This article is adapted from a longer White Paper written in conjunction with the American Law Institute/American Bar Association course, "Eminent Domain and Land Valuation Litigation." The full version can be accessed at http://www.faegre.com/showarticle.aspx?Show=8976.
There has been a resurgence in proposed energy corridor acquisitions across the United States in recent years, as energy companies invest in new corridors to transport electricity, natural gas, oil and other energy products. The demand for new corridors is fueled by many factors, including the price of energy, population growth, the demand for alternative and renewable energy sources, and the fact that existing corridors are overly congested and insufficient to handle anticipated demand. It is well documented that the power transmission grid that transmits electricity in most states cannot support current demand, let alone additional electricity generated by wind farms and other renewable sources. Indeed, the lack of sufficient transmission capacity is a major obstacle in the development of renewable energy sources.
New demand for pipeline corridors—especially oil and natural gas pipelines—is also growing. Utilities are, for example, converting coal-fired plants to run on cleaner natural gas, thereby increasing the demand for pipeline infrastructure to supply natural gas to both new and existing users.
The power of eminent domain, which is available to energy companies under state and federal statutes, is a powerful tool for private entities seeking to acquire property for new energy corridors. Energy companies use eminent domain to secure possession of needed property when landowners refuse to negotiate in good faith or delay responding to purchase offers. In so doing, companies must confront complex legal issues, ranging from challenges to their authority to take property to complicated valuation questions. These challenges are amplified in multi-state projects, as companies must carefully navigate varying sets of condemnation and property laws to ensure timely acquisition. Understanding and planning for these complex issues is a critical step in ensuring that the power of eminent domain is properly and effectively employed to meet goals.
The Doctrine of Prior Public Use
One major challenge faced by private energy companies using their eminent domain power involves the acquisition of government-owned property and property already dedicated to a public use, such as railroads, parkland and existing utility corridors. Energy companies are usually required to locate new corridors along the path of, or next to, existing energy or railroad corridors, which are often adjacent to less populated areas, such as parks and industrial properties. As a result, a private company seeking to establish a new corridor often must acquire easements from government entities and utilities with pre-existing property rights. These entities often have the power of eminent domain themselves.
A private company with the power of condemnation normally has the right to take property from private landowners when negotiations fail and possession becomes necessary. With government property or property already dedicated to a public use, however, the right to condemn is not as clear-cut. Indeed, in certain cases, an energy company simply cannot exercise its condemnation power.
The general rule regarding the power of eminent domain over public property is the well-known doctrine of prior public use: A condemnor may not condemn public property or property already devoted to public use unless the authority to do so is expressly or impliedly granted by statute. The power to condemn under a general grant of eminent domain may be implied when the current owner has not put its land to public use. However, if the land is already dedicated to and actually put to a specific public use, mere general authority to condemn is insufficient to interfere with the prior public use. Further, under the prior public use doctrine, if the proposed new use will extinguish or materially impair the prior use, the proposed taking will be prohibited. This doctrine recognizes that the legislature has delegated the power of eminent domain to many municipal and private corporations. If one such body could acquire land used or held for a public purpose by another corporation under a general power of condemnation, the latter would logically be free to re-acquire the property, an absurd result.
For energy companies, the "consistent use" exception to this doctrine is a useful tool in dealing with other utilities or public property users. It allows condemnation of property already dedicated to a public use if the two uses are compatible and can coexist. This exception is particularly useful when negotiating easement acquisitions along a pre-existing corridor. In most instances, the proposed use interferes little, if at all, with another utility's easements.
Some states have adopted statutes recognizing the doctrine of "higher" or "more necessary" public use. These statutes generally permit a subsequent taking of public use property upon a showing that the subsequent use is a higher or more necessary public use.
Because energy corridor projects are ordinarily subject to rigid timelines, companies may benefit by pursuing alternatives to condemnation. Options include requesting consent from the public entity to be included in the condemnation action, negotiating temporary encroachment agreements to allow immediate access, mediation and arbitration.
Perhaps the most effective way to reduce the risk of not being able to acquire easements is to engage in strategic analysis of the proposed route early in the project. Companies and their legal counsel can assess the types of property along proposed routes so as to minimize legal challenges and reduce costly compensation claims. The goal is to identify problematic properties at an early stage, achieving a greater degree of project certainty.
Valuation of Energy Corridor Takings
Valuations are another important concern. Corridor acquisitions typically involve partial takings of property, as energy companies generally acquire only easement rights. As with any partial taking, the "before and after" method is the predominant appraisal technique. The entire property is valued without the corridor easement (the "before" condition) and then with the easement, in the "after" condition.
A common method of appraising an existing corridor is the "across the fence" approach, in which appraisers determine the value of an easement by the price or value of land "across the fence" from the railroad, pipeline, highway or other corridor. Thus, if the use across the fence is commercial retail worth $20 per square foot, then the corridor receives a value of $20 per square foot.
Public fear of perceived safety hazards associated with natural gas pipelines, oil pipelines, high-voltage transmission lines or electromagnetic fields (EMF) is often asserted as an element of damages in energy corridor condemnation cases. There are three distinct views on the admissibility of evidence of fear in eminent domain cases.
The majority view among courts is that evidence of fear in the marketplace is admissible without proof that such fear is reasonable. This approach focuses on the impact of the alleged fear on property value, and shields the court from having to analyze competing scientific views on issues where no consensus exists, such as the link between electromagnetic fields and cancer. To be compensated for such fear, the property owner must prove a prevalent perception of danger emanating from the objectionable condition and that such perception has affected property values.
The Ninth U.S. Circuit Court of Appeals discussed this issue in a 2008 decision regarding the condemnation of land for electric power lines in California. Quoting its own 1984 decision, the court said:
Wholly apart from evidence of actual health risks, evidence of public perceptions of health risks—even irrational public perceptions—may properly establish an impact on market value. "[I]f fear of a hazard would affect the price a knowledgeable and prudent buyer would pay to a similarly well-informed seller, diminution in value caused by the fear may be recoverable as part of just compensation."
Some courts have adopted the view that evidence of fear is admissible only if the fear is reasonable. A small minority excludes evidence of fear as too speculative to justify damages.
Natural Gas Corridors
Private companies that transport natural gas in interstate commerce have the benefit of pursuing condemnation under the federal Natural Gas Act (NGA). The NGA governs the transportation, storage and sale of natural gas in interstate and foreign commerce, reflecting Congress's judgment that these activities are of national importance and should be subject to federal regulation. A natural gas company seeking to construct or operate an interstate pipeline must first secure a Certificate of Public Convenience and Necessity from the Federal Energy Regulatory Commission (FERC).
The requirements for the FERC application are found in the Code of Federal Regulations. The application process is extensive and includes public hearings, rehearings and the opportunity for review in a federal court of appeals.
The FERC Certificate establishes the location of the pipeline route and the public purpose and necessity for any taking of property along the route. Once FERC issues the certificate, the company cannot deviate from the approved route. The NGA preempts all state or local regulations that conflict with FERC's authority, including certificates.
Under the NGA, the condemnor has a choice of a state or federal forum in which to commence condemnation and acquire property for a corridor. Federal court jurisdiction is limited to cases when the amount claimed by the property owner exceeds $3,000.
Section 717f(h) of the NGA explicitly states that federal courts should look to the "practice and procedure" of the state in which the subject property is located in resolving the rights and obligations of parties to an eminent domain action. A number of courts, following that explicit language, have applied state practices and procedural law in NGA condemnation cases. The majority, however, hold that Rule 71.1 of the Federal Rules of Civil Procedure governs federal eminent domain actions, including those under the NGA. These courts hold that Rule 71.1, which was adopted in 1951, supersedes Section 717f(h), which was enacted in 1938.
Unlike most state procedures, Rule 71.1 allows the condemning authority to join all separate pieces of property in a single action, regardless of whether they are owned by the same person or sought for the same use. Further, the rule contains no express requirement that the condemnor meet and confer with the owner, obtain an appraisal, or pay for an appraisal requested by the owner. Nor is there a right to a jury trial. If the parties are unable to agree, the issue of compensation can—at the court's discretion—be determined by a three-person commission. Also, unlike most state statutes, Rule 71.1 does not allow the owner to recover expenses, including attorneys' fees, from the condemnor.
The NGA does not give private natural gas companies the right of quick take, which allows condemnors to take early possession, before a final determination of compensation. This lack of an explicit right of quick take poses a risk for pipeline companies by subjecting projects to significant delays while parties litigate just compensation, which can take many months, even years.
A number of courts have maneuvered around this perceived shortcoming by allowing immediate possession by exercise of the court's equitable powers. These courts hold that, upon satisfaction of the standard for injunctive relief, pipeline companies holding FERC certificates may be granted immediate possession of the property prior to a determination of compensation, thus allowing commencement of construction. This view has been criticized as circumventing the power of the legislative branch to grant condemnation power, including the power of quick take. The few courts that follow this opposing view hold that a court's inherent equitable powers cannot be used to unilaterally grant a private party the right of quick take.
The NGA framework has been suggested as a model for the siting, regulation and condemnation of electric transmission corridors, which are currently subject to state laws. Indeed, legislation introduced in the U.S. Senate this year—the Clean Renewable Energy and Economic Development Act—seeks to incorporate NGA-type provisions for electrical transmission acquisitions.
Conclusion
The need for new energy corridors to accommodate projected energy demands and the development of clean energy sources is well documented. Private energy companies and government entities are pursuing plans to acquire energy corridors to meet this need. The eminent domain power, which is available to most private energy companies (either through state or federal law), can be a useful tool. An energy company considering eminent domain must carefully consider the scope and limitations of the authority available to it and how that power may be effectively employed to meet goals. Failure to understand the limitations of the eminent domain power and the rules governing its use may result in significant delays and losses. Involving eminent domain counsel at the early stages of a project is one way to ensure that the power is used correctly and effectively.