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Pennsylvania General Energy, Inc. (Wilson Hollow Field) - Second Interim Decision, August 8, 2001

Second Interim Decision, August 8, 2001

STATE OF NEW YORK : DEPARTMENT OF ENVIRONMENTAL CONSERVATION
50 Wolf Road
Albany, New York 12233-1010

In the Matter

- of -

the Application of Pennsylvania General Energy, Inc.
to construct and operate natural gas wells in an area designated as the Wilson Hollow Field
and an order establishing field wide spacing pursuant to the
New York State Environmental Conservation Law ("ECL"), Article 23, and 6 NYCRR Part 553.

DEC Case No. DMN-01-1

SECOND INTERIM DECISION

August 8, 2001

INTERIM DECISION

Introduction and Background

On June 5, 2001, an Interim Decision was issued (herein incorporated by reference) with respect to the Department of Environmental Conservation Staff's ("Staff") request for a Commissioner's Order for field wide spacing and integration rules for the Wilson Hollow Field. Pennsylvania General Energy, Inc. ("PGE") filed applications to construct and operate natural gas wells in an area designated as the Wilson Hollow Field. Pursuant to the New York State Environmental Conservation Law ("ECL"), Article 23, and Part 553 of Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York ("6 NYCRR"), the Commissioner has the authority to issue an order establishing field wide spacing rules that will result in the efficient and economical development of a natural gas pool.

The Interim Decision found that a Decision and Order on the undisputed units could proceed but that Buck Mountain Associates ("Buck Mountain") could file a brief in support of its appeal of Administrative Law Judge ("ALJ") Molly McBride's May 3, 2001 ruling ("Ruling") to deny party status to Buck Mountain. The ALJ found that Buck Mountain did not raise any substantive and significant issues to warrant adjudication under the Department's hearing procedures contained in 6 NYCRR Part 624.

Buck Mountain, by its attorney Charles Edward Fagan, Esq., submitted a Memorandum of Law dated June 15, 2001 to supplement its May 10, 2001 appeal of the ALJ's ruling. PGE, by its attorney John H. Heyer, Esq., filed its Memorandum of Law dated June 22, 2001, and thereafter a page replacement of its Memorandum of Law dated June 27, 2001. The Staff, represented by Arlene Lotters, Esq., filed its Reply Memorandum of Law dated June 29, 2001.

Standards for Adjudication

Under the Department's permit hearing procedures, an issue is adjudicable if "it is raised by a potential party and is both substantive and significant." 6 NYCRR 624.4(c)(1)(iii). An issue is "substantive" if there is sufficient doubt about the applicant's ability to meet statutory or regulatory criteria applicable to the project, such that a reasonable person would require further inquiry. In determining whether such a demonstration has been made, the ALJ must consider the proposed issue in light of the application and related documents, the draft permit, the content of any petitions filed for party status, the record of the issues conference and any subsequent written arguments authorized by the ALJ. An issue is "significant" if it has the potential to result in the denial of a permit, a major modification to the proposed project or the imposition of significant permit conditions in addition to those proposed in the draft permit. 6 NYCRR 624.4(c)(2),(3).

In situations where Department Staff has reviewed an application and finds that a component of the applicant's project, as proposed or as conditioned by the draft permit, conforms to all applicable requirements of statute and regulation, the burden of persuasion is on the potential party proposing the issue related to such component to demonstrate that the issue is both substantive and significant. 6 NYCRR 624.4(c)(4).

The ALJ's Ruling

That portion of the ALJ's Ruling central to the matters appealed by Buck Mountain are presented below and provide the context in which the Buck Mountain appeal can be decided.

The ALJ ruled in pertinent part that:

The issue addressed at the conference related to royalty payments for those subject to compulsory integration. Article 23 of the ECL provides for a royalty payment to any unleased parcel when there is compulsory integration. ECL 23-0901 details what that royalty payment shall be. All agree that the Stipulation correctly applies ECL Article 23. ECL 23-0901 provides for a royalty payment equal to the lowest royalty fraction contained in any lease within the unit, and in any event, not less than 1/8.

Although the details of Buck Mountain's lease with Mr. Griswold were not revealed, Buck Mountain implies that it has entered into a lease agreement that requires it to pay a higher royalty to Mr. Griswold(1) than it will receive if the terms of the Stipulation are incorporated into a Commissioner's Order. Buck Mountain is challenging the fairness of ECL 23-0901 in this circumstance. Buck Mountain does not challenge the Stipulation of December 27, 2000 as being contrary to the law. It simply disagrees with the statute and its fairness in light of a lease agreement Buck Mountain has entered into with Mr. Griswold. Buck Mountain provides no legal authority that allows for royalty payments different from those directed by ECL 23-0901.

Fairness of the statute is not a matter to be adjudicated. Accordingly, the proposed issue is denied.

Buck Mountain also claims that it is an operator as defined by statute and in the Stipulation. PGE and DEC Staff disagree. Operator is defined in the Stipulation as "a person, natural or artificial, engaged in the business of drilling, producing and/or operating wells for oil and/or natural gas." Buck Mountain claims that it is an operator by virtue of its lease with Mr. Griswold. Buck Mountain was questioned as to the specifics of its lease agreement with Mr. Griswold. Counsel for Buck Mountain described it as a standard oil and gas lease and that it has the "full array of standard operator producer rights..."(2) Buck Mountain offers only this lease with Mr. Griswold as proof of its "operator" status. No suggestion was made that Buck Mountain has ever drilled or engaged in the business of drilling, producing or operating wells. I find no rational basis for finding that Buck Mountain is an operator as defined by statute.

The ALJ went on to examine each of the other matters tendered by Buck Mountain in its petition of party status and, overall, denied the intervenor party status upon finding that no substantive and significant issues were raised that warranted adjudication.

Summary of Positions

Buck Mountain

Buck Mountain contends it is entitled to party status based on a lease agreement with the fractional mineral rights owner, Mr. James Griswold ("Griswold Lease"). It is alleged that the terms of the lease gives Buck Mountain the right to drill on the land owned by Griswold, within the Fratarcangelo unit. By denying party status to Buck Mountain and to include the unit occupied, in part, by Griswold in a spacing order, is argued by Buck Mountain to be in "...derogation of privately negotiated existing contract rights." Brief, at p. 6. Buck Mountain concludes that interference with its private contractual rights is in violation of Article I, §10, clause 1, of the United States Constitution. Further, that the Griswold Lease entitles Buck Mountain to royalties in excess of those provided by PGE and thus by diminishing the royalty amount to Buck Mountain is a confiscatory taking without compensation. See, generally, Memorandum of Law, at pp. 1-6.

PGE

PGE argues to affirm the ALJ's Ruling. PGE contends that Buck Mountain leased the Griswold property after the well was permitted, that Buck Mountain is not and was never the operator of oil and gas wells, that Buck Mountain knew of the spacing hearing notice and knew or should have known that it would never be able to obtain an oil and gas drilling permit on the fractional interest of a 0.87 acre parcel. Further, that ECL 23-0901 is constitutional and was constitutionally applied and, moreover, the Stipulation between PGE and Staff does not interfere with contract rights or obligations nor does the Stipulation constitute a 'taking' of Buck Mountain's property.

Staff

Staff also argues to affirm the ALJ's Ruling. Staff contend that the ALJ properly applied the substantive and significant standard and that Buck Mountain did not meet any of the regulatory requirements for raising an adjudicable issue. Staff asserts, for example, that Buck Mountain's appeal regarding interference with private contract rights and confiscatory taking without compensation, are conclusory statements unsupported by factual and technical evidence. Further, Buck Mountain's legal arguments have not raised any matters to adjust the ALJ's Ruling.

Discussion

Upon review of the appeal and all briefs in this matter, I overall affirm the ALJ's Ruling denying party status to Buck Mountain and I agree with her finding that no substantive and significant issues were raised for adjudication. Given Buck Mountain's Memorandum of Law containing conclusory statements left unsupported by the facts, I will not address each and every point, since, overall, none have merit. Instead, I adopt the reasoning stated by both Staff and PGE in their responses, and address only a few salient points herein.

Buck Mountain makes several claims that are overall unsubstantiated on this record. For example, Buck Mountain claims it is an 'operator' as defined in 6 NYCRR 550.3(ab). There is no evidence to corroborate this claim, such as, practical oil and gas experience, experience in development of leases for oil and gas production, or that Buck Mountain has engaged in the business of gas drilling and producing wells. The Staff notes that PGE is the operator for all leases in the subject Fratarcangelo unit. Staff Response, at p. 4. I concur with the ALJ's Ruling on this point.

Buck Mountain claims interference with its private contract rights and that the Staff's action is a confiscatory taking without compensation. However, these claims are simply unsupported by any factual and technical evidence. Moreover, the Griswold Lease, which might shed light on some of the contentions raised by Buck Mountain, was not offered to the record by Buck Mountain. It appears that the Griswold Lease upon which Buck Mountain relies and which is under the control of Buck Mountain, could easily have been offered to the record in support of its claims.

Buck Mountain claims that under the factual circumstances here, Buck Mountain is the owner and producer of the Griswold land and that it cannot be subject to compulsory integration for the purpose of allowing PGE to take over the land. Accordingly, the application of ECL 23-0901, under the circumstances here, is unconstitutional. Memorandum of Law, at p. 6.

Buck Mountain's claim of unconstitutionality of the statute or alternatively, that it was applied unconstitutionally here, is rejected. First, the statue was upheld as constitutional. See, Matter of Sylvania Corp. v. Kilborne, 28 NY2d 427, 322 N.Y. Supp.2d 678 (1971), the Court held, inter alia, "there can be no doubt as to the constitutionally of this legislation." Second, the application of the statute in Sylvania, supra, is similar to the matters here. There is no question that the application of the statute was proper under the circumstances here.

It is beyond cavil that the purpose of the ECL Article 23 and Titles 3, 5, 7 and 9 and the implementing regulations is to protect correlative rights and prevent waste. The declaration of policy affecting oil and gas development, its production and utilization in such a manner as will, inter alia, prevent waste and protect the correlative rights of all owners and the rights of all persons, including landowners and the general public, provides authority enabling the Department to carry out its statutory obligations. See, ECL 23-0301. It is noteworthy that Buck Mountain has only a fractional mineral right interest in the property. The four other individuals owning the 0.87 acre parcel have signed leases with PGE. Under the specific facts here, the Department would not issue a well drilling permit to Buck Mountain, since a well "...cannot be located less than 660 feet from any boundary line of the lease,...." 6 NYCRR 553.1. A 660 foot circle would be approximately 31.5 acres, well in excess of the 0.87 acre parcel. Accordingly, the fractionally leased 0.87 acre parcel would not qualify for a spacing hearing.

With regard to the private contract agreement between Buck Mountain and Griswold, that lease is between the parties to that agreement. Accordingly, the terms of the private agreement does not prevent the Department from carrying out its statutory obligations. Additionally, the Department does not participate in the negotiation of lease agreements. See, Matter of Glodes Corners Road Field, Interim Decision, February 25, 2000.

The record shows the Stipulation was entered into by PGE and the Department on December 27, 2000. Mr. Griswold received the Stipulation on or prior to January 8, 2001. The Department's well drilling permit was issued to PGE on January 11, 2001 and named PGE as operator. On February 24, 2001 Buck Mountain and Griswold entered into its lease. Thus, PGE was permitted by the Department to drill its well prior to the Griswold Lease agreement. It is apparent that Griswold was thus aware of the Stipulation but choose not to participate and instead elected to join with Buck Mountain. The problems presented from which Buck Mountain complains are of its own doing. Given the facts presented here, it is reasonable to conclude that Mr. Griswold's acreage should be compulsorily integrated upon issuance of a final order.

It is noted that Buck Mountain is not without financial relief. Buck Mountain has access to its appropriate share of the royalty, and has the ability to enter into a voluntary integration and unitization in oil and natural gas pools and fields as provided in ECL 23-0701 or in compulsory integration and unitization as provided in ECL 23-0901.3.

Conclusion

The remaining matters raised on appeal are without merit and are rejected. The ALJ's Ruling is affirmed. The Staff is directed to proceed with a Decision and Order regarding the Fratarcangelo unit consistent with this Second Interim Decision.

For the New York State Department
of Environmental Conservation
_____________/s/_____________
Erin M. Crotty, Commissioner

Dated: Albany, New York
August 8, 2001

1 It is important to note that Buck Mountain owner, Vincent Stalis was aware of the Stipulation between PGE and the DEC prior to his entering into the lease with Mr. Griswold.

2 Transcript of Issues Conference, page 74

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