal Feeding Operations (CAFOs) for a number of years.  Since 2011 it has conducted over 1,800 inspections and concluded 217 enforcement actions under the Clean Water Act.
  • Keeping Industrial Pollutants Out of the Nation's Waters (NEW)-  EPA will be focusing on certain industries that it believes contribute a larger portion of nutrient and metal pollution. Those industries include chemical and metal manufacturing, mining and food processing.  On its web-page, EPA signals that it will look to compliance with NPDES permits and electronic reporting of effluent violations (eDMRs) to initiate actions.

Justice Scalia's Passing Has Major Implications for the Clean Power Plan

With the surprising and sad news over the weekend of Justice Scalia's passing, many critical decisions before the Supreme Court suddenly got more interesting. This is certainly the case with the Clean Power Plan. 

Last Week, in the first time in history the Court issued a stay of the effectiveness of the rule while the rule was still under challenge in the lower D.C. Circuit Court of Appeals.  This was a highly unusual move both because the D.C. Circuit denied to grant the stay and because the Court never had taken the step previously.  Many speculated that the Supreme Court's decision signaled the likelihood that the Clean Power Plan would not survive the legal challenge.

The stay was issued in a 5-4 decision along ideological lines.  It seemed likely that the Court's ultimate decision as to the legality of the rule would be issued along similar ideological lines.

With Justice Scalia's passing, the Supreme Court is now split down the middle, with four liberal justices and four conservative justices. 

What this ultimately means for the Clean Power Plan is somewhat uncertain, depending on the timing of the appeal.  First, it appears unlikely the Court will revisit the stay that was issued last week.  This comment appeared in the Atlantic Monthly:

"There is currently no reason to assume the Court will revisit the stay order," said Richard Lazarus an environmental-law professor at Harvard, "It is final as voted by the full Court at the time and is not subject to revisiting any more than any other rule by the Court before the Justice's passing."

Second, it appears more than likely that the case will be heard by the Supreme Court before a justice can be appointed to replace Justice Scalia.  Based upon the political rhetoric that has ensued since news broke regarding Justice Scalia's passing, it appears highly unlikely that the Senate will confirm a new appointee by President Obama.  Also, based on current timing, with a decision expected this fall by the D.C. Circuit and a decision next spring by the Supreme Court, it also appears very unlikely the new President will have a replacement Justice confirmed before the Court issues its decision.

I had commented in my previous post on the Supreme Court's decision to issue the stay that the D.C. Circuit's decision on the merits regarding the legality of the rule was merely advisory. This comment was based on the assumption the Supreme Court would hear any challenge an render the ultimate decision on the legality.

Assuming no new justice is appointed before the Supreme Court hears the challenge to the Clean Power Plan, the D.C. Circuit Court's decision would likely decide the fate of the ambitious Clean Power Plan. Assuming no new Supreme Court Justice is appointed, and assuming the Court does vote on the legality of the plan along ideological lines, this could mean the Court would be deadlocked in a 4-4 tie.  If this were to occur, the D.C. Circuit Court decision on the merits would likely be the law of the land.  

The current panel at the D.C. Circuit seems to favor upholding the Clean Power Plan.  The case will be decided by a three judge panel.  Justices Judith Rogers (a Clinton appointee) and Karen Henderson (a George H.W. Bush appointee) have been inclined to vote in favor of EPA's efforts to regulate greenhouse gases in prior Court decisions.  The third Judge- Sri Srinivasan is an Obama Appointee.

With developments over the weekend, it appears the most significant piece of environmental regulation in decades may have new life.