Recently, the First District Court of Appeals in Houston sided with a landowner who challenged the eminent domain authority of a pipeline company seeking to condemn property.  The case is important for landowners and helps to further flesh out the facts that a pipeline company must be able to show in order to be a “common carrier” and illustrates some considerations in proving fair market value.  [Read full opinion here.]

TAMU AgriLife photo by Robert Burns

Background 

The Hlavinkas own 15,000-16,000 acres of land in Brazoria County, which they purchased in 2002 for the “primary purpose of generating income by acquiring additional pipeline easements.” When they purchased the land, it had over twenty-five pipelines already in place.

HSC Pipeline Partnership, LLC (HSC) owns pipelines in Texas for the transportation of various products, including polymer grade propylene (PGP). Enterprise Products OLPGP is HSC’s sole manager.

In April 2016, Enterprise applied to the Texas Railroad Commission for a permit to operate a new forty-four mile pipeline, which would originate at an interconnection in Texas City, travel through Galveston and Brazoria County, and end at a plant in Brazoria County owned by an Enterprise Customer, Braksem America, Inc.  Enterprise would operate the pipeline on behalf of HSC.

HSC testified that Enterprise purchases refinery grade propylene (produced from crude petroleum) and then produces PGP and propane at its Mont Belview facility.  It uses the same propane generated from this process to produce additional PGP through a separate process at the same location.  It is this PGP that will be transported through the pipeline at issue to the Braskem facility.  Once the PGP is produced by Enterprise, it is purchased by Braskem. Braskem would then own the product that traveled through the line from the Enterprise facility to the Braskem facility.

The Railroad Commission issued a T-4 permit to Enterprise for the pipeline, HSC filed a tariff in which it agreed to offer transportation services to other parties and agreed to be bound by the rules of Chapter 111 of the Natural Resources Code.

Litigation

In July 2016, HSC contacted the Hlavinkas attempting to acquire a 30-wide permanent easement and a temporary workspace easement across their land.  The parties were unable to reach an agreement, and HSC filed condemnation proceedings against the Hlavinkas.

The Hlavinkas filed a plea to the jurisdiction challenging HSC’s eminent domain power.  Specifically, they argued that the court did not have jurisdiction over the case because HSC was not a common carrier and, therefore, did not have the right to condemn their property.  The Hlavinkas based their claim on two arguments.  First, that propylene was neither “crude petroleum” under the Texas Natural Resources Code, nor an “oil product” or “liquefied mineral” under the Business Organizations Code.  Second, they argued that even if the pipeline carrying propylene was covered under either statute, HSC was not a common carrier as the pipeline was not for “public use.”

HSC sought partial summary judgment that it established its right to condemn as a common carrier as a matter of law.  It argued that propylene is obtained by crude petroleum and it is an “oil product” or “liquefied mineral.” HSC also argued the pipeline was available to all shippers who desired to use the line and that HSC had a contract with Braskem, an unaffiliated third party.

The trial court issued an order denying Hlavinka’s plea to the jurisdiction and granting HSC’s motion for summary judgment declaring HSC did have eminent domain power.  The only question left for the jury was just compensation.  The Court also excluded the testimony of Terrance Hlavinka related to damages for failure to use the before-and-after methodology and use instead of a per rod methodology and comparable pipeline easement sales.  The trial court awarded $132,293.36 to the Hlavinkas.

The Hlavinkas appealed.

Opinion

The Court addressed several issues on appeal.

Does Texas Bus. Orgs. Code Section 2.105 provide independent grant of eminent domain authority?

HSC’s eminent domain authority depends on its status as a common carrier under Texas law.  In Texas, common carriers have the right of eminent domain.  See Tex. Nat. Res. Code Section 111.019(a); Tex. Bus. Orgs. Code Section 2.105.   Business Organizations Code Section 2.105 states that an entity “engaged as a common carrier in the pipeline business for the purpose of transporting oil, oil products, gas, carbon dioxide, salt brine, fuller’s earth, sand, clay, liquefied minerals, or other mineral solutions has all the rights and powers conferred on a common carrier by Sections 111.019-111.022 of the Natural Resources Code.”  The court agreed with HSC and affirmed a prior holding that Section 2.105 is an independent grant of eminent domain authority.

Is propylene an “oil product” or “liquefied mineral” under Section 2.105?

HSC argues that propylene falls under the products listed in Section 2.105, but the Hlavinkas disagree.  The Business Organizations Code does not define the term “oil product.”  Related terms are defined in other statutes including the Natural Resources Code and Administrative Code and in various industry sources.

The Natural Resources Code defines “oil” as “crude petroleum oil.”  It defines “petroleum product” as including “any other liquid petroleum product or byproduct derived from crude petroleum oil or gas.”  In the Texas Administrative Code, the Texas Railroad Commission defines “product” broadly.  Schlumberger’s Oil Field Glossary defines “crude oil” as a “general term for unrefined petroleum or liquid petroleum” and defines “petroleum” as “a complex mixture of naturally occurring hydrocarbon compounds found in rock.  Petroleum can range from solid to gas, but the term is generally used to refer to liquid crude oil.”  The US Energy Information Administration definitions were considered as well.

Because the PGP is created from petroleum products, the court concluded that the PGP is an “oil product” for purposes of Texas Business Organizations Code Section 2.105.

Is the pipeline for public use?

The Texas Constitution prohibits the taking of private property by eminent domain except for a “public use.” One recognized public use is a common carrier pipeline.  In other words, only pipelines for hire that will transport product not only for themselves, but for third parties, qualify to use eminent domain authority as common carriers. In Texas Rice Land Partners v. Denbury Green Pipeline-Texas, the Texas Supreme Court stated that a “pipeline company cannot wield eminent domain to build a private pipeline, one ‘limited in its use to the wells, stations, plants, and refineries of the owner.’ A common carrier transporting gas for hire implies a customer other than the pipeline owner itself.”

The Supreme Court also held in Texas Rice that a pipeline owner is “not entitled to common-carrier status simply because it obtained a common-carrier permit, filed a tariff, and has agreed to make the pipeline available to any third party wishing to transport gas in the pipeline and willing to pay the tariff.”  Instead, the Court articulated the following test: To qualify as a common carrier, “a reasonable probability must exist that the pipeline will at some point after construction serve the public by transporting gas for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier.” A reasonable probability is one that is “more likely than not.”

First, the court held that this test from Texas Rice applies not only to CO2 pipelines as at issue in the Texas Rice case, but also to oil product lines like the one at issue in this case.

Second, the court considered whether HSC offered sufficient evidence to satisfy the “reasonable probability” test.

The court stated that the RRC’s issuance of a T-4 permit may provide “some evidence of HSC’s common carrier status, but is far from conclusive” as the RRC has no jurisdiction to investigate or confirm the status when issuing the permit.

The court then considered the transportation contract between HSC and Braskem.   The court held that this contract, where Enterprise produces the product, which is then is transferred from Enterprise to a Braskem before it enters the pipeline, which is also managed by Enterprise, to be shipped to the Braskem facility is not conclusive evidence of public use.  “Enterprise is shipping a product through pipeline it controls to its customer, the sole end user of the product.”  The court stated that this arrangement between the two parties, whereby they essentially agree to confer common carrier status as part of their negotiations is no different than a pipeline owner declaring himself a common carrier by checking a box on the RRC T-4 permit.  This would leave landowners “little, if any” ability to challenge whether the pipeline would actually serve the public.”

The court noted that there were no other interconnections along the pipeline, there were no plans to add other interconnections, HSC offered no evidence it was actively marketing the pipeline’s resources to other suppliers of PGP in the vicinity, there was no evidence of the pipeline’s capacity, HSC identified no other potential customers or identified any other sellers or manufacturers of PGP in the vicinity aside from one company with whom discussions were not successful.

Thus, HSC did not conclusively establish it was a common carrier.  The court of appeals reversed the trial court’s grant of summary judgment in HSC’s favor and remanded the case back to the trial court.

Should Terry Hlavinka’s testimony on damages have been excluded? 

In eminent domain proceedings, compensation is measured by the market value of the land at the time of the taking.  This is typically established through expert testimony, but such expert testimony is not required. Instead, a property owner may testify about the value of his or her property so long as his or her qualifications to express an opinion on land values may be established.  In determining the market value, a fact finder may consider the highest and best use to which the land is adapted, which allows for consideration of the “reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.”  The existing use is presumed to be the highest and best use, but a landowner can rebut that presumption by showing a reasonable probability that when the taking occurred, the land was adaptable and needed or likely to be needed in the near future.

When looking at market value, an economic unit is the portion of the property that is sufficient standing alone to support the highest and best use, regardless of the remaining portions of the whole property.  Three factors aid in determining whether the part taken is part of a single larger tract: physical contiguity, unity of ownership, and unity of use.  In other words, if an owner uses a certain part of an otherwise unified property for a different use, the different parts may be held to be functionally separate economic units.

Terry would have testified that he sells pipeline easements over ten-foot wide tracts of land running parallel to existing pipelines.  He did so long before HSC condemned the thirty-foot-wide easement.  He would testify that the smaller, well-defined units, are functionally separate from the total 15,000-16,000 acres because Terry can sell easements over the smaller units to pipeline companies, where he cannot sell the larger property as a whole for the same, more valuable purpose. He would testify these should be considered separate economic units, and then use the unit to calculate the fair market value.

Additionally, Terry would have testified that the highest and best use for return on the Hlavinkas’ investment has been pipeline development, rather than agricultural use, as was argued by HSC. Pipeline development was a major driver in the Hlavinkas purchasing the property and they have derived far more income from pipelines than any other activity.

He would testify that the property had a fair market value of $3.38 million based on comparable sales, including his own easement sales to Dow and Praxair in 2014 and 2015. He would provide opinions on value on a “per rod” and “per acre” basis that he received for these prior pipelines, taking into account numerous factual distinctions between each easement such as width and surface facilities.

The court concluded that his testimony should have been allowed. “We conclude that Terry’s valuation testimony is relevant because he used comparable sales to support his opinions regarding the fair market value of the easement based on its value as a separate economic unit, his analysis was based on the pre-existing ten-foot-wide units, not the Easement itself, and, although his methodology include per rod figures, he adjusted these values based on other relevant factors.”

Takeaways

This case is a reminder that landowners do have the right to challenge the eminent domain power of pipeline companies and gives additional information regarding which information is and is not sufficient to prove public use.  The contract here, which transferred ownership prior to the product entering the pipeline, was an interesting attempt to prove the arms-length transaction required.  At least for this court, that was insufficient to conclusively prove the line was a common carrier.

The case also offers important insights into lay person testimony regarding fair market value.  Terry’s testimony about prior deals with other private pipeline companies being allowed is important and could potentially provide additional potential evidence for landowner seeking to negotiate for or challenge market values.  The testimony regarding the highest and best use being as a pipeline corridor is really interesting and it will be exciting to see how that plays out either on appeal or at the trial level. Finally, the court allowing testimony based on per rod or per acre basis, so long as these factors were reached by using specific evidence as Terry did, may also be helpful to landowners in some cases.

Lastly, keep in mind that this case is not over.  HSC could (and likely will) elect to appeal the decision.  Even if not, the case will go back to the trial court for further proceedings.