“Common Control” in the States

The June 2, 2017, Pennsylvania Commonwealth Court decision in National Fuel Gas Midstream Corp. v. Pennsylvania Dep’t of Envt’l Protection, No. 116 C.D. 2016 (“Trout Run”), may have finally shown a way out of the seemingly never-ending disputes that arise when determining what constitutes a stationary source for NSR purposes. In Trout Run, the Commonwealth Court of Pennsylvania overturned the Pennsylvania Department of Environmental Protection ("PDEP") and Pennsylvania's Environmental Hearing Board ("EHB") both of whom had, for slightly differing reasons, found that two distinct corporations - "Trout Run" and "Seneca" - should be combined as a single stationary source for permitting purposes. The determination turned on the issue of "control" and the court set forth a straight-forward bright line test for determining "control."

ANALYSIS

EPA defines a "stationary source" as any "building, structure, facility or installation that emits or may emit an NSR regulated pollutant." In turn EPA defines a "building, structure, facility or installation" as any activity or group of activities that:

• Belong to the same industrial grouping [SIC Code],

• are located on one or more contiguous or adjacent properties, AND

• are under the common control.

Since 1980, when the EPA promulgated this definition, it has issued numerous determinations about what it means to "control." States have used EPA's various determinations to help guide them in deciding what activities constitute a "stationary source."

In October 2013 PDEP issued a permit for a compressor station to Trout Run and in doing so concluded that Seneca's operation of Well Pad E (otherwise exempt from permitting) should be combined with the proposed compressor station as a single stationary source. The companies asked PDEP to reconsider and in 2015 PDEP again concluded that the two operations should be a single stationary source. The PDEP found that both facilities have the same SIC code, the facilities are contiguous or adjacent, and that the facilities were under common control based on PDEP’s October 2012 stationary source guidance document. The guidance provided that "common control is determined on a case-by-case basis and is guided by the general definition of control used by the Securities and Exchange Commission (“SEC”). The SEC defines “control . . . as the possession, direct or indirect, of the power to direct or cause the direction of management and policies of a person, whether through ownership of voting securities, by contract, or otherwise.”

The PDEP looked at the corporate ownership of "Trout Run" and "Seneca" and, while they were separate corporate entities, determined that they were both subsidiaries of the same parent company NGFC, that a number of the executive officers were shared among the three companies (NFGC, Trout Run, and Seneca) and their operations were integrated to such an extent that they operated as one organization. Based on these findings PDEP found that Seneca and Trout Run were a single stationary source.

PDEPS's decision was appealed to the EHB. The EHB agreed with the ultimate determination, but in doing so rejected PDEP's use of the SEC approach to determining "control." Instead, the EHB applied a more lenient standard finding that the "power to influence" was sufficient to establish "control."

The EHB decision was appealed to the Commonwealth Court. The court first rejected EHB's "power to influence" approach noting that power to influence is quite different from the power to control. The court pointed out that the PDEP Chief of Permits testified that control requires "mak[ing] the other entity" take some action.

The court then rejected PDEP's SEC approach because it "disregards long-standing principles of corporate governance." The court was persuaded by the U.S. Supreme Court's decision in United States v. Bestfoods, 524 U.S. 51 (1998). In Bestfoods, the U.S. Supreme Court interpreted a provision in the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) that imposes liability on “any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of.” Section 107(a)(2) of CERCLA, 42 U.S.C. § 9607(a)(2) (emphasis added). The Court found that if CERCLA imposed liability only on owners, and the subsidiary owned the site, the parent could not be liable without piercing the corporate veil. Bestfoods, 524 U.S. at 63-65.

The Commonwealth Court stated that corporations are considered "separate and distinct legal entity, even if its stock is owned entirely by one person." Lumax Indus., Inc. v. Aultman, 669 A.2d 893, 895 (Pa. 1995). Moreover - and this is the important point that prior EPA guidance seems to have overlooked - the court noted that each corporation is under the control of their board of directors. The members of the board have a fiduciary responsibility to the company and they have a legal duty to act in the best interest of the subsidiary, not the parent company. This is true even where, as, in the facts of this case, there were persons who served on multiple boards simultaneously. The court also observed that resolving this case in this manner addresses the practical concern with holding one company liable for the acts of a wholly separate company. In this case, Seneca, was exempt from permitting, but would have been held liable for the acts of Trout Run despite not having any direct control over its actions.

The Commonwealth Court rejected a related argument brought by the companies, that they did not comport with the “common sense notion of a plant,” holding that this was an “overarching concept” and that if the regulatory definition was satisfied, then the facility, ipso facto, did meet the common sense definition of a plant.

The Commonwealth Court remanded the case back to PDEP to evaluate whether there was “common control” applying the appropriate test.

COMMENTARY

This decision is consistent with the 2011 11th Circuit decision upholding EPA's denial of a Sierra Club Title V petition in Oglethorpe Power. The background, while somewhat complicated, is important. Georgia Power obtained an NSR permit for 4 combustion turbines at Plant Wansley. Later that year Georgia Power sold one of those combustion turbines to Oglethorpe. When Oglethorpe applied to have the NSR permit transferred, the Sierra Club objected because Oglethorpe was part owner of another stationary source - Plant Scherer. Plant Scherer consists of 4 EGUs and Oglethorpe owned a 60% interest in units 1 and 2. Units 3 & 4 were out of compliance with the Clean Air Act.

One of the requirements for an NNSR permit is that the owner must demonstrate that all major stationary sources owned and operated by such person are in compliance. See 40 CFR 51 App. S, Sec. IV, Condition 2; Ga. Comp. R. & Regs. 391-3-1-.03(8)(c).

The question was whether Oglethorpe was the owner/operator of the major stationary source - Plant Scherer - a portion of which was out of compliance. Georgia and EPA agreed that for permitting purposes Oglethorpe owned and operated Unit 8 at Plant Wansley. However, for compliance purposes, Oglethorpe only "controlled" 2 units at the Plant Scherer and the units Oglethorpe owned were in compliance. The 11th Circuit upheld Georgia and EPA's decision. The court said the "focus is on whether...a source can control the pollution being emitted..." "Simply put, Oglethorpe cannot command Georgia Power to put Units 3 and 4 - units that Oglethorpe does not own or operate - into compliance status."

The analysis by the 11th Circuit was not unlike the analysis in Trout Run. However, the Trout Run court refined it from a legal perspective by grounding the concept in corporate law.

Hopefully, the EPA will acknowledge that absent changing the regulatory definition of stationary source, the question of control rests not on multi-factored tests, but rather on centuries of well-established corporate law.

NSR Law Blog is pleased to welcome John Evans, Senior Environmental Consultant at RTP Environmental Associates and former Chief Deputy Secretary of the North Carolina Department of Environmental Quality as a guest contributor.