Oil and Gas Lawyer Blog
The First Court of Appeals in Houston agreed with the Hlavinkas that HSC Pipeline Partnership, an Enterprise Products company, had failed to prove it has authority to condemn a pipeline easement across their land in Brazoria County. Hlavinka v. HSC Pipeline Partnership, No. 01-19-00092-CV.
The Hlavinkas purchased 15,000 acres in 2002-2003 “for the primary purpose of generating income by acquiring additional pipeline easements.” When they purchased the land there were more than twenty-five pipelines traversing the property. HSC proposed to acquire an easement across the land for a pipeline from Texas City to a plant in Brazoria County owned by Braskem America which would carry propylene. Propylene is a product of refining crude oil. Enterprise purchases refinery-grade propylene from various refineries and further refines it into polymer grade propylene (PGP) at its facilities in Mont Belvieu. HSC contracted with Braskem to sell it propylene at Mont Belview, and then to ship it for Braskem to Braskem’s plant in Brazoria County.
The Hlavinkas and HSC could not agree on terms for an easement, so HSC sued to condemn the easement. The Hlavinkas challenged HSC’s right to condemn on various grounds, which the trial court overruled. The trial court also excluded testimony of Terrance Hlavinka related to damages and valuation of the easement. After trial, the Hlavinkas were awarded $132,293.36, representing $108,957.35 for crop and surface damages and $23,326 for the easement. The Hlavinkas appealed.
The Court of Appeals ruled in favor off the Hlavinkas on two issues: first, it held that HSC did not prove as a matter of law that it was a common carrier with the power of eminent domain, and that a fact issue was raised on that point by the evidence presented. Second, it held that the trial court should not have excluded Terrance Hlavinka’s testimony on the value of the easement.
The Texas Supreme Court addressed the power of pipeline companies to exercise eminent domain authority in two seminal opinions, both involving the same fight between a landowner and a pipeline company: Denbury Green Pipeline-Texas v. Texas Rice Land Partners, 363 S.W.3d 192 (Tex. 2012) and Texas Rice Land Partners v. Denbury Green Pipeline-Texas, 510 S.W.3d 909 Tex. 2017), known as Texas Rice I and Texas Rice II. Denbury sought to condemn an easement across Texas Rice’s land for a pipeline to transport CO2. In Texas Rice I the Court held that, under Texas’ constitution, a pipeline does not acquire condemnation authority merely by obtaining a permit from the Railroad Commission and subjecting itself to that agency’s jurisdiction as a common carrier. In order for a pipeline to serve a public purpose, “a reasonable probability must exist, at or before the time common-carrier status is challenged, that the pipeline will serve the public by transporting gas for customers who will either retain ownership of their gas or sell it to parties other than the carrier.” Once a landowner challenges its status as a common carrier, “the burden falls upon the pipeline company to establish its common-carrier bona fides if it wishes to exercise the power of eminent domain.” The Court also held that one affiliated Denbury company transporting CO2 solely for the benefit of another Denbury affiliate is not a public use of the pipeline. The Court said that the question of whether the pipeline is dedicated to a “public use” is ultimately a judicial question. The court held that the summary judgment evidence submitted by Denbury that it might in the future transport gas owned by others was not sufficient to show that the pipeline would be used for a public purpose. The case was remanded for further proceedings.
In Texas Rice II, the Court again addressed whether Denbury had produced sufficient evidence to prove that it was a common carrier. On remand, Denbury showed that it had entered into contracts with two unaffiliated parties to transport CO2 in its pipeline for them. The Court held that this additional evidence was enough to establish Denbury’s “public use” and its right to exercise eminent domain.
Public Use
The Court of Appeals in Hlavinka discussed the Texas Rice cases extensively in analyzing the “public use” issue. It concluded that HSC had not produced conclusive evidence of a public use:
Here, the Pipeline connects to a single facility, a plant owned by Braskem, Enterprise’s customer Herrscher [HSC’s witness] also testified in his deposition that the Pipeline was built to provide PGP to Braskem. There are no current interconnections and there are no plans to add any interconnections at the present time. Aside from issuing a press release announcing the Pipeline and filing a tariff with the RRC, there is no evidence that HSC is actively marketing the Pipeline’s resources to other suppliers of PGP in the vicinity. There is no evidence of the Pipeline’s capacity. HSC has not spoken with, or identified, any other potential customer about transporting the customer’s PGP using the Pipeline, aside from Braskem. HSC has also not produced evidence of any other PGP sellers or manufacturers in the vicinity of the Pipeline who are in a position to transport their PGP using the Pipeline, aside from INEOS, and Herrscher admitted that the negotiations were unsuccessful and that it was no longer in talks with INEOS.
The Court did not consider it conclusive that Braskem took title to the PGP before it was shipped in the pipeline. “While it may be some evidence of future public use, HSC’s TSA with Braskem refers to a product whose title is transferred from a manufacturer to a customer/end user before it enters a pipeline managed by the same manufacturer to be shipped to the same customer/end user, and that is not conclusive evidence of public use.”
Landowner Testimony of Value – a “Pipeline Corridor”
The more interesting and perhaps more generally applicable part of the Court’s opinion concerns the excluded testimony of Terrance Hlavinka. Hlavinka sought to testify as to the value of the property interest being taken. Although evidence of market value is usually presented through expert testimony, a landowner is entitled to testify as to the value of his property, without being an expert. The Court’s opinion reviews in detail the requirements of testimony on value. Terrance proposed to testify that
he sells pipeline easements over ten-foot wide tracts of land that run parallel to existing pipelines on the property, and that he did so well before HSC condemned the thirty-foot-wide easement. These smaller well-defined units are functionally separate from the larger 15,000-16,000-acre property because Terry can sell easements over these smaller units to pipeline companies, whereas he cannot sell the larger property as a whole for the same, more valuable, purpose. If he establishes the existence of a separate economic unit, Terry could then use that unit to calculate the fair market value of the Easement based on its value before and after the taking. … Terry … would have testified that while the property is generally for agricultural use, the “highest and best usage” for return on the Hlavinkas’ investment has been for pipeline development. … Terry would have testified that he bought and sold property and negotiated pipeline easements and oil and gas leases for over thirty years, and that the “main driver” behind the Hlavinkas’ purchasing the land in 2001-2002 was the opportunity for pipeline development to generate income. According to Terry, the income derived from pipeline development far exceeds the income derived from any other use of the property. Terry would also have testified that there were at least twenty-five pipelines located on the property before HSC expressed an interest in acquiring an easement, and that he relied on this fact when determining that the highest and best use of the property is “pipeline development.” Terry testified that the property burdened by HSC’s pipeline had a fair market value of $3,383,160. He explained that he arrived at that value by considering comparable sales, including the Dow and Praxair pipeline easements he sold in 2014 and 2015. … Terry used the same figures that Praxair paid for the ten-foot easements (multiplied by three for HSC’s thirty-foot easements), and, applying a reasonable amount for inflation, he arrived at his estimate for the HSC easement. … Further, he considered that [in the condemnation] HSC obtained the right to assign its easement, whereas the Dow and Praxair easements did not include the unlimited right. This issue played a role in his assessment of value because he could profit from the ability to re-sell the pipeline easement.
After extensive analysis of HSC’s objections to Terry’s testimony, the Court concluded that it should have been admitted.
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. Therefore, we hold that the trial court abused its discretion by excluding Terry’s testimony.
Remarkably, one of HSC’s arguments was that the Dow and Praxair transactions could not be used as comparable sales “because those are negotiated easements for private pipelines, as opposed to eminent domain seizures by common carriers.” The Court disagreed:
The goal of an easement condemnation case is to determine the fair market value of the seized land. In order to find that value in an easement condemnation case, comparable sales of easements must be voluntary, and should take place near in time to the condemnation, occur in the vicinity of the condemned property, and involve land with similar characteristics. The forced sale of an easement to a common carrier is not a “voluntary” transaction, but evidence of voluntary sales is relevant for purposes of establishing fair market value. … The sale of easements to private pipelines who are not common carriers, and, therefore, do not have the power to acquire property by eminent domain are necessarily voluntary.
The Hlavinkas’ assertion that their property’s highest and best use is for granting pipeline easements has been the subject of discussion among lawyers representing landowners in condemnation, but to my knowledge this is the first time such a “pipeline corridor” concept has succeeded in an appellate court. HSC will undoubtedly seek Supreme Court review.