Supreme Court of Texas Revises Opinion in Pipeline Common-Carrier Case

By Carlos Moreno:

The Supreme Court of Texas recently delivered a revised opinion discussing the power of eminent domain exercised by a common carrier CO2 pipeline. In Texas Rice Land Partners, LTD v. Denbury Green Pipeline-Texas, LLC, No. 09-0901, 2012 Tex. LEXIS 187 (Tex. Mar. 2, 2012), the Court was asked if a landowner can challenge in court the eminent domain power of a CO2 pipeline owner with a common carrier permit from the Railroad Commission of Texas (“RRC”). The Court decided in favor of the landowner.

 

Denbury Green Pipeline-Texas LLC, a subsidiary of Denbury Resources, applied with the RRC for a permit to build and operate a CO2 pipeline in Texas. Denbury Green noted in its permit application that the CO2 pipeline would be operated as a “common carrier”, and indicated that the gas would be “owned by others, but transported for a fee.” Denbury Resources had plans to purchase CO2 from third parties in the future, but the immediate plans were to only transport CO2 owned by Denbury Resources. The RRC approved the permit, including common carrier status. Denbury Green then attempted to condemn a pipeline easement from land owned by Texas Rice Land Partners, Ltd. (“Texas Rice”). However, Texas Rice refused entry. Litigation ensued, with the lower courts finding in favor of Denbury Green.  

The Court began its discussion by examining the power of eminent domain in Texas. The Court noted that Texas law prohibits the taking of property for private use, and requires just compensation for public use takings. The Legislature can grant eminent-domain power, but if the statute leaves doubts about its scope, the Court held that the statute will be strictly construed in favor of the owner of the condemned land.

At the outset, the Court also had to determine whether the Commission’s common-carrier finding could be challenged in court. The Court first noted that the statute does not state that the Commission’s decision to grant a common-carrier permit is conclusive and unreviewable by the courts. In addition, the Court described the process to obtain common-carrier status from the RRC as “one of registration, not of application” with no adjudication, notice, or hearing. Texas Rice, at *18. The Court found that this process by itself failed to meet constitutional requirements. 

Finding that the landowner could judicially challenge the eminent domain finding, the Court then determined what the proper judicial test for common-carrier status should be. To be a common carrier, the Court said, the pipeline must serve the public and not just the pipeline owner or its affiliates. Denbury Green argued that making the pipeline available for public use is sufficient to obtain common-carrier status.  The Court found this interpretation to be inconsistent with the statutory language. In addition, the Court found that merely stating that the pipeline is available for public use could allow a carrier to obtain eminent domain powers even if it knows that no other party would ever desire to use the pipeline. 

However, the Court went further and said that “a carrier is not a common carrier if it transports gas only for its own consumption.”  Thus the Court found that even if Denbury buys CO2 gas from third parties, common carrier status is not proven if after transportation all the CO2 is then used by the owner of the pipeline. Therefore, in order to be a common carrier, some of the CO2 being transported must be owned by a third party (not including subsidiaries of the pipeline owner), then either retained by the third party or sold to a party other than the carrier or its affiliates. 

The Court held that for a CO2 pipeline carrier 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 the gas or sell it to parties other than the carrier.” Texas Rice, at *26. A granted common-carrier permit will still be prima facie valid, but a landowner can challenge it in court. If there is a judicial challenge, the pipeline company would have to burden to prove that it is indeed a common carrier before it can exercise the power of eminent domain. 

In the case at bar, the Court found that Denbury Green did not meet the requirements for common-carrier status as a matter of law. The evidence showing that Denbury could be transporting CO2 from third parties was not enough to show a reasonable probability. Even if Denbury transported CO2 from third parties, its intention was to use all the CO2 in Denbury’s oil fields for tertiary recovery. Thus, Denbury would be the only end user of the CO2, making it a private carrier. 

The Court explicitly stated that its opinion is limited common-carrier status for pipelines transporting CO2 or hydrogen gas under Section 111.002(6). However, if the reasoning were extended in the future to other pipeline operations, common-carrier status would require companies to not only transport products other than its own, but also have one or more third-party end users after pipeline transportation.

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