Shale Gas Perspectives - When Do Gas Drilling Bans Violate the Constitution of the United States? (Vol. I, No. 10)

A Periodic Blog on the Status of Marcellus Shale Development in the Southern Tier of New York - and Other Interesting and Exciting Developements in the Law, Science and Politics of Natural Gas Development (Or Not) in theEmpire State.

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(October 9, 2013)
           This edition of Shale Gas Perspectives will examine the issue, recently raised by HH&K lawyers in litigation against the Town of Sidney, a community in the northwest corner of Delaware County, of whether local bans and moratoria throughout New York State and the statewide de facto moratorium prohibiting or restricting unconventional natural gas extraction and associated exploration and support activities. individually or collectively, violate the “dormant commerce clause” of the U.S. Constitution.

I. INTRODUCTION TO THE COMMERCE CLAUSE 

           The Commerce Clause gives Congress the power “to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”  U.S. Constitution, Article I, Section 8, Clause 3; http://usgovinfo.about.com/od/usconstitution/a/a1s8.htm .  It is both a grant of legislative authority to Congress and a restriction on the regulatory power of states and their local subdivisions.  Clause 18 of Article I, Section 8 gives Congress the power to “make all laws which shall be necessary and proper” for the execution of enumerated powers, including the power to regulate commerce.  Under the Tenth Amendment, powers not delegated to the Congress, nor prohibited to the States, are reserved to the States or to the people.  As has been firmly established by the U.S. Supreme Court, the Commerce Clause “is not only a ‘positive’ grant of power to Congress, but is also a ‘negative’ constraint upon the states.  This aspect of the Commerce Clause, sometimes called the ‘dormant’ commerce clause, means that the courts may measure state legislation against Commerce Clause values even in the absence of congressional regulation, i.e., when Congress’s exercise of its power is dormant.”[1. The Constitution of the United States of America: Analysis and Interpretation (Centennial Edition), Congressional Research Service, Library of Congress, USGPO, Washington, D.C.: 2013, p. 233.  http://www.gpo.gov/fdsys/pkg/GPO-CONAN-2013/pdf/GPO-CONAN-2013.pdf .]

          The U.S. Supreme Court determined in Swift and Company v. United States, 196 U.S. 375 (1905) that even business done at the local level (e.g., at a local meat market) could become part of a continuous “current” of interstate movement of goods and services.[2. The dormant commerce clause applies equally to local and municipal laws as to state laws.  See, Fla. Transp. Serv’s, Inc. v. Miami-Dade Cnty., 703 F.3d 1230, 1243 (11th Cir. 2012).]   Subsequently, the Court recognized that state activity could be considered “commerce” if it had a “substantial economic effect” on interstate commerce, or if the “cumulative effect” of one act could have a substantial economic impact on interstate commerce.  NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937).

          Clearly, drilling for natural gas in a local Upstate New York town or village and associated exploration, storage, disposal and transportation activities are part of a continuous “current” or network of interstate movement of goods and services in the global energy market.  The overlapping temporary and permanent bans on these activities in Upstate New York are demonstrably having a “substantial economic effect” individually and cumulatively on interstate commerce.  (E.g., local landowners are deprived of the right to market their subsurface oil and gas resources on interstate markets and out-of-state purchasers are deprived of the ability to purchase their oil and gas product from local New York sources.)   As eloquently noted by one Midwestern court: “Quite often… a minor locality’s laws will likely have no more effect on interstate commerce than a twig would disrupt a river… [t]aken together, however, these twigs become a dam, crippling the interstate flow of commerce.”  Randy’s Sanitation, Inc. v. Wright Cnty., Minn., 65 F.Supp. 1017, 1027 (D.Minn. 1999). [3. See also, Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 586 (1997) (“although the summer camp involved in this case may have a relatively insignificant impact on the commerce of the entire Nation, the interstate commercial activities of nonprofit entities as a class are unquestionably significant”).]

           U.S. Supreme Court jurisprudence concerning the “dormant commerce clause” has been primarily elucidated in two cases: Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970); and Hughes v. Oklahoma, 441 U.S. 322, 336 (1979).  See also, Kassel v. Consol. Freightways Corp., 450 U.S. 662, 670-671 (1980).  Whether state and/or local legislation unconstitutionally burdens interstate commerce, where the legislation is facially valid (i.e., it is evenhanded and not discriminatory), depends on the balancing of multiple factors:

(1) does the state or local legislation, individually or collectively, significantly burden interstate commerce? 
(2) does the state or local government have a proper public purpose?
(3) is the legislation’s design reasonably related to achieving this purpose?
(4) are there alternative means to promote the local purpose without burdening interstate commerce?  and
(5) is the burden on interstate commerce excessive when balanced against the public purpose sought to be vindicated?

II. THE TOWN OF SIDNEY GAS DRILLING MORATORIUM

           These issues have been raised in connection with Local Law No. 1 of the year 2013 of the Town of Sidney, entitled “Moratorium and Prohibition on Natural Gas and Petroleum Exploration and Extraction Activities, Underground Storage of Natural Gas, and Disposal of Natural Gas or Petroleum Extraction, Exploration, and Production Wastes,” as approved by the Sidney Town Board on February 14, 2013.  The local law was challenged, in a hybrid Article 78 and Declaratory Judgment action, Grafe-Kieklak v. Town Board, Town of Sidney, filed in Delaware County Supreme Court on June 12, 2013 (Index No. 2013-602), and reported on in a Binghamton Press & Sun-Bulletin front-page story on June 24, 2013. [4. https://advance.lexis.com/GoToContentView?requestid=c119571b-3761-7540-152d-6a0e3aa0ade5&crid=2e301a6b-7ad9-4384-2a85-eca14f13321]

            The Sidney moratorium law prohibits any use of “any land, body of water, building, or other structure located within the Town” for any natural gas and/or petroleum exploration, extraction of support activities, or the processing or approval of any permit “for the construction, establishment, or use or operation” of any land, body of water, building, or other structure for any of these purposes. (Section 4).  Failure to comply with any provisions of the Local Law is designated “an unclassified misdemeanor.”  (Section 5).  The Local Law invalidates any conflicting local approvals or permits (Section 7) and expressly supersedes (Section 10) “any inconsistent provisions of any and all other local ordinances, local laws, or local resolutions or policies of the Town of Sidney.”  The Local Law purports to be both “a police power and [a] land use regulation” (Appendix A, Section 1) and claims to be needed to: protect the Town’s quality of life; maintain the quality of the Town’s water resources; preserve the Town’s irreplaceable recreational and scenic sites; protect the Town’s sense of identity and well-being; prevent impairment of the existing character of the Town; avoid “hazardous or inconvenient” traffic; prevent air pollution, dust and odors from being generated; avoid “hazardous or inconvenient” noise, vibrations and light pollution; etc.—all of which “could result” in “a crisis condition.”  (Appendix A, Section 2).  The Local Law even asserts that it “is not being enacted merely as a pretext to assuage community opposition.”  (Appendix A, Section 3).  It concludes with a finding that “a moratorium of one year duration, coupled with a mechanism for an ‘unnecessary hardship’ variance procedure, will achieve an appropriate balancing of interests between [on the one hand] the public need to safeguard the character and other resources of the Town of Sidney and health, safety and general welfare of its residents, and the rights of individual property owners or businesses desiring to conduct such activities [on the other] during such period.”  (Appendix A, Section 3).

III. APPLYING THE DORMANT COMMERCE CLAUSE BALANCING TESTS TO THE SIDNEY MORATORIUM LAW

           At this writing, the Commerce Clause issue—along with multiple other claimed legal deficiencies—is before Delaware County Supreme Court (Hon. John Lambert, Acting Supreme Court Justice), having been argued on September 6, 2013.  As set forth in an Affirmation of Counsel on behalf of the landowners, in support of their Motion for Summary Judgment, the Petitioners-Plaintiffs would apply the dormant commerce clause balancing tests as follows:

(1) does the state or local legislation, individually or collectively, significantly burden interstate commerce?  

a.      Yes.  The Town of Sidney [the Town]—like many other towns and villages in Delaware County, in New York State, in adjoining states (including Pennsylvania), in the Northeastern United States, and beyond—is part of and dependent on an extensive network of interstate commerce in energy, including natural gas.

b.      The Town of Sidney moratorium and New York State’s de facto moratorium are evenhanded and non-discriminatory in the sense that they prevent or discourage the sale of natural gas products generated within their geographical boundaries equally, whether to local or out-of-state users.  There is no intent to protect or enhance local markets at the expense of distant markets.  All are discouraged equally.

c.      The interstate market in natural gas includes associated storage and disposal facilities which are expressly prohibited by the Sidney local law.

d.      While reaping the benefits of abundant and inexpensive natural gas to power its businesses, farms, and residences, the Town has told its residents, landowners, and businesses (as well as outsiders), through Local Law No. 1, that they may not—under threat of criminal penalties—include any land, body of water, or structure located (in whole or in part) within the Town’s borders in a long list of activities that would promote or assist: the exploration or extraction; treatment, processing, storage or disposal; or otherwise support the web of interstate commerce in natural gas and petroleum and its products and byproducts that flow between states.

e.      In essence, the Town of Sidney (and other anti-gas drilling municipalities) categorically reject interstate commerce they deem harmful while continuing to reap the energy benefits of natural gas.

f.      More than 170 other cities, towns and villages in New York State—and the number is growing—have joined this balkanization strategy, reaping the benefits of ready access to energy, while increasing the barriers to generating, distributing, and using such energy.  http://www.fractracker.org/maps/ny-moratoria/ .  The courts must consider the practical effect that would arise “if not one, but many or every, jurisdiction adopted similar legislation.”  “Quite often… a minor locality’s laws will likely have no more effect on interstate commerce than a twig would disrupt a river… [t]aken together, however, these twigs become a dam, crippling the interstate flow of commerce.”

g.      Moreover, the effect on interstate commerce is by no means incidental.  When one considers the available supply of natural gas, the economics of it, and the jobs that would be directly created by drilling and producing that gas, the effect is enormous.  The jobs that would be supported in relation to pipelines, refineries, etc., as well as indirectly, produce a further large impact.  The effect on interstate commerce becomes even more vast when one considers the effect of increased natural gas production on liquefied natural gas (LNG) exports and the potential for manufacturing jobs to return to the U.S.  Lastly, if the economic loss is added to New York’s own consumption of natural gas, the burden that New York and its anti-gas drilling municipalities have placed on interstate commerce cannot be overstated.  

(2) does the state or local government have a proper public purpose?  Potentially.

a.      The Town of Sidney moratorium law sets forth its purposes in Section 3 of Appendix A of Local Law No. 1 (Certified Record, p. 055).  They are said to be not “merely… a pretext to assuage community opposition,” but to “prevent the occurrence of a crisis condition” associated with “the construction, operation, and establishment of” (and processing of approvals for) the natural gas exploration, extraction and support activities prohibited by Section 4.  See also, Local Law No. 1, Section 2.C.

b.      The de facto New York State moratorium on the issuance of permits by NYS DEC for unconventional gas drilling has been in place now for more than five years, while the State has studied and assessed the associated potential environmental and public health issues.

c.      The Town cannot have a proper public purpose in enacting a gas drilling moratorium, when:

(i) the “crisis” it seeks to forestall has already been placed in abeyance by the State, which has issued no gas drilling permits for unconventional drilling in more than five years, and no resumption of such drilling is currently in prospect;

(ii)  the Town contends that “[e]ven prior to (and separate and aside from) enactment of Local Law No. 1 of 2013, the Town of Sidney Zoning Ordinance made it unlawful… to engage in any of the activities proscribed by the local law” and that “these activities were and are unlawful without regard to whether Local Law No. 1 of 2013 had been enacted ….”  Respondent’s Memorandum of Law…, p. 7.  If, in the Town’s view, the activities banned under Local Law No. 1 were already prohibited by the Town’s Zoning Ordinance, what proper public purpose is served by enactment of this moratorium law?

(iii) advancing the protection of public health, safety and welfare would be a legitimate state interest and a valid public purpose, but 5+ years of study and assessment in New York, and decades of field experience in numerous other states, has failed to demonstrate that unconventional gas drilling (or hydrofracturing), especially when properly regulated, presents a greater threat to public health, safety and welfare than any other economically important industrial activity;

(iv) despite what it sees as an impending “crisis” if unconventional gas drilling is allowed to proceed, the Town of Sidney has taken no known steps “to study any ill effects gas drilling or fracking might have on the Town” and “[n]o one has asked [the Town] to do anything ….”  Email from Town of Sidney Supervisor Bob McCarthy, Exhibit C-8, Petitioners’ Consolidated Exhibits.

(v) if unconventional gas drilling portends such a dire crisis, why address it through a one-year moratorium (particularly, when no use is being made of the moratorium period by the Town to better prepare the Town to deal with post-moratorium events)?

(3) is the legislation’s design reasonably related to achieving this purpose?;

a.     No.  Permanent bans and less permanent moratoria are extreme ways to protect against undesirable side-effects of natural gas exploration, extraction, and support activities.  More tailored regulations to promote safe drilling practices and prevent harm to natural resources would be more measured and reasonable ways to accomplish legislative goals directed at protecting public health, safety and welfare.

b.     Tailored regulation of the gas drilling industry is a role reserved under New York State Law (the Oil, Gas & Solution Mining Law) to the State Department of Environmental Conservation.

c.     The process employed by DEC to structure protective tailored regulations, involving a de facto ban for more than five years, a repeatedly amended Environmental Impact Statement and repeatedly delayed regulatory changes, is not a reasonable means to accomplish the desired objective.

d.     A temporary local moratorium, if used to study the issues and develop tailored solutions within the scope of local jurisdiction, might be reasonably related to achieving this purpose—but that is not the case here.

(4) are there alternative means to promote the local purpose without burdening interstate commerce?;

a.     Yes.  Regulation at the State level to assure that unconventional gas drilling proceeds in a manner that protects public health, safety and general welfare to the maximum practicable extent.

b.     Limitations at the local level, short of permanent or long-term bans, pursuant to the zoning authority, to limit adverse land use impacts to the maximum practicable extent.

and

(5) is the burden on interstate commerce excessive when balanced against the public purpose sought to be vindicated?Yes.

a.     The Local Law pronounces itself an “appropriate balancing of interests (on the one hand) between the public need to safeguard the character and other resources of the Town of Sidney and the health, safety and general welfare of its residents, and the rights of individual property owners or businesses desiring to conduct such activities (on the other)” during the period of the moratorium.  Local Law No. 1, Section 3 of Appendix A.  (Certified Record, p. 055).

b.     The Local Law and the de facto State moratorium both deprive landowners of their right to market their resources on interstate markets and receive their due share of the in-state market, and deny out-of-state purchasers the ability to procure their product from New York sources.

c.     The indisputable burden on interstate commerce of state and local gas drilling bans and moratoria in New York State are excessive when balanced against potential harms which have failed to materialize in other parts of the country where unconventional gas drilling is carried out on a daily basis.  Fears of potential, unproven harms—despite intensive studies and assessment by the State of New York for more than five years and intensive scrutiny by the news media and the strident opponents of unconventional gas drilling—do not outweigh the actual harm that is occurring to the free flow of commerce.

IV. CONCLUSION

           Professor Meredith A. Wegener, Director of Energy Legal Studies at Oklahoma City University Meinders School of Business, has analyzed the applicability of the Dormant Commerce Clause to gas drilling bans in New York State in a forthcoming law review article: Meredith Wegener, Drilling Down: New York, Hydraulic Fracturing, and the Dormant Commerce Clause, 28 BYU J.Pub.L. (forthcoming Apr. 2014).  For general background, see Steven Ferrey, Sustainable Energy, Environmental Policy, and States’ Rights: Discerning the Energy Future Through the Eye of the Dormant Commerce Clause, N.Y.U. Envtl. L.J. 507, 578-610 (2004).[5. http://ssrn.com/abstract=980074]

           Professor Wegener believes that “the legal analysis roadmap” is provided by the test laid down in Hughes v. Oklahoma, 441 U.S. 322, 336 (1979):

“(1) whether the challenged statute regulates evenhandedly with only ‘incidental’ effect on interstate commerce, or discriminates against interstate commerce either on its face or in practical effect; (2) whether the statute serves a legitimate local purpose; and, if so, (3) whether alternative means could promote this local purpose as well without discriminating against interstate commerce.”

           Granting that “the language at issue… is not discriminatory in the sense that New Yorkers are being protected from out-of state competition at the expense of the out-of-state competition,” the professor concludes that the effect of the gas drilling bans “is not incidental, in fact, it is enormous.”  Next, the professor considers the legitimacy of the expressed purpose of these local bans.  While the “potential pitfalls the government seeks to avoid are substantial—polluted water, polluted air, associated health issues, aesthetic impairment and others,” the question is whether New York State’s supplemental environmental review, now entering its sixth year, will determine that the actual risks are substantial enough and unavoidable enough to justify continuing the de facto ban on the issuance of state permits for unconventional gas drilling.  So, the crucial question is whether there are alternative means to safeguard public health and the environment without imposing bans or moratoria that discriminate against interstate commerce.

           Professor Wegener’s conclusion:  “After five years of discussion, study, comments and revisions, the mechanisms to lessen the potential hazards of unconventional drilling are available.”  Specifically:

“… the casing and cementing process is critical and deserves full attention, as does the entire process.  Pilot wells and incremental schemes or staging of the drilling and production and multitude of other proposals can achieve the goals the moratoria seek to accomplish.  Through industry initiative, and government regulation and oversight, unconventional drilling can proceed and the significant burdens created by the moratoria can be lifted.  It is doubtful that an outright ban can continue to be justified.”

           Whether or not the New York State Court of Appeals ultimately upholds lower court decisions in the Dryden and Middlefield  cases, “[t]he conflict with the dormant Commerce Clause still exists” and “this issue… is not going to disappear as long as the local bans or moratoria continue.”  As Professor Wegener concludes in her analysis:

“Accordingly, this discussion is one for all who participate in this industry and who follow these events to bear in mind.  New Yorkers will continue to consume natural gas and to the extent that local governments take steps that may seem to only be local in nature, the United States Supreme Court may ultimately step-in to remind us all once again that we do not exist in isolation.”

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 Article written by Kenneth S. Kamlet, Esq.  For more information, contact Mr. Kamlet at 607-231-6914 or via email at kkamlet@hhk.com.

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