As we discussed in an earlier post about regulatory structures, the question of who is authorized to regulate oil and gas operations in Ohio pits local governments against the state government. The state won the first round earlier this week — and it may have landed a knock-out punch.

In State ex rel. Morrison v. Beck Energy Corp., 2013-Ohio-356 (Ninth Dist.) Beck obtained a permit from the Ohio Department of Natural Resources (ODNR) to drill an oil and gas well on property located within the city of Munroe Falls, Summit County, Ohio. When Beck began drilling, the city issued a stop work order and filed a lawsuit. The city claimed that Beck’s activities were illegal because Beck did not comply with city ordinances that required Beck to obtain a city drilling permit (and pay the associated application fee), a zoning certificate, rights-of-way construction permits, post a performance bond and attend a public hearing. The trial court agreed with the city and issued an injunction. Beck appealed.

The appellate court framed the issue on appeal as, “whether the City of Munroe Falls can enforce its ordinances governing oil and gas drilling and related zoning and rights-of-way issues despite the state’s comprehensive statutory scheme for drilling set forth in R.C. Chapter 1509.” The court added that this was a case of first impression; i.e., the first time the court had considered this question.

The court pointed out, “In 2004, the General Assembly enacted H.B. 278, which expanded the regulatory scheme and amended R.C.1509.02 to give the Division of Mineral Resources Management of the Ohio Department of Natural Resources the ‘sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells.’”

The court also observed that in 2010 ODNR’s authority was expanded to include “production operations,” and was expanded further in 2011 to include “well stimulation,” “completing,” “construction” of site and “permitting related to those activities.”

Nevertheless, the city argued that Article XVIII, Section 3 of the Ohio Constitution gives municipalities “home-rule” authority to regulate gas drilling operations because the authority given to the state by the statute only pertains to “permitting, location and spacing of” oil and gas wells under R.C. 1509.02.

To decide whether the ordinances were an appropriate use of the city’s home-rule authority, the court went through a three-step analysis established by the Ohio Supreme Court. After disposing of the first two steps, the court determined that the third step — whether the ordinances conflicted with a state statute — was most critical. The court said: “… the issue to be resolved in this appeal boils down to whether the ordinances Munroe Falls attempts to enforce are in conflict with R.C. 1509.02. In the event of a direct conflict, the state regulation prevails.”

The city argued that because none of its ordinances infringed on the states control over “permitting, location and spacing” of oil and gas wells, the ordinances did not conflict with the statute and were enforceable.

The court agreed that the city’s ordinances regarding excavations and rights-of-way do not conflict with R.C. 1509.02 and found those ordinances to be enforceable as long as the city did not enforce those ordinances “in a way that discriminates against, unfairly impedes or obstructs oil and gas activities and operations.”

However, with respect to the other ordinances, the court did not agree with the city, finding instead that the authority granted to the state by statute is broader than the city’s interpretation and in conflict with the remaining city ordinances. The court held, “We are compelled to follow the established law in our application of the constitutional home-rule analysis to Munroe Falls’ drilling ordinances. Because the drilling ordinances are in direct conflict with the state statutes, the city cannot enforce the ordinances as presently written.”

With that, the court reversed the judgment of the Summit County Court of Common Pleas, but instructed that Beck would need to apply for the excavation and rights-of-way permits.

You can bet that, given this guidance, creative city council members who are opposed to oil and gas production will stretch the court’s reasoning as far as possible. We expect to see more litigation testing the limits of home rule authority.