The Texas Supreme Court on August 26, 2011 issued its opinion in Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline–Texas, LLC, in which it offered important guidance on the meaning of “common carrier” under Chapter 111 of the Texas Natural Resources Code, and which will likely have a profound effect on the way pipelines are permitted and constructed in Texas. The decision is discussed more fully below, and here is a link to the full opinion: http://www.supreme.courts.state.tx.us/historical/2011/aug/090901.pdf.
Section 111.019 of the Texas Natural Resources Code grants condemnation authority to certain common carrier pipelines. Section 111.002 defines a common carrier in terms of the products the pipeline carries, and also generally requiring that the product be transported “to or for the public for hire.” In the past, the permitting process had been that the pipeline would file the T-4 pipeline permit application with the Railroad Commission, in which the pipeline would simply check a box indicating its willingness to be either a common carrier or a private line. The application would typically be approved administratively without a hearing.
Denbury was granted a permit by the Commission to operate a carbon dioxide pipeline as a common carrier. It sought access to the Texas Rice Land property to survey a route, and Texas Rice Land refused. Denbury then sought an injunction to permit it to survey the property. Texas Rice opposed the injunction, contending that Denbury had not established its common carrier status and thus did not have condemnation authority.
In a far reaching opinion, the Texas Supreme Court agreed with Texas Rice Land. First, the Court took issue with the process used by the Commission to determine a pipeline’s common carrier status. The Court found that the mere administrative granting of a T-4 permit by the Commission with no effort to investigate, confirm, or test whether the pipeline will be public or private is not sufficient to vest the pipeline with the power to condemn. The Court seemed particularly troubled by the fact that the Commission had no process to determine whether the pipeline would be operated for the public, no notice was provided to the affected landowners, and no hearing was held. Further, the Court noted that the parties pointed to no statute or regulation directing the Commission to determine whether a pipeline will in fact serve the public interest.
Next, the Court developed a test for determining the common carrier status of a pipeline. After discussing the facts applicable to Denbury, the Court held that to qualify as a common carrier under Chapter 111, “a reasonable probability must exist, at or before the time common-carrier status is challenged, that the pipeline will serve the public by transporting gas for customers who will either retain ownership of their gas or sell it to parties other than the carrier.”
This decision has the potential to impact pipeline construction and permitting in several ways. First, the Court makes it clear there needs to be some type of adversarial, evidentiary process, of which affected landowners have notice, to determine the common carrier status of a pipeline before the permit is granted, and before the condemnation process starts. Pipelines are often lengthy, going through several counties, and having one or more courts in counties along the route make this decision seems to be very inefficient and ripe for exploitation as pipelines and landowners jockey for favorable courts to hear the matter. Having the Commission make that decision for the entire length of the pipeline might make more sense, but it’s not clear whether the Commission has the authority to make that decision. But in any event, there must be a contested process in some forum where the affected landowners have the opportunity to contest the common carrier status.
Second, a pipeline may be put in a very difficult situation in trying to route the line and provide notice to landowners without having access to the property. Only a common carrier pipeline can force its way onto land to survey the route for the line. But under this decision, its common carrier status is determined only after a contested proceeding in which notice is provided to all affected landowners. But the pipeline can’t determine the route, and who the affected landowners are, until the route is surveyed. The route could likely be surveyed from the air without requiring access to the property, but given that such an aerial survey would provide little information about underground conditions, a route based on an aerial survey may have to change once access to the land is gained.
Finally, the Court held that to acquire common carrier status, the pipeline must transport gas for customers who will either retain ownership of their gas or sell it to parties other than the carrier. This is contrary to how many pipelines currently operate, as they often purchase the gas from the producer at the injection point into the line, and then re-sell the gas at the line’s endpoint either back to the original producer or to some other third party. What the Court has done here is to effectively “unbundle” gas pipelines which operate as common carriers.
The Court’s opinion is still subject to motions for rehearing, and it’s expected that several such motions will be filed.