Opinion ID: 2429351
Heading Depth: 2
Heading Rank: 2

Heading: forney's offer to pool vountarily

Text: Before the commission may establish a pooled unit, the MIPA applicant must make a fair and reasonable offer to pool voluntarily to the other interest owners in the proposed unit. Tex.Nat.Res.Code § 102.013. The commission has authority to create a pooled unit only when the owners have not agreed to pool their interests. Id. § 102.011. If the commission finds that the applicant did not make a qualifying offer, it lacks jurisdiction over the petitioner's application and must dismiss it. Carson v. Railroad Comm'n, 669 S.W.2d 315, 318 (Tex.1984); Windsor Gas Corp. v. Railroad Comm'n, 529 S.W.2d 834, 837 (Tex.Civ.AppAustin 1975, writ dism'd as moot); Tex.Nat.Res.Code § 102.-013(b). This requirement, probably more than any other aspect of the MIPA, makes the Texas Act unique, compared to the compulsory pooling acts of other states. 3 E. Smith & J. Weaver, Texas Law of Oil and Gas § 12.3(B)(1)(a), at 23 (1990) [hereinafter Smith Douglass & Whitworth, Practice Before the Oil and Gas Division of the Railroad Commission of Texas, 13 St. Mary's L.J. 719, 743 (1982) [hereinafter Douglass Smith, The Texas Compulsory Pooling Act, 43 Texas L.Rev. 1003, 1009 (1965) [hereinafter Smith, Texas Compulsory Pooling Act]. The obvious intent of the legislature is to encourage voluntary pooling. The Act, then, is more aptly described as an Act to encourage voluntary poolingrather than an Act to provide compulsory state action. Smith, Texas Compulsory Pooling Act 1009. Reasonable minds may, of course, differ on what constitutes a fair and reasonable offer. Because the MIPA does not define the phrase fair and reasonable offer to pool voluntarily, this is left to the commission's discretion. 3 Smith 12.3(B)(1)(a), at 23-0. Not surprisingly, application of this standard has been often litigated. See, e.g., Carson v. Railroad Comm'n, 669 S.W.2d 315 (Tex.1984); Railroad Comm'n v. Broussard, 755 S.W.2d 951 (Tex.App.Austin 1988, writ denied); American Operating Co. v. Railroad Comm'n, 744 S.W.2d 149 (Tex.App.Houston [14th Dist] 1987, writ denied); Buttes Resources Co. v. Railroad Comm'n, 732 S.W.2d 675 (Tex.App.Houston [14th Dist.] 1987, writ refd n.r.e.); Windsor Gas Corp. v. Railroad Comm'n, 529 S.W.2d 834 (Tex.App.Austin 1975, writ dism'd as moot). The MIPA provides that a person affected by a commission pooling order is entitled to judicial review of that order in a manner other than by trial de novo. Tex. Nat.Res.Code § 102.111.
Section 19 of the APTRA sets the standards for judicial review of agency actions, including those of the Railroad Commission. Imperial Am. Resources Fund, Inc. v. Railroad Comm'n, 557 S.W.2d 280, 283 (Tex.1977). If the manner of review authorized by the law governing the agency's decision is other than by trial de novo, the court, sitting without a jury, may only review the decision of the agency on the basis of the agency record. Tex. Rev.Civ.Stat.Ann. art. 6252-13a § 19(d)(3); Southwestern Bell Tel. Co. v. Public TJtil. Comm'n, 571 S.W.2d 503, 508 (Tex.1978). How rigorously a court conducts other than by trial de novo review depends on whether the legislation that is the basis for the agency's action provides for the scope of review. Where the law ... does not define the scope of judicial review, the court may not substitute its judgment for that of the agency as to the weight of the evidence on questions committed to agency discretion but may affirm the decision of the agency in whole or in part and shall reverse or remand the case for further proceedings if substantial rights of the appellant have been prejudiced.... Tex. Rev.Civ.Stat.Ann. art. 6252-13a § 19(e). Substantial rights of the appellant may be prejudiced when administrative findings, inferences, conclusions, or decisions are: (1) in violation of constitutional or statutory provisions; (2) in excess of statutory authority of the agency; (3) made upon unlawful procedure; (4) affected by other error of law; (5) not reasonably supported by substantial evidence in view of the reliable and probative evidence in the record as a whole; or (6) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion. Id. Subsection (5) articulates what is commonly known as the substantial evidence rule. At its core, the substantial evidence rule is a reasonableness test or a rational basis test. See Texas Health Facilities Comm `n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446, 453 (Tex.1984) ([T]he agency's action will be sustained if the evidence is such that reasonable minds could have reached the conclusion that the agency must have reached in order to justify its action.); accord Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126 (1938) (Substantial evidence ... means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.). The reviewing court, then, concerns itself with the reasonableness of the administrative order, not the correctness of the order. Texas State Bd. of Dental Examiners v. Sizemore, 759 S.W.2d 114, 117 (Tex. 1988); Firemen's & Policemen's Civil Serv. Comm'n v. Brinkmeyer, 662 S.W.2d 953, 956 (Tex.1984). The rule prevents the court from usurping the agency's adjudicative authority even though the court would have struck a different balance. Sizemore, 759 S.W.2d at 117; Gerst v. Goldsbury, 434 S.W.2d 665, 667 (Tex.1968).
The MIPA does not state the scope of review courts are to use when examining commission conclusions that a fair and reasonable offer to pool voluntarily was made. Carson v. Railroad Commission of Texas states that the proper review is a jurisdictional review, not substantial evidence review under APTRA section 19(e)(5). 669 S.W.2d at 316. In Carson, the threshold issue was the meaning of section 102.013(c) [6] of the MIPA. Subsection (c) gives some meaning to the phrase fair and reasonable offer to pool voluntarily contained in section 102.013(b). The Carson court of appeals' construction of subsection (c) would simply have required that an offer by an interest owner to share on the same yardstick basis as other interest owners in the proposed unit is all that is required under section 102.013. Id. This, we said, is not the only criterion. See id. Rather, we stated that the offer must be one which takes into consideration those relevant facts, existing at the time of the offer, which would be considered important by a reasonable person in entering into a voluntary agreement concerning oil and gas properties. Id. at 318. Because of the Carson court of appeals' misinterpretation of subsection (c), its application of the established facts to the statutory phrase fair and reasonable offer to pool voluntarily in subsection (b) was incorrect as a matter of law. We, therefore, were not constrained by the substantial evidence rule in reviewing its construction, because there was no need to examine the administrative record for substantial evidence supporting the court of appeals' construction. We nevertheless held that courts are required to review commission findings about and conclusions of fair and reasonable offers to pool by examining those relevant facts which existed at the time of the offer. See id. To do so, courts must apply the substantial evidence rule under APTRA section 19(e)(5). Once we held, as a matter of law, that the Carson court of appeals' interpretation of MIPA subsection (c) was erroneous, it followed that the court of appeals' application of that erroneous standard to the established facts was likewise erroneous as a matter of law. We made our statement about jurisdictional review because we were deciding the question of the commission's jurisdiction as a matter of law. We were not delving into the administrative record to determine whether there was substantial evidence supporting the commission's conclusion that a fair and reasonable offer to pool existed. Rather, we simply examined the record to ascertain whether the commission took into consideration those relevant facts, and we ultimately determined that it did not. It is in this context, then, that our statement about jurisdictional review should be understood. Jurisdictional review was limited to the narrow issue presented in Carson. It is not some talismanic incantation that permits courts to freely substitute their judgment for that of the administrative agency. When we referred to jurisdictional review in Carson, it did not eliminate the requirement of substantial evidence review of commission findings of a fair and reasonable offer to pool voluntarily. Jurisdictional review does not mean that courts decide the question of whether an offer to pool voluntarily is fair and reasonable without some deference to the commission's fact-finding. The commission's application of the statutory term to the facts in each case is conclusive, unless it is unreasonable. Therefore, courts must apply the substantial evidence rule under APTRA section 19(e)(5) to determine if the commission's conclusion of a fair and reasonable offer to pool voluntarily is reasonable. We now apply APTRA section 19(e)(5) to the facts of this case. In a letter dated December 22, 1983, Forney made a pooling offer to Pend Oreille and the other interest owners in the Bennett Unit. Forney sought to pool the productive portions of its lots with the productive acreage in the existing Bennett Unit. Since the productive acreage hearings were underway, Forney proposed that the determination of the productive portions of the proposed unit be based upon those proceedings. Alternatively, Forney proposed that the productive acreage be determined by agreement of the parties. Forney stated that, at that time, it believed approximately 50 of its acres were productive in the Limes Field and that approximately 290 acres of the Bennett Unit were productive in the field. Forney also proposed that production from the existing Bennett Well, and all applicable drilling and completing costs, be allocated to each tract in the unit based on each tracts' share of the productive acreage in the unit. Under this proposal, Pend Oreille and its interest owners would retain 85.3 percent of the production and be assessed 85.3 percent of the cost. Forney's percentage of production and cost would be 14.7. In another option, Forney offered to base the owners' participation on the commission's ruling in the productive acreage hearings. Each lease holder was to work out his share of production with the other interest owners in their respective tracts. Forney offered to pay its appropriate share, determined on a productive-acreage basis of the cost of drilling and completing the Bennett Well, as soon as the proposed unit became effective and the costs could be ascertained. Furthermore, Forney agreed to a 100 percent risk factor and to pay its proportionate share of all drilling and completion costs and, further, to participate from the date of first production from the well. Forney also proposed that Pend Oreille remain the operator of the well, that the proposed unit continue to utilize the current operating agreement, and that each party pay, on a productive-acreage basis, its proportionate share of the operating costs of the Bennett Well. Forney offered to pay its share on the basis of billings furnished in the usual manner. Under Forney's proposal, each party that had paid its share of drilling and completion costs (and any applicable risk factor) would pay its share of operating costs. The proportionate share of operating costs for any party who had not paid its share of drilling and completion costs would be deducted from the recipient's share of production. Forney proposed an effective date of January 1, 1984. At the time of the offer, allowables in the Limes Field were allocated on a productive surface-acreage basis. Production from the Bennett Well, too, was apportioned based on productive surface ownership. At the time of Forney's offer, Pend Oreille had already applied to amend the field rules to an acre-feet basis. Pend Oreille did not know whether the Stray Sand was separate and distinct from, or common to, the Main Sand, but it treated them as common pursuant to commission regulation. Neither was Pend Oreille aware of what the other interest owners' positions would be concerning whether field allowables should be allocated on a surface-acre formula or a net acre-feet formula. Pend Oreille did not respond to Forney's offer to pool in any fashion. The commission found Forney's offer fair and reasonable based upon the rationale in the examiners' amended PFD. The examiners noted that, at the time of Forney's offer, the Limes Field was treated, by everyone concerned, as a common reservoir. The examiners also determined that Forney's offer to pool voluntarily, based on an upcoming commission determination in the productive acreage hearings, was fair and reasonable from the perspective of the party being force pooled. The examiners noted that there were differences of opinion about the most fair and reasonable allocation of interests, and the outcome of the productive-acreage hearings determining this issue was not predictable. They reasoned that, although Pend Oreille may have been reluctant to act on Forney's offer because of uncertainty due to an upcoming field rules hearing, this fact did not make Forney's offer unfair or unreasonable. Furthermore, they noted that MIPA section 102.051 requires allocation of production on a surface-acreage basis unless the commission finds that such allocation does not allocate to each tract its fair share. Tex.Nat.Res.Code § 102.051. The commission did not change the basis of allocation from surface acreage to net acre-feet until approximately 21 months after Forney's offer. The examiners, therefore, reasoned that until the commission determined that surface acreage does not allocate each tract its fair share, an offer to pool on a surface-acreage basis was fair and reasonable. Finally, the examiners observed that Pend Oreille did not respond to Forney's offer by counteroffer, or even indicate that it considered the offer to be inadequate. This lack of response, they determined, frustrates the purpose of the MIPA, which is to encourage voluntary pooling. And, although the MIPA does not require a counteroffer, it is a factor to consider in determining whether an offer is fair and reasonable. See American Operating Co. v. Railroad Comm'n, 744 S.W.2d 149, 154 (Tex.App.Houston [14th Dist] 1987, writ denied). We conclude that the commission's finding that Forney made a fair and reasonable offer to pool voluntarily is supported by substantial evidence. The court of appeals was correct in finding that Forney had invoked the commission's jurisdiction pursuant to MIPA section 102.013(b).