2017 Q1

Holding: Rejected the “substantial public interest test”

the pipeline was contemplated. Some have called this a “subjective test.” The Beaumont Court of Appeals also held that a reasonably probable future use of the pipeline must serve a “substantial public interest.” The Texas Supreme Court reversed the Beaumont Court of Appeals and reinstated the trial court’s judgment in favor of Denbury Green. The Court’s opinion clarified several facets of the rule previously set forth in Texas Rice I. Texas Supreme Court Clarifies Test, Sides with Denbury Holding: Post-construction contracts are relevant The Texas Supreme Court noted that the “reasonable probability test” is an objective test, meaning that the pipeline is not required to prove the requisite intent existed before construction. The court further explained that evidence of post- construction contracts with unaffiliated entities, showing that non-pipeline-owned gas is being transported for the benefit of the unaffiliated entity, can be relevant under the reasonable probability test. For example, the Court explained that such contracts can be relevant to a showing that: 1. There was a reasonable probability that, at some point after construction, the pipeline would serve the public; and The Court further explained that, without any other relevant evidence, post-construction contracts with unaffiliated entities would normally establish only a pre- construction possibility of future public use. However, when combined with other evidence, they could allow a reasonable observer to determine that there was a reasonable probability that the pipeline would benefit the public.  For example, the Court noted the following potentially relevant additional evidence: 1. the regulatory atmosphere; 2. There are specific, identified, potential customers that own CO2 near the pipeline’s route.

The Texas Supreme Court also rejected the “substantial public interest” test set forth by the Beaumont Court of Appeals.  Instead, the Texas Supreme Court held that for the pipeline to serve the public, it did not need to be direct, tangible, or substantial, and did not focus on “existential arguments related to the power and importance of the individual.”  Instead, “evidence establishing a reasonable probability that the pipeline will, at some point after construction, serve even one customer unaffiliated with the pipeline owner is substantial enough to satisfy the public use under the Texas Rice I test.” (emphasis supplied) The Texas Supreme Court applied this test to Denbury’s evidence and noted, among other things, the following: 1. Under the AirGas contract, AirGas retained title to the CO2, and ultimately sold the CO2 to its customers in the area, which showed that “no longer could a reasonable fact-finder determine that a genuine issue exists” as to whether the pipeline would, “at some point after construction,” transport CO2 owned by a customer who retained ownership of the gas. 3. The post-construction contracts showed that, not only was the pipeline “more likely than not” that it would “someday” be used for public use, but the pipeline is already used for public use 4. These contracts support Denbury’s contention that the route was designed in part to facilitate transfer of gas owned by third parties. The Texas Supreme Court noted that, when the evidence was considered together, Denbury Green “conclusively established that there was a reasonable probability that, at some point after construction, the Green Line would serve the public.” The Texas Supreme Court further noted that the Air Products contract, standing alone, would not satisfy the “reasonable probability” test, because the CO2 transferred Holding: Denbury’s evidence was “conclusive” 2. The AirGas and Air Products contracts were evidence of the proximity of the pipeline to customers;

2. proximity of the pipeline to potential customers;

3. actual post-construction use by unaffiliated entities.


G r o w t h T h r o u g h E d u c a t i o n - J a n u a r y / F e b r u a r y / M a r c h 2 0 1 7

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