On February 21st, the Supreme Court in New York found that local governments are empowered to regulate hydrofracking under their delegated zoning and land use authority, despite preemptive language in the state’s Oil, Gas and Solution Mining Law (“OGSML”).  To fully understand the importance of this holding, some context is helpful.

Over the past three years, state and local officials, business leaders, environmentalists, and the public in New York have been locked in a fractious and escalating debate about whether and how to allow horizontal drilling for natural gas in New York.  Much of the attention regarding the promise and perils of drilling for shale gas is focused on the Marcellus Shale formation, which is one of the largest shale gas formations in the U.S., underlying several mid-Atlantic states including 18,700 square miles in New York.  Estimates of the number of wells that will result in this vast Marcellus region in New York alone range up to 40,000.  Drilling in New York awaits the completion of a study on the draft rules issued that will govern state-issued permits.[1]

A central issue in this rulemaking is a hydrofracking by-product known as “flow-back water.”  This fluid mixture must be trucked to injection wells or water treatment plants.  In New York this raises a further complication since New York geology is not favorable to injection wells.  This, in turn, has led to a search for appropriate injection wells in other states and for wastewater treatment plants that can handle this wastewater, which are in short supply.

Under the Environmental Conservation Law (“ECL”) of the State of New York, the New York Department of Environmental Conservation (“DEC”) is the permitting agency for hydrofracking operations and must study their potential environmental impacts before finalizing its regulations.  The DEC has released a revised Draft Supplemental Generic Environmental Impact Statement (“dSGEIS”) regarding hydrofracking.  Until the environmental impact statement is final, there is a de facto moratorium on the issuance of drilling permits.  In the meantime, the industry is laying the groundwork for obtaining permits by leasing land.

The Town of Dryden’s zoning law, which prohibits drilling anywhere in the town, has been challenged by the Anschutz Exploration Corporation, a Colorado-based driller and developer of natural gas wells.  Anschutz is the owner of oil and gas leases on approximately 22,200 acres in the Town of Dryden.  In its declaratory judgment challenge, Anschutz claims that the OGSML preempts all local regulation of gas drilling.

On February 21, 2012, the Supreme Court upheld the Town’s total ban on hydrofracking within its borders.  The court found that the OGSML did not expressly preempt local zoning and that the town’s zoning amendment did not regulate gas production; it validly regulated land use, not the operation of gas mining, which was preempted by the statute.

The court noted that “[n]one of the provisions of the OGSML address traditional land use concerns, such as traffic, noise or industry suitabiliy for a particular community or neighborhood.”  It cited other statutes that preempt local zoning, noting that they require the relevant state agency to consider impacts that are the traditional concerns of zoning in deciding whether a permit is to be issued.  “Under this construction, local governments may exercise their powers to regulate land use to determine where within their borders gas drilling may or may not take place, while DEC regulates all technical operational matters on a consistent statewide basis in locations where operations are permitted by local law.”

This is merely the first round in the legal fight over the future of hydrofracking.  A ruling in a similar challenge to the Town of Middlefield’s ban on hydrofracking is expected any day.  Anschutz may appeal the Dryden ruling on preemption or it may challenge the Town’s ban as a regulatory taking or as a violation of its substantive due process rights.  New York’s legislature may weigh in, either reinforcing the Dryden decision or limiting local control of hydrofracking.  In addition, the EPA is reconsidering its role in regulating horizontal gas drilling under federal law.  Stay tuned.

[1] Under New York law, state and local agencies must complete an Environmental Impact Statement when their actions, such as permitting gas drilling, may have an adverse impact on the environment.  DEC has issued draft rules to regulate the permit issuing process and has issued a draft Supplemental  Environmental Impact Statement (dSGEIS) for public comment.  Over 60,000 comments have been received.  Until this process concludes, permits will not be issued, thereby creating a de facto moratorium.