Appeal
from the Superior Court of the State of No. 3KN-11-00252 CI
Alaska, Third Judicial District, Kenai, Carl Bauman, Judge.
Bruce
E. Falconer, Boyd, Chandler & Falconer, LLP, Anchorage,
for Appellant.
Donald
W. McClintock, Eva R. Gardner, and Matthew T. Findley,
Ashburn & Mason, P.C., Anchorage, for Appellee Cook Inlet
Natural Gas Storage Alaska, LLC. No appearance by Appellees
Kirkpatrick-Walkowski-Watkins Trust and Chere D. Kaas.
Before: Bolger, Chief Justice, Winfree, Stowers, Maassen, and
Carney, Justices.
OPINION
MAASSEN, JUSTICE.
I.
INTRODUCTION
A
public utility filed a condemnation action seeking the land
use rights necessary to construct a natural gas storage
facility in an underground formation of porous rock. The
utility held some rights already by assignment from an oil
and gas lessee. The superior court held that because of the
oil and gas lease, the utility owned the rights to whatever
producible gas remained in the underground formation and did
not have to compensate the landowner for its use of the gas
to help pressurize the storage facility.
The
court held a bench trial to determine the value of the
storage space. The landowner appeals the resulting
compensation award. It argues that it retained ownership of
the producible gas in place because the oil and gas lease
authorized only production, not storage. It also argues that
it had the right to compensation for gas that was discovered
after the date of taking. But we conclude that the superior
court did not err in ruling that the landowner's only
rights in the gas were reversionary rights that were
unaffected by the utility's non-consumptive use of the
gas during the pendency of the lease.
The
landowner also challenges several findings related to the
court's valuation of the storage rights: that the proper
basis of valuation was the storage facility's maximum
physical capacity rather than the capacity allowed by its
permits; that the valuation should not have included buffer
area at the same rate as area used for storage; and that an
expert's valuation methodology, which the superior court
accepted, was flawed. We conclude that the superior court did
not clearly err, and we therefore affirm its judgment.
II.
FACTS AND PROCEEDINGS
A.
Facts
Cook
Inlet Natural Gas Storage Alaska, LLC ("CINGSA"),
is a private company building a natural gas storage facility
on the Kenai Peninsula.[1] The facility stores natural gas
collected from other sites by injecting it into a mostly
depleted rock formation nearly a mile underground - the
Sterling C Reservoir - so that it can be withdrawn in
wintertime when the demand for natural gas exceeds what local
production can immediately supply.
To
ensure the efficient extraction of gas, the facility must
maintain a minimum amount of pressurization, which in turn
requires that it retain a minimum amount of gas in storage.
This is called "base gas" (or "cushion
gas"). In the Sterling C Reservoir, part of the need for
base gas was satisfied by gas left in the reservoir at the
time CINGSA acquired it; such gas left in the ground is known
as "native gas." Any gas in the reservoir in
addition to the base gas is called "working gas,"
since that gas moves in and out of storage according to
demand.
The
storage facility's "safety, pressure limitations,
and other operational matters" were subject to
regulation by the Alaska Oil and Gas Conservation Commission
(AOGCC), and its "financial and economic matters and
relationships with its customers" were regulated by the
Regulatory Commission of Alaska (RCA). The RCA granted CINGSA
a certificate of public convenience and necessity in 2011,
and CINGSA, as a regulated public utility, proceeded to use
the power of eminent domain to acquire the property rights
necessary for the storage facility's
operation.[2]
Kenai
Landing, Inc. owns a parcel of land overlying the Sterling C
Reservoir. Kenai Landing acquired the property subject to an
existing oil and gas lease - the "Wards Cove Lease"
- entered into in 1978 by C.W.C. Fisheries and Union Oil
Company. The Wards Cove Lease, committed to the Cannery Loop
Unit, [3] provides that it will not terminate as
long as gas is being produced anywhere in the unit. When
CINGSA filed its condemnation action, the royalty rights
under the Wards Cove Lease were held by Wards Cove and the
production rights were held by Marathon Alaska Production
Company. CINGSA negotiated separate agreements with both
Wards Cove and Marathon, acquiring their rights as lessor and
lessee, respectively, under the lease. The Department of
Natural Resources (DNR) then agreed to sever the Sterling C
Reservoir from the Cannery Loop Unit so that it could be used
for storage purposes.
Sometime
after CINGSA commenced its condemnation action, it discovered
"a pocket of gas" referred to as the "isolated
reservoir." CINGSA's drilling brought this "new
gas" into contact with the gas already known to be in
the reservoir; the new gas, thus, increased the volume of
native gas overall, including that underlying Kenai
Landing's property.
B.
Proceedings
In
March 2011 CINGSA filed a complaint against Kenai Landing and
others to condemn the rights to the Sterling C Reservoir that
it had not been able to acquire through negotiation. It
sought to condemn (1) an easement for gas storage, to include
the underground formations in the Sterling C Reservoir plus
an adjoining geological zone for use as a "buffer";
and (2) an easement in the mineral interests, which would
allow CINGSA the use of "all gas, oil, or other minerals
. . . located within the Sterling C Pool and the correlative
buffer geological formation," including the use of
native gas as "base gas for the storage facility."
CINGSA
moved for partial summary judgment, asking for a ruling that
Kenai Landing had no right to compensation for any of the
native gas in the Sterling C Reservoir because CINGSA owned
this gas as assignee of the Wards Cove Lease. Kenai Landing
countered that the lease had been terminated, either by the
condemnation itself or by DNR's severance of the Sterling
C Reservoir from the Cannery Loop Unit, and that ownership of
the minerals had therefore reverted to Kenai Landing. The
superior court decided that the Wards Cove Lease was still in
effect and granted summary judgment on this issue in
CINGSA's favor.
The
parties agreed that Kenai Landing had a right to compensation
for the use of its property for underground gas
storage.[4] A hearing to value these storage rights
was held in June 2013 before a master, who determined that
Kenai Landing was entitled to $ 125, 000 in compensation.
Kenai Landing requested a trial de novo, and the superior
court held a bench trial over seven days in May 2016. Each
side presented expert testimony by appraisers and petroleum
engineers. Finding CINGSA's expert testimony more
credible, and declining to defer to the master's
determination of value, the superior court concluded that
Kenai Landing was entitled to $65, 000 for the gas storage
rights. Adding $23, 677 for the stipulated value of the
non-producible minerals under Kenai Landing's land,
[5] the
total compensation award to Kenai Landing was $88, 677. Kenai
Landing now appeals.
III.
STANDARD OF REVIEW
We
review a decision on summary judgment de novo.[6] "We will
affirm a grant of summary judgment if there are no genuine
issues of material fact and if the movant is entitled to
judgment as a matter of law."[7] Whether the superior court
applied the correct legal standard in an eminent domain
proceeding is a question of law which we also review de
novo.[8]
The
proper amount of compensation to be paid for a taking is a
factual question.[9] "We review the factual findings of a
trial court for clear error, 'a standard that is met if,
after a thorough review of the record, we come to a definite
and firm conviction that a mistake has been made.'
"[10]
IV.
DISCUSSION
Kenai
Landing raises five issues on appeal. First, it argues that
the superior court erred by failing to compensate it for
CINGSA's use of the native gas remaining in the Sterling
C Reservoir as base gas. Second, it argues that it was also
entitled to compensation for its proportionate share of the
new gas CINGSA discovered after the taking.
Kenai
Landing's other three claims relate to the superior
court's valuation of the gas storage space. It argues
that the court erred by failing to consider the "highest
and best use" of the land and the "fullest
extent" rule; that the court erred by giving equal value
to the storage space and the surrounding buffer zone; and,
finally, that the court erred by relying on the valuation
testimony of one of CINGSA's expert witnesses, who Kenai
Landing contends applied the valuation methodology
improperly.
We
conclude that none of these issues involves legal error or a
clearly erroneous finding of fact, and we therefore affirm
the superior court's judgment.
A.
The Superior Court Did Not Err In Deciding That Kenai
Landing Was Not Entitled To Compensation For CINGSA's
Easement In The Native Gas.
Kenai
Landing argues that the superior court erred when it
concluded that Kenai Landing owned at most "a
reversionary interest in the native gas in place." Kenai
Landing argues that the only interest in native gas that its
predecessor-in-interest transferred to Marathon under the
Wards Cove Lease was the right to extract it. Kenai Landing
argues that the rights transferred under the lease
"relate exclusively to production and do not include the
right to make use of the native gas as Base Gas," a
right which "is instead part of the rights the lessor
retained and belong to the property's fee simple owner,
[Kenai Landing]." Kenai Landing argues that its
perspective is supported by the language of the lease,
"which the superior court utterly failed to
analyze."
We do
not find the lease language to be as
"straightforward" as Kenai Landing characterizes
it. The granting clause is broad: "[The] lessor... has
... leased ... exclusively unto the lessee the hereinafter
described land... for the purpose of the drilling, mining,
and operating for, producing, and saving all of the oil [and]
gas A later paragraph provides that "[t]he lessee shall
have the right to use, free of cost, gas . . . found on said
land for its operations thereon . . . ." The lease
specifically contemplates that it will remain in effect even
if not producing, as long as it is part of a unit on which
some production is occurring and the lessor is being paid
royalties on the unit's production.
Citing
cases, Kenai Landing argues that "it would be unusual to
interpret a production lease like the Wards Cove Lease to
include the right to store non-native gas absent specific
language conferring that right upon the
lessee."[11] That may be true, but "the right to
store non-native gas" is a separate issue; Kenai Landing
is being compensated for CINGSA's storage of gas in Kenai
Landing's pore space, though it disputes the amount. What
concerns us here is the use of the native gas, not the
storage of non-native gas. Kenai Landing concedes that both
Marathon and CINGSA, as the assignee of Marathon's
production rights, had the right to produce all the
native ...