Denbury v. Texas Rice "Texas Rice II": The Texas Supreme Court Affirms Common Carrier Status

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On Friday, January 6, 2017, the Texas Supreme Court issued its long-awaited decision in Denbury Green Pipeline-Texas v. Texas Rice Land Partners (“Texas Rice II”), reversing the 9th Court of Appeals and reinstating the trial court judgment finding that a pipeline company, Denbury, had conclusively established its common carrier status through the presentation of a transportation agreement, entered after the pipeline was constructed, with at least one unaffiliated customer.

Almost five years ago, the Texas Supreme Court issued its revised decision in the controversial case of Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC (“Texas Rice I”), holding that merely “checking the box” on the appropriate Railroad Commission application form does not make the pipeline a “common carrier” with the power of eminent domain.  Instead, the Supreme Court held that pipelines must also show that a reasonable probability exists 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.  For more information and background on the dispute, read about Texas Rice I.

After establishing the common carrier test in Texas Rice I, the case was remanded to determine whether Denbury was, in fact, a common carrier pipeline consistent with the test provided by the Supreme Court.  Relying in part on the fact that Denbury had entered into transportation service agreements with two shippers, Airgas Carbonic, Inc. and Air Products and Chemicals, Inc., the trial court granted summary judgment in favor of Denbury, having determined that a reasonable probability existed that the Denbury pipeline would serve the public.

However, the 9th Court of Appeals held that “reasonable minds could differ regarding, whether at the time Denbury Green intended to build the Green Line, a reasonable probability existed that the Green Line would serve the public.”  In so holding, the Court of Appeals required that the pipeline company have the “intent at the time of its plan to construct the Green Line” to serve the public and not only itself and thus held that the transportation service agreements were not relevant and could not be considered because they were entered after construction had commenced.  The court of appeals also required that the reasonably probable future use of the pipeline serve a “substantial public interest,” and concluded that a fact issue existed about whether the public interest was substantial given the relative size of the respective uses of the pipeline by Denbury and by third parties. The Supreme Court rejected both principles.

In its decision, the Supreme Court explained that the Court of Appeals improperly focused on the intent of a party at the time the pipeline was contemplated rather than the direct evidence establishing a reasonable probability of the pipeline’s future public use, even if the intent was formed and the evidence created after the construction of the pipeline.

Specifically, it held that Denbury:

conclusively established that there was a reasonable probability that, at some point after construction, the Green Line would serve the public. With evidence that Denbury Green entered into a contract in 2013 to transport CO2 for Airgas Carbonic, along with the proximity of the Green Line to potential customers such as Airgas Carbonic and Air Products, no longer could a reasonable fact-finder determine that a genuine fact issue exists as to whether the Green Line would, at some point after construction, do what it now most certainly does: transport CO2 owned by a customer who retains ownership of the gas.

The Supreme further rejected the Court of Appeal’s holding that fact issues existed concerning whether the public use would be “substantial,” holding that “evidence establishing a reasonable probability that the pipeline will, at some point after construction, serve even one customer unaffiliated with the pipeline owner is substantial enough to satisfy public use under the Texas Rice I test.”

In addition to clarifying that the intent for the pipeline to serve the public can be formed and supported by evidence after the pipeline is constructed and affirming that use by even one unaffiliated customer is substantial enough to convey common carrier status, this decision clearly establishes at least two factors that would weigh in favor of a pipeline company seeking to meet the Texas Rice I test: a transportation service agreement with at least one unaffiliated customer and proximity of the pipeline to potential customers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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