Monthly Archives: May 2014

2014 Regulatory Reform

May 21, 2014. Yesterday, the Senate Agriculture and Environment Committee approved a 62-page regulatory reform bill that many committee members did not see until it was handed out at the beginning of the committee meeting.  Today, the Senate Finance Committee  gave  Senate Bill 734  (Regulatory Reform Act of 2014) a favorable report and the bill will go to the Senate floor tomorrow for an initial vote. Some of the most significant environmental provisions:

More legislative review of environmental rules.   In 2011, the General Assembly, returning to an idea from the 1980s,  put strict limits on  adoption of state environmental rules that are more stringent than federal rules on the same subject.  The   law  has  exceptions only for rules needed  to address a “serious and unforeseen threat to public health, safety or welfare” and rules required by state law, federal law, state budget policy or a court order.   (An earlier post  talks about  the practical difficulties and policy implications of  chaining  state environment standards so tightly to federal rules.)   Section 1 of Senate Bill  734  goes another step and  requires legislative review of  any  rule adopted under one of the  exceptions, possibly delaying the effective date of the rule for months.   The state’s Administrative Procedures Act normally requires legislative review of a rule only if 10  or more people send letters objecting to the rule.  Under Senate Bill  734,  ten letters of objection would still be needed to  get  legislative review of  a rule change that weakens environmental standards, but  the legislature would  automatically review any rule that  goes beyond minimum federal environmental standards.

Eliminate citizen appeals of toxic air pollution  permits. Sec. 2.2 limits citizen appeals of air quality permits to  decisions  involving a national ambient air quality standard. The problem is that “national ambient air quality standard” does not even cover the universe of federal air quality rules.  National ambient air quality standards cover six pollutants  (carbon monoxide,  lead, nitrogen dioxide, sulfur dioxide, particulates, and ozone) that cause environmental and health problems when levels  reach a certain level in outdoor air.   But the Clean Air Act  also regulates a much longer list of  hazardous air pollutants or “air toxics”  associated with   cancer risk, infertility, birth defects  and other acute environmental and health effects. Mercury and benzene are examples of air toxics.  There are no national ambient air quality standards for air toxics; those pollutants are regulated under a different set of rules that require  a high level of pollution control on every regulated air toxic source. As  written, Senate Bill 734 would   bar  citizen appeals of  air quality permits issued for facilities that emit air toxics.

Emergency Authority to Waive Coastal Development Permits. Sec. 2.5 gives the governor the authority to waive Coastal Area Management Act (CAMA) permits and environmental impact statements  for emergency repairs to a highway “that provides the sole road access to  an incorporated municipality or an unincorporated inhabited area bordering the Atlantic Ocean or any coastal sound, where bridge or road conditions as a result of the events leading to the declaration of the state of emergency pose a substantial risk to public health, safety, or welfare”. The description fits Highway 12 in Dare County — the  perennially endangered road on  Hatteras Island. (See an earlier post for the history – and cost — of maintaining Highway 12.) The idea of waiving state permits for rebuilding damaged segments of Highway 12 after a storm has some appeal — but may not have the desired effect. Aside from eliminating any state review of  project  impacts, waiving the CAMA permit only puts the  U.S. Army Corps of Engineers entirely in  control of the permitting process.

Environmental Audits/ Self-Reporting. Sec. 3.6   of the bill does two significant things: 1. Protects internal company  environmental “audits” from disclosure to regulatory agencies; and 2.  Provides immunity from civil penalties to a company that voluntarily self-reports a violation.

Limited immunity from penalties can make sense if limited to situations where the violator has  self-reported a recent, unintended violation. The Senate Bill 734 audit/self-reporting provision has not been limited to those situations and potentially provides the benefit of confidentiality and immunity to violators who have committed  longstanding, continuing violations of environmental laws. Under the bill, the violator can use a recent environmental audit to cover numerous  past  violations and acquire immunity by “self-reporting” those violations.  Although the bill does not give immunity for willful and intentional violations or violations resulting from criminal negligence, it would deny regulators access to internal environmental audits that may document  the intentional behavior.  In the worst case, the provision could be a gift to violators who gambled for years on their ability to evade enforcement.

It is difficult to ignore the implications for   violations  at coal ash impoundments. Under the bill, a company  inspection of a coal ash impoundment could be treated as  a confidential “environmental audit” and  withheld from state regulators. And the owner/operator of the coal ash impoundment   may  get immunity from civil penalties by  self-reporting violations that had gone on for years.

Other sections of the bill incorporate legislation  recommended by the Environmental Review Commission (described here).  Senate Bill 734 actually goes beyond the ERC recommendation on isolated wetlands and proposes to eliminate permit review of  isolated wetlands impacts of less than an acre in both the eastern and western parts of the state.  The bill  continues a recent pattern of  weakening  open burning  rules by limiting local government authority to regulate open burning.  The bill also proposes to shift rulemaking authority for the waste management and drinking water programs from the Commission for Public Health to the Environmental Management Commission.

2014 Shale Gas Legislation

Note: The original  post has been updated to reflect the fact that a new bill draft presented in committee today added a section authorizing the issuance of permits for hydraulic fracturing effective July 1, 2015. 

May 20, 2014: In what has become an annual rite of spring, the N.C. Senate has introduced another bill on oil and gas exploration and development. Some highlights of Senate Bill 786 (Energy Modernization Act):

Fracking Rules. The bill extends the deadline for  adopting rules on hydraulic fracturing from October 1, 2014 to January 1, 2015. The extension gives the Mining and Energy Commission   (MEC) more  time to  consider public comment on draft rules and finalize the standards.  The bill  also  exempts the fracking rules from Administrative Procedure Act provisions that would otherwise prevent the rules from going into effect until mid-June 2016. The changes would allow  the rules to become effective in 2015 (assuming the legislature approves the rules) .

Allow Issuance of Permits for Hydraulic Fracturing Beginning July 1, 2015. A new version of the bill presented in committee today added a section authorizing the Dept. of Environment and Natural Resources to begin issuing permits for natural gas production using horizontal drilling and hydraulic fracturing on July 1, 2015.  Shale gas legislation enacted in previous legislative sessions had prohibited issuance of permits until the state had rules in place to regulate hydraulic fracturing. This provision authorizes DENR to begin issuing permits on a date certain without regard to the status of the proposed rules.

Trade Secrets. The Senate wades back into the controversial issue of  “trade secrets”.  In 2013, oil and gas industry giant Halliburton lobbied both the Mining and Energy Commission (MEC) and the legislature to allow the industry to withhold  “trade secret” information about chemicals used in hydraulic fracturing  from state regulators unless needed to respond to an emergency.  Earlier posts describe the previous (failed) attempts to legislatively resolve the tension between protecting trade secrets and making timely information available to doctors and first responders in an emergency.

Senate Bill 786  would require oil and gas companies to disclose  all of the chemicals used in hydraulic fracturing fluid to DENR, but protect  trade secret information from public disclosure.  The trade secret information would be maintained  by the State Geologist (a position in DENR) and protected from public disclosure under confidentiality provisions in the N.C. Public Records Act.  The bill would allow the State Geologist to provide the information to emergency  or medical personnel  if  needed to respond to an emergency. Up to this point, the bill follows a  common approach to balancing protection of trade secret information  with  emergency response needs.

The new controversy concerns penalties in the bill for unauthorized disclosure of  oil and gas industry trade secrets. First, the bill allows the owner of  the trade secret to require a doctor or fire chief receiving the information for emergency response purposes  to enter into a confidentiality agreement that may set out remedies  for breach of the agreement including “stipulation of a reasonable pre-estimate of likely damages”.  Without any further explanation of how the stipulation would be used, it  sounds  like a stipulated penalty that could make it unnecessary for the company  to establish  actual economic damages in court.

The bill also makes unauthorized disclosure of an oil and gas industry trade secret  by any person  a Class I felony if the person knew  the information was a trade secret. (Class I felonies carry a presumptive sentence of 4-6 months — but you may be eligible for community service or supervised probation.)  By contrast,  current state law protecting trade secrets does not impose a  criminal penalty for  unauthorized disclosure, unauthorized acquisition or even unauthorized use of trade secret information.  G.S. 66-154  provides civil remedies and allows recovery only of “actual damages…measured by the economic loss or the  unjust enrichment caused by misappropriation of a trade secret”.  Aside from  questions about the  reasonableness of the penalties proposed in Senate Bill 786,  it is clear that the bill creates  much more severe penalties for disclosure of  oil and gas industry trade secrets  than state law imposes for  unauthorized disclosure or use of  other types of trade secrets.

Well Drilling Fees.  The bill reduces the well drilling fee from $3,000 per well to $3,000 for the first well and $1500 for additional wells on the same well pad.

Notice of Oil and Gas Activity. Section 11  of Senate Bill 786 adds a new requirement that the company holding lease rights for oil and gas must provide 30 days notice to the owner of the surface property  before starting exploration, development and production activity.

Pre-Drill Water Testing/Presumption of Liability for Contamination. Section 12  of the bill would  amend the law requiring pre-drilling tests of water supply sources located within  5,000 feet of the  proposed wellhead by limiting the testing to water supplies within a  one-half mile (2,640-foot) radius  around the proposed wellhead.  A corresponding change to G.S. 113-421 would reduce  the area  where  a presumption of oil/gas operator liability for water supply contamination would apply — from  the current 5,000 feet to the same 1/2 mile radius around the wellhead. 

Restrictions on Local Ordinances Prohibiting Oil and Gas Activity.  Section 13  of the bill repeals any past local acts  or resolutions of the General Assembly prohibiting well siting, horizontal drilling or hydraulic fracturing  in specific localities. The bill then preempts local ordinances that have the effect of prohibiting oil and gas exploration and production,  horizontal drilling and hydraulic fracturing. An  oil/gas operator  could challenge a local ordinance as preempted under the law by filing a petition with the Mining and Energy Commission.   The bill creates a presumption that general  development  conditions in local zoning and land use ordinances   (such as buffers, setbacks and stormwater requirements) will continue to be valid unless the MEC  finds otherwise. To preempt a local ordinance, the MEC  would have to find that: 1. The ordinance would prohibit oil and gas activities; 2. The oil/gas operator has received all  necessary state and federal approvals (unless the only reason for denial was inconsistency with the local ordinance); 3. Local residents and elected officials had an adequate opportunity to participate in the permitting process; and 4. The oil and gas activities will not pose  “an unreasonable health or environmental risk” to the surrounding locality,  the operator will take reasonable measures to reduce foreseeable risks, and the operator will comply with local ordinances to the maximum extent feasible. This section of the bill seems to be modeled on a similar preemption  law concerning  the  siting of hazardous waste facilities.

Ban on subsurface Injection of drilling wastes.   The N.C. Senate has previously proposed to amend an existing state law prohibiting underground injection of waste to allow subsurface disposal of oil and gas drilling waste.  The earlier proposals ran into strong opposition from members of the Mining and Energy Commission as well as the public. In Section 14, Senate Bill 786 abandons the effort to authorize subsurface disposal of drilling waste and instead reinforces the existing prohibition on underground injection of waste found in G.S. 143-214.2.

Compliance review for oil and gas permit applicants. Section 14 also creates an environmental compliance review  for oil and gas permit applicants. The compliance review will cover at least the previous five years.  For business entities, the compliance review  will extend to any parent company, subsidiary, or other affiliated entity; a partner, officer, director, member or managing director; and any other person with a direct or indirect interest in the company (other than a minority shareholder in a publicly traded corporation).  The bill allows DENR to deny an oil and gas  permit based on a past history of significant or repeated violation of statutes, rules, orders or permit conditions.

Trespass.  The bill protects workers collecting seismic or other geophysical data from trespass claims as long as they do not physically enter private land without consent. Seismic surveys  use  sound waves to  characterize subsurface geology and identify potential oil and gas reserves. The survey team generates  sound waves  on one side of the  target area  (by setting off small explosive charges or using trucks specially outfitted to create vibrations); geophones record the waves on the other side of the target. The intent of the bill is to prevent trespass claims based on movement of  the seismic waves under surface properties  the workers do not physically enter. The  company conducting the  seismic testing  would still be liable for any physical or property damage caused  to the surface property.

Severance Tax. Section 16 of the bill creates a new severance tax for oil and gas.  Others with expertise in severance  taxes  and oil/gas industry revenues will have to provide the in-depth analysis. One quick observation:  The bill  appears to prohibit cities and counties from imposing any taxes on the oil and gas industry other than property taxes.

Miscellaneous. In a provision unrelated to oil and gas, the bill caps city and county property tax revenue at an 8% increase over revenue received the previous year.

The bill requires  a number of new studies, including a  feasibility study for  a liquified natural gas export terminal on the N.C. coast.

Beyond Coal Ash – Other Environmental Bills

For those of you making scorecards and tracking sheets for  2014 legislation, a list of other bills on energy and the environment filed  so far; some  bills have already  been  introduced in both chambers:

Environment. The first six bills listed below   were recommended by the House/Senate Environmental Review Commission (ERC).    The last, House Bill 1105,  came out of a House/Senate legislative study commission on land development.

House Bill 1081 (Senate Bill 765)  addresses several  concerns about  state and local permit review of engineering plans.  An engineer submitting an innovative design proposal to a state or local permitting agency will have the opportunity to elevate the  permit review to a supervising engineer.  The bill also allows the permitting agency to charge the applicant for a third-party engineering review if the agency does not have a staff engineer qualified to review the innovative design.  The bill makes other less significant changes. The bill requires  permit reviewers to clearly distinguish necessary design changes  from suggested changes and  cite the law or rule that makes a design change necessary for permit  approval. The bill also directs permitting agencies to review working job titles for permit reviewers  to insure only PEs have “engineer” job titles. For more on the history of these proposals, see an earlier post.

House Bill 1057 (Senate Bill 757)  requires the Department of Environment and Natural Resources (DENR) to study several  issues related to transfer of water from one river basin to another  or “interbasin transfer” (IBT):  1.  Whether  temporary and emergency interbasin transfers, including transfers to relieve water shortages caused by drought, should be regulated differently  than long-term interbasin transfers; 2. Whether interbasin transfers between river sub-basins should be regulated differently  than interbasin transfers between major river basins. and 3. Whether there are types of interbasin transfers that should be exempt from state approval or  other regulatory requirements.

Interbasin transfers  usually  involve piping water from a drinking water source in one river basin to  a water system in another, although some large water systems cross river basin boundaries  and need an IBT just to serve  system customers. An  IBT  of  2 million gallons per day or more requires a certificate of approval from the Environmental Management Commission (EMC). Rather than using the boundaries of the  17 major state river basins,  the  IBT law requires  a certificate for any transfer among  38 sub-basins.  Over the last seven years, a series of legislative changes have made the IBT approval process increasingly difficult.   The House and Senate IBT bills signal an interest in reexamining some of the restrictions.

House Bill 1058 (Senate Bill 756) directs the General Assembly’s Program Evaluation Division (PED) to study: 1.  the benefits of combining water and sewer systems into larger, regional entities; 2. potential incentives for systems to merge; and 3. the possibility of  allowing one system to apply for grants  on behalf of  a less efficient  system  based on a commitment to purchase, interconnect  or enter into a joint management agreement with the less efficient system. The idea of encouraging merger of  small water systems and wastewater  systems into larger, more efficient utilities  has popped up in just about every legislative session for a decade or more.  The biggest obstacles tend to be local resistance and the financial burdens  associated with the takeover of  a small, inefficient system often badly in need of capital investment.  The last of the three PED study issues (allowing one system to apply for grants on behalf of a system targeted for takeover) may be focused on removing the financial disincentives.

Senate Bill 737 (Amend Isolated Wetlands Regulation). “Isolated wetlands”  fall outside the federal Clean Water Act permitting program for wetland impacts because the wetlands do not have a connection to navigable waters.  (Congress adopted the Clean Water Act  under its  authority to regulate interstate commerce and  limited federal regulatory jurisdiction to navigable waters used in interstate commerce.)   In response to pressure from realtors and developers to eliminate state  protection of isolated wetlands,  S737  allows additional  impacts  to isolated wetlands without  prior state permit review.  State water quality rules  now allow  development impacts  to  isolated wetlands below specific thresholds to be “deemed permitted”.  S737 raises those thresholds from 1/10th of an acre to 1/3 of an acre west of Interstate 95 and from 1/3 of an acre to 1 acre east of Interstate 95.  (I-95 has long been used as the  dividing line between the wetter eastern counties and drier piedmont/western counties.)  DENR has expressed concern that raising the  threshold to 1 acre east of I-95 will effectively eliminate review of projects impacting isolated wetlands in the eastern part of the state. S737 also reduces the amount of mitigation required for isolated wetland impacts (from a 2:1 ratio to 1:1) and eliminates the  practice of giving more mitigation credit for creation or restoration of wetlands  than  for preservation of existing wetlands.

Senate Bill 738 (Clarify Gravel Under Stormwater Laws). In 2013, the N.C. Homebuilder’s Association successfully lobbied for legislation directing  the state stormwater  program to  treat gravel areas as “pervious” (meaning the surface allows water to percolate through to the soil beneath) and exclude  them  from the calculation of built-upon area on a development site.  The amount of built-upon area determines the level of stormwater control required for the project, so excluding gravel areas from the calculation  potentially  reduces stormwater costs.  The 2013  provision  (included in  Session Law 2013-413)  also directed the ERC to study “how partially impervious surfaces are treated in the calculation of built-upon area under [the stormwater] programs”.    Ironically, the ERC study found: 1.  no consensus on  the definition of  “gravel”; and 2. evidence that permeability is a function of several factors, including the nature of the substrate and method of installation as well as the surface material itself.  Instead of further weakening stormwater control requirements,   the  ERC bill recommends repeal of the 2013  provision declaring  gravel areas to be pervious and  funds a study of the permeability of different surface materials to be done by the North Carolina State University Department of Biological and Agricultural Engineering.

Senate Bill 734  (Authority to Adopt Certain Ordinances).  The  Regulatory Reform Act of 2013 (Session Law 2013-413)  put  a one-year moratorium on local environmental  ordinances and directed the ERC  to study  local authority to adopt environmental ordinances. The  moratorium/study  provision represented a compromise  between the House and the Senate after the Senate  passed  a bill (Senate Bill 112) putting significant restrictions on local environmental ordinances.

An ERC working group looked at the issue  of local authority through the lens of actual conflict between local ordinances and state or federal environmental  rules.  The legislators identified only one  conflict — local ordinances on use of fertilizers regulated by the N.C. Department of Agriculture and Consumer Services.  Based on the working group recommendation, the ERC  proposed  a limited bill addressing state  versus  local authority to regulate fertilizer use. The bill also  directs  DENR and the Department of Agriculture to  report back in  November 2014  and again one year later on any  local ordinances that  “impinge on or interfere with” state rules.  Supporters of S112   almost certainly want something more.  It seems clear the intent of S112 was to prevent  local government from imposing  additional environmental requirements on developers  and not simply  to avoid conflict with state rules.

House Bill 1105  amends the section of the  state Sedimentation Pollution Control Act that allows DENR to delegate  authority to a local sedimentation program. The amendment transfers responsibility for enforcement of previously approved erosion and sedimentation control plans from DENR to the local government when DENR approves a local program.


House Bill 1055   would appropriate a total of  $5 million to North Carolina State University and UNC-Charlotte  for research on renewable energy, energy storage, and coal ash reuse.  The bill sponsor,  Rep. Mike Hager,  spent much of the 2013 session   in an unsuccessful effort  to repeal  the state’s renewable energy portfolio standard (REPS).  (You can find the first of several  posts on the 2013 REPS repeal bill here.)  Some of the 2013 combatants  have already signaled an intent to  continue the battle for  repeal  of the REPS standard.    That  very fresh legislative history makes  Rep. Hager’s  proposal to  fund research on renewable energy  somewhat surprising.

Senate Bill 786, (The Energy Modernization Act).  The bill proposes so  many changes to state law on  oil and  gas exploration and development that it merits a separate  post. (To follow.)

2014 Legislative Session Begins With Coal Ash

Today opened the 2014 “short” session of the N.C. General Assembly. The main purpose of the off-year short session is to make adjustments in the two-year budget adopted by the legislature in the first year of the biennium.  In addition to appropriation  and revenue bills, the legislature can  take up any bill that passed  one chamber of the legislature in 2013 and bills recommended by interim special committees or study committees.  

One of the first bills introduced in the short session turned out to be a coal ash bill.  Given concerns about environmental problems associated with coal ash impoundments in the state (described here  and here),  a bill had been expected. The bill  surprisingly turned out to be  identical to  Governor Pat McCrory’s  “Comprehensive Coal Ash Action Plan”. The governor’s legislative proposal  initially received a  chilly reception from lawmakers, but has  new life as Senate Bill 729  (“Governor’s Coal Ash Action Plan”).  An earlier post analyzing  the Governor’s proposal for coal ash legislation also describes Senate Bill 729.

The bill  sets aggressive timelines for assessment and remediation of groundwater contamination around the existing  coal ash ponds.  The bill also requires Duke Energy to take steps to find and eliminate unpermitted discharges from ash  impoundments to surface waters.

The bill does not set a hard date for transition away from wet disposal of coal ash, but directs the Department of Environment and Natural Resources (DENR) to prioritize  existing coal ash impoundments for closure.  There is no deadline for completing  closure  of all 33 ash impoundments. The bill itself puts  four Duke Energy impoundment sites  at the top of the priority list for closure — Riverbend (located near Charlotte’s drinking water source);  the Asheville plant;  the Dan River plant; and  the Sutton plant near Wilmington. The Asheville site  has already been linked to contamination of a private drinking water well.  Groundwater contamination near the Sutton plant has required closure of several public water supply wells.

The bill identifies three methods for closing an ash impoundment  — capping the ash in place; removing the ash to an off-site disposal facility (such as a landfill); and  a hybrid approach that would involve consolidating the ash into a smaller footprint before installing an engineered cap. The bill provides only one  very broad standard for closure:  the closure method should result in restoration of contaminated groundwater to the  state groundwater standards to the extent  economically and technically feasible. There are no technical standards for the individual closure methods and no criteria  for selecting the appropriate closure method for an individual  site.

The bill  remains silent on standards for  future coal ash disposal, although it amends state law to classify coal ash removed from an impoundment as solid waste.  Presumably that means ash removed from an  impoundment during  closure  would have to be disposed of under the solid waste laws — most likely in a landfill. The option of using coal ash as structural fill on a construction site would still be available, although the bill puts a temporary “moratorium” on large scale structural fill sites. (Projects using less than 5,000 cubic yards of coal ash for fill would not be affected.)

The Senate had always been expected to  move first on coal ash legislation, but state House members have their own ideas about regulation of coal ash.  Senate Bill 729  just starts the   coal ash debate in the legislature.