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June 2009 issue
Prepared by Bowles Rice McDavid Graff & Love LLP
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Pennsylvania Supreme Court Rejects State Agency’s Attempt to Unilaterally Impose Conditions on Oil & Gas Development in State Park
Belden & Blake Corp. v. Commonwealth of Pennsylvania, Department of Conservation and Natural Resources
969 A.2d 528 (Pa. 2009)
Jeremy D. Bragg, Energy Practice Group
The Supreme Court of Pennsylvania held that the Pennsylvania Department of Conservation and Natural Resources (DCNR) exceeded its authority when it attempted to unilaterally impose conditions on oil and gas development on State property. The DCNR’s statutory mandate to maintain and preserve State parks does not authorize it to restrain a subsurface owner’s reasonable exercise of its oil and gas rights.
Well settled principles of Pennsylvania law require a subsurface owner to “exercise its rights in a reasonable manner, with due regard to the surface owner’s rights.” To satisfy the “due regard” requirement, Belden & Blake Corporation (Belden) gave the DCNR several months notice of its intent; met with the DCNR to discuss park preservation alternatives; allowed time for the DCNR to clear timber; offered to pay fair market value for timber extraction; provided maps of proposed wells; and obtained a right-of-way across private property. In addition, Belden posted bond with the Department of Environmental Protection to secure well closure, reclamation, and remediation costs.
In response, the DCNR conditioned access to the subject property upon Belden’s execution of a “coordination agreement,” by the terms of which Belden would be required to post additional $10,000 performance bonds for each gas well. In addition, Belden would have to pay “$74,885 in stumpage fees, double the fair market value of the timber to be removed.”
Belden successfully petitioned for equitable relief and secured a grant of partial summary judgment regarding the DCNR’s authority to impose performance bonds and levy stumpage fees. On appeal the Supreme Court of Pennsylvania affirmed, holding that “a subsurface owner’s rights cannot be diminished because the surface comes to be owned by the government . . . . The government and its agencies must be held to the same standard as any other surface owner.” If the DCNR chooses to impose additional conditions on a subsurface owner, it “must compensate the subsurface owner for the diminution of its rights.”
United States District Court Dismisses Plaintiffs’ Claims to Rescind Oil, Gas and Mineral Lease
Thomas v. Pride Oil & Gas Properties, Inc.
Civil Action No. 08-1166, 2009 WL 1309725 (W.D. La. 2009).
Jeffrey M. Shawver, Commercial and Financial Services Group
William R. Thomas (“Thomas”) and Pride Oil & Gas Properties, Inc. (“Pride”) entered into an Oil, Gas, and Mineral Lease (the “Lease”) on February 26, 2007. Under the Lease, Thomas leased to Pride 17 acres in Red River Parish, Louisiana for an initial term of three years for $100.00 plus royalties of 3/16 of the market value for oil and gas “produced and saved” from the land. At that time, however, Thomas was unaware that the Haynesville Shale formation (allegedly one of the largest natural gas deposits in the world) was located beneath the land. Thomas then filed suit and alleged three claims as to why the Lease should be rescinded.
First, Thomas claimed that his consent to the Lease was invalid “due to fraud by suppression of the truth by [Pride] or its agents, with the intent to obtain an unjust advantage.” He alleged that Pride knew of the existence and value of the Haynesville Shale deposits, took steps to conceal their existence from the public, and should have known that Thomas had no such knowledge. The court maintained that a duty to disclose information must be present and such a duty did not exist in this case. The court noted that a “mineral lessee . . . is not under a fiduciary obligation to his lessor.” Thomas did not allege that Pride offered to appraise or provide technical advice concerning the mineral deposits or that Thomas was prevented from seeking advice from an expert. Because Thomas did not put forth allegations of a fiduciary relationship, Pride had no duty to disclose the value of the mineral deposits to Thomas. Therefore, the court dismissed Thomas’ fraud claim
Second, Thomas claimed that “the price paid by [Pride] was grossly out of all proportion with the value of the minerals sold.” He argued that the true value may be over 10,000.00 percent higher than the price he received from Pride and that had he known about the property’s true value, he would not have agreed to the terms and price in the Lease. Under Louisiana law, the price in a contract cannot be out of proportion with the value of the item sold. In addition, a contract can be rescinded when “the price is less than one half of the fair market value of the immovable[.]” However, the court reasoned that the sale of mineral rights does not fall under the above doctrine because mineral sales are speculative by nature and involve risks to production and market prices. Because the subject minerals of such sales do not have “an intrinsic definite and fixable value,” the court rejected Thomas’ claim.
Third, Thomas claimed that he was mistaken concerning “a substantial quality” of the leased mineral rights, Pride knew or should have known about his mistake, and that without the mistake he would not have agreed to the Lease terms. The court, however, reasoned that Thomas’ “lack of awareness [did] not amount to a mistake concerning ‘a substantial quality’ of the mineral rights that the Lease conveyed.” Thomas neither alleged that the existence of the mineral deposits had been proved before he entered into the Lease nor that he would not have entered into the Lease if their existence had been proved. The court noted that Thomas leased the property to Pride because Pride “was willing to assume the incidental expenses and risks of exploring the land and exploiting any mineral deposits found therein.” Thus, due to the “particularly speculative nature of mineral exploration and production,” the court held that a mistake as to the existence of mineral deposits does not constitute a “cause without which the obligation [under the Lease] would not have been incurred.
Because the court rejected and dismissed with prejudice all three of Thomas’ claims for rescission of the Lease, the court in essence upheld the Lease by granting Pride Oil’s Motion to Dismiss.
Supreme Court of Vermont Upholds Award of Certificate of Public Good for Wind Power Facility
In re Amended Petition of UPC Vermont Wind, LLC
(Supreme Court of Vermont, 2009)969 A.2d 144, 2009 WL 279971 (Vt.), 2009 VT 19
Ross C. Lovely, Commercial & Financial Services, Energy, Environmental and Intellectual Property Practice Groups (contributing to article: Dana Daughetee)
At issue is the review by the Vermont Supreme Court of the issuance by the Chair of the Public Service Board (“PSB” or “Board”) of a certificate of public good (“CPG”) for construction of a wind power facility. In Vermont, the PSB deserves significant deference and will only be overturned if the court finds that the PSB’s findings are clearly erroneous. The requested wind power facility was to be a sixteen-turbine, forty-megawatt wind-generation facility. In order to maximize wind exposure, the facility was planned to be built on a high ridgeline with rotors of 315 feet in diameter mounted on towers 262 feet high. Each tower would be sixteen feet at its base, tapering to nine feet near the top of the tower. The project would meet the energy demands of approximately 15,000 homes. The Board awarded the CPG after some deliberation with relatively minor conditions.
The court upholds the Board’s award. First, the court recognizes that the PSB sufficiently considered and carefully concluded that the project would be economically beneficial to the state because it will provide a reliable, clean and cheaper source of energy, it will increase the tax base, and it will create jobs. In specific rejection of the challenge of the Board’s decision, the court notes that the extent of economic harm is merely one factor to be considered, so long as the Board finds that some economic benefit will persist. Second, the court rejects the challenge that the PSB erred by failing to conclude that the project would unduly interfere with the orderly development of the region. Specifically, the court finds that the PSB must only give due consideration to the recommendations of municipalities and regional planning commissions and upheld the Board’s decision that the relatively small intrusion into the rural landscape represented by the project would not unduly interfere with the orderly development of the neighboring towns or region. Third, the court upholds the Board’s decision, based on several statutory factors, that the project would not have an unduly adverse effect on aesthetics. The Board applied the Quechee test, which is used in Vermont to decide whether there will be an adverse effect on aesthetics and, if so, whether that adverse effect will be undue. An adverse effect will be undue if: (1) it violates a clear, written community standard intended to preserve the aesthetics or scenic natural beauty of the area; or (2) it offends the sensibilities of the average person; or (3) the applicant has failed to take generally available mitigating steps that a reasonable person would take to improve the harmony of the proposed project with its surroundings. The court upheld the Board’s reasoning that the adverse impact was not undue based on its evaluation of all three factors.
Fifth Circuit Holds that FERC Show Cause Order Not a Final Agency Action Ripe for Review and Hearing Before ALJ Not a Duplicative Proceeding under Collateral Order Doctrine
Energy Transfer Partners, L.P. v. FERC
2009 WL 139286
Melissa M. Rounds, Energy Practice Group
FERC issued a Show Cause Order against Energy Transfer Partners, L. P., (“ETP”) based on FERC’s preliminary determination that ETP had manipulated wholesale natural gas prices in violation of the Natural Gas Act (“NGA”), and had discriminated against non-affiliated natural gas pipeline shippers in violation of the Natural Gas Policy Act of 1978 (“NGPA”). FERC also proposed penalties. ETP responded with a request for a rehearing and a stay of the Show Cause Order. FERC denied both the request and the stay. ETP responded to FERC’s Show Cause Order by denying that it violated the NGA or NGPA, and requesting summary disposition. FERC then found that the disputed facts required a hearing before an ALJ, and FERC issued an Order Establishing Hearing. ETP petitioned the Fifth Circuit to review FERC’s Order Establishing Hearing and Show Cause Order. The Fifth Circuit was faced with the following issues: (1) Is the issue ripe for review in a federal district court pursuant to § 19(b) of the NGA; and (2) does the collateral order doctrine apply in this case, which would protect ETP from duplicative proceedings?
With regards to the first issue, the Fifth Circuit considered the four ripeness factors stated in Abbott Laboratories v. Gardner, 387 U.S. 136 (1967), including that the challenged action must be “a final agency action.” The Fifth Circuit found that FERC’s Orders in the present case were not definitive rulings or regulations. ETP’s primary argument (that FERC cannot require a hearing before an ALJ) failed under the ripeness test because any ruling by an ALJ would not bind the federal district court. The Fifth Circuit stops short of saying that FERC is authorized to require such a proceeding, but the Fifth Circuit does say that the statute is not clear, and nothing in the statute seems to foreclose FERC from ordering such a proceeding. The Fifth Circuit stated that the NGA statutory scheme is far from clear, but the issues are not ripe for review.
With regards to the second issue, the Fifth Circuit stated that the U.S. Supreme Court has not clarified whether the collateral order doctrine applies in cases other than 28 U.S.C. § 1291. Also, the U.S. Supreme Court emphasized that the doctrine is narrow. The Fifth Circuit analogized this case to that of Will v. Hallock, 546 U.S. 345 (2006), and found that the collateral order doctrine should not be applied in this case.
The Fifth Circuit ultimately dismissed ETP’s petition for review.
D.C. Circuit Approves Decision by the Federal Energy Regulatory Commission to Approve the Proposal of the Electric Reliability Organization to Allocate Costs According to Net Energy for Load
Alcoa, Inc. v. F.E.R.C.
--- F. 3d --- 2009 WL 1257725
Ross C. Lovely, Commercial & Financial Services, Energy, Environmental and Intellectual Property Practice Groups (contributing to article: Dana Daughetee)
At issue is the decision by the Federal Energy Regulatory Commission (“FERC”) to approve the proposal by the Electric Reliability Organization (“ERO”) to allocate costs according to net energy for load. Because the decision by FERC was reasonable, the D.C. Circuit upholds the decision and denies the petition for review. The action by ERO and FERC was spurred by 2005 legislation mandating FERC-approved electric reliability standards to replace the program of voluntary compliance with industry standards upon which the reliability of the nation’s bulk-power system had depended for so long. FERC was to certify only one ERO according to certain criteria, and the ERO was to develop and enforce the reliability standards.
The North American Electric Reliability Corporation (“NERC”), which historically operated a voluntary reliability organization that issued nonbinding guidelines and operational standards for the bulk-power system, was the only applicant to be certified as the ERO. NERC had been funded by assessments to its members based on net energy for load, and it proposed to continue to cover costs in that manner as the ERO. Alcoa objected to NERC’s proposed funding mechanism and requested that NERC account for capacity-related costs in addition to operating costs. FERC rejected Aloca’s objection on the grounds that NERC had satisfied the requirement to have rules in place that equitably allocate costs among electric energy users.
As a preliminary matter, the court sided with Alcoa that its challenge was a timely challenge of the Certification Order instead of, as FERC argued, an untimely collateral attack on a previous FERC Order No. 672, which set forth the criteria an entity must meet to qualify as the national ERO and the methods it may employ to distribute costs.
Alcoa was concerned with the net energy for load method because it does not account for the demand costs taken into account in FERC’s traditional two-part rate structure. Alcoa argues that customers with traditionally low demand charges will have to shoulder a greater burden of the ERO’s costs than they would under a two-part rate structure.
However, the court finds that FERC’s decision was not arbitrary and capricious and was supported by adequately reasoned analysis. First, FERC explained that it found net energy for load to be a fair and reasonable method of allocating costs that minimized the chance of double-counting (i.e., charging end users twice for the reliability functions of the organization). Second, as to Aloca’s argument that net energy for load represents a departure from FERC’s traditional rate structure, the court responds that there is not an apparent departure because the demand-based transmission rate has never been used for an entity like the ERO, an entity that will operate on a continent-wide basis. The court goes on to say that even assuming a departure, it was adequately explained by FERC that it would be, at best, problematic to apply a demand-based allocation of costs to a national rate for all transmission service.
West Virginia Supreme Court of Appeals Rules on Damages to Co-tenant Unaware of His Ownership in Leased Interest Who Actively Negotiated Lease for Other Co-tenant
Drake v. Waco Oil & Gas Company, Inc.
2009 WL 497604; Slip Op. 34224, February 7, 2009
Angel Moore, Energy Practice Group (contributing to this article: J. Zak Ritchie)
Waco Oil & Gas Company, Inc. (“Waco”) entered into an oil and gas lease with Karen Drake, as lessor, covering a 100 acre tract of land. Unbeknownst to the parties at the time of entering into the lease, Rickey Drake, the plaintiff and Ms. Drake’s brother, owned one-half interest in the tract by virtue of a deed dated August 2, 1994. When this particular tract was acquire, the Drakes intended that the tract be titled in Ms. Drake’s name alone; however, the deed preparer erred and included Mr. Drake as a grantee as well.
Unaware of his ownership in the tract, Mr. Drake negotiated with Waco on his sister’s behalf in fomulating the lease agreement. Following the execution of the lease, Waco’s title examiner certified that Karen Drake was indeed the sole owner of the minerals under the leased property. Subsequently, a third party interested in subleasing a portion of the lease conducted its own title examination of the tract and found that Rickey Drake and Karen Drake each owned a one-half interest in the mineral rights covered by the lease.
Ms. Drake had been receiving royalty payments equal to one-eighth of the value of the gas produced from the well until Waco discovered Mr. Drake’s one-half interest in the mineral rights. Waco then split the one-eighth royalty between the Drakes. Mr. Drake refused to negotiate the checks arguing he was entitled to the value of the gas less reasonable cost of production rather than a portion of the royalties as a “nonconsenting cotenant.”
On February 6, 2007, Mr. Drake filed a complaint against Waco alleging that he had been wrongfully denied the full value of the oil and gas Waco removed from the property without his authority. The issue on appeal was whether the correct calculation should be the value of the gas produced less reasonable costs of production or that portion of the royalty to which the non-leasing tenant would have been entitled had each tenant executed the lease.
Mr. Drake relied on Syllabus Point 4 of Thaxton v. Beard, 157 W.Va. 381, 201 S.E.2d 298 (1973), which states:
Where a tenant in common, claiming in good faith to be the sole owner of the oil and gas interest, leases the property to a third person, the nonconsenting cotenant may recognize the lease and receive his fractional interest in the royalty or reject the lease and receive his fractional part of the oil or gas produced, less his proportionate part of the cost of discovery and production.
Relying heavily on equitable principles, the court found that Rickey Drake was not a “nonconsenting cotenant” under Thaxton because he had notice of the lease and negotiated its terms for the benefit of his co-tenant/sister, Ms. Drake, although he acted in good faith in doing so believing that Ms. Drake was the sole owner of the property. While the court noted that both parties were ignorant of the ownership interests and thus both parties bear the blame, the court reasoned that “it would be inequitable for Rickey Drake to receive a larger portion of the profits from Waco than he would have received had both parties not been ignorant of his ownership interest at the time the lease agreement was executed.” Therefore, a cotenant such as Mr. Drake is entitled to recover from the lessee only that portion of the royalty to which he or she would have been entitled had he or she been a signatory to the lease.
The West Virginia Supreme Court of Appeals held:
When mineral rights have been leased to an oil and gas producer, and a person subsequently learns that he or she was a co-tenant to the land at the time that its mineral rights were leased, but that cotenant cannot be classified as a ‘nonconsenting co-tenant’ as contemplated by Syllabus Point 4 of Thaxton v. Beard, 157 W.Va. 381, 201 S.E.2d 298 (1973), such cotenant is entitled to recover from the lessee only that portion of the royalty to which he or she would have been entitled had he or she been a signatory to the lease. Drake, Syl. Pt. 2, 2009 WL 497604.
Pennsylvania Court Upholds Municipal Regulation of Oil and Gas Drilling
Arbor Resources Limited Liability Company, et al. v. Nockamixon Township
No. 1972 C.D. 2008, 2009 WL 1288232 (Pa. Commw. Ct. 2009)
Kristin A. Shaffer, Commercial and Financial Services Group
The Commonwealth Court of Pennsylvania recently considered an appeal from an order of the Court of Common Pleas of Bucks County Pennsylvania filed by four gas companies - Arbor Resources Limited Liability Company, Pasadena Oil and Gas Wyoming, L.L.C., Hook ‘Em Energy Partners, Ltd., and Pearl Energy Partners, Ltd.
In May of 2008, the four gas companies filed a Complaint for Declaratory and Injunctive Relief challenging two zoning ordinances regulating oil and gas drilling enacted by the Nockamixon Township Board of Supervisors. In response to the Complaint, the Township filed preliminary objections arguing that the Pennsylvania Municipalities Planning Code vested the Township Zoning Hearing Board with exclusive jurisdiction over the gas companies’ claims and that the trial court therefore lacked subject matter jurisdiction. In response, the trial court acknowledged the Pennsylvania Oil and Gas Act’s preemptive effect on municipality regulation, but sustained the Township’s preliminary objections based on subject matter jurisdiction. The gas companies appealed this decision.
The Commonwealth Court upheld the trial court’s holding based upon a distinction between operational ordinance provisions and zoning ordinance provisions. A court may exercise equitable jurisdiction to prevent or restrain “the commission or continuance of acts contrary to law and prejudicial to the interest of the community, or rights of individuals,” and the issue of whether the trial court had equitable jurisdiction over the gas companies’ claims depended on whether the challenged provisions involved “operational ordinance provisions in addition to, and distinct from zoning ordinance provisions.” Therefore, the court had to “recognize statutory and judicial distinctions between ordinance provisions governing where the location of the facility may be (zoning provisions) and, . . . how it may be technically designed and operated (operational regulations).” The court recognized that zoning is the “legislative division of a community into areas in each of which only certain designated uses of land are permitted” and that zoning does not involve the regulation of the fine details of various activities conducted on land.
The court concluded that the challenged ordinances lacked operational provisions and that the trial court correctly concluded that it lacked subject matter jurisdiction over the claims. The regulations focused primarily on location and size, which the court stated are indicative of traditional zoning issues and not operational processes. The court also found that environmental requirements were logically related to zoning issues and that public safety and financial security requirements that did not relate to the design of oil and gas drilling were not operational. In sum, because the challenged ordinances were neither “inextricably linked nor intended to extensively regulate oil and gas drilling,” the court held that the statutory remedies provided for the proper resolution of this matter pursuant to the Pennsylvania Municipalities Planning Code.
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