Compensation in Power Line and Pipeline Cases New Thoughts on an Old Subject

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1 Compensation in Power Line and Pipeline Cases New Thoughts on an Old Subject Nicholas P. Laurent Christopher J. Oddo Roy R. Brandys Blaire A. Knox BARRON, ADLER, CLOUGH & ODDO, LLP 808 Nueces Street Austin, Texas (512) (512) (fax) October 13, 2017 Barron, Adler, Clough & Oddo, LLP is a boutique law firm with offices in Austin and Houston, Texas that practices exclusively in the area of eminent domain, condemnation, inverse condemnation, and regulatory takings of property. The firm s lawyers represents clients throughout Texas and have successfully handled eminent domain cases for a variety of landowners including individuals, Fortune 500 publicly traded companies, business owners, tenants, and public agencies and entities. The cases the firm s lawyers have handled cover a broad spectrum of properties, ranging from residential, commercial, and industrial properties to vacant land and special use properties. With a combined 80+ years of experience in eminent domain and regulatory takings, lawyers with the firm are routinely asked to educate the community, professional organizations and politicians on eminent domain issues and emerging case law and have assisted in both drafting and advancing legislation to protect landowners. Page 1 of 10

2 Compensation in power line and pipeline cases new thoughts on an old subject Representing landowners in eminent domain cases is always challenging, but is particularly so in utility easement acquisitions. The mandate of just or fair compensation under our federal and state constitutions is readily susceptible to mixed interpretation. This paper addresses several concepts to assist eminent domain and real estate practitioners in representing landowners in their efforts to obtain fair treatment when private property is taken for a utility easement. A. Valuing utility easements on a per linear foot or per rod basis It is generally accepted that utility easements, including pipelines and power lines, are bought and sold on the open market between willing buyers and sellers on a per linear foot or per rod 1 basis. It would make sense, then, that when valuing utility easements in a condemnation case landowners should be permitted to use market data reflecting per linear foot or per rod transactions. Courts from around the country, however, have typically rejected the per linear foot or per rod method of valuation. In rejecting the per linear foot or per rod valuation of utility easements, these courts have declined to consider a whole universe of market driven transactions that provide valuable guidance in estimating just compensation for utility easements. 1. Just compensation Just compensation for the taking of a utility easement is based on the market value of the property at the time of the taking. TEX. PROP. CODE ; Enbridge Pipelines (E. Tex.) L.P. v. Avinger Timber, LLC, 386 S.W.3d 256, 261 (Tex. 2012). The fair market value standard drives the fair compensation determination, that being, the price a property would bring in a transaction between a willing buyer and willing seller. City of Austin v. Cannizzo, 267 S.W.2d 808, 813 (Tex. 1954); see also United States v Acres of Land, 441 U.S. 506, 511 (1979) (quoting United States v. Miller, 317 U.S. 369, 374 (1943)). In determining fair market value, one of the most critical pieces of evidence is the value of sales for similar transactions in similar locations. City of Harlingen v. Estate of Sharboneau, 48 S.W.3d 177, 182 (Tex. 2001). When value is at issue, evidence of sales between willing sellers and willing buyers, similarly situated, is the most relevant and useful evidence available. Bauer v. Lavaca-Navidad River Auth., 704 S.W.2d 107, 110 (Tex. App. Corpus Christi 1985, writ ref d n.r.e.) (noting that comparable sales are even more reliable than expert valuations). In partial taking cases, like most utility easement acquisitions, the landowner is entitled to compensation in the amount of the fair market value of the part taken, plus damages to the remainder caused by the acquisition. Westgate, Ltd. v. State, 843 S.W.2d 448, 456 (Tex. 1992). In Texas, as in other jurisdictions, the preferred method of determining such compensation when the taking does not constitute a separate economic unit, is to calculate the difference between the market value of the whole property before the taking compared to the market value of the remainder after the taking. State v. Petropolous, 346 S.W.3d 525, 530 (Tex. 2011). The calculation 1 A rod is a commonly used term in pipeline easement negotiations and acquisitions and represents a sixteen-anda-half foot segment of a pipeline. The term rod relates to an old surveying tool used by surveyors when measuring survey boundaries without the assistance of GPS or lasers. Page 2 of 10

3 of this difference then requires that the appraiser determine the impact of the proposed taking on the property. The loss in remainder value constitutes the decrease in the fair market value of the landowner s whole parcel burdened with the utility easement. Essentially, this is the amount a willing seller should take in an open and willing marketplace to accept all of the added burdens, potential liability, uncertainty, and negative attributes associated with a utility easement. Remainder damages quantify these burdens and translate them into a monetary loss (i.e., the market value is diminished due to these, and other, factors). 2. Per linear foot or per rod valuation Market participants in the business of buying and selling utility easements, including those with and without the power of eminent domain, often pay for utility easements on a per linear foot or per rod basis. In many of these open market transactions, there is no obligation to buy or to sell, rather one utility company is acquiring an entire utility easement line or valuing easements as part of the acquisition or divestiture of a company. The prices paid for the utility easements in these transactions indicate what, in the open market, a willing buyer is willing to pay and a willing seller is willing to accept and thus should serve as at least one of the potential bases for valuing utility easements in condemnation cases. Certainly this information is relevant to determining what constitutes fair market value and would be helpful to a jury in arriving at their verdict. 3. Paired sales problems and the need for market data Many appraisers attempt to use a paired sales analysis to determine the impact of a utility easement on property value. The recent Texas Supreme Court case of Houston Unlimited Inc. Metal Processing v. Mel Acres Ranch, 443 S.W.3d 820 (Tex. 2014), is particularly instructive in illustrating the problem of relying exclusively on this approach. In Mel Acres, the landowner s appraiser performed a paired sales analysis attempting to account for the difference in price attributable to stigma associated with environmental contamination. In striking the expert s opinion, the court relied upon the fact that the appraiser s ultimate opinion was cause-dependent in that her reasoning could only be sound if the losses found for the properties in question were attributable to market stigma and no other factors. Because the landowner s appraiser offered no evidence tending to establish the cause of the property s diminution in value, and instead merely assumed that the diminution in market value was attributable to nearby contamination, the court struck the opinion for its lack of adequate foundation and reliable methodology. Id. at Mel Acres highlights the inherent problem with a paired sales analysis and emphasizes the importance of obtaining as much market data as possible to support or test its results. Because of the many inherent differences between properties, it is typically very challenging, if not sometimes impossible, to know exactly what caused the difference in value between the sales in a pairing. When viewing utility easement transactions in which the buyer did not have the power of eminent domain, it is undisputed that the ONLY issue being negotiated in that free market situation was the impact of the utility easement on the properties involved. Using such market data eliminates the issues and concerns raised by the Supreme Court of Texas in Mel Acres. However, the availability of these sales and other related market data may be limited. Page 3 of 10

4 4. Alternatively, condemnors should pay royalties or lease utility easements A royalty is a share of the product or profit reserved by the owner for permitting another to use the property. In its broadest aspect royalty is a share of profit reserved by the owner for permitting another the use of the property. Lyle v. Jane Guinn Revocable Trust, 365 S.W.3d 341, 351 (Tex. App. Houston [1st Dist.] 2010, pet. denied) (quoting Alamo Nat l Bank v. Hurd, 485 S.W.2d 335, 338 (Tex. Civ. App. San Antonio 1972, writ ref d n.r.e.) (citing Griffith v. Taylor, 291 S.W.2d 673, 676 (Tex. 1956)). Oil and gas leases in most cases contain several compensation components, including bonus payments made at the time the lease is executed, delay rental payments to delay drilling obligations, and cost-free royalty payments representing a fraction of the value of the minerals extracted from the property. Similarly, a strong argument can be made that the landowners that must suffer the burden of utility easements should also receive compensation in the form of royalties for the use of their property for utility purposes. This is particularly true for pipelines and other utilities that transmit hydrocarbons or electricity for a profit. 5. Horse Hollow example In 2009, a subsidiary of Next Era Energy formerly known as Florida Power & Light ( FPL ) announced the Horse Hollow project in which the utility company sought to connect its 747-megawatt West Texas windfarm in Nolan and Taylor Counties with a substation approximately 200 miles away near San Antonio. Horse Hollow did not have the power to condemn, so the electric transmission line to connect the wind farm with the substation would be a private line acquired through voluntarily easement acquisitions. Horse Hollow negotiated for and acquired easements in the open market from over 200 Texas landowners and constructed the largest and longest private 345kV electric transmission line in the country, ultimately traversing ten Texas counties. These acquisitions were negotiated between a willing buyer, Horse Hollow, and willing sellers, Texas landowners, and Horse Hollow completed the 345kV electric transmission line in record time just ten months after breaking ground. Condemnors of subsequent utility easements claim the Horse Hollow transactions are not market transactions and/or should not be used as evidence in utility easement condemnation cases, primarily because of the allegedly inflated prices paid by Horse Hollow to acquire its private utility easements and quickly have its utility line in service. Landowners, on the other hand, argue the Horse Hollow transactions are the best evidence of the market value of utility easements because they were acquired without the threat or power of eminent domain. See Harris Cty. Flood Control Dist. v. Taub, 502 S.W.3d 320, 330 (Tex. App. Houston [14th Dist.] 2016, pet. denied) ( As a matter of long-established state law, evidence of the price for which comparable property was sold to an entity with the power of eminent domain is not competent evidence of the value of the condemned property. ). Page 4 of 10

5 6. Condemnor s arguments against using per linear foot or per rod valuations i. Value-to-the-taker rule Many utility companies argue that using per linear foot or per rod valuation violates the value-to-the-taker rule, which states that just compensation for condemned property is measured by what the owner lost, not what the taker has gained. Enbridge Pipelines (E. Tex.) L.P. v. Avinger Timber, LLC, 386 S.W.3d 256, 262 (Tex. 2012). Utility companies often argue that valuing utility easements on a per linear foot or per rod basis violates the value-to-the-taker rule because the particular taker usually has much more to gain in acquiring utility easements acquired on a per linear foot or per rod basis than the rest of the population of potential buyers. Landowners contend this argument is often misplaced because the value to the taker rule prohibits an owner from receiving an award based on a tract s special value to the taker, as distinguished from its value to others who may or may not possess the power to condemn. Id. In using market data on per linear foot or per rod transactions, the landowner is seeking what an other who does not possess the power of eminent domain pays for the same type easement impacting the same type property, oftentimes in the same geographic real estate marketplace. The landowner simply uses market data to determine compensation owed focusing on what was paid to impose the same limitations as the condemnor seeks to now impose on the landowner s property. ii. Utility corridors Utility companies also often argue the per linear foot or per rod valuation method is inappropriate because of the project enhancement rule, which prohibits consideration of the project giving rise to the acquisition in estimating the value of the subject property and just compensation. In particular, they take the position that the utility project creates the need and value of the utility corridor or easement area taken. Without the project, the highest and best use of the easement area would be determined with regard to the use of the overall parcel, i.e., agricultural, rural residential, commercial, etc. and not the utility corridor created by the utility acquisition. As such, utility companies argue that the utility easement should not be considered a separate economic unit and by attempting to value the taking based on the easement area created by the taking, the landowner is seeking to profit from the project through the creation of a utility corridor. See Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623 (Tex. 2002). The Zwahr case involved the acquisition of a 1.01 acre pipeline easement by Exxon across the Zwahrs 49 acre property, used for cotton farming. At the time the Zwahrs purchased the property, it was burdened with a natural gas pipeline owned by United Gas Pipeline Company. The United Gas pipeline was subsequently transferred to Koch Gateway Pipeline. Exxon sought to condemn a fifty foot wide easement for an ethane pipeline. The proposed Exxon ethane pipeline easement was parallel to the already existing Koch easement and in fact overlapped approximately 82% of the Koch easement. In the condemnation case brought by Exxon to acquire an easement, the Zwahrs and their appraiser took the position that the 1.01 acre easement area constituted a separate economic unit with a highest and best use as a pipeline corridor. Importantly, the Zwahrs waived any claim to Page 5 of 10

6 remainder damages to the remaining 48 acres of their land. Their appraiser valued the 1.01 acres as a pipeline corridor and testified that the Exxon condemnation created the economic unit, and that the 1.01 acres did not exist until after the condemnation. Id. at 630. He also testified that once Exxon received Koch s consent to lay another pipeline within the easement, the value of the.82-acres increased to $35,720 per acre, making the 1.01-acre Exxon easement worth $36,077. Id. In striking the Zwahr appraiser s opinion of value, the court reasoned that by claiming a distinct economic unit crafted entirely upon the condemnation, the owner was impermissibly seeking compensation based on the Exxon project itself, violating the project enhancement rule. Id. at The Zwahrs reliance on the pipeline project to create an economic unit is not necessary to determine just compensation. Consistent with the proliferation of utility lines in Texas and throughout the country, landowners do not need to rely on the subject project to support the argument that the highest and best use of the property taken is for a utility corridor. This is especially true when the property is already burdened with a pre-existing utility easement. The question thus becomes when is it appropriate to consider the highest and best use of property as a utility corridor and value it on a per rod or linear foot basis? Or stated another way, when can the easement area itself constitute a separate economic unit for valuation purposes? The court in Bauer v. Lavaca-Navidad River Authority, 704 S.W.2d 107, 109 (Tex. App. Corpus Christi 1985, writ ref d n.r.e.) addressed some of these issues. In Bauer, the river authority condemned a 50 foot wide, 10,000 foot long easement for a water pipeline. The landowner s appraiser and other witnesses argued that the highest and best use of the easement area was for the sale of easement rights-of-way. To establish that the sale of easement rights-of-way was the highest and best use of the property being condemned, the landowner testified that he had negotiated many easement transactions and had required pipelines to be placed next to one another to ensure adequate space to lay additional pipelines. The court ruled that the landowner could base compensation on a utility corridor theory, but only if it could be shown that he had previously marketed and used his land as such as of the date of the taking. Id. at This reasoning ignores the legal premise that a property s highest and best use is not necessarily its current use, but rather the use to which it could reasonably be put given its physical, legal, and financial characteristics. Enbridge Pipelines (E. Tex.) L.P. v. Avinger Timber, LLC, 386 S.W.3d 256, 264 (Tex. 2012) ( The presumed highest and best use of land is that of its existing use, which in this case was a gas processing facility.... [T]he landowner can rebut this presumption by showing a reasonable probability that when the taking occurred, the property was adaptable and needed or would likely be needed in the near future for another use. (quoting Zwahr, 88 S.W.3d at 628)). Thus, if a property s highest and best use is for a utility corridor consistent with eminent domain jurisprudence that is how compensation should be determined in a condemnation case. In particular, if the property to be acquired could be bought and sold in the marketplace as a utility corridor and traded on a per linear foot or per rod basis, that is how the property should be valued. Regardless of the utility corridor theory, evidence of market-based per linear foot or per rod transactions are useful to determine how the market would assess the reasonably foreseeable impacts of an easement like a new utility easement on the entire tract based on what utility Page 6 of 10

7 company s without the power to condemn had to pay to cause similar impacts in the free market applied over an entire tract. iii. Business necessity Lastly, condemnors often argue that evidence of per linear foot or per rod market transactions should not be used in valuing utility easements because those transactions were consummated out of business necessity. Condemnors in seeking to exclude evidence of per linear foot or per rod market transactions argue that these purchasers are unwilling because the utility easements had to be acquired to accomplish some business purpose (i.e., delivery of power generated in one area to another area that needed the power). While business motivation may have in fact existed, the utility company s free will in those instances usually was not destroyed because, for example, there are various alternative routes to attach to the electricity grid and the utility company paying for per linear foot easements is certainly under no threat from the individual landowners. Landowners argue that a buyer purchasing due to business necessity does not necessarily mean that the buyer is no longer a willing market participant. Often businesses are more desirous of a certain location than other willing buyers in the market; however, the urgency or business need for a parcel of land does not make the business an unwilling buyer in the general appraisal context. There are few, if any, cases that prohibit comparable market sales because the property was purchased due to business necessity. In fact, business necessity is often the primary motivation for land to be bought or sold. A business that values a strategic location is simply a willing buyer, like any willing buyer who has an underlying motivation to purchase a specific parcel. A willing buyer only ceases to be considered willing when the buyer is under economic duress. Business necessity and economic duress, however, are two very different things. Economic duress occurs when one party takes unjust advantage of the other party s economic necessity or distress to coerce the other party into making an agreement. King v. Bishop, 879 S.W.2d 222, 224 (Tex. App. Houston [14th Dist.] 1994, no writ). A party claiming duress must show: (1) a threat or action was taken without legal justification; (2) the threat or action was of such a character as to destroy the other party s free agency; (3) the threat or action caused the opposing party s free will to be overcome and caused the other party to do that which it would not otherwise have done and was not legally bound to do; (4) the restraint was imminent; and (5) the opposing party had no present means of protection. Graybar Elec. Co. v. LEM & Assocs., L.L.C., 252 S.W.3d 536, 546 (Tex. App. Houston [14th Dist.] 2008, no pet.). For example, in Bradfield v. State, 524 S.W.2d 438, 440 (Tex. App. Austin 1975, writ ref d n.r.e.), the party attempting to use a comparable sale made under duress admitted at trial testimony that the sellers were unwilling and under duress during the sale. Therefore, the Bradfield court found sufficient economic duress to disregard the sale. Id. Economic duress in Bradfield, however, excluded evidence because the seller was under economic duress not the buyer. In most per linear foot or per rod market transactions, the buyer could have chosen a different route; it could have chosen to put off the tie-in that it was trying to accomplish, or elected not to complete Page 7 of 10

8 the project at all. Nothing, other than economics, motivated its decision. Buyers and sellers typically decide to buy and sell based on economics. If a fast food restaurant is trying to get into a market on a corner tract, it might pay top dollar for that corner because it had a business desire for the location. That would not disqualify the sale because of business necessity as a market transaction. Rather, that transaction is indicative of market value for the desirable corner tract. As another example, a land developer may be looking to buy up tracts to hold or assemble for a future subdivision. Again, that likely makes that developer/buyer the highest bidder. This is how most sales occur to eliminate even discovery of these sales as compulsory would severely limit the relevant market data available to appraisers. The fact that a utility company without the power of eminent domain paid a high price to acquire utility easements merely indicates that it is the most willing buyer, not that it is a buyer under economic duress or suffering from business necessity. Likewise, it indicates a true market price at which the seller is willing to sell various legal rights in the property. Often in condemnation cases, the condemnor alleges some type of duress or necessity when facing high-value comparable sales. Duress or business necessity cannot be a valid basis to wholesale exclude evidence of true market transactions because it ignores realities of the real estate marketplace and the financial motivations of those who participate in the real estate marketplace. As a check on using some high-value marketplace transactions, the landowner s appraiser could easily discount or disregard comparable sales where a utility company without the power of eminent domain was theoretically under severe economic distress. Similarly, the condemnor s appraiser can also chose to discount or disregard comparable sales where a utility company without the power of eminent domain was theoretically under severe economic distress. Ultimately, the trial court s role as gatekeeper mitigates the risk of unfair, inaccurate, or unreliable market transactions coming into evidence in a utility easement condemnation case, either through preliminary Daubert rulings or in rulings on evidence when offered. We should, as a state and a nation, encourage the free market purchase of real estate interests rather than the use of forced sales through eminent domain because free market economy is the founding bedrock of our economic system. It is for this reason that in eminent domain cases, the goal is to mirror the market. But, to be sure, the eminent domain system is no substitute for the free market. The acquisition of utility easements can and does occur without the use of eminent domain by free market negotiation. This is laudable and should be encouraged. Throwing the rug over these market transactions only encourages the use of eminent domain at the expense of free market acquisitions. We should instead force condemnors to at least face the same market conditions that those without the power of eminent domain face because ignoring those market conditions unfairly reduces just compensation owed to landowners in most instances. B. Focusing on fair market value The Texas Supreme Court has defined market value as the price which the property would bring when it is offered for sale by one who desires, but is not obliged to sell, and is bought by one who is under no necessity of buying it, taking into consideration all of the uses to which it is reasonably adaptable and for which it either is or in all reasonable probability will become available within the reasonable future. City of Austin v. Cannizzo, 334, 267 S.W.2d 808, 815 (Tex. Page 8 of 10

9 1954). Oftentimes, appraisers hired by utility company condemnors conclude that compensation for the taking of a utility easement should include only a fraction of the fee value of the easement area and little, if any, damages to the remainder property. The practical effect of this conclusion is that landowners in the marketplace would willingly become a cotenant with a utility company and assume all of the burdens that come with utility easements for a minor fraction of the overall value of the whole, or even a small portion of, the subject property s fee value. As an example, a landowner needs to be careful about the terms of an easement it grants because typically a landowner subject to a utility easement assumes many of the following burdens on their property: Permanent burdens, negative aesthetics, liabilities, and loss of property interests; No limit on the height or number of above-ground appurtenances, including compressor stations, pumping stations, valve riser stations, and/or power line towers; No limit on the number of pipelines, other utilities, or wires to be installed; No royalty or lease paid and also no future revenue stream on the condemned parcel (i.e., no cell tower, billboard, etc.); Typically no abandonment clause and thus no requirement that the utility company remove its equipment and associated structures or bear the responsibility of any cost for such removal; Exposure to liability with no or limited indemnity, in many instances making the landowner liable for all incidents related to the utility line even if the condemnor or its contractors are negligent; The permanent clear cutting of the easement area, including temporary easement areas; The loss of control over access, including many easements allowing blanket access across the landowner s whole property (not just the easement area) and creating the corresponding loss of quiet enjoyment of property; Reduced aesthetics, including above ground appurtenances and power line towers constructed up to 160 feet high; Targets for future utility lines (for example, in Texas the Public Utility Commission s criteria for the route selection of power lines favors placement along other already existing utility lines); The presence of electromagnetic fields on power lines, which are often perceived by the public as health risks and potentially lead to damaging disease; and A smaller pool of potential buyers interested in properties burdened by utility lines and/or longer exposure times when trying to sell the burdened property. From the willing buyer s perspective in determining fair market value, the first question is whether any of these items individually or collectively would cause him to look elsewhere and avoid the subject altogether, which reduces the buyer pool and lengthens the marketing period for the subject property. A reduced buyer pool and lengthier marketing period results in economic hardship and damages to the landowner. Secondly, do any of these items become a negotiating point utilized by the potential buyer to reduce the price point at which he is willing to purchase the property? If so, the reduction in price constitutes evidence of remainder damages. Page 9 of 10

10 From the willing seller s perspective, the question becomes whether he or she would be willing to accept the added burdens, liability, and negative impacts of the utility line that brings no direct benefit to the property for little, or in many instances, no compensation for remainder damages. In most instances, the answer would be a resounding no. C. Determination of Whole Parcel Determining the area of the whole parcel continues to provide opportunities for landowners and appraisers to present evidence in support of just compensation that in many instances differs from their condemnor counterparts. In particular, special attention should be directed to the market within which a property is located and the likelihood and manner in which it will be developed. The Texas Supreme court addressed this issue in In Re State of Texas, 355 S.W.3d 611 (Tex. 2011), where the court instructed [t]hough the State has a right to define the property being taken, it does not have the power to constrain the owner s evidence of competing conceptions of the best economic unit by which the taken property should be valued. Id. at 617. Thus, the Court confirmed the landowner s right to introduce evidence of the appropriate economic unit from which a taking occurred without having to actually subdivide the property. This is critical in determining the per acre or per square foot value of land in light of the varying price for land of different size, use, and physical features. Page 10 of 10