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By Tiffany Kary - Jul 24, 2012 3:55 PM ET in Bloomberg

The U.S. said a New York State lawsuit seeking fuller review of the effects of hydraulic fracturing on the state’s water supply should be dismissed because the multistate commission responsible for the watershed isn’t a U.S. agency.

The Delaware River Basin Commission, created in 1961 by New York and three other states and the federal government, is responsible for rules governing the natural gas-extraction process known as fracking. New York sued federal agencies in May 2011 to force a fuller assessment of the environmental impact that gas development could have its water supply.

Assistant U.S. Attorney Sandra Levy argued today in federal court in Brooklyn, New York, that the Environmental Protection Agency and other federal parties sued by the state don’t have control over how the commission regulates fracking.

“The federal defendants didn’t cause the rules to be proposed and can’t stop them from being issued,” Levy said. She also told U.S. District Judge Nicholas G. Garaufis that the DRBC doesn’t have to comply with U.S. laws that require a fuller environmental review because it isn’t a federal agency.

Federal Agency

New York, arguing that the DRBC is a federal agency, maintains that it does have a right to sue. The state seeks a ruling in its favor without a full trial.

Garaufis said he would rule on the motions after today’s hearing.

The commission says it lacks funds for a full environmental review even if it was obliged to conduct one. The DRBC is a compact formed between Delaware, New Jersey, New York and Pennsylvania and tasked with protecting the water quality in the Delaware Basin.

“So we have an unfunded mandate -- you have responsibility but not the capability to protect the water quality of four states and 15 million people?” Garaufis asked a lawyer for the DRBC.

Kenneth Warren, the lawyer, said the DRBC can’t afford to make a full environmental impact statement, partly because New York hasn’t paid its fair share. Still, the commission has done its own “robust” analysis and will issue regulations that will provide an extra layer of protection over what the states in its compact do on their own to regulate.

Stringent Regulations

If New York issues more stringent regulations on fracking, they will be required on top of what the commission proposes.

Assistant Attorney General Andrew Frank said the state, while can’t regulate fracking in other states, may still be exposed to air and water pollution.

The federal agencies named as defendants also argued today that the state can’t prove injury from fracking, and that the case isn’t “ripe” because the commission hasn’t issued any regulations yet. The state said it can’t determine how protective the rules are without a full environmental impact statement.

The lawsuit, brought by New York Attorney General Eric T. Schneiderman, also pits arguments for environmental conservation against those for a domestic energy source and new jobs. New York City Council and environmental groups have sided with the state, warning of breathing problems for city residents and risks to fish in the Chesapeake Bay. Trade groups that represent companies including Exxon Mobil Corp. (XOM) have sided with the federal government, and say the lawsuit is based on “speculative fears.”

Scientific Experts

Both sides have filed declarations from scientific experts, creating hundreds of pages of court documents. The expert testimony covers issues including due process to accidents, and how toxins are handled.

Garaufis said today he will also rule on whether the trade groups have formal standing to intervene in the case.

Schneiderman claimed in his suit the DRBC and federal agencies had proposed regulations that will allow fracking at 15,000 to 18,000 gas wells without a full environmental review.

If the regulations are issued, a moratorium on drilling in New York, already in effect for 18 months, will be lifted.

New York says it has shown that fracking generates millions of gallons of wastewater contaminated with toxic metals and radioactive substances, and that companies drilling in Pennsylvania have violated the law 1,600 times in recent years, harming the state’s water.

Expert Conclusions

“The data and methodologies of New York’s experts are unreliable and are inadequate to support their conclusions,” lawyers for the federal agencies wrote.

The lawsuit might shut down gas development in the Delaware River Basin “for many years to come,” according to trade groups representing oil and gas companies that hold natural gas leases in New York State. The Marcellus Shale, which lies beneath parts of New York, Pennsylvania, Ohio, Maryland, West Virginia and Virginia, has an estimated 400 trillion cubic feet of natural gas, one of the largest such formations in the world, the trade associations said.

The Delaware River Basin covers 58 percent of the land area of New York City’s watershed west of the Hudson River.

The American Petroleum Institute, the Independent Petroleum Association of America and the US Oil & Gas Association have filed briefs in the case while they seek more formal status to intervene. They say their members -- pipeline operators, natural gas producers and other businesses -- should be allowed to develop natural gas in the basin while paying heed to environmental rules set by the DRBC.

Drinking Water

New York City has spent almost $1.5 billion to protect the drinking water that flows from the watershed west of the Hudson River, Schneiderman said in his complaint. The money has gone to buying land to serve as a buffer for pollutants, upgrading sewage plants and regulating human activity.

In Pennsylvania, natural gas and related industries have created 72,000 jobs, 3,143 well permits and more than $1 billion in tax revenue since 2009, the trade associations said.

The case is New York v. U.S. Army Corps of Engineers, 11- cv-2599, U.S. District Court, Eastern District of New York (Brooklyn).

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