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July 17, 2012

Three Recent Developments Impacting Shale Gas Drilling in New York State

Three recent developments offer a foreshadowing of how the tapping of New York's vast Marcellus and Utica formation shale gas resources is likely to begin as well as the extent of regulatory obstacles that will have to be avoided or overcome.

High-volume hydraulic fracturing and horizontal drilling (hydrofracking) is the only cost-effective way to exploit the enormous reservoir of natural gas encased in the Marcellus and Utica shale formations underlying much of Western New York, Central New York and the Southern Tier. Nevertheless, hydrofracking, if left unregulated, holds the potential to significantly adversely impact the environmental. The State has, therefore, declared a moratorium on hydrofracking until the New York State Department of Environmental Conservation (NYSDEC) can complete an environmental impact statement process pursuant to the State Environmental Quality Review Act (SEQRA). Presently, the NYSDEC is reviewing and preparing responses to tens of thousands of comments on its 1000+ page supplemental generic environmental impact statement (SGEIS).

In mid-June, unnamed sources within Governor Cuomo's administration leaked a tentative plan for first stage hydrofracking focused on five Southern Tier counties with 50 drilling permits issued in the first year of development. The unnamed sources, however, also indicated that local governments within the Southern Tier would be permitted to prohibit hydrofracking within their jurisdictions.

Meanwhile, a coalition of landowners and businesses in the City of Binghamton, the most populous city within the Southern Tier, brought suit against the City to challenge its enactment of a two-year ban on hydrofracking activities within City borders. The lawsuit raises substantial issues not previously addressed by the trial courts' decisions this past February in the Dryden and Middlefield drilling ban cases. See, Hiscock & Barclay Alert, Did the Dryden and Middlefield Courts Get It Wrong?

Finally, the federal Second Circuit Court of Appeals just upheld the issuance of the certificates approving a new 39-mile natural gas pipeline through northeast Pennsylvania by the Federal Energy Regulatory Commission (FERC), rejecting the plaintiffs' claim that FERC should have conducted an in-depth study of the "cumulative impacts" from any increased drilling that the pipeline might stimulate before making a decision.

First Stage Hydrofracking in the Southern Tier

On June 13, 2012, The New York Times reported that Governor Cuomo's administration is developing a plan that allow drilling for the next several years only in the Southern Tier counties of Steuben, Chemung, Tioga, Broome, and Chenango. The reported justification for this limitation is that the greater depth of the Marcellus Shale formation in those counties reduces the risk that the shallower drinking water aquifers will be adversely impacted. Furthermore, within these counties, municipalities would be permitted to determine whether or not to allow hydrofracking projects within their jurisdictions, and hydrofracking would be prohibited within the Catskill Park and nationally-designated historic districts.

These gubernatorial restrictions would be in addition to any previously announced limitations proposed by NYSDEC, including the prohibition on hydrofracking within the water supply watersheds for New York City and Syracuse, near various categories of public and private surface and groundwater supplies, and in State parks and wildlife preserves. The leaked plan would also reduce the number of drilling permits issued in the first year from 75 to 50.

This leak is likely a trial balloon to allow the Cuomo administration to gauge how it plays the hydrofracking issue with stakeholders and the public at large. Therefore, the leaked plan is certainly subject to change and contingent upon the SGEIS process, "a step that is not a foregone conclusion but is widely expected later this summer," according to the Times.

Challenge to Binghamton's Ban

The City of Binghamton enacted in December 2011 a two-year, City-wide ban on all activities involving the exploration for and extraction of natural gas and/or petroleum (the "Ban"). The Ban, therefore, extends beyond hydrofracking to natural gas "support activities," such as compressor and processing facilities, storage and disposal of production wastes, and pipelines not regulated by state or federal laws. The Ban was enacted by a lame-duck City Council on an expedited basis after the November 2011 election resulted in the impending turn-over of five of the City Council's seven seats.

Typically, the municipalities that have enacted bans have done so as an amendment to their zoning codes. But, the lame-duck City Council did not have enough time to enact the Ban as a zoning law because that would have required a referral to the City planning board and, under Section 239-m of the State's General Municipal Law, a referral of at least 30 days to the county planning board to allow "for inter-community or county-wide considerations" and recommendations. Although the City would have been free to choose not to abide by the county planning board's recommendations, it would have had to both explain why it was not abiding by the county recommendations and approve the Ban by the vote of a majority plus one. So, instead of making the Section 239-m referral in order to enact the Ban as a zoning amendment, the City Council enacted the Ban as a stand-alone City Code chapter separate from zoning.

On May 30, 2012, a group of Binghamton-area citizens and businesses commenced a lawsuit (Jeffrey v. City of Binghamton) seeking to have the Ban annulled. The plaintiffs allege that the Ban "implicitly or explicitly 'amends' a zoning ordinance or local law and is subject to mandatory referral under General Municipal Law § 239-m." Therefore, the Ban is invalid because the City failed to make the required Section 239-m referral prior to its enactment.

Noting that the City is a center of commerce and industry in an area with rich Marcellus Shale gas reserves, the plaintiffs' brief states that the Ban "inherently constrains gas development in our area and, thus, has major land-use and economic ramifications, not only for Binghamton landowners and businesses, but also for landowners and businesses in adjoining municipalities and for all of Broome County. These implications are far-reaching, even absent the potential for major gas-drilling within the City limits of Binghamton." The plaintiffs also allege that the Ban will adversely affect "the hospitality industry"¦, businesses that sell hardware, sand and other products needed by gas workers, providers of legal, accounting, insurance and banking services, real estate brokers and agents, and many others."

Anticipating the gubernatorial proposal before it was leaked to the Times, the plaintiffs' note that NYSDEC likely will abide by the preferences of local governments in the hydrofracking process and "[b]y branding Binghamton as hostile to gas drilling and support services, the City may cause all of Broome County to be bypassed by both State regulators and the gas drilling industry." One plaintiff, the owner of a Holiday Inn located in Binghamton, had already experienced a surge in business simply as a result of overflow demand generated by gas drilling activity in the Northern Tier of Pennsylvania, and feared the Ban's "deleterious economic impact"¦ on the Holiday Inn's future business [because] it could discourage the natural gas industry from coming to Broome County to utilize the Holiday Inn Binghamton."

In its defense, the City asserts that the Ban is premised on the City's authority under State Municipal Home Rule Law ("MHRL") §10 to "guard against pollution, and to protect the safety, health and well-being of its residents" and, under the State Environmental Conservation Law ("ECL") "to abate water pollution and [regulate] solid waste disposal." The text of the Ban states that it is designed to protect the City's EPA-designated "sole source" groundwater aquifer, which is the principal drinking water source for the area and allegedly vulnerable to contamination due to the highly permeable soils that overlay it. The City cites two Appellate Division decisions, the Town of Islip v. Zalak and Pete Drown, Inc. v Town Bd. of Town of Ellenburg, that held that a municipality's regulation of facilities can be justified under the "police power" and will not be invalidated for not abiding by state laws governing zoning. See165 A.D.2d 83 (2d Dept. 1991) and 229 A.D.2d 877 (3d Dep't 1996). In Town of Islip v. Zalak, the court upheld a town law regulating solid waste transfer facilities, including the minimum size of lots. In Pete Drown, Inc. v Town of Ellenburg, the court upheld a town-wide ban on commercial medical waste incinerators as a valid exercise of the "police power" provisions of the MHRL.

Thus, the Binghamton case raises supersedure issues not raised in the Dryden and Middlefield cases. If the Ban is not a zoning amendment and is supported by the MRHL, it is arguably preempted by State's Oil, Gas and Solution Mining Law ("OGSML"), which authorizes NYSDEC to solely regulate the location of wells for purposes of protecting public and private property, public safety, and fresh surface water and groundwater aquifers. See, ECL §§ 23-0301, 23-0305(8)(d) and (k); 6 NYCRR §§ 553.2, 560.4. The OGSML expressly provides that it "shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries." The only statutory exceptions to such preemption are with respect to local government jurisdiction "over local roads or the rights of local governments under the real property tax law." ECL§23-2303(2). To date, the only judicial exception to State primacy is for the application of local zoning ordinances per the trial courts' decisions in the Dryden and Middlefield.

Therefore, it would appear that, were the court to accept the City's assertion that the Ban is not a zoning amendment but, instead, a law to control "air, water and land pollution that is reasonably likely to result from... Natural Gas Exploration," then the Ban would be an illicit attempt to locally regulate the gas mining industry expressly superseded by the OGSML unless the trial court were to find yet another judicial exception to the OGSML. Such an outcome would appear to be unlikely because the Dryden and Middlefield trial courts reviewing the two towns' bans upheld them based in large part on the State's constitutional and legislative doctrine of municipal home rule over zoning. Without a basis in zoning, the Ban loses the traditionally strong presumption in favor of municipal home rule without replacing it with some equally strong basis in the State's municipal enabling laws.

At present, of the approximately 100 New York municipalities that have passed a hydrofracking ban or moratorium, only two "” Binghamton and the town of Wayne, Steuben County "” sit within the five-county region that is targeted for development in Governor's tentative plan. On the other side of the ledger, approximately five towns and one village in Broome County have adopted resolutions opposing the enactment of local bans as "an irresponsible and premature misallocation of [local government] resources," and that "are detrimental to the interests of other municipalities for many reasons, including: foregone economic activity and new jobs; and a negative impact on the competitive environment of all of New York State for natural gas development." The integrity of the members of those town and village boards that oppose hydrofracking bans have, in turn, been challenged because some of the members own land or businesses that stand to profit once hydrofracking commences in New York, according to a June 27, 2012 newspaper article in the Rochester Democrat and Chronicle. The issue of whether property owning political leaders should be able to vote on hydrofracking-related matters has yet to be litigated. However, the Broome County Attorney opined in 2009 that county legislators who had leased or intended to lease their mineral rights should abstain from voting on hydrofracking matters.

FERC's Review of Pipeline Will Not Reopen

On June 12, 2012, the federal Court of Appeals for the Second Circuit upheld FERC's approval of the Marc I Hub Line Project, a 39-mile long natural gas pipeline in northeast Pennsylvania, rejecting claims that FERC's environmental impact review of the project was incomplete because it failed to look at the cumulative environmental impact of all hydrofracking-related facilities that will be stimulated by the pipeline's construction.

During FERC's environmental assessment of the pipeline under the National Environmental Policy Act (NEPA), FERC declined environmentalists' requests for a cumulative review of future Marcellus Shale natural gas production facilities whose development would be stimulated along the pathway of the pipeline. The environmentalists argued that the impacts of future production facilities on forest fragmentation, air and water resources, land use, visual resources, recreation, and other aspects of the environment should be reviewed pursuant to NEPA as reasonably foreseeable direct and indirect cumulative impacts of the pipeline even though the facilities are outside FERC's jurisdiction.

A three-judge panel of the Court, however, ruled that FERC was not obligated to consider the broader effects of the permitting of the pipeline in its environmental assessment, holding that "FERC reasonably concluded that the impacts of that development are not sufficiently causally related to the project to warrant a more in-depth analysis." This decision removes one more potential bureaucratic, delay-inducing obstacle to hydrofracking development in New York. FERC will not be forced to require each developer of a FERC-related facility to repeat the comprehensive, state-wide analysis of hydrofracking's environmental impact which NYSDEC is conducting through the SGEIS process under SEQRA.


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