Takings for pipeline projects are subject to challenge by property owners to ensure public benefits

June 29, 2017

Pipes emerge from the ground at the Buckeye Partners' Laurel Pipeline terminal in Pittsburgh, Pennsylvania, U.S. May 1, 2017. REUTERS/Jason Cohn

As natural gas companies continue to produce products from the Marcellus and Utica shale fields in Pennsylvania, Ohio and West Virginia, new and expanded infrastructure has been proposed throughout the northeast to accommodate growing supply. One new project is the Mariner East 2 pipeline project, which is being developed by Sunoco Pipeline LP to transport natural gas liquids across Pennsylvania.

As the development of new natural gas infrastructure has increased, so too has the opposition advanced by environmental protection organizations and property owners’ rights advocacy groups.

In addition to raising objections during the environmental permitting process, opponents against pipeline projects have seen recent success challenging the legal status of pipeline entities themselves.

These opponents target the eminent domain authority that is statutorily delegated to qualified utility companies, thus limiting the companies’ ability to use eminent domain to obtain the property rights necessary to complete such projects.

In Clean Air Council v. Sunoco Pipeline LP, No. 15-0803484 (Pa. Ct. Com. Pl., Phila. Cty.), environmental protection group Clean Air Council is trying to block Sunoco from using eminent domain for the Mariner East project and wants a determination as to whether Sunoco is a regulated public utility.

The Clean Air Council’s primary argument is that the Mariner East 2 pipeline project should not be regulated as a public utility in Pennsylvania because the project is for an interstate pipeline.

The group also alleges Sunoco cannot derive its eminent domain authority from federal regulation because the pipeline will transport natural gas liquids, which are not regulated by the Federal Energy Regulatory Commission.

These arguments ride a wave of recent decisions in Pennsylvania and other jurisdictions where property owners have successfully undermined pipeline companies’ attempts to exercise eminent domain authority.

Sunoco is an interstate carrier of oil, gasoline and natural gas liquids including propane, butane and ethane. Sunoco developed a pipeline project, known as the Mariner East 1 project, to transport natural gas liquids from Ohio and West Virginia shale fields across Pennsylvania to distribution facilities in the state and Delaware.

The Mariner East 1 project repurposed an existing pipeline that carried refined products from a Pennsylvania oil refinery throughout the state market. FERC approved the development of the Mariner East 1 project in 2012.

In 2014, Sunoco proposed to construct a new 350-mile pipeline, referred to as the Mariner 2 project, in an effort to increase capacity for the transportation of natural gas liquids to Pennsylvania and other markets.

The Mariner East 2 project aims to build a new pipeline in a new right of way and will require Sunoco to acquire easement rights necessary for access, construction, operation and maintenance of the pipeline.

Sunoco intends to acquire those rights through eminent domain if property owners do not voluntarily grant the necessary easement rights.

The Clean Air Council filed its lawsuit on behalf of property owners Sunoco contacted in order to acquire easements for the Mariner 2 project.

The group primarily alleges that Mariner 1 and Mariner 2 are engaged in interstate commerce and therefore, Sunoco is not entitled to the eminent domain authority conferred on utility companies with common carrier status in Pennsylvania intrastate commerce.

Specifically, the Clean Air Council cites numerous filings that Sunoco made to the Pennsylvania Public Utility Commission that describe the purpose of the proposed facilities as the “interstate” transportation of natural gas liquids.

The argument follows that if the Mariner 2 project is not regulated by the Pennsylvania public utility code, Sunoco lacks any authority to exercise the right of eminent domain to acquire the rights necessary for the project.

The public utility code, 66 Pa. Cons. Stat. Ann. § 104, explicitly provides that it “shall not apply, or be construed to apply, to commerce … among the several states, except insofar as the same may be permitted under the provisions of the Constitution of the United States and the acts of Congress.”

The only “public utilities” that may exercise eminent domain authority under Pennsylvania’s eminent domain code are those public utilities defined in the public utility code, which include:

any person or corporations now or hereafter owning or operating in this Commonwealth equipment or facilities for … producing, generating, transmitting or furnishing natural or artificial gas, electricity, or steam for the production of light, heat, or power to or for the public for compensation … [and] transporting or conveying natural or artificial gas, crude oil, gasoline, or petroleum products, materials for refrigeration, or oxygen or nitrogen, or other fluid substance, by pipeline or conduit for the public for compensation.

Furthermore, the definition of a public utility does not include “[a]ny producer of natural gas not engaged in distributing such gas directly to the public for compensation.”

Therefore, the Clean Air Council alleges that Sunoco is not a regulated public utility in Pennsylvania for purposes of developing the Mariner 2 project.

In addition, the group argues that Sunoco cannot claim the right to exercise eminent domain authority under federal law. The Natural Gas Act, 15 U.S.C.A. § 717f(h), authorizes utility companies to exercise eminent domain for natural gas transportation projects regulated by FERC.

However, the transportation of oil and petroleum products by common carriers by truck, rail or pipeline are regulated by the Interstate Commerce Act, 49 U.S.C.A. § 10501, which does not confer the power of eminent domain.

The Clean Air Council alleges that Sunoco is a common carrier for purposes of transporting natural gas liquids in interstate commerce for the Mariner 2 project, as Sunoco represented in various filings for exemption from local zoning requirements.

In response, Sunoco argues that any challenge against its right to acquire property by eminent domain for the Mariner 2 project is premature because Sunoco has not filed condemnation actions against the named plaintiffs.

According to Sunoco, a challenge to its eminent domain authority should be properly raised in opposition to a taking as provided under Section 306 of Pennsylvania’s eminent domain code, 26 Pa. Cons. Stat. Ann. § 306, if such a taking is ever filed.

In direct response to the Clean Air Council’s arguments, Sunoco insists that it is a “public utility corporation” as that term is defined in the Pennsylvania Business Corporation Law, 15 Pa. Cons. Stat. Ann. § 1511(a)(2).

Under that law, public utility corporations are expressly authorized by statute with the “right to take, occupy and condemn property.”

Sunoco says a “public utility company” is defined under 15 Pa. Cons. Stat. Ann. § 1103 as “[a]ny domestic or foreign corporation for profit … that is subject to regulation as a public utility by the Pennsylvania Public Utility Commission or an officer or agency of the United States.”

In support of this argument, Sunoco cites to numerous orders and certificates of public convenience issued by the PUC as prima facie evidence that the company is a public utility as that term is defined in the Pennsylvania public utility code and by the state’s courts.

Finally, Sunoco relies on a certificate of public convenience issued by the PUC for an extension of a portion of the Mariner 1 project. The certificate found that the project is for an intrastate service by a public utility and therefore is vested with eminent domain authority.

The scope of eminent domain authority for private entities engaged in activities for the public benefit has been shaped by challenges from property owners who allege the anticipated use is private and not for public benefit.

The power of eminent domain is authorized but limited by the Fifth Amendment of the U.S. Constitution, which provides that, “no person shall be … deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

In 1954 the U.S. Supreme Court established that the Fifth Amendment did not prohibit a private entity from taking property for redevelopment purposes if the taking was authorized by an act of Congress.

In Berman v. Parker, 348 U.S. 26 (1954), a property owner challenged the right to condemn private property in a blighted neighborhood of the District of Columbia to foster a redevelopment project.

The court upheld the taking and opined that the legislature (subject to specific constitutional limitation), not the judiciary, is the guardian of the public needs, which are served by social legislation enacted in the exercise of the government’s police powers.

The high court deferred to Congress’ intent as to what constituted a public use, noting that it was not the court’s role to determine whether a particular housing project might be desirable.

Furthermore, the court said it is within Congress’s power to utilize an agency of private enterprise for such a purpose, or to “authorize the taking of private property and its resale or lease to the same or other private parties as part of such a project.”

The decision in Berman created a divergence in how the public use clause of the Fifth Amendment is interpreted. Under the broad definition of public use, any use that creates a public advantage is acceptable.

Thus, any eminent domain action that tended to “enlarge resources, increase industrial energies, or promote the productive power of any considerable number of inhabitants of a state or community manifestly contributes to the general welfare and prosperity of the whole community” and is, therefore, a valid public use. Philip Nichols, Eminent Domain § 7.02[2] -[7] (J. Sackman, 3d ed. rev. 2003).

Under this view of public use, it has been held that the scope of eminent domain is “coterminous with the scope of the sovereign’s police powers, as well as its constitutional taxing authority.”

The narrow reading of public use insists that property acquired through the exercise of eminent domain power must be used by the public or the public must at least have the opportunity to use it.

This restricted view of public use permits the taking of private property by a governmental unit only for the construction of, for example, a highway or a public building such as a school.

In 1984 the U.S. Supreme Court re-examined this precedent and considered a proposed acquisition of private property by eminent domain for private use in Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984).

In reaffirming Berman, the court cautioned that it would not substitute its judgment for that of a state legislature as to what constitutes a public use, unless the use be “palpably without reasonable foundation” because legislatures are in a better position to assess what public purposes should be advanced by an exercise of the state’s taking power.

Again, in 2005, the Supreme Court reaffirmed this long-standing principle:

Just as we decline to second-guess the city’s considered judgments about the efficacy of its development plan, we also decline to second guess the city’s determinations as to what lands it needs to acquire in order to effectuate the project. It is not for the courts to oversee the choice of the boundary line nor to sit in review on the size of a particular project area. Once the question of public purpose has been decided, the amount and character of land to be taken for the project and the need for a particular tract to complete the integrated plan rests in the discretion of the legislative branch. Kelo v. City of New London, 545 U.S. 469, 488-9 (2005), quoting Berman, 348 U.S. at 35-36.

While the case law makes clear that the legislatures are authorized to determine what public purposes constitute a public use, that delegation of authority must be strictly construed.

The Clean Air Council relies on the strict construction of definitions in various Pennsylvania and federal statutes that regulate Sunoco’s proposed project, to advance the argument that Sunoco lacks eminent domain authority for the Mariner 2 project.

There is support in Pennsylvania case law for strict construction of the statutes that provide eminent domain authority and for the stance that courts will look to the “’real or fundamental purpose’ behind a taking.” Middletown Twp. v. Lands of Stone, 595 Pa. 607, 617 (2007).

Furthermore “the exercise of the right of eminent domain ‘is necessarily in derogation of a private right, and the rule in that case is that the authority is to be strictly construed: What is not granted is not to be exercised.’”

The eminent domain authority of a pipeline company was recently limited in Robinson Township v. Commonwealth, 147 A.3d 536 (Pa. 2016), in which the Pennsylvania Supreme Court invalidated provisions of the state’s oil and gas industry legislation for violating the equal rights amendment of the state constitution.

The relevant portion of the statute authorized an acquisition, by condemnation of property, for the storage of gas by a “corporation empowered to transport, sell or store natural gas or manufactured gas” in Pennsylvania.

The Pennsylvania Supreme Court found this delegation of eminent domain authority to a “corporation” to be too broad and without the guarantee of a public purpose. The only guarantee that the public interest could be furthered under the Pennsylvania Constitution is to limit eminent domain authority to a “public utility” regulated by the PUC.

This strict construction of the statute delegating eminent domain authority should bolster the Clean Air Council’s complaint, which was filed prior to the Robinson decision.

The proliferation of pipeline development throughout the U.S. has led to challenges to eminent domain authority for proposed utility projects in other jurisdictions.

In Colorado, a company engaged in the transport of petroleum products sought to expand an existing right of way for a new pipeline. When property owners declined to sell the easement rights, the company, Sinclair Transport Co., sought to acquire the easement by eminent domain.

The property owner opposed the private corporation’s move to acquire the easement rights by eminent domain, arguing that the statute Sinclair relied on for eminent domain authority did not authorize such a taking.

The Colorado Supreme Court strictly interpreted that Colo. Rev. Stat. Ann. § 38-5-105 only allows “electric companies” to obtain “the rights of way for poles, wires, pipes, regulator stations, substations, and systems.” Larson v. Sinclair Transp. Co., 284 P.3d 42 (Colo. 2012).

The court noted that there was no express delegation of eminent domain authority for oil or petroleum product transportation, and declined to find that Sinclair engaged in the regulated activities.

The Bluegrass Pipeline project in Kentucky recently faced an eminent domain challenge. Bluegrass Pipeline Co. LLC v. Kentuckians United to Restrain Eminent Domain, 478 S.W.3d 386 (Ky. Ct. App. 2016).

The 1,100-mile pipeline was supposed to transport natural gas liquids from the Marcellus and Utica shale areas in Pennsylvania, West Virginia and Ohio to the Gulf of Mexico. The pipeline would have passed through Kentucky but would not have provided service in the state.

Bluegrass Pipeline sought to acquire land rights through the eminent domain authority in Kentucky’s public utility statute, Ky. Rev. Stat. Ann. § 278.502, which allows that “[a]ny corporation or partnership organized for the purpose of … operating oil or gas wells or pipeline for transporting or delivering oil or gas, including oil or gas products, in public service, may … condemn the land and material or the use and occupation of lands.”

The Kentucky Court of Appeals concluded that the Bluegrass Pipeline could not be considered “in public service” without delivering natural gas to the market in the state, and denied the pipeline’s exercise of eminent domain.   

In Ohio energy infrastructure company Kinder Morgan proposed the Utopia Pipeline project to transport oil products used in plastics manufacturing, but did not intend to use the pipeline for energy consumption such as petroleum or heating oil.

Kinder Morgan relied on its status as a common carrier in Ohio to acquire easement rights necessary for the pipeline project. Landowners challenged the eminent domain authority arguing the remote benefits to the Ohio market did not constitute a public purpose.

The trial court made findings of fact based on a record of evidence that consisted of permit applications, press releases and Kinder Morgan’s public outreach materials to conclude that the pipeline’s primary purpose would be to benefit private commercial enterprise in Canada, not to service the energy needs of Ohio’s citizens. Kinder Morgan Utopia LLC v. PDB Farms of Wood Cty. LLC et al., No. 2016-CV-0220 (Ky. Ct. Com. Pl., Wood Cty. 2016).

The court rejected Kinder Morgan’s attempt to acquire land rights by eminent domain under Ohio’s common carrier statute concluding that “Kinder Morgan is not offering its services to the public or even to an unlimited number of commercial enterprises.”

Furthermore, the court said, “[i]ts sole purpose is to convey a petroleum derivative to a company in Canada … Kinder Morgan has failed to establish any activities that establish it as a common carrier.”

Kinder Morgan’s attempt to exercise eminent domain authority failed on not only a strict interpretation of the statute authorizing eminent domain for common carriers but also on the fact specific nature of the proposed pipeline project.

Notably, however, Sunoco’s use of eminent domain to acquire land rights in Ohio for the Mariner 2 project was upheld in Sunoco Pipeline LP v. Teter, Nos. 16 HA 0002 and 16 HA 0005 (Ohio Ct. App. 2016).

The recent wave of decisions declining to extend eminent domain authority based on the strict interpretation of statutes delegating eminent domain authority support the arguments advanced by the Clean Air Council.

Moreover, the property owners in the Mariner case are engaged in discovery that will allow for a fact-sensitive evaluation of the public benefits of the Mariner 2 project and an evaluation of whether the anticipated benefits are in support of a public purpose.

The court will be required to evaluate the arguments advanced by the Clean Air Council to make a determination as to whether Sunoco’s status as a Pennsylvania public utility extends to the construction of the facilities proposed for the Mariner 2 project to find the valid exercise of eminent domain.