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The proliferation of unconventional natural gas production in the last few years has been an economic and energy boom to Pennsylvania and other key stakeholders, like local municipalities, exploration and production firms, gas industry vendors and natural gas gathering companies, among others.

As natural gas gatherers in particular have sought to position themselves for increased opportunities, they have been on a capital spending spree to locate, design, construct and operate gathering pipelines to take advantage of the current market opportunities.

But what happens when gathering-pipeline construction stalls because property owners refuse to accept reasonable (or even substantial, above-market) amounts of money for rights-of-way needed to place these pipeline facilities in the ground?

If private negotiations to procure rights-of-way are unsuccessful, gas gatherers have no real alternative but to abandon what might otherwise be an excellent site, positioned strategically near many production wells. However, if those gathering companies can avail themselves of eminent domain authority, allowing them to take private land for a “public” purpose by paying “just compensation,” they would have another valuable tool available when negotiating rights-of-way with landowners.

A few years ago, natural gas gatherers recognized the value of eminent domain authority in the development of new pipeline in Pennsylvania. At that time, three entities sought status as a public utility in order to be “regulated” by the Pennsylvania Public Utility Commission.

Although not expressly mentioned, it was believed that one of the primary drivers for seeking public utility status was to have the ability to exercise eminent domain authority. Achieving “public utility” status allows a company to condemn private land for gathering pipeline facilities if an impacted landowner refuses to negotiate a right of way.

While none of the three original gas gatherers that sought public utility status in Pennsylvania ever achieved that milestone, issues relating to how such entities can timely and cost-effectively obtain rights-of-way for gathering pipeline facilities remains a critical issue for gas gatherers operating in the Marcellus Shale.

A case currently pending before a Pennsylvania court of common pleas involving a pipeline attempting to transport petroleum products may have important implications for natural gas gatherers. Sunoco Pipeline LP is developing the Mariner East Pipeline, a proposed interstate pipeline originating in Pennsylvania and terminating in Delaware.

The objective of the pipeline is to provide ethane, propane and other liquid petroleum products to customers. Sunoco is currently attempting to procure the necessary rights-of-way for the pipeline. This includes, among other things, a 50-foot-wide permanent easement across certain private properties and in some cases, a temporary workspace easement for use during construction.

When negotiations to obtain the required permanent and temporary easements for the pipeline stalled last summer, Sunoco filed with the Court of Common Pleas of Washington County, Pa., in August 2013, the first of four Verified Petitions for Approval and Order Filing Bond, which is one of the two primary procedures available in Pennsylvania to effect a condemnation of private property for public purposes.

Shortly after the initial petition was filed, a pair of property owners (Ronald A. Cox and Sallie A. Cox) filed a complaint in equity challenging Sunoco’s right to condemn easements across their property. Later, three other groups of property owners filed similar actions. Eventually, on Nov. 18, 2013, four sets of petitions and complaints in equity challenging the same were consolidated at Docket Nos. 2013-6407, 2013-6443, 2013-6446, 2013-6865, 2013-6871, and 2013-6872, Washington County.

Sunoco has opposed the complaints in equity and filed a memorandum in opposition to them. The primary question in the consolidated proceeding is whether Sunoco has eminent domain authority under Pennsylvania’s Business Corporation Law without the need to obtain a certificate of public convenience (CPC) and separate condemnation approval/authority from either the PaPUC or the Federal Regulatory Commission.

Not surprisingly, Sunoco and the impacted property owners have decidedly different views of how and whether an entity qualifies as a “public utility” that can exercise the power of eminent domain.

Sunoco has argued that under Section 1511 of the BCL a “public utility corporation” has the right to exercise eminent domain. Under Section 1103 of the BCL, a “public utility corporation” can either be (1) a public utility that is regulated by the PaPUC (which Sunoco is not), or (2) regulated by “an officer or agency of the United States.”

Sunoco claims that it is an FERC-regulated entity under the Interstate Commerce Act, because FERC was assigned jurisdiction over oil pipelines in 1977. Sunoco argues that FERC has held that pipelines transporting ethane, propane and other natural gas liquids (like those proposed to be transported via the pipeline) are subject to FERC regulation under the ICA.

And, once Sunoco qualifies as a public utility corporation under the BCL (under option (2) above), Sunoco argues it has the grant of eminent domain authority separate and distinct from any other federal or state grant of authority.

The property owners, on the other hand, disagree. They claim that absent obtaining a CPC to exercise eminent domain authority — either under the Pennsylvania Public Utility Code or the ICA — Sunoco cannot condemn any easements. The property owners appear to be trying to push Sunoco into a situation where it must obtain a CPC but cannot do so because it is not a regulated public utility under the Pennsylvania Public Utility Code and there is no process under the ICA for a pipeline to obtain FERC authorization to condemn.

A common pleas case decided in 2005 may have a significant role in resolving this emerging dispute. In National Fuel Gas Supply Corp. v. Kovalchick Corp., 74 D&C 4th 22 (Pa. Com. Pl 2005), National Fuel Gas Corp. attempted to condemn a right of way for two natural gas gathering lines that were exempt from regulation under the Natural Gas Act.

National was regulated as a “public utility” due to its involvement in the gathering, storage and interstate transportation of natural gas. Because National’s two gathering lines provided transportation services associated with interstate commerce, all of National’s transportation obligations through them — rates, terms and conditions of service — were governed by FERC. However, the two gathering lines were not the subject of a CPC issued by FERC.

On these facts, the court in Kovalchick held, among other things, that (1) gas gathering, although not mentioned in Section 1511 of the BCL, is “ancillary” to “the production, generation, manufacture, transmission, storage, distribution or furnishing natural gas ... to or for the public,” and gathering is a function for which eminent domain authority can be exercised; (2) National was a “public utility corporation” under BCL Section 1103 even though not all aspects of its gathering lines were subject to FERC regulation (e.g., the location or siting of such facilities); and (3) the absence of a CPC from the PaPUC was of no consequence since National was considered a “public utility” by FERC.

The currently unresolved and hotly debated question is the precedential value of Kovalchick. Do the factual differences between Kovalchick and the Sunoco proceeding (including the fact that FERC’s authority over the pipeline arises not from the Natural Gas Act, but via the ICA, and Kovalchick involved natural gas and not petroleum products and other liquids) support a different outcome? Or, as claimed by the property owners, must Sunoco have a valid CPC before it can exercise eminent domain authority?

Natural gas gatherers presently operating or planning to operate in Pennsylvania will most certainly be awaiting the answers to these important questions.


See the article as it was published in Law360.