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Lesley v. Veterans Land Board and the Duties of the Executive Right Holder

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November 20, 2011

By Matt Norwood

Mr. Norwood graduated from The University of Texas at Austin in 2009 with a B.A. in the Plan II Honors Program. Mr. Norwood expects to receive his JD in 2012 and plans to work as an associate for Lynch, Chappell & Alsup in Midland, Texas after graduation.

In 2010, the Texas Journal of Oil, Gas & Energy Law (at p. 138 et seq.) discussed the executive right to lease minerals in connection with a then-pending Texas Supreme Court case, Lesley v. Veterans Land Board of the State of Texas. http://tjogel.org/wp-content/uploads/2010/02/E_Recent-Developments_Final.pdf

This blog entry will update that discussion of Lesley in light of the Texas Supreme Court’s recent opinion deciding the case, which was issued on August 26, 2011 and is available at http://www.supreme.courts.state.tx.us/historical/2011/aug/090306.pdf.

In Lesley, a land developer, who also owned part of the mineral estate and all of the executive mineral right, imposed restrictive covenants on a subdivision to limit oil & gas development in order to protect lot owners from intrusive exploratory, drilling, and production activities. The non-executive mineral interest owners complained that the developer, as the executive, breached its fiduciary duty to them by imposing these restrictive covenants that would prevent the mineral estate from being leased.

The Lesley case has been highlighted by practitioners as an important decision for several reasons.  First, its fact pattern addresses the issue of oil & gas development in residential areas, which is becoming an increasingly contentious issue in today’s energy climate.  As Law360 states in its discussion of the case, “The discovery and exploration of the Barnett Shale and other shale plays in Texas have created new concerns for residential property developers. Often, the surface of a particularly valuable portion of a shale play is covered in residential subdivisions. This inevitably creates a conflict between the competing interests of developing the minerals within the shale and the desire of homeowners to enjoy the peace and quiet of their neighborhoods.”

Second, the Texas Supreme Court’s opinion in Lesley was also eagerly anticipated because of the uncertainty in Texas law concerning the nature of the duty the executive right holder owes to non-executive owners of the mineral estate.

As the court explains in Lesley, the executive right to lease minerals is only one stick in the bundle of real property rights that comprise a mineral estate.   Executive rights are frequently severed from other incidents of mineral ownership, which means that mineral estates often have both executive and non-executive owners as in Lesley.  Non-executive owners own an interest in the minerals in place, but they do not have the right to lease the minerals.  Thus, to some extent the non-executive owners are at the mercy of the executive when it comes to realizing the value of their interest in the mineral estate

For this reason, Texas law has held since 1937 that the holder of the executive interest owes the non-executive owners a duty of “utmost good faith and fair dealing” in exercising the executive right to lease the mineral estate.  But despite the long history of the doctrine, the scope of the executive’s rights and fiduciary duties to non-executives has remained somewhat unclear.

For example, Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984) – once thought to be the definitive case on the issue – established that the executive right owner has a duty to “acquire for the non-executive every benefit that he exacts for himself.”  But more recently in In re Bass, 113 S.W.3d 735 (Tex. 2003), the Texas Supreme Court seemed to limit the broad duty from Manges, and suggested that the executive cannot breach his duty to non-executive owners until the executive power is actually exercised.

This interpretation of Bass arguably could mean that the executive has no affirmative duty to develop or lease minerals – under any circumstances – since the duty of utmost good faith is only triggered once the executive exercises his leasing power.  The Eastland Court of Appeals adopted this interpretation when it decided Lesley by holding that the developer, having never undertaken to lease the mineral estate, did not exercise the executive right and therefore owed no duty to the non-executive mineral interest owners.

With this background, the Texas Supreme Court had several questions to answer in its Lesley opinion.  Does the executive right holder’s duty of utmost good faith and fair dealing apply only to instances in which the executive actually executes an oil and gas lease?  Or does the executive right holder’s duty apply more broadly, imposing an affirmative obligation to lease the non-executive’s minerals when a prudent mineral owner, acting in his own self-interest, would do so?

Unfortunately, the Texas Supreme Court mostly avoided answering these questions in its opinion.  The court reversed the Eastland Court of Appeals’ decision and found that the restrictive covenants were a breach of the executive’s fiduciary duty.  However, the Supreme Court’s reversal was based on the idea that imposing restrictive covenants on the land actually was an exercise of the executive right, since this had an effect on future leasing.   Exercising the executive right triggered the executive’s fiduciary duty, and according to the court, the use of restrictive covenants was a breach of this fiduciary duty because the surface owner was already adequately protected without restrictive covenants through the accommodation doctrine.

However, the Lesley decision largely sidestepped the issue many had hoped it would decide: whether the executive owner has an affirmative obligation to lease the mineral estate.  The court did comment in dicta that Bass should not be read to shield the executive from liability for all inaction. But the Supreme Court was quick to point out that this was not meant to be a definitive statement establishing an affirmative duty to lease, noting that, “We need not decide here whether as a general rule an executive is liable to a non-executive for refusing to lease minerals, if indeed a general rule can be stated, given the widely differing circumstances in which the issue arises.”

The closest the court comes to identifying circumstances where an executive’s inaction might be a breach of duty is its noncommittal comment, “If the executive’s refusal [to lease] is arbitrary or motivated by self-interest to the non-executive’s detriment, the executive may have breached his duty.”   In some ways, this comment that a refusal motivated by self-interest may breach the executive’s fiduciary duty describes a more limited fiduciary duty than the one contemplated in Manges, where the court held that the executive’s self-dealing and refusal to lease to a 3rd party was a breach of the executive’s fiduciary duty.

So, the duties of the executive right owner in Texas remain uncertain after Lesley.  Reading between the lines of the Supreme Court’s opinion, Lesley may hint that the duty falls somewhere between what was described in Manges and Bass. If an affirmative duty to lease does exist, it only exists in limited circumstances that the court is not willing to describe at this time.

On the other hand, the court was willing to rule definitively on the other area of interest in Lesley – the conflict between mineral owners and surface owners in the context of residential property.  Lesley reinforces the traditional dominance of the mineral estate over the surface estate, even in the case of residential property, by cancelling the land’s restrictive covenants based on the theory that they were improper exercises of the executive right.  Although this might not have been as controversial a legal issue as the executive’s duty to lease, it could end up having a substantial practical significance as more and more discoveries and potential shale plays arise near population centers in Texas.

Sources:

Lesley v. Veterans Land Board of the State of Texas, No. 09–0306, 2011 WL 3796568 (Tex. Aug. 26, 2011), 54 Tex. Sup. Ct. J. 1705

Veterans Land Bd. v. Lesley, 281 S.W.3d 602 (Tex.App.—Eastland 2009)

Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984)

In re Bass, 113 S.W.3d 735 (Tex. 2003)

D. Davin McGinnis and Olga Kobzar, Lesley V. Veterans Land Board: Revisiting the Scope of the Duty Owed by Executive Mineral Interest Owners to Non-Executive Mineral Interest Owners, 5 Tex. J. Oil Gas & Energy L. 138 (2010), available at http://tjogel.org/wp-content/uploads/2010/02/e_recent-developments_final.pdf

Case Study: Lesley V. Veterans Land Board of Texas. Law360 (Oct. 14, 2011), http://www.law360.com/articles/278124/case-study-lesley-v-veterans-land-board-of-texas

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Did the Department of Energy break the law with Solyndra?

Filed Under: Current Industry Issues by admin — Leave a comment
November 9, 2011

by Lindsay Hagans

Ms. Hagans graduated from the University of Southern California in 2006 with a B.A. in English and Public Relations. After graduation, Ms. Hagans worked in Los Angeles, making low-budget zombie movies, for 2 years before moving back to Texas in 2008 where she then worked as a field organizer on a campaign and at the Texas Capitol as a policy aide for two state senators. Ms. Hagans will spend this summer working for Baker Botts in Houston and Quinn Emanuel in San Francisco before receiving her J.D. in May 2013.

Did the Department of Energy break the law with Solyndra?

On September 6, 2011, Solyndra, a solar energy company and recipient of a $535 million government loan, filed for bankruptcy, which immediately unleashed a political firestorm.  Solyndra had been the poster child of President Barack Obama’s green energy initiative, which many critics have said pushed loans through too quickly.  Republican lawmakers say that, despite serious warning signs, the Obama administration fast-tracked the loan in an effort to tout the President’s federal stimulus efforts.  In response, the Obama administration and the Department of Energy (DOE) say the Solyndra loan was properly vetted and an unfortunate failure in an otherwise successful program.

Background

In 2005, President George W. Bush signed the Energy Policy Act of 2005, which created a loan guarantee program for innovative technologies that avoid greenhouse gases, including renewable energy.  In 2007, Solyndra was selected as one of sixteen clean-tech companies considered ready to move forward in the due diligence process, and the DOE began to develop a conditional commitment with these companies for funding from the loan guarantee program.  In 2009, the DOE offered a $535 million loan to Solyndra, the first loan guarantee issued under the 2005 energy law and the largest award given to a solar manufacturer.

In late 2010, Solyndra was facing a liquidity problem and approached the DOE for an increase in its loan guarantee.  The DOE refused, but after private investors pumped an additional $75 million dollars into the company, the DOE agreed to restructure the loan in February 2011.  Under the modified loan agreement, the private investors could recoup their $75 million before the taxpayers got any money back if Solyndra went bankrupt.  In other words, the investors’ claims to Solyndra’s assets, in the event of bankruptcy, ranked ahead of the government’s claims.

Did the DOE break the law?

The issue is the February restructuring.  Critics argue that the DOE violated the Energy Policy Act when the department “subordinated” the taxpayers’ interest to those of private investors.  The DOE insists that it did not violate the 2005 energy law in restructuring the loan.  Instead, the department says the move was aimed at protecting the federal investment by giving the struggling company the best chance to stay afloat and giving taxpayers the best chance of being repaid.

In response, Republicans argue that a series of emails shows that there were concerns about the restructuring before it was authorized.  The emails, between the administration and officials at the Treasury Department and the Office of Management and Budget, allegedly show that the administration pressed officials to make a swift decision on whether to restructure the loan, and that there was disagreement within the government about whether the initial loan guarantee was sound.

What are the legal ramifications?

While critics may be insistent that the government violated the 2005 energy law, any repercussions will likely be political, not legal.  Unlike laws such as the Clean Air Act, which allows citizens to sue the Environmental Protection Agency for possible violations, the Energy Policy Act of 2005 does not provide a similar remedy.  A taxpayer wishing to sue the DOE under the Act would not have standing to bring a lawsuit.

Representative Cliff Stearns (R-Fla.) is the chairman of the House Energy and Commerce Committee’s Oversight and Investigations Subcommittee.  When asked in an interview about what actions the House could take to address any allegations of illegalities, Rep. Stearns could not provide a specific answer.

Another member of the subcommittee, Representative Michael Burgess (R-Tex.), has publicly expressed his frustration at the lack of available recourse and suggested that such a dearth of options may need to be fixed through a new energy law.  Rep. Burgess also indicated that even though there’s language in the 2005 energy law to prevent subordination of a loan guarantee, there’s really no penalty to be imposed on the DOE for doing so.

Indeed, in Section 1702 regarding terms and conditions of repayment, the law states, “the [guaranteed] obligation shall be subject to the condition that the obligation is not subordinate to other financing.”  However, in her memo, Richardson justified the decision by arguing that the rule is “applicable only as a condition precedent to the issuance of a loan guarantee.  It is not a continuing restriction on the authority of the secretary.”  In other words, the proscription against subordination only applies at the time of initial loan, not any subsequent modifications.

Perhaps a reason for the lack of repercussions is because the government has typically had wide discretion in making these executive-level decisions, even if the decision is subsequently viewed as ill advised by critics.  Also, any waiver of federal sovereign immunity must be explicitly waived, as in the Clean Air Act.  Here, it was not.

The House Committee investigation

After the bankruptcy became public, the House Energy and Commerce Committee initiated an investigation into Solyndra and whether the administration failed to follow proper protocol before issuing the loan guarantee.  The committee has requested DOE officials to submit to depositions, but on October 18, the DOE informed the House committee that it would not allow the committee to perform depositions of DOE officials, including Susan Richardson.  Richardson is the chief counsel of the DOE Loan Programs Office; in that capacity, she authored the memo justifying the DOE’s decision to restructure the $535 million loan to Solyndra.

While the Republican-controlled committee has cried foul, the DOE says it has offered to make Energy Secretary Steven Chu available for a hearing on November 1st or 2nd, voluntarily provided more than 65,000 pages of documents to the committee, and provided the head of the loan program for a committee hearing.  However, the DOE says the committee does not have the authority to compel a witness to perform a deposition.

Despite these concessions, news sources indicate that Chu, Richardson and other DOE officials are all likely to be called to testify on why they decided to change the terms of the loan.  While before the committee, the DOE officials can also expect questions about why they apparently did not follow a DOE regulation requiring them to first consult with the Justice Department before modifying the terms of Solyndra’s loan guarantee.

The DOE is not the only governmental department to be haled into a hearing before the committee.  Two officials from the Treasury Department testified at a recent hearing that the DOE’s decision to restructure the $535 million loan guarantee was unusual, and they had not seen anything else like it before.  However, the officials refused to comment on the legality of the restructuring, saying their role was to raise questions but not provide legal guidance.

Additional Solyndra hearings are likely to be scheduled in the coming weeks.  Meanwhile, the White House has said that it will not give Congress internal communications relating to Solyndra’s loan guarantee, citing confidentiality interests of the executive branch.  In response, news sources indicate that House Republicans are preparing for a possible vote in early November to subpoena White House documents related to Solyndra.

The FBI investigation

Solyndra may be facing bigger problems than just the House committee inquiry.  On September 8, the Federal Bureau of Investigation raided the company’s Fremont, California, offices.  There are differing stories given as to why the FBI has initiated a criminal investigation.  Ben Schwartz, a vice president and lawyer at Solyndra, official testified in U.S. Bankruptcy Court in Delaware that the FBI’s search warrant affidavit specifically sought information about company contracts.  But some news sources, citing an anonymous FBI official, suggest that the FBI is examining possible misrepresentations in financial statements that Solyndra submitted to the DOE.

Schwartz was in court because the U.S. Office of the Trustee said he had refused to answer questions about the company’s contracts.  His refusal, government lawyers argued, proved that a trustee should be appointed to take over the company.  However, after hearing oral testimony, U.S. Bankruptcy Court Judge Mary F. Walrath rejected the government’s argument, saying there was no indication of any fraud or mismanagement at the company.

Update:  The latest update, as of October 28, 2011, is that the White House has ordered an independent review of similar loans made by the DOE.  The review would not look at the Solyndra case but would evaluate other loans worth tens of billions of dollars and recommend steps to stabilize them if they appear to have problems like the loan to Solyndra.

Sources:

http://dailycaller.com/2011/10/20/doe-refuses-to-let-author-of-solyndra-legal-memo-be-interviewed/

http://www.politico.com/news/stories/1011/66592.html

http://thehill.com/blogs/e2-wire/e2-wire/188861-house-gop-energy-department-isnt-fully-cooperating-with-solyndra-probe

http://www.washingtontimes.com/news/2011/oct/17/judge-denies-bid-by-government-for-solyndra-truste/

http://www.mercurynews.com/breaking-news/ci_19112887

http://www.businessweek.com/news/2011-09-30/solyndra-said-to-be-investigated-by-fbi-for-accounting-fraud.html

http://www.grist.org/solar-power/2011-09-13-bush-admin-pushed-solyndra-loan-guarantee-for-two-years

http://www.usatoday.com/news/washington/story/2011-10-28/solar-investigation/50978966/1

Text of the 2005 Energy Policy Act: http://www.gpo.gov:80/fdsys/pkg/PLAW-109publ58/pdf/PLAW-109publ58.pdf

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Hydraulic Fracturing May be Safer for the Environment Than You Think

Filed Under: Industry Trends, Regulatory Issues, Uncategorized by admin — Leave a comment
October 26, 2011

by James Faulkner

Mr. Faulkner graduated from Texas A&M in  2007 with a B.A. in Communication. He spent the past two summers as the legal intern with the General Counsel department at CTIA, a trade association for the wireless industry. Prior to law school Mr. Faulkner worked in Office Services for DuBois, Bryant, & Campbell, LLP. Mr. Faulkner expects to receive his JD in May 2012.

Community and Environmental groups often express concern over the environmental impacts of using hydraulic fracturing to extract natural gas from shale formations. A simple Google search of “the dangers of fracking” will turn up thousands of hits. But is fracking really that much more dangerous than conventional types of drilling? A recent report by the Secretary of Energy Advisory Board (SEAB) Shale Gas Subcommittee supports the idea that while hydraulic fracturing has its risks, a few of the most common arguments  regarding the safety of hydraulic fracturing in comparison to conventional drilling are based less in fact, and more upon misconception and a lack of knowledge about the industry.

Background:

In 2001 natural gas produced from shale formations accounted for less than two percent of U.S. natural gas production. Today that figure is approaching 30 percent. This increase in production can be attributed primarily to developments in hydraulic fracturing and horizontal drilling. Hydraulic fracturing to obtain shale gas involves pumping fluid into wellbores at high pressure in order to create fractures in the shale and release natural gas from the shale formation.  Due to the rapid increase in hydraulic fracturing in the United Sates and public concerns over the environmental and safety repercussions of the practice, President Obama instructed the Secretary of Energy to form a subcommittee of the SEAB to make recommendations addressing the safety and environmental performance of shale gas production. The subcommittee was tasked with reporting to the SEAB within 90 days as to the immediate steps that could be taken to improve the safety and environmental performance of fracturing. That report was released on August 18th and members of the committee subsequently testified as to their findings before the Senate Subcommittee on Energy and Natural Resources on October 4th. In the report, the SEAB Subcommittee touched on a number of arguments most commonly raised in opposition to hydraulic fracturing.

Common Arguments Against Hydraulic Fracturing:

Risk of Hydraulic Fluid Leakage into the Water Supply:

Among the most commonly perceived risks from hydraulic fracturing was the possibility of hydraulic fluid traveling through underground fractures into the water supply. However, the report notes there is consensus among regulators and geophysical experts that the risk of this type of hydraulic fluid migration is remote. In the majority of regions where fracturing is utilized, the large depth of separation between drinking water sources and producing zones makes the risk of fluid migration unlikely. Additionally, despite concerns over the fluid migration into water supplies, the committee could find few if any documented examples of this actually happening.

Risk from the Composition of Fracturing Fluids:

Not only are fluids unlikely to travel through fractures into the water supply, the hydraulic fracturing fluids may not be as dangerous as many believe them to be. The report recognizes a “high level” of public concern over the composition of fracturing fluids which are injected at high pressure into the ground. It appears the concern over the composition of fracturing fluids may be due to misinformation more than anything else. In written testimony to the Senate Committee on Energy and Natural Resources, Stephen A. Holditch, a member of the SEAB Shale Gas Subcommittee, stated:

If you read recent news articles on hydraulic fracturing, the process is often described as pumping in a mixture of water and toxic chemicals under high pressure.  This description is far from the truth.   Most fracture treatment fluids consist of 99.5% percent pure water and sand.   About 0.5% of the fluid is made up of gelling agents, surfactants, and biocides.  Virtually all of these chemicals can be found in a typical home.  Gelling agents are typically guar gum, which is used in many food products to viscosify the product.   A surfactant is just soap, like Dawn dishwashing fluid.   Biocides are use to kill bacteria, like the Clorox we use in our homes.  Granted, we do not want to drink these fluids, but they are all found in our homes.  However, the concentration of these ‘chemicals’ is very minute and does not pose a danger to fresh water aquifers, if the field operations are conducted properly.

Risk of Methane Migration into Surrounding Areas:

The risk of methane leaking into surrounding drinking wells is another risk cited in opposition to hydraulic fracturing. The report recognizes the risk that methane leaking from producing wells into other areas as a cause for concern, though they caution that, “the presence of methane in wells surrounding a shale gas production site is not ipso facto evidence of methane leakage from the fractured producing well since methane may be present in surrounding shallow methane deposits or the result of past conventional drilling activity.”  The report also notes that industry experts believe that when methane migration does occur, is the result of, “drilling a well in a geologically unstable location; loss of well integrity as a result of poor well completion (cementing or casing) or poor production pressure management.” These dangers are not specific to hydraulic fracturing. The report explicitly notes that, “a well with poorly cemented casing could potentially leak, regardless of whether the well has been hydraulically fractured.”  Thus the risk of methane leakage cannot be used to single out hydraulic fracturing as any more dangerous than any other form of conventional drilling.

Conclusion:

The SEAB Subcommittee report and the testimony of the subcommittee members provide evidence that at least three of the most common arguments against hydraulic fracturing are based upon misconceptions over the process of hydraulic fracturing rather than actual risks. While a few groups have had some success whipping up public concern over hydraulic fracturing, the evidence suggests that perhaps fracking is not the great danger that its opponents allege it to be.

Sources:

Secretary of Energy Advisory Board, Shale Gas Production Subcommittee: 90-Day Report, August 18, 2011, available at http://www.shalegas.energy.gov/resources/081811_90_day_report_final.pdf

Written Testimony of Stephen A. Holditch  before the Committee on Energy and Natural Resources, United States Senate, October 4, 2011, available at http://energy.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=b6244826-03fe-5e7c-63a7-ce0cdbb9f141&Witness_ID=60dda64c-e494-4958-8dc0-b7d3ad62334a

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EPA’s Cross-State Air Pollution Rule (CSAPR) Carries Heavy Consequences for Texas

Filed Under: Energy in Texas, Industry Trends, Regulatory Issues by admin — Leave a comment
October 18, 2011

by Jaron Hudgins

Mr. Hudgins graduated from the University of Okahoma in 2010 with a degree in History. He worked full-time at Cox Communications from 2004-2010 while attending OU. Mr. Hudgins will be working this summer at Hall Estill and is expected to graduate in May 2013.

Origins of EPA’s CSAPR and Why It Matters to Texas

The U.S. Environmental Protection Agency (EPA) drafted the Cross-State Air Pollution Rule (CSAPR) to limit the interstate transport of emissions of nitrogen oxides (NOx) and sulfur dioxide (SO2) to downwind states in nonattainment areas. The EPA drafted the CSAPR in response to the 2008 decision in North Carolina v. EPA. In that decision, the D.C. Circuit Court of Appeals vacated EPA’s Clean Air Interstate Rule (CAIR), holding that the rule had serious flaws that violated the Clean Air Act (CAA). The Court’s holding required the EPA to develop a replacement rule to address the Court’s concerns.

Early drafts of the CSAPR did not include Texas in the annual SO2 and NOx emissions reduction program. Within the last year, however, the EPA changed its methodology for estimating emissions from Texas in its emissions models. Texas Attorney General Greg Abbott expressed in his challenge to the rule that the EPA’s new methodology is questionable. The EPA based its decision to raise Texas’ SO2 contribution level from .13 to .18 on a single air quality receptor reading in Granite City, Illinois. While numerous states contributed far more SO2 emissions to the Granite City reading, the EPA decided to use this single instance to move Texas above the .15 threshold.

On August 8, 2011, the EPA published its final proposed rule, placing caps on electric generating units (EGUs) in 27 states and requiring 23 states, including Texas, to drastically reduce SO2 and NOx emissions back to 1997 National Ambient Air Quality Standards (NAAQS) levels. Compliance to CSAPR’s annual SO2 and NOx reduction program is required starting on January 1, 2012, and compliance to the seasonal NOx emissions reduction program is required starting on May 1, 2012. By requiring Texas EGUs to execute such an immediate and severe reduction in emissions, the CSAPR carries heavy consequences for Texas.

What EPA’s CSAPR Requires of Texas

One of the alarming aspects of the CSAPR is how quickly states must gain compliance before penalties begin. The CSAPR requires significant reductions in SO2 and NOx emissions, and EGUs within affected areas must take significant measures to meet compliance by the January 1, 2012 deadline. The CSAPR caps 2012 SO2 emissions at 3,385,929 tons compared to recent SO2 emissions of a little over 5 million tons. Recent NOx levels have to be reduced from 1,595,756 tons to the 2012 NOx emissions cap of 1,245,869 tons.

The new rule will require Texas power plants to reduce SO2 emissions by 42% and NOx emissions by 7%. Luminant, the largest power generator in Texas, stated that the new rule requires it to reduce SO2 emissions in its fossil fuel generating units by 64%. The SO2 reduction requirements placed on Texas constitute 25% of the overall reduction requirements in the emissions program. The burden placed on Texas is twice its contribution in emissions.

Likely Consequences of EPA’s CSAPR on Texas

The CSAPR creates considerable increases in the costs of compliance as compared to past rules. As with most cap and trade programs, the EPA expects that the marketability of allowances will help reduce compliance costs. The Integrated Planning Model (IPM) that the EPA utilized to determine the emissions cap depends upon a different formula than previous models that used historical operations to estimate appropriate budgeting. The IPM’s state caps are based on highly cost effective controls that may not be feasible for many EGUs to implement. By not using historical operations, there is the danger of overestimating the ability of EGUs to affordably reduce emissions to EPA’s expectations. Such overestimation would likely result in fewer available permits than the market would need to keep costs down. Roger Caiazza, Director of the Environmental Energy Alliance of New York, described the reduction program as a “direct control approach masquerading as cap-and-trade.” The result, he says, will be a “cap and trade program that could run out of available allowances for compliance.”

The possible scarcity of allowances is coupled with severe penalties for noncompliance. Each ton of excess emissions constitutes a violation of the CAA, and each violation carries a maximum penalty of $25,000. The required reduction levels under the CSAPR and uncertainties regarding future levels create a furthered lower expectation for the marketability and availability of permits. As such, power companies are preparing to make significant changes to remain in compliance.

The changes that Texas power generators will have to make in order to meet CSAPR requirements are likely to carry heavy consequences for Texans. In compliance with the protocol of the Electric Reliability Council of Texas (ERCOT), Luminant submitted its operational response plan to ensure compliance to the CSAPR’s limits. Luminant’s plan indicates what actions power generators across the emissions program area will have to take to ensure compliance.

Luminant announced that it will have to close operations at several sites to remain in compliance because the CSAPR’s January 2012 deadline does not provide Luminant enough time for the permitting, construction and installation of the environmental control equipment necessary to maintain operations. At Luminant’s Monticello Power Plant, Units 1 and 2 will be idled, while Unit 3 will cease using Texas lignite and operate solely on Powder River Basin coal. The Thermo and Winfield mines will cease mining Texas lignite. At Luminant’s Big Brown Power Plant, Units 1 and 2 will cease using Texas lignite and operate solely on Powder River Basin coal. The Big Brown/Turlington mine will also cease mining Texas lignite.

The cessation of operations to meet compliance with CSAPR is projected to result in approximately 500 job losses at Luminant. Additional costs include reduced tax contributions in the communities affected by the cessation of operations, among other costs.

Luminant projects that expenditures on environmental control equipment to upgrade its capabilities to meet CSAPR’s limits will cost approximately $280 million. Luminant expects more than $1.5 billion in costs before the end of the decade to remain in compliance with CSAPR.

Further consequences of CSAPR compliance include increased unreliability. The Monticello units produce 1,2000 megawatts. Statewide, ERCOT estimates that power generation capacity may be reduced by as much as 1,500 megawatts, enough to cause rolling blackouts throughout parts of Texas.

Legal Responses to EPA’s CSAPR

On August 5, 2011, Luminant requested EPA to reconsider and stay the rule due to the probable consequences of the CSAPR on Luminant and Texas. The EPA’s September 11 letter to Luminant did not provide relief. In response, on September 15, 2011, Luminant filed a petition with the D.C. Circuit Court of Appeals requesting that the court invalidate the CSAPR as it relates to Texas. Luminant’s petition argues 1) that the EPA failed to give fair notice and opportunity to provide comment, 2) that Texas bears an unfair burden of reduction in comparison to its emissions contribution, 3) that the EPA improperly elevated its modeled percentage of Texas SO2 emissions over actual conditions, 4) that the NOx emissions were similarly improperly elevated over actual conditions, and 5) that compliance with the CSAPR’s requirements will jeopardize the reliability of Texas’s electric grid and cause hundreds of job losses.

Other states, power generators, and other interests have filed suit since EPA finalized the CSAPR. Kansas Attorney General Derek Schmidt filed suit against the EPA on September 19, 2011, stating the same complaints against the EPA as numerous other affected states.

On September 21, 2011, Texas Attorney General Greg Abbott filed a motion for stay with the D.C. Circuit Court of Appeals against the EPA. The Attorney General’s press release noted that “because the EPA opted not to include the State of Texas in key aspects of the proposed CSAPR regulations…and added Texas without notice to the final regulations…the rule violated federal law and should be stayed by the Court.” The Attorney General’s petition argues that the EPA 1) violated public notice and comment requirements, 2) altered the standards used to consider states in order to include Texas, and 3) relied on just one downwind site that was actually in compliance but had a connection to Texas as a basis to skew the emissions modeling data to bring Texas under the CSAPR.

On September 22, 2011, Attorney General Greg Abbott, along with attorney generals from Alabama, Florida, Oklahoma, South Carolina, and Virginia, joined Nebraska’s suit against the EPA over the CSAPR.

While the outcome of the current litigation against the EPA’s CSAPR is uncertain, what is certain is that if the litigation is unsuccessful in gaining a stay on the rule, there will be heavy consequences for Texas.

Article Update as of 10-23-11:

Reacting to the widespread opposition to the rule, the EPA proposed some revisions on the state budget limits, increasing them by 1-4%. The EPA has also now stated that while the trading programs will begin on January 1, 2012, companies will have until the end of 2012 or early 2013 to be in compliance.

http://www.gpo.gov/fdsys/pkg/FR-2011-10-14/pdf/2011-26521.pdf

http://www.epa.gov/crossstaterule/pdfs/CSAPRStatement.pdf

Major Change: the EPA’s allowance forfeiture and financial penalty process will begin starting January
1, 2014, rather than 2012, allowing companies additional time to come into compliance.
Here is an additional link that discusses the changes:
http://www.energyblogs.com/theoptimizationblog/index.cfm/2011/10/14/CSAPR-Update-The-Kinder-Friendlier-Ghost

Sources

EPA’s final CSAPR:

http://www.gpo.gov/fdsys/pkg/FR-2011-08-08/pdf/2011-17600.pdf

For more specific information on the EPA’s CSAPR:

http://www.epa.gov/airtransport/stateinfo.html#states

http://www.epa.gov/airtransport/

http://www.epa.gov/airtransport/pdfs/DavidCampbell.pdf

http://www.epa.gov/airtransport/basic.html

For Lesley Foxhall Pietras’ views on EPA’s CSAPR:

http://www.theenergylawblog.com/

For Roger Caiazza’s views on EPA’s CSAPR:

http://www.masterresource.org/2011/09/epa-cross-state-rule-cap-trade/

For the statement by Energy Future Holdings (parent company of Luminant):

http://www.hotstocked.com/8-k/–918772.html

For Luminant’s press release:

http://www.luminant.com/news/newsrel/detail.aspx?prid=1218

For Texas Attorney General Greg Abbott’s press release:

https://www.oag.state.tx.us/oagnews/release.php?id=3857

For N.C. v. EPA:

http://www.epa.gov/cair/pdfs/05-1244-1127017.pdf

Other sources:

http://www.ksag.org/page/attorney-general-schmidt-challenges-new-epa-regulations

http://www.oag.state.ok.us/oagweb.nsf/0/b24bfd8eb57a140d8625791400700ade/$FILE/Nebraska%20Petition%20for%20Review.pdf

http://www.powermag.com/POWERnews/Kansas-Sues-EPA-on-CSAPR-Rule_4040.html

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Advancements in Deep-Water Well Containment Technology

Filed Under: Industry Trends, Regulatory Issues by admin — Leave a comment
April 25, 2011

By Chris Blair

Mr. Blair graduated from the University of Minnesota in 2007 with a B.A. in Law and Politics. This summer he will be clerking for Haynes & Boone in Dallas. He expects to receive his J.D. from the Texas School of Law in 2013.

I. Introduction

As we look back at the one-year anniversary of the Deepwater Horizon blowout, allowances for permits for new deep-water drilling projects remains relatively sluggish. However, the noticeably cautious stance of federal regulators with the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) – routinely derided by critics as a product of regulatory excess – seems to have yielded to both necessity and technological advances. Recent developments in deep-water well containment technology have provided solutions to a beleaguered field, creating opportunities for safe and effective access to deep-water oil fields by utilizing risk-management strategies adapted to an open-ocean blowout like that which occurred on April 20, 2010. Within the past month, several new permits for deep-water drilling have been approved after months of postponement, largely due to such innovation. View full article »

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The Keystone Controversy

Filed Under: Industry Trends, International Energy Law, Regulatory Issues by admin — Leave a comment
April 14, 2011

By Jamie Leader

Mr. Leader graduated from Georgetown University in 2009 with a B.A. in History and Political Economy. This summer he is clerking in Houston at Fulbright & Jaworski and Vinson & Elkins. He expects to receive his J.D. from the Texas School of Law in May 2012.

There are over 2 million miles of pipeline running through the United States, but a Canadian company’s plan to add just 1,600 miles to that total has created a controversy than spans from Nebraska to east Texas. The pipeline, called the Keystone XL, is controversial not for where it goes, but what it carries: crude oil extracted from tar sands. View full article »

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Why the Texas Railroad Commission Needs a Name Change

Filed Under: Industry Trends, Regulatory Issues by admin — Leave a comment
April 4, 2011

By Jack Oberstein

Mr. Oberstein graduated from the University of Texas with a B.S. in Communications in 2008 and a minor in Business Administration. This summer he will be clerking for K&L Gates in Dallas. He expects to receive his J.D. from the Texas School of Law in May 2012.

When asked what the Texas Railroad Commission does, most people would say that it’s in charge of Texas railroads. But the Railroad Commission has nothing to do with railroads—it regulates the oil and gas industry. Accordingly, the legislature is considering renaming the Commission. While this seems simple enough, there are those who oppose the change due to the name’s historical significance and the costs involved. Nevertheless, it’s time for change— changing the Railroad Commission’s name will increase its transparency and accountability.

View full article »

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Debating the Texas Solar Energy Bill

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March 28, 2011

By Jordyn Johnson

Ms. Johnson graduated from the University of Texas at Austin in 2010 with a B.A. in Government. This summer, she is interning at the Texas Advocacy Project and with Judge Lawrence Meyers at the Texas Court of Criminal Appeals. She expects to receive her J.D. from the Texas School of Law in May 2013.

Just over a decade after the Texas legislature jump-started the state’s wind energy industry in 1999, Texas has become the top-producing state for wind-generated electricity. The legislature is now considering a bill that would serve to stimulate other renewable energy sources, including solar energy, with similar subsidization. Although a recent study lists Texas as the 10th-largest solar energy market in the U.S., the study also observed that while interest in solar energy is rising, the incentives for promotion of solar energy are not growing at the same rate. While the drive for solar energy use is fairly high at the individual residential level, the lack of a statewide program has caused Texas to fall behind its renewable energy sister states. A goal of the proposed legislation is to provide incentives for energy companies similar to those offered by states such as California and New Mexico. View full article »

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Update: Exxon Corp. v. Emerald Oil & Gas

Filed Under: Recent Cases, Regulatory Issues by admin — Leave a comment
March 21, 2011

By Jared Staples

Mr. Staples graduated from the University of Texas at Austin in 2009 with a B.A. in journalism. This summer he will be clerking for Lloyd Gosselink Rochelle & Townsend, P.C. He is expected to receive his J.D. from the Texas School of Law in May 2012.

Exxon Corp. v. Emerald Oil & Gas involves a twenty-year dispute arising after Emerald took a mineral lease that included wells previously operated by Exxon. Emerald and the royalty owners sued Exxon after they discovered the wells were improperly plugged. Their claims were severed into two cases, both of which the Supreme Court of Texas issued an opinion on in March 2009. The opinions established principles that those in the oil and gas legal practice came to accept; however, a rehearing on both cases was granted, which created speculation as to what changes would result. The Court issued new opinions for both cases in December 2010, withdrawing its prior opinions, and this article reviews the ensuing changes. View full article »

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Environmental Impacts of Hydraulic Fracturing

Filed Under: Industry Trends, Regulatory Issues by admin — Leave a comment
March 7, 2011

By Preston Ward

Mr. Ward graduated from the University of Texas at Arlington in 2006 with a B.A. in Business Administration. He received his J.D. at Texas Wesleyan University School of Law in 2010, and is expected to receive his LL.M. from the Texas School of Law this May. Mr. Ward also currently works as an associate at Burnett & Thomason, specializing in Oil and Gas title options.

I. Introduction

“[F]racing is now essential to economic production of oil and gas and commonly used throughout, Texas, the United States, and the world,” and as worldwide demand for fossil fuel rises, it will become an increasingly necessary practice. In the United States 80% of all wells drilled used fracing. Recent technological advances in hydraulic fracturing (hydro-fracing, “fracking” or just “fracing”) now allow developers access to oil and natural gas buried deep within shale formations which had been inaccessible. The evolution in technology brought a rapid increase in urban gas drilling—a change that could have significant environmental consequences. View full article »

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