DENTON, TEXAS: COMPLEX ISSUES SURFACE IN FRACKING DEBATE

Residents of Denton, Texas, will vote this November on a proposed ban to partially prohibit hydraulic fracturing within city limits. Earlier this week, the Denton City Council declined to vote on the initiative, which came about after citizens petitioned the Council by gathering two thousand signatures in support, instead pushing it to a public vote this fall. Denton sits atop the Barnett Shale formation, one of the largest natural gas reserves in the country.

The upcoming vote is significant on many levels. Texas is the nation’s largest oil and gas producer. Texans traditionally hold a more favorable view on drilling and oil-related matters. Indeed, 275 wells in Denton have already undergone fracking — and the proposed ban would allow operators to continue extracting oil and natural gas from those wells. If the initiative passes, however, Denton would be the first Texas municipality to partially ban hydrofracking. Many people see the Texas situation as a litmus test for towns and cities across America.

Moreover, the initiative interjects a new legal wrinkle into the fracking debate. Texas law divides land ownership into two components: surface ownership and the mineral rights below. In Denton, mineral rights are mostly held by trusts or entities, and some of them are located outside of Denton. Future legal battles could conceivably pit owner against owner for the same land. The optics for any such battle wouldn’t be good: people versus entities; locals versus outsiders, and so on.

The Denton vote may also include a constitutional element. Former Texas Supreme Court Judge Tom Phillips, who represents the powerful Texas Oil and Gas Association, has gone on record as saying the Association’s thousands of members would “undoubtedly sue” if the fracking ban passes. He’s likely referring to the argument that any ban would nullify lease and ownership rights, which could constitute a “taking” under the Constitution or other applicable law. Association members would therefore be entitled to just compensation. Phillips contends further that Texas state regulation preempts any city’s right to ban “economically viable drilling.”

As we’ve seen from the recent Dryden decision in New York State, the specific language used in fracking bans, as well as the manner in which they are implemented, have considerable legal import. In Dryden, discussed at length [here], the New York Court of Appeals considered whether the Town of Dryden may ban oil and gas production activities, including hydrofracking, within municipal boundaries through the adoption of local zoning laws. The Dryden court answered in the affirmative. It found that the Town of Dryden could take such action because the supersession clause in New York’s oil and gas statutory framework does not preempt the home rule authority vested in municipalities to regulate land use. The court drew a distinction between regulating “land use,” which is permissible, and the “regulation of the details or procedure of the oil, gas and solution mining industries,” which would have been preempted.

Although we expect the arguments to crystalize as November draws closer, a few things are clear now: The legal issues are complex. The interests are hard to reconcile. And in Denton, Texas at least, the voters will have to sort these matters out until the legislature acts.

COURT: TOWNS CAN EFFECTIVELY BAN HYDROFRACKING

New York State’s highest court recently issued a significant ruling in Mark S. Wallach, as Chapter 7 Trustee for Norse Energy Corp. USA v. Town of Dryden, et al., an important case involving zoning laws and hydrofracking. In a 5-2 decision, the New York Court of Appeals affirmed the two lower courts that had upheld local zoning ordinances that effectively ban hydrofracking in the Town of Dryden (and, in a companion case, the town of Middlefield). The decision can be accessed here: https://www.nycourts.gov/ctapps/Decisions/2014/Jun14/130-131opn14-Decision.pdf  Click [here] for an earlier post on the lower court decisions.

These cases have generated considerable debate. In August 2011, Dryden amended its zoning ordinances to ban all activities related to the exploration for, and the production or storage of, natural gas and petroleum. The zoning amendment essentially banned hydrofracking activities within Town limits. Norse Energy (Norse has since initiated bankruptcy proceedings and Mark S. Wallach, as bankruptcy trustee, has been substituted as the petitioner) challenged the zoning amendment. It argued that the zoning amendment is preempted by the Oil, Gas and Solution Mining Law (ECL 23-23-0301 et seq. (OGSML)). Two lower courts disagreed with Norse, and upheld the ban.

The Court of Appeals framed the issue this way: “We are asked in these two appeals whether towns may ban oil and gas production activities, including hydrofracking, within municipal boundaries through the adoption of local zoning laws.” It answered in the affirmative, and found that the towns may take such action because the supersession clause in the statewide OGSML does not preempt the home rule authority vested in municipalities to regulate land use.

The Court began its analysis with an examination of “home rule,” the source of a town’s municipal authority to regulate land use, and the limits the State may impose on this power. Pursuant to Article IX of the New York Constitution:

…every local government shall have power to adopt and amend local laws not     inconsistent with the provisions of this constitution or any general law . . .except to the extent that the legislature shall restrict the adoption of such a local law…

NY Const, art IX, § 2 [c] [ii]

In order for the constitutional mandate to be given effect, the legislature enacted the Municipal Home Rule Law, which empowers local governments to pass laws both for the “protection and enhancement of [their] physical and visual environment” and “for the “government, protection, order, conduct, safety, health and well-being of persons or

property therein.” Towns may also enact zoning laws to further “the health, safety, morals, or the general welfare of the community.” The Court reiterated that the local regulation of land use is “[a]mong the most significant powers and duties granted . . . to a town government.”

Although the Court recognized the scope of the fundamental powers granted to a municipality, it also noted that a town may not enact ordinances that conflict with the State Constitution or any general law. The “supersession clause” of the OGSML reads as follows:

The provisions of this article [i.e., the OGSML] shall supersede all local laws or

ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads or the rights

of local governments under the real property tax law” (ECL 23-0303 [2])

The Court examined the plain language of the supersession clause, the statutory scheme as a whole, and the relevant legislative history, and concluded that the towns’ zoning ordinances did not conflict with the OGSML.

In a previous post, I raised the concern that there are other aspects to Dryden that could shift the hydrofracking debate in a new direction. The amended zoning ordinance, as written, bans traditional vertical drilling and other oil or gas exploration activities, some of which may have been ongoing for years within the Town’s borders before the amendment was passed.

I also raised a constitutional concern. Norse Energy, through its predecessor in interest, owns lease rights covering thousands of acres of land. To the extent that the amended ordinance severely restricts or interferes with those lease rights, it may constitute a “taking” under the Fifth Amendment, such that it violates due process rights under the Fourteenth amendment, or other applicable law. If so, Norse Energy would be entitled to just compensation.

It appears that Norse advanced some variation of this argument. It contended that the OGSML’s policy of protecting correlative rights, or those under which “each landowner is entitled to be compensated for the production of the oil or gas located in the pool beneath his or her property regardless of the location of the well that effects its removal,” militates in favor of a broader reading of the supersession clause. But the court disagreed, stating rather cryptically that the concept of correlative rights is not synonymous with the right to drill, and that the statute’s stated purpose is to ensure the rights of the “general public.”

For now, at least, the Dryden decision means that New York towns appropriately act within their home rule authority when they adopt zoning laws that ban oil and gas exploration, production, and storage activities—even when those ordinances effectively prevent hydrofracking.