### TEXA S C OU R T OF A PPEAL S, THIR D DIST R ICT , AT AU STIN

NO. 03-04-00154- CV

Howa r d Hil l G r im e s, App e lla nt

v. State of Texas and End eavor Ener gy Resourc es, L.P ., Appellees

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 53RD JUDICIAL DISTRI CT NO. GN2-026 47, H ONO RAB LE SUZ ANNE COVINGTO N, JUDGE PRESIDI NG

M E M O R

A N D U M O P I N I O N Appellee En deavor

Energ y Resource s, L .P. (Endeavor ) applied f or and r ece ived a permit to operate a sa ltwater disposal we ll from the Texas Railroad C o m m i ssion (Railroad Commi ssion), appellee
. See Tex. Water Code Ann. § 27.051(b)( 1)-( 4) (West Supp. 2 0 0 4 -05). Appellant Gr imes owns two-thirds of the surf ace estate a

nd an undivided intere st in the mineral estate of a tract lease d to Endeavor . Endeavor planne d to operate the saltwater disposal we ll on the one-third of

the surfa ce es t at e adja cent to Gr imes’s surfa ce e state intere st. Grimes opposed Endeavor’s a

pplication. Both Grimes and Endea vor par ticipated in the per

mit application hear ing and presented evidence on whether the permit should be gra nted; the R ailroad Commission gra nted the p e r m i t i n i t s f

i n a l o r d e r , s u

b j e c t t o c e rt a i n c o n s t r

u c t i o n an d o p e r a t i o n c o n d i t i o n s d e s i g ne d to protec t the trac t’s fre shwater supply . Grimes broug ht suit in Travis Count y to appea l the Railroad2

Commi ssion’s final orde r, complainingthat the orde r wa s not supported by substantial evidence and
was issued arbitra

rily and capr iciously
. The trial court aff irmed the orde r and this appe al followed. We disag ree with Grimes for the rea sons discussed below, and we affirm the Railroad Commis sion’s order
. BACK GR OUND

Under the terms of the g overningoil and g as l ease (Hill “30-A ” L ease ), Grimes ow ns a portion of the surfa ce estate and an undivi ded roy alty interest in the t rac t of land lea sed for oil and g as produc tion by

Endeavor. The sur fac e estate was pa rtitioned by

court order in 1986; Grimes was
awa rded a specific two-thirds of t he tract’s surface estate. Ende avor soug ht to operate a saltwater disposal well on the one- third surfac e estate adjac ent to Grim es ’s t wo -t hirds surfa ce e state. The proposed sa ltwater disposal well would service the three producingwells and other s planned for the Hi ll “ 30 -A ” L e a se tr a c t. E nd e a vo r a pp lie d to the Ra ilr oa d Co mmi ssi on fo r per mis sio n to op e rate the saltwater disposal well. See Tex. Water C ode Ann. § 27.051(b). Grimes protested Endeavor’s
a pp lic a tio n b e c a

us e he fe are d th a t th e sa ltw a te r o pe ra tio ns on the a dja c e nt land

wo uld dama g e his g roundwater a

nd surfa ce e state. Grimes a ppear ed at the hea

ring the Railroad Commission held on the ma tte r t

hr ou g h c ouns e l and

pr e se nte d e vid e nc e to s up po rt his ob je c tio ns . The Railroa d Commi ssion found that the well was cased and ceme nted with “g ood quality ” ce ment at the depths e x pecte d to hold the saltwater and that operating the saltwater disposal well was in the public interest. The examiners found that the disposal oper ations, if conducte d under t h e p re s s u re an d

v o l u m e co n d i t i o n s s p ec i fi ed i n th e p erm i t , wo u l d n o t en d an ger t h e n at u ra l en er gy
resour ces or

cause pollution of the freshwater stratu m . The Railroa d Commi ssion approved3

Endeavor’s a

pplication and g rante d Endeavor a pe rm it to conduct saltwater disposal operations subject to c erta in conditions; t he per mit allows Endeavor to dispose of sa ltwater w aste produc ed on t h e H i l l “ 3 0
- A ” L e a s e o n l y.

Gr ime s f ile d a mot ion fo r r e he ari ng that wa s d e nie d. He the n b ro ug ht s uit in T ra vis County district court to appe al the Railroad Commission’s decision. The district c ourt aff irmed the Railroad Commissi on’s orde r. This appe al followed.
DI SCU SSIO N Gr ime s argue s th a t th e Ra ilr oa d Co mmi ssi on ’s de c isi on to g ra nt the pe rm it t o o pe rate the saltwate r disposal well wa s not supported b y s u b s t antial evidenc e, and w as ar bitrary and capr icious. Grimes re quests that we r ever se t he Railroad Commission’s order a nd rende r judg ment in h is f a vo r, or a lte rn a tiv e ly , re mand the or de r t o th e Ra ilr oa d Co mmi ssi on fo r f ur the r p ro c e e din g s.
Sub stantial Evid ence R eview

We reviewthe Railroad Commission’s decision under a substantial evidence sta nd ard . T e x. Go v’ t Co de Ann. § 2 00 1. 17 4 ( Wes t 20 00 ); E n t ex v. Railroad Comm’n of Tex. , 18 S.W .3d 858, 862 (Tex. App.—Austin 2000, pet. denied) . The Railroa d Commi ssion’s final order s
are presumed to be supported by substantial evidence
. Impe rial Am. Res. Fund, Inc . v. Rail r oad Comm’n of Tex. , 557 S.W .2d 280, 284-85 (Te x . 1997).

Ac c or din g to t

he su bs tanti a l e vid e nc e ru le , w e re vie w the jud g me nt o f t he state ag ency on the weight of the evidence on questions committed to age ncy discretion. Te x . Gov’t Code Ann. § 2001.174 (West 2000). We may aff irm the ag ency

decision in whole or in pa rt. Id
.4

§ 2001.174(1). We shall re verse or remand a case for further procee dings if substantial rig hts of the appellant have bee n prejudice d beca use the a dminist rative f

indings, infere nces, c onclusions, or decisions violate a c onstitut ional or statuto r y p r o v is io n ; e xc e e d

th e a g ency ’s statutory

authority ; were made throug h unlawful procedur e; are affec ted by other error of law; ar e not re asonably supported by substantial evidence considering the reliable and probative evidenc e in the rec ord as a whole; or
are arb itr ary

or c a pr ic iou s o r c ha

ra c te ri zed by an a bu se of dis c re tio n or

c le arl y unwa rr ante d e xer c ise of discre tion. Id. § 2001.174(2). The revie wing court may not substit ute its judgment for that of the ag ency , but rather

deter m i n es whether the or der is re asonably supported by

substantial evidence
. Texas He alth Faciliti es Comm’n v . Charter Med.-D allas, Inc. , 665 S.W .2d 446, 452 (Tex. 1984).

T h e c ru x o f as u

b s t an t i al ev i d en ce an al y s i s i s wh et h er t h e agen cy ’s fa ct u al fi n d i n gs
are rea sonable in light of the evidence from which they wer e purportedly inferr ed. Hinkley v. Texas Sta te Bd . o f M e d. Ex am ’r

s , 140 S.W .3d 737, 743 (Tex. App.—Austin 2004, pet. denied). Substantial
ev i dence does not mean a larg e or c onsiderable amount of evide nce, but r ather such re levant eviden ce as a re asonable mind might acc ept as a dequate to support a conc lusion of fac t. Id. A l t h o u g h t h e e v i d e n c e i n t h e r e c o r d m ay a c tu a l l y p r e p o n d e r a t e a g a i n s tt h e d e c i s i o no f t h e a g e n c y,
no ne the le ss, the tr

ue te st i s no t wh e the r the a g e nc y re a c he d th e c or

re c t c on c lus ion , b ut whe the r s ome
rea sonable ba sis ex ists in t h e re cord for the a ction taken by the ag ency . Texas He alth Faciliti es Comm’n , 665 S.W .2d at 452. Thus, the ag ency ’s dec ision will be sustained if the evidenc e is such that r e a so na

ble min ds c ou ld h a ve re a c he d th e c on c lus ion the a g e nc y re a c he d in ord e r to just if y its actions. Id. at 453.5 To g ra nt a n a pp lic a tio n f

or a sa ltw a te r dis po sa l we ll, the Ra ilr oa d Co mmi ssi on mus t find, amongother c riteria, that the use or installation of the well is in the public interest and w ill not endang er or

injure any

exis ting r ights—including m inera l formations—and, that with prope r
s a f e g u ar d s , b o th g r o u n d an d s u r f a c e f r e s h w a te r c a

n b e a d e qu a te ly p r o te c te d f r o m p o ll u ti o n . T e x. Water Code Ann. § 27.051( b).

The Railroa d Commi ssion gr anted Ende avor a permit to ope rate a saltwater disposal
we ll s ub je c t to se ve ra l add iti on a l c on dit ion s: the oil and g a s w a ste wi ll o nly

be inj e c te d in to t

he str a ta in the subsurfac e depth inter val from 4460 to 5630 fee t; the injection volume shall not ex cee d 4000 ba rr e ls pe r da

y ; the ma ximumop e ratin g surf a c e inj e c tio n p re ssu

re sh a ll n ot e xce e d a

c e rt a in l imi t; and only fluid produce d on the Hill “ 30-A” L ease trac t ma y be discarde d in the well. The Railroa d Commi s s ion approve d finding s in its t echnic al and he aring s examiners repor ts that: (1) a c ement bond log c onfirmed that the proposed saltwater dis posal well has “ g ood quality ” ce ment betwee n the 3620 foot and 5700 foot de pths of the well; (2) that the proposed w ell was drilled r ece ntly , in 2002, and is ade quately

case d and cemented to protec t useable- quality water to a depth of 200 f

eet; (3) that the proposed w ell will only be used to dispose of waste produce d on the Hil l “30-A” L ease ; and that (4) the disposal o f l ea s e- p roduce d water is in the public interest. The Railroa d Commi ssion supported it s public interest finding by pointing out that the ex pecte d cost of disposal for a ffe cted wells will fall from 80 cents to 10 cents per barr el, saving $630 per da y for the e x isting and pla

nned
w e ll s , th a t t

h e w e ll s ar e e xp e c te d

to la s t t w e n ty to th ir ty y e ar s , and th a t E n d e a v o r w il l r e a li ze signific ant cost saving s that will allow t he we lls to y ield more produc tion, thus conserving natura l
resour ces. The Railroad Commissi on found that the disposal oper atio n s , i f conducte d at the6

proposed pressures and volumes under the proposed pe rmit conditions will not endang er oil, g as, or g e oth e rm a l r e so ur c e s o r p oll ute th e lan d’s f re shwate r. Gr ime s f

a ile d to pr e se nt a

ny e vid e nc e to
c on tr a dic t th e te sti mony

g ive n b y En de a vo r’ s e xpe rt

and did no t c ro ss- e xami ne him
. We hold that there wa s substantial evidence to suppor t the Railroad Commissi on’s
or de r; ba se d o n

t h e e vid e nc e , r e a so na

ble min ds c ou ld h a ve c on c lud e d th at th e pr op os e d d isp os a l w e ll is a de qu a te ly

c a se d w ithg oo d qu a lity c e me nt to pr ote c t g ro un dw a te r, and is in the pu bli c int e re st. See Tex as Health Facilities Comm’n , 665 S.W .2d at 453.
Arbitrar y and Cap ricious Stand ard

Grimes asser

ts that the Railroad Commi ssion’s de cision was a rbitrar y and ca pricious b ecause: (1) the Railroad Commission i ncorr ectly interpre ted the “public inter est” re quirement of the per mitti ng proce ss under the w ater code; ( 2) the Railroad Commi ssion f ailed to take into ac count En de a vo r’ s ope ratin g his tor y vio latio ns ; (3) the pe rm it impe rm iss ibl y a llo ws En de a vo r t o d isp os e of wa ste produce d from anoth er lease into the saltwater disposal we ll; and (4) the Railroa d Commi ssion failed to consider whether Endeavor had a

g ood faith cla im to the lease. We reviewthe judg ment of the Railroad Commi ssion on the weig ht of the evide nce on quest ions committ ed to ag ency discretion, but shall reve rse or rema nd a ca se for

further proce eding s if the administrative finding s, inf er en ce s , conclusions, or de cisions are arbitra ry or capr icious or cha

rac terized by

an abuse of di scre tion or clearly unwar rante d exercise of

discretion. Te x. Go v’ t Co de Ann. § 2 00 1. 17 4. An a g e nc y ’s de c isi on

is n ot g e ne ra lly

arb itr ary or c a pr ic iou s if it is supported by

substantial evidence
. Hinkley , 140 S.W. 3d a t 743. Ho we ve r, ins tanc e s ma y ari se in which an a g ency ’s dec ision is s upported by substantial evidence , but is arbitra ry and ca pricious7

nonetheless. Id. One such instance is w hen a denial of due proc ess has re sulted in the prejudice of substantial rig hts of a litiga nt. Id. An a g e nc y a

bu se s its dis c re tio n in re a c hin g a de c isi on if it o mit s fr om i ts c on sid e rat ion f

a c tor s th a t th e le g isl a tur e int e nd e d th e a g e nc y to c on sid e r, inc lud e s in

its
c on sid e ratio n ir

re levan t f a c tor s, or re a c he s a

c omp le te ly

unre a so na

ble re su lt a ft e r w e ig hin g on ly rele vant fa ctors. Id. The finding s, infere nces, c onclusions , and decisions of an administrative
a g e nc y are pr e sume d to be su pp or te d by su bs tanti a l e vid e nc e , a

nd the burd e n is on

the c on te sta

nt t o prove othe rwise. Texas He alth Faciliti es Comm’n , 665 S.W .2d at 453.

Grimes asse rts that the public intere st require ment of the water c ode re l at es t o the safe ty an d environmental soundness of the propose d disposal well, and not the pre vention of the waste of natura l resourc es. See Tex. Water Code Ann. § 27.051(b), c f. Tex. Nat. Res. Code Ann. §§ 85 .0 58 , . 20 1 ( Wes t 20 01 ). Gr ime s urg e s th a t th e re a so ns the Ra ilr oa d Co mmi ssi on g a ve to
su pp or t it s deci si on , (1) ma ximizin g the natur a l r e so ur c e yie ld, (2 ) s a vin g En de a vo r s ome of its disposal costs, and (3) the fac t that the proposed we ll will not endang er the l an d ’s fre sh water are
conserv ation r a ti o n a le s , an d n o t th e p r o p e r “ p u b li c in te r e s t” in qu ir ie s th e le g is latu r e in te n d e d
. We disag ree . The Railroa d Commi ssion is charg ed with pre venti ng waste, c onservingnatura l
resour ces, a

nd preve nting the pollution of the natural environme nt. See Tex. Nat. Re s. Code Ann. § 85.201; 16 Tex. Admin. C ode § 3.9 (2004) . There is no controlling pr ece dent interpre ting what
c on sid e ratio ns the Ra ilr oa d Commi ssi on may we ig h w he n d e c idi ngwh e the r g ra nti nga dis po sa l w e ll operating pe rmit is in the publ ic i ntere st. Howeve r, courts have found that the produc tion of oil and g as af fec ts the public interest and that the Railroad Commissi on may rea sonably

regulate to conse rve8

these resource s. See Corzelius v. Railroad Comm’n of Tex. , 182 S.W .2d 412, 417 (Tex. Civ. App.—Austin 1944, no writ) (“ [I ]t is long since settl ed that the publ ic has an int ere st in the natural
resour ces of

the State; that the production of oi l and g as is aff ecte d with the public interest, and a re subject t o an y

re as o n ab l e r egu l at i o nn ec es s ary t o co n s erv e t h em . ”)
. T h e R ai l ro adC o m m i s s i o nfound that g ra nti ngthe dis po sa l w e ll o pe ratin g pe rm it w ou ld r e su lt i n c on se rv ing so me natur a l r e so ur c e s. We hold that the Railroad Commiss ion rea ched a rea s o n ab l e result when it found that gr anting En de a vo r’ s p e rm it w a s in

the pu bli c int e re st. Th e re fo re , its de c isi on wa s n ot a rb itr ary or c a pr ic iou s. Grimes next c omplains that the Railroad Commi ssion’s decision was a rbitrar y and capr icious beca

use th e R ai l ro ad Commissi on failed to take into account Ende avor’ s history of operating violations . We disag ree with Grimes’s asse rtion. First, the Railroa d Commi ssion considere d Endeavor’s ope ratinghistory ; Grimes offe red evidence of Endeavor’s past violations of the Railroad Com mission’s rules in the hearing on this matter, and the e x aminers a dmitted Grimes’s exhibi t “for whateve r we ight it is worth.” Sec ond, t h e wa t er code does not require the Railroad Commi ssion to consider a n operator’s history

to gr ant a disposal we ll permit. See Tex. W ater Code Ann. § 27.051(b). We hold that the Railroad Commiss ion considere d the re levant fa ctors and
rea ched a rea sonable re sult based on the evide nce in the r ecor d. Next, Gr imes complains that the Railroad Commission’s decision was ar bitrary and capr icious beca

use t he order permits Endeavor t o dispose of waste produce d on the adjac ent Roper L e a s e ; G r im e s ar g u e s th a t E n d e a v o r d o e s n o t h a v e th e le g a l r ig h t to d is p o s e o f the saltwater pro d u c e d f r o m t h e Ro p e r L e a s e o p e r a ti o n s o nth e H il l “ 3 0
- A ” L e a s e tr a c t. T h e Ra ilroad Commi ssion gr anted Ende avor a p ermit to dispose of saltwater produce d only

on the Hill “30-A”En de a vo r cl a ims that it re c e ive d a per mit to dis po se of

the sa ltw a te r g e ne rate d f

ro m bo th 1 the Hill “30-A” and Roper le ases. The fi n al order ’s unequivoca l lang uag e prohibiting Endeavor from disposing of

waste pr oduced f

rom operations on other lease s indicates other wise. 9 L ease, wh i ch co vers a

pproxi mately

1500 acr es. The pe rmit specifica lly prohibits the disposal of fluid g ener ated on any other lease, such as t he adjacent Roper lease
. The Railroad Commi ssion’s Finding of F act 3 mistakenly ref ers to the Hill “ 3 0 -A ” L ea s e ac rea g e as 1840 a cre s, which inadver tently included the Roper

lease acr eag e. The Roper lea se is not, in fact, pa rt of the Hill “30- A” L ease . Both Gr imes and the Railroa d Commi ssion concede that this was a cle rica l error
. 1

The la n gu age of

the final orde r states that Ende avor ha s permission to operate the saltwater disposal well to dispose of on ly those fluids g ener ated from operations on the “Hill ‘30-A’ L ease ” tra ct. B eca

use the languag e of the final orde r cle arly o n l y p er m i t s Endeavor to dispose of saltwater waste produced on the Hill “30-A” L ease , we hold that the e rror is harmless, and that the Ra ilr oa d Co mmi ssi on ’s or de r w a s n ot a rb itr ary and c a pr ic iou s. L ast, Grimes a sserts that the Railroad Commission erre d beca use it failed to conside r whether Endeavor st ill had a g ood faith claim to the Hil l “30-A ” L ease . I n Grimes’s r esponse to the Rul e 19 4 d isc ov e ry

re qu e st f or dis c los ure, he fai led to id e nti fy thi s g ro un d a s a

le g a l ba sis fo r h is op po sit ion

to t he pe rm it. Th e dis c ov e ry re qu e st fo r d isc los ur e re qu ir e d G ri me s to dis c los e a ll o f h is leg al theories a

nd underlying f

actua l bases. See 16 Tex. Admin. C ode § 1.81(a )(3) , (b) ( 2005) (sc ope of discover

y in Railroad C ommissi on proce eding shall be the same as provide d by Texas Rules of Civil Procedur e and sha ll be subject to constra ints provided there in); Tex. R . Civ. P . 194.2 (c) . A party who fa ils to m ake, a

mend, or supplement a

discovery

response i n a timely

manner may not int ro du c e in e vid e nc e the mate ri a l or inf or matio n th a t w a s n ot t ime ly dis c los e d. Te x. R. C iv. P.10

19 3. 6 ( a ). I t w a s the re fo re pr op e r fo r t he Ra ilr oa d Co mmi ssi on

to e xclu de e vid e nc e re late d to thi s leg al theory

at trial bec ause G rimes fa iled to supplement his disclosure to inclu d e this theory in a timely manner . We overrule Grimes’s se cond issue.
CO NC LU SION Havingaddre ssed ea ch of G rime’s a rg uments, we h old that substantial evidence
su pp or ts the or de r a

nd tha t th e Ra ilr oa d Co mmi ssi on did no t g ra nt E nd e a vo r’ s a

pp lic a tio n a

rb itr ari ly
or ca priciously . We overrule both of Grimes’s issues a nd aff irm the Railroad Commission’s final order
.

W. Kenneth L aw, Chief Justice Be fore Chief J ustice L aw, Justi ces B . A. Smith and Pemberton Affir med: Filed: August 26, 2005