Robert Wagstaff, Wayne Watson, and Bayleigh Walker 2016-02-26 15:30:28
With the growth of wind farms comes a surge in eminent domain issues for landowners. Despite the number of windmills on the horizon, especially in West Texas, wind energy constitutes about 4.4 percent of the energy supply in the United States.(1) The intent is clearly there for an increase in the market share as wind farms continue to crop up all over Texas. The proliferation of wind farms has naturally caused an increase in power lines to distribute the electricity. The wind farms and the power lines create opportunities and problems for landowners. As such, a number of law firms, especially in West Texas and the Panhandle, represent landowners in leasing their land for the placement of the windmills and in dealing with the utility companies on power line and eminent domain issues. Windmills Back in 1997, the royalty compensation terms of a proposed wind energy/windmill lease for a friend consisted of a yearly fixed rate to hold the property for development and once any windmills were actually placed on the property, a fixed monthly royalty per windmill constructed, to be paid whether the big turbines were turning and generating electricity or not. Today, most lease agreements consist of an upfront option payment and a royalty payment as a small percentage of the gross revenues generated by the kilowatts produced and sold once the windmills are producing, with some guaranteed minimum yearly payment. Many lease agreements have a primary term of 10 to 15 years with a secondary or extended term to follow. Some leases may include a different percentage of the gross revenues for on-peak time versus off-peak time. While this type of royalty payment does not appear complicated, it has become somewhat of a mystery as to how gross revenues are calculated and applied by some of the big wind farm operators. The issue of just what defines gross revenue and how the landowner knows that his or her percentage is truly a reflection of the gross revenues received is a growing source of contention between the landowner and the lessee/operator. A number of lease agreements broadly state that gross revenues mean payment from any source for the sale of energy, power, electricity, capacity, and credits from the generation of a particular landowner’s windmills. This seems relatively simple, yet when audits are requested and explanations given, complicated formulas make a given month’s gross revenue figure nearly impossible to determine. For example, in a recent case that involved a general gross revenue definition, a client was told that the gross revenue figure was determined by contracts being sold with a mean price calculated using the electricity kilowatt futures price at every 15-minute interval for the entire month. This average price calculation is then multiplied by the monthly kilowatt production from the particular landowner’s windmills and then multiplied by the applicable royalty percentage to arrive at the royalty payment for a given month. Then the client was told that it made a difference whether the electricity was sold “west” versus “south.” Even though the client’s turbines were turning and generating electricity, royalty payments were not paid for several months. The operator had sold an amount of electricity that it could not produce, and therefore the contracts were not fully funded. So, despite the promise to pay a gross revenue figure, it appears that costs were passed on to the client in a net figure. How does a landowner find out how he or she is being paid, short of filing a lawsuit? Most leases contain a landowner’s right-to-audit provision. Such audit requests have generally been ignored by operators. Attempts at using Rule 202 of the Texas Rules of Civil Procedure to determine the gross revenue and royalty interest issue have garnered mixed results. With no statutory transparency oversight, the authority to force the audit and an explanation of royalty benefits is purely contractual. Thus, it is recommended that future lease agreements contain particular definitions of gross revenue formulas, a monthly statement accompanying payment that shows how the formula was adhered to with contractual sales terms and power production records, and strong penal provisions with a liquidated damage clause for the failure to timely comply with the audit request. Although Oklahoma and North Dakota have such legislation, there have been several unsuccessful attempts by Texas state lawmakers to introduce statutory oversight and transparency bills.(2) As such, it is incumbent on the landowners themselves to secure such oversight by exercising their respective audit rights. However, this can be an expensive process with mixed results. Without some legislative assistance, the operators appear to have a significant advantage over the landowners. High-Voltage Transmission Lines and Eminent Domain The wind blows in northwestern Texas, but the lights glow in the cities along the I-35 corridor and eastward. In order to transmit electricity from the windmills to the electrical grid serving the major cities, utility companies have invoked the power of the state to condemn paths across thousands of miles of Texas to build high-voltage transmission lines. Routing. Landowners receive notice that a line may come across their property. The notice may show a proposed route and two alternate routes. Landowners on the alternate routes sometimes ignore the first notice, assuming there is no need to fight the route selection at that point. This can be a huge mistake, as the Public Utility Commission of Texas can select one of the alternate routes without any further notice to the affected landowners. Once the route is approved by the PUC, the opportunity to try to keep the new line off a client’s property is gone, and the line will be built on his or her land—whether he or she likes it or not Early negotiations. Landowners are sometimes invited to attend an informational meeting about the proposed project. The utility may send a swarm of land agents to meet with the landowners one-on-one and offer some amount of compensation for an easement across their land. It would be wise to accompany a client to this meeting, or at least provide a warning, or else a client might sign a deal that leaves a significant amount on the table. Placement. Imagine a square tract of land where the most efficient placement of the power line would be from one corner to the opposite corner, bisecting the property into triangles. Depending upon how the property is used and where the improvements are located, this proposed line placement could decimate the value of the land. However, if the line were run along one edge and then across the back of the property, this might be much less distasteful for the landowner. Negotiating the placement of the line can be of enormous benefit to your client. Even though taking a longer route costs more, the utility is often willing to do it. Note that the construction and easement acquisition budgets are often handled by different people within the utility, and they often do not attempt to barter away compensation in exchange for a less damaging placement of the line. Compensation. Landowners are entitled to fair compensation for the partial taking of their land for public use. What is fair can be measured as the difference in fair market value of the land immediately before and immediately after the taking. This is the domain of experienced real estate appraisers familiar with condemnation valuations. The utility is now required to obtain an appraisal before making an offer of compensation. In a recent case, however, the appraiser hired by the utility testified that the damage was less than $50,000, while the appraiser retained by the landowner testified to more than $2 million in damage. Condemnation cases can come down to which appraiser the jury finds more credible. More negotiation. The form of the easement instrument can be as important to the landowner as the amount of compensation. It is possible to negotiate specific easement terms that will benefit a client, such as limiting intrusions during hunting or lambing season, requiring prior notice before nonemergency visits by utility company employees and contractors, and building and using roads—to name just a few. Legal process. Condemnation follows a unique path through the legal system. It is set out in Chapter 21 of the Texas Property Code. In the absence of a negotiated easement, the utility files a petition in district court or a county court at law, and the court immediately appoints three landowners to serve as special commissioners. The procedure for naming those commissioners varies greatly by county, but typically the commissioners have already been selected by the time the landowner is served with citation, which can seem unfair. The landowner has a limited time to strike undesirable commissioners, and the evidentiary hearing follows quickly thereafter. Utilities often hire a court reporter to take down the testimony so that it can be used later for cross-examination. The commissioners listen to the utility and its appraiser, and to the landowner and its appraiser, and then decide the amount of compensation. If either party is dissatisfied with the commissioners’ award, it can appeal and the court will conduct a trial de novo. Unlike other cases, the utility can pay the amount of the commissioners’ award into the registry of the court and take immediate possession of the property to build the line. The landowner has the option of withdrawing the funds from the court registry, but if the final judgment is for less than the amount withdrawn, the landowner must repay the difference. Whether dealing with a number of wind turbines on your land, or a large electric power line across it, landowners’ opportunities are best served with experienced legal representation at the earliest phase of the process. Notes American Wind Energy Association, Annual Wind Industry Report Reveals Strong Growth, http://www.awear.org/pubs/factsheets/Industry_Rankings_Factsheet.pdf. Matthew Waller, TEXAS LEGISLATURE: BILL TO REQUIRE DETAIL FOR LANDOWNERS IN WIND POWER LEASES, Scripps Texas Newspaper, April 3, 2013, (http://www.gosanangelo.com/news/texas-legislature-bill-to-require-detail-for-landowners-in-wind-power-leases-ep-438726470-355670381.html). ROBERT WAGSTAFF is a director of the Litigation Section of McMahon Surovik Suttle. A graduate of Texas Tech University School of Law, he is certified in personal injury law by the Texas Board of Legal Specialization. WAYNE WATSON is a director of the Litigation Section of McMahon Surovik Suttle. A graduate of the University of Texas School of Law, he is certified in consumer and commercial law by the Texas Board of Legal Specialization. BAYLEIGH WALKER is an associate of the Litigation Section of McMahon Surovik Suttle. She graduated from Texas Tech University School of Law in 2015.
Published by State Bar of Texas. View All Articles.
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