By Dan Wiessner

ALBANY, N.Y., Sept. 19 (Reuters) - A lawsuit challenging a small town's ban on natural-gas drilling could have far-reaching implications throughout New York, where state officials are poised to approve the controversial drilling method known as hydraulic fracturing, or fracking.

Anschutz Exploration Corporation filed suit in state Supreme Court in Tompkins County on Friday against the town of Dryden, a rural suburb of Ithaca with about 13,000 residents, where last month local officials amended the zoning law to expressly ban all gas drilling within the town's unincorporated borders.

The suit, which asks the court to invalidate the amendment, is the first to test the legal implications of the state's lifting its ban on fracking, which involves injecting millions of gallons of water, sand and chemicals into rock formations to release the gas trapped inside. Critics say the intensive method has the potential to pollute water and air, as well as create industrial traffic and damage roads in rural areas.

Anschutz, which owns oil and gas leases covering more than 22,000 acres of land in Dryden, is arguing that New York's Environmental Conservation Law (ECL) bars local governments from any regulation of drilling.

But officials in Dryden and other towns considering their own restrictions on gas extraction say the law prohibits them only from regulating the drilling itself, and not from regulating where, or whether, it can take place.

"The town has land-use regulatory powers that are consistent with the ECL because we're not enacting a ban on a single industry," said Mahlon Perkins, Dryden's town attorney.

CONFLICT OF LAWS

The suit brings to light the conflict between the conservation law and "home-rule" authority, which gives towns the power, among other things, to create land-use policies, including zoning ordinances.

But that power is limited by the ECL, which expressly pre-empts any local law "relating to the regulation of the oil, gas and solution mining industries."

Precisely how the conservation law and home-rule authority interact, however, is not always clear.

Kevin Bernstein, an environmental lawyer at Bond Schoeneck & King in Syracuse, said the intent of the ECL's pre-emption provision was to create a consistent regulatory scheme throughout the state.

"For there to be a hodgepodge of attempted regulation by municipalities would run counter to that original purpose," Bernstein said. The ECL trumps home-rule authority, he added, "by a clear-cut supercession of their ability to regulate a specific industry."

Dryden's amendment states that it "is not directed at the regulatory scheme for the operation of natural gas wells [under the ECL]," but rather "addresses land use and nuisance concerns" as well as concerns over health and the environment.

The amendment is well within the town's power under the conservation law, said Assemblywoman Barbara Lifton, an Ithaca Democrat who has been an outspoken opponent of the drilling industry.

"If they wanted to say, 'We're going to require you to take the noise level down 50 percent,' or 'This is how you're going to dispose of waste fluid,' then you're regulating the industry and that is clearly the prerogative of the state. But saying we're going to not allow it at all is not regulating the industry itself."

'IT ALL AMOUNTS TO REGULATION'

Lawyers defending the industry don't see it that way. "The law says they can regulate roads and taxes, and that's it," said Tom West, Anschutz's lawyer. "I'm sure some municipal attorneys will try to come up with other clever means to accomplish the same goal [of banning drilling], but we will argue if it prohibits drilling in any way, it's beyond their authority."

Michael Joy, a partner at Blitekoff & Joy in Buffalo, who advised a pro-drilling group in Dryden that attempted to block the local ban, said, "Regardless of the methodologies municipalities have thought up, it all amounts to regulation."

But whether an outright ban is the same as a regulation is an unresolved question, and one the court will likely be forced to address more often now, beginning with the case against Dryden.

In fact, Dryden is not the first New York town to enact a drilling ban. At least a dozen local governments across the state have passed some type of prohibition on gas drilling, but most of them -- including Buffalo and Ithaca -- are not prospective drilling sites, so the industry has chosen not to litigate, West said.

But because the Dryden amendment is a "very clear ban," West said, it gives courts the opportunity to address the ECL's pre-emption provision head-on.

MINING LAW MAY BE MODEL

State appellate courts have never reviewed the scope of the ECL's pre-emption provision, but the Court of Appeals has twice ruled that a similar statute, the Mine Land Reclamation Law, does not pre-empt local zoning ordinances.

To some, this suggests that the courts should rule similarly with regard to gas drilling.

Assemblywoman Lifton, who sponsored a bill this year intended to clear up the confusion by including gas-drilling bans under the scope of local governments' land-use authority, said, "It doesn't make sense that land-use authority applies to mining and not to drilling; that would be a huge inconsistency in state law." The bill passed the Democrat-dominated Assembly, but languished in the Republican-led Senate.

Joy, the Buffalo attorney, said there are important distinctions between the mining and drilling laws, including provisions in the mining law that allow for local control of small-scale mining activities. For example, municipalities can issue permits for mining under a certain volume.

"You can't draw a parallel when you're starting with a completely different standard," Joy said.

A much-anticipated report released earlier this month by the state Department of Environmental Conservation found that fracking can be performed safely if it is closely regulated. A public comment period will run into December, and the state is expected to begin issuing drilling permits sometime next year.

(Reporting by Daniel Wiessner)

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(A previous version of this story stated that Anschutz Exploration Corporation owns more than 22,000 acres of land in Dryden. It owns oil and gas leases on that land, not the land itself.)