Source: https://oilandgas.jacksonkelly.com/litigation/
Timestamp: 2019-04-26 08:21:48+00:00

Document:
In 2017, the State Supreme Court considered the applicability of Tawney and Wellman to the deductibility of post-production costs where the basis of royalty payments was the “Flat Rate Statute” rather than a production-based lease. Acknowledging that different rules of construction apply to interpreting freely entered production-based contracts and to statutory language which binds a party that had no role in its formulation, the Court ruled that the term “at the wellhead” as used in the Flat Rate Statute was NOT ambiguous and authorized lessees to deduct post-production costs that were actually incurred. See Leggett v. EQT Production Company, ____ S.E. 2d ___ (2017) (available at http://www.courtswv.gov/supreme-court/docs/spring2017/16-0136.pdf ).
Earlier this year, however, the West Virginia Legislature amended W.Va. Code §22-6-8(e) to again effectively alter the provisions of older flat rate leases. Thus, in addition to the 1982 changes requiring the payment of at least a 1/8 production based royalty “at the wellhead,” the 2018 amendment provides that lessees must pay a royalty on the ultimate sale price to an unaffiliated third party—that is after the lessees have borne the cost of gathering, compressing, processing and transporting the gas. Further, the statute prohibits lessees from deducting any post-production costs. See W.Va. Senate Bill 360 (effective May 31, 2018) (available at http://www.wvlegislature.gov/Bill_Text_HTML/2018_SESSIONS/RS/bills/SB360%20SUB1%20ENR.pdf).
The Complaint also squarely addresses the artifice by which the Legislature has sought to withstand a Contracts Clause challenge—by not expressly amending leases and instead by prohibiting WVDEP from issuing necessary permits unless lessees agree to be bound by the statutory terms. EQT contends that states cannot, under the “unconstitutional conditions doctrine,” condition receipt for a government benefit on the waiver of a constitutionally protected right.
It seeks to declare the original 1982 statute unconstitutional to the extent it requires flat rate lessees to pay something other than the agreed upon flat rate as a condition of obtaining a well permit.
It seeks to declare that the new royalty provision—requiring calculation at the point of sale to an unaffiliated third party and prohibiting deduction of post-production expenses—is unconstitutional.
In Alford v. Collins-McGregor Operating Co., 2018-Ohio-8, the Supreme Court of Ohio decided that Ohio does not recognize an implied covenant to explore further, separate and apart from the implied covenant of reasonable development. In Alford, the Appellants were landowners and lessors of an oil and gas lease with Appellees. The lease was held by the production of a single well drilled to the Gordon Sand formation in 1981. The Appellants claimed that the lease should be partially forfeited due to the Lessee’s breach of an implied covenant to further explore deeper stratigraphic depths and utilize more modern drilling technology.
The trial court had dismissed the Appellants’ claim and held that the production from the 1981 well was sufficient to hold the lease. The Fourth District had affirmed, holding that Ohio does not recognize partial horizontal forfeiture of an oil and gas lease as an available remedy.
The Supreme Court of Ohio affirmed the judgment of the court of appeals, and declined to recognize an implied covenant to explore further. The holding found that long-recognized implied covenant of reasonable development is an adequate protection for lessors. The Court recognized the risk undertaken when lessees develop oil and gas leases, as well as the motivation of both the lessee and lessor to profit from the lease. Instead, the Court favored the implied covenant of reasonable development which considers all factors, including market conditions, geological knowledge and adjoining activity. While the Court acknowledged that the implied covenant of reasonable development was well suited to address the lessors’ interests, no opinion was expressed in this regard as the only issue raised by Appellants regarded the implied covenant to explore further.
This blog was authored by Andrew Schock, Jackson Kelly PLLC. For more information on the author, see here.
The 7th District Court of appeals was busy interpreting deeds in December. The Court issued four opinions involving the interpretation of purported mineral reservations in various conveyances in four separate decisions: Talbot v. Ward, 2017-Ohio-9213, Mcauley v. Brooker, 2017-Ohio-9222, Rubel v. Johnson, 2017-Ohio-9221, and Porterfield v. Bruner Land Company, Inc., 2017-Ohio-9045. While deed interpretation cases are often fact intensive, the court did find that the oil and gas was reserved by one party or another in all four cases. In the four cases the Court effectuated the intent of the parties based on the language of the deeds and, when necessary, parol evidence. This illustrates the driving legal policy of deed interpretation: the court should effectuate the expressed intent of the parties to a deed.
Most notably, the Court adopted the Duhig rule from Texas in its decision in Talbot v. Ward to address an issue with the reservation of fractional mineral interests. Although not expressly adopted by Ohio Courts until now, the Duhig rule, or its logic, had often been applied and relied on by landmen and title examiners in the state.
Below are summaries of the four decisions. If you would like further information on any of the cases, please contact Andrew Schock at anschock@jacksonkelly.com.
The 7th District Court of Appeals recently adopted the Duhig rule in Talbot v. Ward, 2017-Ohio-9213. The Duhig rule is a Texas rule which dates back to 1940. It estops a grantor and his successors from claiming title in a reserved interest fractional interest, when to do so would breach the grantor’s warranty as to the title and interest purportedly conveyed to the grantee.
In Duhig, the granting clause purported to convey all of the land and minerals, and the reservation clause reserved a one-half mineral interest in the grantor, Duhig. Id. at 880. The warranty deed failed to mention that Duhig did not own all of the minerals and that a prior owner had also reserved a one-half interest. See id. Thus, because the warranty deed did not mention the third-party interest in the minerals, the grantee expected that the conveyance included a one-half mineral interest. The Duhig court explained that in this situation, the grantor breaches his warranty in the warranty deed by appearing to convey more than he actually did. See id. The court reasoned that because the grantor holds “the very interest, one-half of the minerals, required to remedy the breach,” Duhig, 144 S.W.2d at 880, the grantor should be “estopped from asserting a claim to that ½ mineral interest because of the prior outstanding reservation and the deed's purported conveyance of all of the minerals less only a ½ interest.” Gore Oil Co. v. Roosth, 158 S.W.3d 596, 601 (Tex.App.–Eastland 2005, no pet.) (discussing Duhig).
Combest v. Mustang Minerals, LLC, 502 S.W.3d 173, 184 (Tex.App.2016).
Although the 7th District also relied on other factors to reach its decision, the Talbot decision is the first instance where an Ohio court has adopted the Duhig rule to clarify issues with fractional mineral reservations or exceptions.
RESERVING from the operation of this deed the undivided interest in the oil, gas, coal and other minerals underlying said premises and reserved in a deed from Isaac Atkinson and Hannah Atkinson to George Rice and further reserved in a deed from Isaac W. Atkinson to Cora Atkinson, in Volume 89 at Page 576, Deed Record of Noble County, Ohio.
In its majority decision, the 7th District parsed the language of the reservation to determine that the clear and unambiguous language includes (1) a reservation of all oil and gas; (2) a reference to a prior partial reservation contained in the deed from Isaac Atkinson and Hannah Atkinson to George Rice; and (3) a reference to a second prior reservation contained in the deed from Isaac W. Atkinson to Cora Atkinson. Therefore all oil and gas was reserved in accordance with the unambiguous language.
The dissenting of Judge Waite found that because of a lack of a comma the language refers to only one interest, being the partial interest reserved in the deed from Isaac Atkinson and Hannah Atkinson to George Rice, and later referenced in the deed from Isaac W. Atkinson to Cora Atkinson. Based on such a reading, Judge Waite opined that the entire mineral estate had not been reserved, and a portion was therefore conveyed.
In reaching this conclusion the 7th District analyzed case law from multiple jurisdictions, noting that magic words are not required nor are variations of the words “except” or “reserve.” The Court also notes that while “subject to” clauses are often used to protect a grantor from a claimed breach of warranty, they are also used for other purposes. In this case, the use of a “subject to” clause which explicitly references the rights of the grantor clearly and unambiguously excepted or reserved the mineral rights. Any other interpretation would give the clause an unnatural construction.
On November 22, 2017, in one of many ongoing challenges to pipeline construction, a three-judge panel of the United States Court of Appeals for the Sixth Circuit (“Sixth Circuit”), in a 2-1 decision, granted an emergency stay of pipeline construction within the city of Green, Ohio (“Green”) pending a decision on the merits of Green’s petition seeking review of the Clean Water Act (“CWA”) §401 water quality certification issued by the Ohio Environmental Protection Agency (“Ohio EPA”). See City of Green, Ohio v. The Ohio Environmental Protection Agency, No. 17-4016, 6th Cir. November 22, 2017, Order granting emergency stay.
As noted in prior articles of September 7, 2017 and October 9, 2017, the Natural Gas Act of 1938 (“NGA”) vests the Federal Energy Regulatory Commission (“FERC”) with exclusive jurisdiction to regulate sales and transportation of natural gas in interstate commerce, including the construction and operation of pipelines. Prior to commencing construction, the NGA requires that the pipeline company obtain from FERC a certificate of “public convenience and necessity.” Armed with a certificate of public convenience and necessity, the pipeline company may exercise the right of eminent domain to gain property access and construct pipelines. Moreover, even though pipeline construction and operation must comply with environmental laws, the NGA restricts the rights of third parties to use state administrative remedies to challenge pipeline development.
For example, the NGA was amended in 2005 to grant exclusive jurisdiction to the Federal circuit courts of appeal for judicial review of determinations made by state agencies “acting pursuant to Federal law” on approvals “required under Federal law” with respect to applicable gas infrastructure. See 15 U.S.C. § 717r (d)(1). Challenges to FERC certificates must be filed either in the D.C. Circuit or in the circuit where the natural gas company is located or does business, where FERC is afforded deference in this decision making process. See 15 U.S.C. § 717r (b).
Before FERC can issue a certificate of public convenience and necessity, FERC must ensure that the proposed pipeline complies with all applicable federal, state, and local regulations. See 15 U.S.C. §717(b)(d); 18 C.F.R. § 4.38. Opponents of pipeline development often use the CWA § 401 certification process to delay or defeat pipeline projects. Section 401 of the CWA requires applicants for federal licenses or permits which may result in a discharge to the waters of the United States to obtain a certificate from the states in which the discharges will occur that the discharges will comply with state-issued water quality standards. See 33 U.S.C. § 1341(a).
NEXUS Gas Transmission, LLC (“NEXUS”) sought authority to construct 257.5 miles of new natural gas pipeline traversing northern Ohio and Southeastern Michigan to Canada. On August 25, 2017, FERC issued a Certificate of Necessity and Public Convenience for the $2.1 billion project, subject to, inter alia, NEXUS obtaining a CWA §401 Water Quality Certification from Ohio.
NEXUS applied for the CWA §401 certification on December 17, 2015. The application was subject to public comment in the fall of 2016 and a public hearing was held on October 19, 2016. The Ohio EPA issued the certification on September 19, 2017. Green petitioned the Sixth Circuit for review on September 26, 2017 and moved for an emergency stay of construction on an eight–mile section of the pipeline proposed to run through Green, pending a decision on the merits of its petition.
The Sixth Circuit majority opinion began its analysis by noting that the burden of persuasion was on Green and reciting the four well-known factors that would guide the court’s consideration of Green’s motion for an emergency stay: (1) whether Green has made a strong showing that it will likely succeed on the merits; (2) whether Green will suffer irreparable harm in the absence of a stay; (3) whether the stay will substantially injure other interested parties; and (4) where does the public interest lie. City of Green at 2, citing Nken v. Holder, 556 U.S. 418, 433-34 (2009).
Addressing the first factor, the majority found that, despite the difficulty of meeting the deferential arbitrary and capricious standard necessary to vacate Ohio EPA’s decision, “Green persuasively asserts that the 401 Certification was improper” because Ohio EPA ignored and failed to follow significant procedures. City of Green, at 2. For example, the majority focused on an Ohio statute requiring “a wetland characterization analysis consistent with the Ohio rapid assessment method (“ORAM”)” and noted that “Ohio EPA appears to concede that ORAM was not followed.” Id at 3. Ohio EPA’s arguments that “it had discretion to use other methods” and that “many of its actions satisfied ORAM,” did not sway the majority. Instead, the majority cited examples of EPA Ohio’s failure to follow ORAM, failure to explain why its evaluations “were nonetheless reliable,” and failure to evaluate alternative routes that avoid Green. Id.
The majority next had no problem finding that Green had satisfied the second factor-irreparable harm-noting that “[e]nvironmental injury, by its nature, can seldom be adequately remedied by money damages and is often permanent or at least of long duration, i.e., irreparable.” City of Green, at 3 at 3, citing Amoco Prod. Co. v. Village of Gambell, Alaska, 480 U.S. 531, 545 (1987). The majority then relied on Ohio EPA’s admission that the pipeline would cause long-term environmental harm to at least one location in Green and discounted any off-site compensatory mitigation to be performed by NEXUS as not relevant to the factor “that considers irreparable harm to Green.” Id. at 3-4.
With respect to the third factor, the majority appeared to down-play the potential monetary injury to NEXUS, because the stay applied “only to the eight-mile section of the pipeline that travels through Green” and because the court ordered the clerk of the court to expedite the appeal.” Id at 4.
The majority then found that the fourth factor – whether the stay is in the public interest – did not favor either party noting that “[e]nvironmental protection is certainly in the public interest” and acknowledging the arguments of Ohio EPA and NEXUS that “prompt construction of the pipeline would also be in the public interest.” City of Green, at 4.
The majority concluded that, on balance, a stay was warranted. They found that Green had made a strong showing of likelihood of success and, contrary to the dissent’s suggestion, “Green is not required to identify bulletproof arguments proving that it will achieve a “landslide victory.” City of Green, at 4. Hence Green’s strong showing on the first two factors, which are the “most critical,” convinced the majority that a stay was appropriate. Id.
But victory on the merits under an arbitrary-and-capricious standard is exceedingly rare, as it is meant to be. Based on the briefing currently before us, I do not see how Green has shown the kind of strong showing we require to clear this hurdle.
City of Green, at 5.
The dissent disagreed with the majority’s emphasis on Ohio EPA’s failure to apply the ORAM method noting that the Ohio Administrative Code and the ORAM manual both give Ohio EPA discretion to decide whether ORAM is appropriate given the particular wetland conditions. City of Green, at 5, citing Ohio Admin. Code § 3745-1-54; Ohio Rapid Assessment Method for Wetlands v. 5.0, at 1.
The dissent found that the most serious flaw in the majority’s decision was its failure to properly weigh factors three and four, noting that “even the strongest” claims must be balanced against the harm to the opposing party and the public interest. City of Green, at 6, citing Nken, 556 U.S. at 434, 435. The dissent noted that these two concerns merge when the Government is the opposing party since the government has a strong interest in executing its own orders. Id. at 6, citing Nken, 556 U.S. at 435-36.
The dissent concluded that the “massive economic” costs on NEXUS and the serious “downstream economic effects” caused by a stay cannot be minimized by limiting the stay to the eight-mile section of the pipeline that travels through Green and expediting the appeal. The dissent reasoned that a pipeline, like a chain, “is only as strong as its weakest link - a pipeline with one missing section is just as useless as a pipeline that doesn’t exist at all.” City of Green, at 6.
If, as the majority concluded, Green has made the requisite strong showing of success on the merits, then the delay will extend far beyond the resolution of this appeal, as the Ohio EPA conducts all the additional testing that Green deems necessary. So expedited consideration is of relatively little comfort unless NEXUS will probably win on the merits-in which case we could not grant a stay in the first place. And as the Court has consistently reminded us, the cost of delay (which is ultimately what Green seeks here) is a substantial factor in the emergency-stay analysis. Nken, 556 U.S. at 434-36. Regulatory agencies cannot function if we order them to “try again” every time their testing “may have been unreliable.” Again, that is why the standard on the merits searches for arbitrariness and caprice, not merely imperfection.
The parties are now briefing the merits. No date has been set for oral arguments. Stay tuned.
CRISIS MANAGEMENT: ARE YOU READY?
“Everybody has a plan . . . until they get punched in the face.” Mike Tyson.
In his prime, Mike Tyson created a crisis for opposing fighters. Many claimed to have a plan for dealing with Iron Mike, but the plan didn’t hold up under pressure. And Mike knew it.
Planning for a crisis is difficult, but necessary. Crises by their very nature are unexpected, so you cannot plan a detailed response in advance. However, there are certain things you can plan now. As 2018 approaches, it is a good idea to start planning for next year by thinking about the following issues.
The media will want information if there is a crisis at your facility. Who will speak for the company? Here’s a hint: it may not be your highest ranking official. It may instead be an engineer or other person with an understanding of your plant, mine or pipeline. Determine who the likely candidates are now and train them on how to respond.
Agencies often overwhelm crises with responders. Their alternative is being criticized for not taking a crisis seriously (think President Bush after Hurricane Katrina).
The media will respond with large numbers as well.
Where will you put all these people? You will need separate space for you, for government responders and for the media, as well as a briefing area large enough for everyone. Think about your facility and how you might make the best use of your space.
Do your employees know who to call after a spill or release? What if the spill happens after normal business hours?
Training on spill and release reporting is incredibly important. When and where to call will depend on what and how much material gets spilled. Figuring this out under pressure is not always easy.
Tabletop exercises are available to drill employees on spill reporting and other crises. These exercises can be used to train and test employees under simulated conditions.
Good managers work hard to prevent crises. Great managers plan responses they hope to never implement.
This article was written by M. Shane Harvey, Jackson Kelly PLLC.
Issues regarding the deduction of post-production costs from royalty payments to landowners were recently addressed by a Memorandum Opinion and Order filed in Lutz v. Chesapeake Appalachia, LLC, Case No. 4:09-cv-2256-SL, United States District Court, Northern District of Ohio, Eastern Division.
Lutz has a long procedural history and involved somewhat novel questions under Ohio law. The Northern District had previously certified the following question to the Supreme Court of Ohio: “Does Ohio follow the ‘at the well’ rule (which permits the deduction of post-production costs) or does it follow some version of the ‘marketable product’ rule (which limits the deduction of post-production costs under certain circumstances)?” The Supreme Court of Ohio held that oil and gas leases are contracts subject to traditional rules of contract interpretation and denied certification because the rights and remedies of the parties are controlled by the specific language of the lease agreement.
The royalties to be paid by Lessee are: . . . (b) on gas, . . . produced from said land and sold or used off the premises . . . the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale. . . .
In a recent Memorandum Opinion and Order, the Court held that “at the well” rule should be applied to such leases, based on clear language that royalties are to be paid based on “market value at the well.” See Doc # 142.
This article was published by Andrew Schock, Jackson Kelly PLLC. For more information on the author, see here.
“For any company desiring to construct a natural gas pipeline, all roads lead to FERC.” Millennium Pipeline Company, L.L.C. v. Seggos, 860 F.3d 696, 698 (D.C. Cir. 2017).
In a significant and already controversial decision issued in mid-September, the Federal Energy Regulatory Commission (“FERC”) granted approval for Millennium Pipeline Company L.L.C. (“Millennium”) to proceed with a pipeline extension project despite the prior denial of the company’s application for a Clean Water Act (“CWA”) §401 water-quality certification by the New York Department of Environmental Conservation (“NYDEC”). See Millennium Pipeline Company, L.L.C., 160 FERC ¶ 61,065 (September 15, 2017).
As noted in prior articles of August 11, 2016 and September 7, 2017, the Natural Gas Act of 1938 (“NGA”) vests FERC with exclusive jurisdiction to regulate sales and transportation of natural gas in interstate commerce, including the construction and operation of pipelines. Prior to commencing construction, the NGA requires that the pipeline company obtain from FERC a certificate of “public convenience and necessity.” Armed with a certificate of public convenience and necessity, the pipeline company may exercise the right of eminent domain to gain property access and construct pipelines. Moreover, even though pipeline construction and operation must comply with environmental laws, the NGA restricts the rights of third parties to use state administrative remedies to challenge pipeline development.
On November 13, 2015, Millennium applied to FERC for a certificate of public convenience and necessity requesting authorization to construct a 7.8 mile pipeline spur to provide services to the Valley Energy Center in Wawayanda, New York. On November 9, 2016, FERC issued a provisional certificate of public convenience and necessity for the proposed project. FERC, however, conditioned its approval on proof of Millennium’s receipt of all authorizations required under federal law, including the CWA. Because Millennium’s proposed pipeline would traverse several streams in New York, the CWA required that New York’s NYDEC certify that any impacts from the pipeline will comply with the state-issued water quality standards. See 33 U.S.C. § 1341(a)(1).
In December 2016, more than a year after applying to the NYDEC for CWA § 401 certification, Millennium petitioned the D.C. Circuit under § 19(d)(2) of the NGA alleging that NYDEC had unlawfully delayed action on the water quality certification and waived its authority under CWA § 401. The D.C. Circuit dismissed Millennium’s petition on jurisdictional grounds, finding that Millennium had not been damaged in light of its other remedies. Millennium, 860 F.3d 696, 698 (D.C. Cir. 2017).
On July 21, 2017, Millennium requested permission from FERC to proceed with construction of the Valley Lateral Project pursuant to the previously-issued provisional certificate of necessity. In its request, Millennium asserted that NYDEC had waived its authority to issue a CWA § 401 certification by failing to act within one year of November 23, 2015, the date of Millennium’s application. NYDEC disagreed, contending that the time to act on the application had not been waived since the time did not start to run until NYDEC received a “complete” application, which it contended was August 31, 2016.
On August 30, 2017, NYDEC denied Millennium’s CWA § 401 water certification application. In support of its denial, NYDEC found that FERC’s review of the 7.8 mile pipeline spur failed to consider the indirect effects of downstream emissions that would come from the power plant if the connecting pipeline was approved.
Subsequently, on September 15, 2017, FERC rejected NYDEC’s denial of the CWA § 401 water quality certification for Millennium’s pipeline project, finding that the NYDEC had waived its authority to act on the application by failing to do so within the one-year statutory deadline. Citing the “plain meaning” of the statute, FERC found that state agency had “waived” its right to review Millennium’s application for a water quality certification under CWA § 401. See Millennium Pipeline Company, L.L.C., 160 FERC ¶ 61,065, at 5 (September 15, 2017).
Addressing what it called the crux of the case—the event that triggered the one-year waiver period—FERC looked to the language of CWA § 401 providing that “[i]f the State … fails or refuses to act on a request for certification within a reasonable period of time (which shall not exceed one year) after receipt of such request, the certification requirements of [Section 401] shall be waived with respect to such Federal application.” See Millennium Pipeline Company, L.L.C., 160 FERC ¶ 61,065, at 2 (September 15, 2017) citing 33 U.S.C. 1341(a)(1) (emphasis in original). FERC concluded that “receipt” was the triggering event and, after consulting the dictionary definition, concluded that “the plain meaning of ‘after receipt of the request’ is the day the agency received a certification application, as opposed to when the agency considers the application to be complete.” See Millennium Pipeline Company, L.L.C., 160 FERC ¶ 61,065, at 5 (September 15, 2017).
FERC found that its decision was consistent with Congress’s intent and FERC precedent. Congress has explained that “the review period of one year was established to ‘ensure that sheer inactivity by the State … will not frustrate the federal application.’” See Millennium Pipeline Company, L.L.C., 160 FERC ¶ 61,065, at 6 (September 15, 2017). Similarly, in Georgia Strait Crossing Pipeline LP, 107 FERC ¶61, 065 (2004), FERC found that the Washington Department of Ecology had waived its CWA § 401 authority after it declined the pipeline’s certification request more than two years after receipt. See also AES Sparrows Point LNG, LLC 126 FERC ¶ 61,019 (2009) (Order Issuing Certificate).
FERC found further support in its hydropower regulations and case law, as well as D.C. Circuit precedent. As explained by the D.C. Circuit, “[i]n imposing a one-year time limit on States to ‘act,’ Congress plainly intended to limit the amount of time that a State could delay a federal licensing proceeding without making a decision on the certification request. This is clear from the plain text.” See Millennium Pipeline Company, L.L.C., 160 FERC ¶ 61,065, at 5 (September 15, 2017) citing Alcoa Power Generating Inc. v. FERC, 643 F.3d 963, 972 (D.C. Cir. 2011). In the final analysis, FERC concluded that, consistent with its precedent in both NGA cases and hydroelectric licensing proceedings under the Federal Power Act, the triggering date for waiver under § 401 of the CWA is the date the certifying agency receives the application.
… if the [NYDEC] has delayed for more than a year—as Millennium alleges—the delay cannot injure Millennium. Instead, the delay triggers the Act’s waiver provision, and Millennium then can present evidence of waiver directly to FERC to obtain the agency’s go-ahead to begin construction.
Millennium Pipeline Company, L.L.C. v. Seggos, 850 F.3d 696, 700 (D.C. Cir. 2017).
This article was authored by Kevin M. McGuire.
Opponents of natural gas development do not have the resources to challenge individual well permits in the Marcellus and related shale gas basins. Instead, they understand that the future of the industry depends on assembling the rights to draw gas from fractionated ownership and on the ability to attract higher prices by building transmission pipelines to carry the gas to new markets. So, the Sierra Club and its various local and regional partners have focused their efforts on joining forces with local landowners to oppose both pipeline permits and legislative efforts to allow development of fractionated ownership interests in the gas.
That opposition, however, has required those groups to develop new theories and tools because transmission lines are regulated first of all by the Federal Energy Regulatory Commission (“FERC”) under the Natural Gas Act (“NGA”). Under the NGA, transmission lines require a certificate of public need and convenience from FERC, a process that takes considerable time and money. But once obtaining a certificate, gas pipelines may exercise the right of eminent domain both to gain property access and to construct pipelines. And, even though pipelines must comply with environmental laws, the NGA restricts the rights of third parties to use state administrative remedies to challenge many of their permits. A previous article can be seen here.
Instead, the NGA grants exclusive jurisdiction to Federal Circuit Courts of Appeal for judicial review of determinations made by state agencies “acting pursuant to Federal law” on approvals “required under Federal law” with respect to applicable gas infrastructure. 15 U.S.C. § 717r(d)(1) (“Section 19(d)(1)). Challenges to FERC certificates must also be filed either in the D.C. Circuit Court or in the Circuit where the natural gas company is located or does business, where FERC is afforded great deference in its decision making process. 15 U.S.C. § 717r(b).
In response, the Sierra Club has sought to exploit several other perceived vulnerabilities. First, to conduct the necessary environmental and historic preservation reviews required by NEPA, the Endangered Species Act and the National Historic Preservation Act, pipeline companies need access to properties along the potential route. Generally, they cannot gain access under the NGA until they have obtained a FERC certificate. To accelerate that process, pipeline companies have sought to use similar state statutory authorities designed to give “public” projects the right to access private property to gather necessary information to consider impacts on the environment and historic resources. Challenges to those authorities have focused on whether an interstate pipeline that does not provide retail service and is therefore unregulated by state utility authorities may nonetheless within a state qualify as a “public” project for the purposes of using state eminent authority. These challenges have met with mixed success, but generally can only delay a project until a FERC certificate, which also grants a right of access, is granted. Previous articles on this issue can be seen here and here.
More recently, a lawsuit filed in federal court in Roanoke, Virginia challenged the constitutionality of the NGA’s grant of eminent domain authority to FERC and its designees. See Orus Ashby Berkley, et al. v. Mountain Valley Pipeline, LLC, et al., Case No. 7:17-cv-00357 (WD. Va.) There, the challengers argue that FERC has allowed gas pipelines to demonstrate that projects are in the public interest (and therefore entitled to use the power of eminent domain) on minimal evidence when the primary purpose of the pipeline is to get the developers’ own supplies to market.
While the eminent domain provision of the NGA provides pipeline developers with great power, its exercise also creates and exposes a source of potential vulnerability. As project developers exercise eminent domain authority in rural areas, they create an odd alliance of libertarian landowners and green-leaning anti-development groups which assert that these projects are an abuse of the eminent domain authority. While these groups likely have little else in common, on pipeline and gas development issues they represent a potential political force that organizations like the Sierra Club seek to exploit.
In West Virginia, for example, these forces have, by design or not, pushed back on efforts by state legislators to allow developers to develop fractionated gas resources over the objections of minority reserve owners. See https://www.theet.com/opinion/letters_to_editor/sb-doesn-t-satisfy-royalty-owners-group-s-concerns/article_a66b9d41-c001-5dff-94fa-a09c8722e216.html; http://wvpress.org/breaking-news/property-rights-advocates-try-stop-wv-gas-drilling-bill/. More recently, groups have sought to use their local leverage to influence Clean Water Act (“CWA”) § 401 certifications required from state environmental agencies. Section 401 of the CWA requires applicants for federal licenses or permits which may result in a discharge to waters of the United States to obtain a certificate from the states in which discharges will occur that the discharges will comply with state-issued water quality standards. See 33 U.S.C. § 1341(a). For pipelines, this “section 401 certificate” is typically required for the federal FERC certificates and for CWA § 404 “fill” permits issued by the U.S. Army Corps of Engineers for pipeline stream and wetland crossings.
In New York, a gas-rich state whose executive is opposed to gas development, state authorities denied a § 401 certificate after claiming the Constitution Pipeline did not respond adequately to requests for more information. On August 18, 2017, the Second Circuit Court of Appeals in New York affirmed that decision. In West Virginia, the WVDEP approved and issued a § 401 certificate for a pipeline, but the Sierra Club has challenged the certification in the Fourth Circuit Court of Appeals. There, the Sierra Club argues: 1) WVDEP was required, but failed, to conduct an antidegradation review of potential discharges; 2) WVDEP restricted its review to the water quality effects of stream crossings without adequately examining the potential of upland activities to contribute sediment to streams; and 3) WVDEP failed to consider the effects of blasting and construction in karst (limestone) terrain.
Finally, the Sierra Club recently obtained a victory when a split D.C. Circuit Court of Appeals ruled that FERC must consider the impact of greenhouse gas (GHG) emissions when licensing natural gas pipelines. The ruling directed FERC to revise the Southeast Market Pipelines Project’s environmental impact statement (EIS) to either estimate the project’s impact on GHG emissions that will result from burning the gas that the pipelines will carry or explain more fully why it could not do so. The panel held that Congress instructed FERC to consider “the public convenience and necessity” when evaluating interstate pipeline applications which requires FERC to balance public benefits against the adverse effects of the project. When examining this balance, the panel held that FERC should consider direct and indirect effects that could be harmful to the environment, such as GHG emissions. This ruling could have broad implications as FERC has previously declined to evaluate these downstream GHG impacts in prior pipeline environmental impact statements. The Sierra Club will likely use this ruling to challenge FERC’s findings for these pipelines.
This article was authored by Robert G. McLusky and Matthew S. Tyree.

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 § 1341
 §401
 §401
 v. 
 v. 
 § 3745
 v. 
 v. 
 v. 
 §401
 § 1341
 § 401
 § 19
 § 401
 § 401
 § 401
 § 401
 § 401
 § 401
 § 401
 v. 
 § 401
 v. 
 § 717
 § 717
 v. 
 § 401
 § 1341
 § 404
 § 401
 § 401