Municipal Restrictions on Hydraulic Fracturing: A New Test for Federalism

The past few months have brought frequent and significant developments in federal, state, and local regulation of hydraulic fracturing and much accompanying debate in the media. A proposed rule from the Bureau of Land Management (BLM) increasing regulation of hydraulic fracturing on federal lands has raised criticisms from industry over increased permitting delays and concerns from state agencies about duplication of existing state regulations. Several state legislatures have recently passed legislation, such as Act 13 in Pennsylvania and SB 315 in Ohio, overhauling oversight of hydraulic fracturing, and several more are gearing up to follow.

Outright moratoriums and bans on hydraulic fracturing are also increasingly prevalent. While calls from environmental groups to place a federal moratorium on hydraulic fracturing have failed to gain traction, five states and dozens of towns and municipalities currently prohibit hydraulic fracturing. As discussion increases about the possibility for the Cuomo Administration to lift the moratorium on hydraulic fracturing in New York, many are taking a closer look at the potential for local bans and moratoria to prevent development in the state.

These movements raise some key questions for operators:

• What is the current extent and status of local bans and moratoriums?
• Do towns and municipalities have a legitimate legal basis to prohibit hydraulic fracturing?
• What are the potential implications for industry going forward?

Current bans and moratoriums Some of the notable bans and moratoriums in the Appalachian region include:

• New York: At the end of August, there were 36 bans and 99 moratoriums on hydraulic fracturing in municipalities and towns in the state. Two of these bans-in Dryden and Middlefield-were challenged in court; the New York State Supreme Court upheld both bans. The New York State Supreme court overturned a moratorium in Binghamton.
• Pennsylvania: At least five PA municipalities have banned hydraulic fracturing, including the city of Pittsburgh.
• West Virginia: A ban on hydraulic fracturing in Morgantown was overturned in August 2011. Another city has since withdrawn its ban.

Searching for legal options Whether municipalities have clear legal authority to prohibit hydraulic fracturing is yet to be definitively decided; the answer will come slowly as courts in each state rule on individual cases and set precedent for those to come. Municipalities in NY and PA are claiming a variety of different legal authorities in order to prohibit hydraulic fracturing. Some common options include:

• Enacting zoning ordinances, which allow municipalities to keep incompatible land uses separate from one another.
• Prohibiting hydraulic fracturing by asserting the right to use police power to protect their citizens from harm to their health and environment.

Cases unfolding in NY and PA The zoning ordinance technique was used and upheld in Dryden and Middlefield, NY. While New York state statute preempts municipalities from regulating oil and gas activity, the NY Supreme Court ruled that zoning ordinances were not preempted and therefore legitimate. This sets a precedent for the successful use of zoning ordinances to prohibit fracturing in NY; however, if the state legislature passes a new law amending the oil and gas preemption to include zoning, this reasoning may no longer remain valid.

This is exactly what has occurred in Pennsylvania with the passage of Act 13. Act 13 revised PA's oil and gas preemption language to explicitly prohibit municipalities from banning hydraulic fracturing. The legal issues in PA have now become more complicated:

• Is complete state preemption of local oil and gas regulation constitutional?
• Do municipalities have an intrinsic right to protect their citizens as they see fit?

The new preemption language was challenged as violating the state's constitution, and the challenge was upheld by a PA commonwealth court. For now, municipalities are still allowed to enforce their zoning ordinances, but the appeal is currently being heard by the PA Supreme Court. The scope of the PA Supreme Court's decision-how many of the intrinsic legal issues it addresses-will determine the extent to which it sets precedent for other municipalities in PA and elsewhere.

The ruling in Binghamton provides even less clarity. While the Binghamton moratorium attempted to invoke police power authority, the Court ruled that the law did not sufficiently demonstrate the "crisis condition" needed to invoke a moratorium or plan any steps to resolve the crisis before the moratorium expires. However, the language of the ruling suggested it is possible police power authority could be successfully invoked against hydraulic fracturing in the future if a better case is made.

Looking to the future This complex legal issue will not be easily or quickly resolved, and the outcomes are likely to be different in each state. Each state's constitution is unique and the authority granted to municipalities could be interpreted differently in each state. Unless one of the court cases successfully invokes federal statute or the US constitution (one of the counts in the Act 13 case attempts this), court decisions in one state will not set precedent for another state.

In the meantime, natural gas producers are becoming increasingly aware of the potential power of communities to affect their ability to develop resources, lending importance to the concept of a "social license to operate" across the country. While court arbitration will surely continue, the underlying relationships between industry, communities, and governments will drive the nature of the conflicts, suggesting that collaborative alternatives to litigation may ultimately prove more effective and valuable for the oil and gas industry in the future.

Hear Sarah Fletcher speaking at the IHS Forum, November 14th 2012, Washington DC Sarah Fletcher will be presenting some case studies during our Onshore Oil and Gas Environmental Dialogue session at the IHS Forum on November 14th 2012 in Washington DC. Register here to attend this event.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.