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Declaratory Ruling 23-13: Western Land Services, Inc.

STATE OF NEW YORK
DEPARTMENT OF ENVIRONMENTAL CONSERVATION

In the Matter of the Petition of

Western Land Services, Inc.

for a Declaratory Ruling Pursuant to Section 204 of the
State Administrative Procedure Act and 6 NYCRR Part 619

I. Introduction and Petitioner's Questions

Western Land Services, Inc. ("WLS" or "Petitioner") petitions for a declaratory ruling interpreting certain portions of Sections 23-0301, 23-0305 and 23-0901 of the Environmental Conservation Law (ECL), which, inter alia, regulate the development, production and utilization of natural gas wells within the State.1 WLS requests clarification on the Department's process for determining the size and configuration of units in a proposed natural gas well field.2 As discussed below, the established process for determining well spacing and compulsory integration is lawful and consistent with Article 23 of the ECL and applicable regulations of the Department.

II. Statement of Facts

For purposes of this declaratory ruling only, the Department will assume that the facts alleged in the petition are true. The Department may take official notice of any fact not subject to reasonable dispute if it is generally known or can be accurately and readily verified. 6 NYCRR §619.2(b). The Department will engage in no fact finding for purposes of this declaratory ruling and the binding effect of the ruling is limited by the assumed fact predicate. Power Authority v. N.Y. State Dept. of Environmental Conservation, 58 N.Y.2d 427, 434 (1983).

The petition states that WLS and its affiliates are actively involved in the oil and gas business in Michigan and other states. WLS has been the primary operator of wells and the owner of operating interests with other operators in hundreds of wells in Michigan. WLS has obtained oil and gas lease rights in Otsego, Tioga, Chemung, Steuben and Schuyler Counties in the State of New York covering 10,618 acres. These leases are in the general area which is thought to overlie the Trenton/Black River formation. The Trenton/Black River is a laterally extensive geological formation. The development of natural gas fields exploiting the formation may well extend over substantial geographic areas of New York State, including the portions of the above counties where WLS's leases are located.

The issues raised in the petition relate primarily to the procedures followed by the Department in establishing well spacing and compulsory integration of interests in a well field.3 The procedures, as outlined in the petition and numerous prior decisions of the Commissioner, are as follows:

  1. A potential operator of a well applies to the Department for a permit to drill one or more wells. If the permit application meets the requirements of 6 NYCRR Parts 551, 552, and 553, a permit is issued.
  2. After a well operator has developed one or more producing wells in a field, Department Staff determine the necessity of an order establishing the size and boundaries of the unit from which each well will draw natural gas.
  3. To arrive at proposed unit spacing, qualified Department Staff review test data, including subsurface imaging data such as seismic data. The data are generally gathered by the operator of the proposed units, at the operator's expense, and are considered proprietary and confidential business information by the operator.
  4. Prior to the commencement of hearings pursuant to either ECL §§ 23-0501 or 23-0901, Department Staff have entered into a stipulation agreement with the operator. Stipulations have included, among other things, the agreed upon size and boundaries for each well spacing unit, as well as an agreed upon procedure for determining the location, size and configuration of spacing units for any additional wells that may be drilled in the field.
  5. After the stipulation is executed by the operator and Department Staff, Staff initiates the public notice and hearing process required by ECL §§ 23-0501 and 23-0901.4 The matter is referred to the Department's Office of Hearings and Mediation, and an Administrative Law Judge is assigned to preside over the Legislative Hearing and Issues Conference.
  6. In conducting the legislative and adjudicatory hearings, the Department's Office of Hearings and Mediation utilizes the Department's well established procedures for conducting legislative and adjudicatory hearings found at 6 NYCRR Part 624.
  7. During the public comment period and at the Legislative Hearing, the Department receives comments of interested parties concerning the proposed unit spacing and compulsory integration order. In addition, potential parties are given an opportunity to submit petitions for party status in any adjudicatory hearing that may be held on issues raised by the parties.
  8. During the issues conference and any adjudicatory hearings that may follow, Staff defends the unit sizes and boundaries set out in the stipulation between Staff and the operator.

III. Discussion

The Department issues well spacing orders under Section 23-0501(2) and compulsory integration orders under Section 23-0901(2) of the Environmental Conservation Law. Both statutory provisions provide that such orders must follow "notice and hearing".6 Well spacing and compulsory integration orders are required whenever necessary to carry out the policy established by ECL Section 23-0301.7

Importantly, neither ECL Section §23-0501 nor Section §23-0901(2) specify the type of hearing that must be held to satisfy the statute's requirements for a hearing.8 The hearing process described in the petition, however, is consistent with ECL Article 23 and the Department's well established uniform hearing procedures at 6 NYCRR Part 624.

Hearing Process

6 NYCRR Section 624.1 sets out the types of hearings subject to the Department's uniform permit hearing procedures.9 Sub-sections 624.1(1) to (5) include various hearings on permit or approvals governed by the Uniform Procedures Act, ECL Article 70, and the regulations promulgated thereunder, 6 NYCRR Part 621.10 Subsection 624.1(6) makes Part 624 applicable to other Department approvals, such as orders for well spacing under ECL §23-0501(2) and order for compulsory integration of interests under ECL §23-0901(2):

any circumstance comparable to those set forth in paragraph (1), (2), (3), (4) or (5) of this subdivision which arises out of permits, licenses, or other entitlements that are not subject to ECL article 70 or Part 621 of this Title. The circumstances where this part applies include, but are not limited to, permits for aquatic pesticide applications, the registration of pesticides, oil and gas well spacing variances, oil facility certifications and water supply rate disputes.

Given the general requirements for a hearing set out in ECL §23-0501(2) and §23-0901(2), Department Staff appropriately refers requests for such orders to the Office of Hearings and Mediation for hearings under Part 624.

Part 624 contemplates two types of public hearings: legislative and adjudicatory.11 The process, as outlined in the petition, indicates that both a legislative and adjudicatory hearing is held.12 Pursuant to Section 624.4(b), the first stage of an adjudicatory hearing is the issues conference. The purpose of the issues conference is to decide what issues, if any, will be the subject of adjudicatory hearings. 6 NYCRR §624.4(b)(2).

Only issues that are both "substantive" and "significant" are adjudicated in Department hearings.13 In general, in order to be adjudicable, an issue must be "substantive", viz. the issue raises sufficient doubt about the applicant's ability to meet statutory or regulatory criteria such that a reasonable person would inquire further. See 6 NYCRR §624.4(2). In addition to being substantive, an adjudicable issues must also be "significant", viz. the issue has the potential to result in the denial of the permit, a major modification to the proposed project or the imposition of a significant permit condition. See 6 NYCRR §624.4(3). At the issues conference, parties and potential parties to an adjudicatory hearing may make oral arguments as to what issues should be covered in adjudicatory hearings.14

At the close of the issues conference record, the administrative law judge will issue a ruling that determines which potential parties are to be granted party status and whether adjudicatory hearings will be held on the proposed issues.15 The issues ruling is subject to expedited appeal to the Commissioner of the Department by any party or potential party.16 Final Department decisions by the Commissioner under Article 23 of the ECL are subject to judicial review under Article 78 of the Civil Practice Law and Rules.17

Staff Participation in Hearings

In addition to the hearing process followed in connection with requests for unit spacing and integration orders, the petition also seeks clarification on the manner in which Department Staff participates in such hearings. Specifically, the petition questions whether Department Staff may enter into stipulations with one or more well developers concerning unit configuration prior to the start of the hearing process. Department Staff is free to enter into stipulation agreements with well developers and/or potential parties to an adjudicatory hearing. Such stipulations are a well established and appropriate part of administrative practice before the commissioner and her administrative law judges.

The Department's hearing procedures contemplate that parties to a DEC hearing may enter into stipulations to settle an issue that may be in dispute. 6 NYCRR §624.2(ii) defines "stipulation" as "an agreement between two or more parties to a hearing, and entered into the hearing record, concerning one or more issues of fact or law which are the subject of the hearing." In the case of stipulations executed by all parties to a proceeding, Section 624.13(d) provides that "a stipulation executed by all parties resolving any or all issues removes such issue(s) from further consideration in the hearing" (emphasis added). Thus, stipulations are fully contemplated by the Department's procedural rules.

The petition alleges that Department Staff's practice of entering into Stipulations with well developers deprives potential parties to a hearing on a proposed well spacing or compulsory integration order of due process. The petition misconstrues the effect of such stipulations, however. As expressly stated in Section 624.13(d), only a stipulation "executed by all parties" removes one or more issues from consideration in the hearing. Where, as in the assumed process contained in the petition, not all potential parties have executed a stipulation, the stipulation does not remove the issue from the hearing process. Instead, a potential party is free to challenge issues that are covered by stipulations that potential party did not execute.18

Information Claimed as Trade Secrets

Petitioner also questions whether it is appropriate for the Department to rely on information claimed as trade secrets without allowing potential parties the opportunity to review such information. As discussed below, this issue is not properly decided as part of a declaratory ruling.

Access to records in the possession of the Department is governed by Part 616 of Title 6 of the NYCRR. Part 616 provides for a procedure for requesting records, obtaining rulings on whether data is appropriately withheld as trade secrets, and an appeals procedure for parties who are unsuccessful in obtaining records from Department Staff. Whether a particular record is properly withheld is a highly factual inquiry not appropriately answered in a declaratory ruling.19

In addition to the procedures set out in Part 616, Section 624.7 provides for discovery in DEC administrative hearings, both before and after the issues conference. Thus, a potential party has two potential avenues for obtaining information it maintains is necessary to review in order to make its case at the issues conference. In other words, where a potential party is seeking to review information that may form all or part of the basis of a proposed well spacing or integration order, that party may seek that information through the process provided for in Part 616 and seek additional time to make its arguments in written submittals and at the issues conference under Sections 624.4(b) and 624.7.

Given these clear procedures for obtaining information necessary to participate in Department hearings, and the highly fact-specific nature of rulings on whether a particular document should be disclosed, a declaratory ruling on the issue is declined.

Conclusion

For the reasons set forth above, the process followed by the Department in conducting hearings on proposed orders for well spacing and compulsory integration is lawful and appropriate. With respect to the issue regarding information submitted with a request for trade secret protection, no ruling is made for the reasons discussed herein.

James H. Ferreira
Deputy Commissioner and General Counsel

Dated: January 29, 2004
Albany, New York

1. The petition for a declaratory ruling was filed pursuant to Section 204 of the State Administrative Procedures Act and Part 619 of Title 6 of the New York Codes, Rules and Regulations.

2. WLS Petition ¶3.

3. The petition also raises questions about the availability of seismic data compiled by well operators and treated as confidential business information. As discussed more fully below, this is not an appropriate issue for a declaratory ruling and a ruling on this issue is declined.

4. Department Staff may request a hearing without a stipulation in place if necessary.

5. This position is assumed for purposes of this declaratory ruling. While Staff is likely to stand behind its work in determining unit sizes and configurations, there is no reason to assume that Staff would not change its position when presented with credible evidence that one or more boundaries agreed to in a stipulation are not correct. In any event, the position Staff takes in a particular case is not directly relevant to the issues decided in this Declaratory Ruling.

6. ECL Section 23-0901(2) provides for a coincidental notice and hearing to consider the compulsory integration of interests in the same natural gas field.

7. ECL Section 23-0301 provides that regulation of natural gas supplies in the State of New York shall be conducted in such a manner "as will prevent waste; to authorize and provide for the operation and development of oil and gas properties in such a manner that a greater ultimate recovery of oil and gas may be had, and that the correlative rights of all owners and the rights of all persons including landowners and the general public may be fully protected...."

8. The form and manner of public notice under ECL Article 23 are governed by §23-0304(4), which provides that

[a]ny notice required by this article shall be given by the department by any one or more of the following methods: (a) personal service, (b) publication in one or more issues of a newspaper of general circulation in the county where the land affected or some part thereof is situated, or (c) by registered or certified mail addressed, postage prepaid, to the last known mailing address of the person or persons affected. The date of service shall be the date on which service was made in the case of personal service, the date of first publication in the case of notice by publication, and the date of mailing in the case of notice by mail. The notice shall specify the style and number of the proceeding, the time and place of the hearing, and shall briefly state the purpose of the proceeding. Should the department elect to give notice by personal service, such service may be made by any officer authorized to serve process, or by any agent of the department in the same manner as is provided by law for the service of process in civil actions in the courts of the state.

9. Notably, the term "permit" is given a very broad meaning in the Department's permit hearing regulations. 6 NYCRR Section 624.2(x) defines "permit" as "any permit, certificate, license or other form of departmental approval, other than an enforcement order, issued in connection with any regulatory program administered by the department."

10. Unit spacing orders and compulsory integration orders under Title 3 of Article 23 of the ECL are not subject to the Uniform Procedures Act or the regulations promulgated thereunder. ECL §70-0107(3); 6 NYCRR §621.2.

11. A legislative hearing is one in which members of the public and the parties to a hearing are invited to make unsworn statements on the record. 6 NYCRR §624.2(t). An adjudicatory hearing is defined at 6 NYCRR §624.2(a) as a

hearing, held pursuant to ECL section 70-0119 or [the State Administrative Procedures Act] article 3, where parties may present evidence on issues of fact, and argument on issues of law and fact prior to the commissioner's rendering of a decision on the merits, but does not include legislative hearings.

12. This is consistent with the process followed in numerous well spacing cases. See In the Matter of the Application of Pennsylvania General Energy, Inc., Interim Decision, dated October 28, 2002, p. 2 (the "Quackenbush Field Decision"); In the Matter of Wilson Hollow Field, Interim Decision dated June 5, 2001("Interim Wilson Hollow Field Decision"); In the Matter of Pine Hill Field, Decision and Order, dated September 30, 2002; In the Matter of Cutler Creek Field, Decision and Order, dated October 1, 2002.

13. See note 10 above.

14. Section 624.4(c)(4) provides that in situations where the applicant for a "permit" and the department are in agreement as to the application of the statutory and regulatory requirements to the applicant's project, then "the burden of persuasion is on the potential party proposing any issue... to demonstrate that it is both substantive and significant". See note 9 above for the broad definition of "permit".

15. 6 NYCRR §624.4(b)(5).

16. 6 NYCRR §624.6(e).

17. The recent Decision and Judgment in Caflisch, et al. v. Crotty, et al., Supreme Court, Chemung County, Index No. 2003-1579, dismisses the petition/complaint in the matter of Quackenbush Hill Field Order and finds that "the petitioners have failed to demonstrate that the Commissioner or her agents violated any of the public hearing provisions outlined in 6 NYCRR Part 624 or failed to comply with the procedures for compulsory integration pursuant to Article 23 of the Environmental Conservation Law, and specifically Sec. 23-0901." Caflisch at page 4.

18. Any issue that has not been settled may be raised by a potential party in its issues conference submission. If the issue is shown to be substantive and significant, it would then be adjudicated.

19. 6 NYCRR §616.7(e).

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