The Oil and Gas Addendum

Landowners should be wary of the Oct. 24 decision by the Pennsylvania Public Utility Commission strengthening Sunoco Pipeline LP’s claim as a public utility and possibly paving the way for other pipeline operators to perhaps invoke similar status.

This status unlocks special rights and powers for pipeline operators, such as eminent domain and zoning exemptions. Armed with the enhanced legal rights and powers derived from public utility status, operators in the future could invoke the power of eminent domain and possibly avoid negotiating pipeline rights-of-way with landowners.

Pennsylvania’s Marcellus Shale drilling has outpaced infrastructure development, and there are now more wells than active pipelines. This has created pressure on industry players to transport gas downstream by building new pipelines or, as in Sunoco’s case, by repurposing existing pipelines.

To design and construct this pipeline infrastructure, pipeline operators must secure rights-of-way from landowners through whose properties the pipeline will cross. To this end, pipeline operators can enter into leases or voluntary agreements with landowners, or take properties through eminent domain proceedings. Interstate pipelines are governed by the Natural Gas Act, which gives the Federal Energy Regulatory Commission the power to issue a “certificate of public convenience” to operators, which may then condemn property through eminent domain proceedings. This power generally applies to interstate transmission lines only, not gathering lines, though some operators have tried to obtain public utility status with the PUC—which regulates some but not all intrastate pipelines—in order to condemn property to install gathering lines.

Sunoco’s proposed Mariner East pipeline project involves the conversion of pipeline infrastructure—which had been used to transport gasoline, diesel fuel and heating oil across Pennsylvania—to accommodate the increased volume of shale gas extracted from wells located in western Pennsylvania. The pipeline’s conversion entails constructing 31 valve control and pump stations along the pipeline’s 300-mile route across the state.

In 2013, Sunoco petitioned the PUC for a determination that structures built around these stations were exempt from local zoning ordinances because they constituted public utility buildings. Section 619 of the Municipal Planning Code states that local zoning ordinances “shall not apply to any existing or proposed building” if the structure is to be “used by a public utility corporation.” This exemption would relieve Sunoco from having to comply with the multiple, and often inconsistent, local zoning ordinances that the pipeline will encounter along its 300-mile path from western Pennsylvania to Delaware.

On July 30, two administrative law judges recommended that the PUC dismiss Sunoco’s exemption request. Specifically, the judges recommended that the PUC sustain preliminary objections challenging PUC’s subject-matter jurisdiction on the basis that Sunoco is not a public utility. The judges noted that Sunoco is regulated by FERC not as a public utility, but as a common carrier of natural gas liquids. The judges also found persuasive the argument by opponents that Sunoco had failed to show how the public would be the enduser customer of the pipeline. On the contrary, the judges characterized the pipeline as private in nature because it benefited the third-party storage facilities or distribution terminals connected to the pipeline. Based on these reasons, the judges concluded that Sunoco’s pipeline did not provide a public utility service and, therefore, Sunoco could not satisfy the threshold element under Section 619 of the MPC. As such, the PUC lacked jurisdiction to even entertain Sunoco’s exemption request.

But in its recent 4-1 decision, the PUC reversed the judges’ recommendation and remanded the matter for further proceedings. In doing so, the PUC overruled the jurisdictional challenge, concluding that Sunoco’s petition set forth a sufficient basis for the PUC to exercise jurisdiction over Sunoco as a public utility. The PUC observed that Sunoco holds certificates of public convenience in connection with the pipeline, which were granted and modified at various times over the years beginning with the pipeline’s original construction in the early 1930s. This creates a rebuttable presumption that Sunoco is a public utility.

The PUC also rejected the argument that Sunoco’s services are private, not public. Opponents of Sunoco’s request had argued that Sunoco’s services are limited to a few select shippers and are not available to the public at large; as a result, they cannot be public utility services. In dismissing this argument, the PUC pointed out that services may still be regarded as public utility services even if economically feasible to only certain large commercial entities and even if there is no retail component. Accordingly, the PUC concluded that it had jurisdiction over Sunoco’s petition.

The PUC’s ruling is apparently at odds with an opinion issued earlier this year by York County Court of Common Pleas Judge Stephen P. Linebaugh. In Sunoco Pipeline LP v. Loper, No. 2013-SU-4518- 05 (C.P. York Feb. 24, 2014), landowners challenged Sunoco’s attempt to use eminent domain powers and survey rights as a purported public utility. Linebaugh denied Sunoco’s request, citing Sunoco’s status with FERC as a common carrier rather than a public utility.

Since Sunoco was not regulated by FERC as a public utility under the Natural Gas Act, Sunoco could not condemn property under Section 1511(a) of Pennsylvania’s Business Corporation Law. The eminent domain powers set forth in Section 1511(a) are reserved for public utility corporations, which are regulated as a public utility by the PUC or the federal government. Since Sunoco is regulated as a common carrier, it could not be recognized as a public utility under Section 1511(a). Linebaugh’s decision was not appealed by Sunoco.

There are some explanations for this inconsistency. First, the PUC was ruling on preliminary objections, a procedural stage of litigation in which the statements made in Sunoco’s petition must be accepted as true. Just because Sunoco survived this procedural hurdle does not mean that Sunoco will ultimately prevail. On the other hand, the Loper case involved a motion by Sunoco for immediate entry on landowners’ property. As a result, Linebaugh had more latitude to analyze the arguments presented against Sunoco’s status as a public utility.

Furthermore, in Loper, Sunoco was seeking to access the landowners’ property under Section 309 of the Eminent Domain Code. The purpose of this extraordinary request was to perform preliminary surveying activities in connection with the Mariner East pipeline. Since Linebaugh concluded that Sunoco could not satisfy the definition of a public utility corporation under Section 1511(a), he denied Sunoco’s request to enter upon the property prior to the commencement of formal condemnation proceedings. Alternatively, the PUC at this point is only setting the stage for consideration as to whether Sunoco’s buildings will be entitled to zoning exemptions under Section 619 of the MPC. It is possible that a later PUC decision may deny Sunoco’s petition based on the same rationale set forth in Linebaugh’s opinion.

As such, the matter is far from over. The PUC instructed that, on remand, the initial question will be whether sufficient evidence has been presented to rebut Sunoco’s presumptive status as a public utility. Following that determination, attention can turn to the merits of Sunoco’s Section 619 exemption request. In this regard, the PUC clarified that Sunoco is not seeking approval to be certified as a public utility or approval of the project and stations themselves; rather, the sole issue is whether the structures that Sunoco will be building “around” and “over” the valve and pump stations are exempt from local zoning ordinances. The key question is whether those structures are “buildings” under the MPC and, if so, whether they are reasonably necessary for the convenience or welfare of the public. If so, they are exempt from local zoning ordinances.

For now, this ruling represents a preliminary yet significant victory for Sunoco, whose public utility status has been strengthened. If Sunoco receives a favorable determination after the remand hearing— namely, that it is a public utility and its pipeline structures are exempt from local zoning ordinances—this could encourage other pipeline operators to seek similar status from the PUC. Landowners should closely monitor the Mariner East proceedings since a definitive ruling on Sunoco’s public utility status could impact the nature of future right-of-way negotiations throughout the state.