The Houston 14th Court of Appeals issued a very interesting decision last month concerning the “exclusive jurisdiction” of the Texas Railroad Commission. The case is In re BHP Billiton Petroleum Properties (N.A.), LP, No. 14-17-00436-cv, 2017 WL 6331103 (Tex. App.—Houston [14th Dist.] Dec. 12, 2017, orig. proceeding) (mem. op.).
Discussing the difficult task of balancing environmental stewardship and hydrocarbon production with Texas Railroad Commissioner Christi Craddick.
A non-op in the Eagle Ford sued BHP, the operator, for charging excessive gathering fees under a set of JOAs. The gist of the claim is that BHP owned part of the gathering company (named Eagle Ford Gathering), so it had a conflict of interest in the gathering fee negotiations that disadvantaged the non-ops, who had no interest in the gathering company. The JOAs contained language that BHP would operate the joint prospect as a “reasonable prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulation . . .” (emphasis based entirely on the name of this blog). In the non-op’s view, by agreeing to an above-market gathering rate with a BHP-affiliated gathering company, BHP breached this contractual standard of care.
When the non-op sued BHP in Houston, BHP filed a plea to the jurisdiction contending that the court had no jurisdiction over this gathering fee claim because the Texas Railroad Commission had exclusive jurisdiction over the rates charged by gas utilities such as Eagle Ford Gathering. The trial court denied the plea, but BHP filed a petition for a writ of mandamus in the Houston Court of Appeals to order the trial judge to dismiss this claim.
BHP argued in its mandamus petition that the Texas Gas Utility Regulatory Act vested sole power to decide the reasonableness of gathering fees in the Texas Railroad Commission. This argument struck me as far-fetched when I first read it, but after reading further, I can see why BHP gave this a shot. The Act states that it establishes “a comprehensive and adequate regulatory system for gas utilities to assure rates, operations, and services that are just and reasonable to the consumers and to the utilities.” Its scope is also broad, applying to all natural gas transportation infrastructure not subject to federal regulation by FERC. Best of all (for BHP), the Act also says that “[t]he railroad commission has exclusive original jurisdiction over the rates and services of a gas utility.” Utilities must file rate schedules with the RRC, and the RRC then determines if a gathering fee is “just and reasonable” based on factors set forth in the Act. That all sounds like a plausible exclusive jurisdiction argument.
However, the Houston Court of Appeals rejected BHP’s argument, based on a key distinction. In the Court’s view, the non-op was not specifically contending that the gathering fee was not “just and reasonable” under the Act. If that were the case, the non-op would have sued Eagle Ford Gathering, the gathering company, not BHP. Instead, the non-op was claiming that BHP chose to hire the wrong gathering company (out of several different options), all of which had their rates approved by the RRC. In other words, there may be several gathering companies with “just and reasonable” rates under utility regulations, but an operator may still be liable to the other working interest owners for hiring the most expensive one based on an alleged conflict of interest.
Keep in mind that the Houston Court of Appeals addressed only the jurisdictional issue of whether the trial court is the proper place to fight. BHP can still contest the non-op’s allegations about BHP’s conflict of interest and the above-market gathering fee. Moreover, cases like this depend on the specific JOA language, which may contain a gross negligence/willful misconduct standard, waivers of certain kinds of damages, provisions related to the use of affiliates, etc.