Railroad Com'n of Texas v. ARCO Oil and Gas Co., a Div. of Atlantic Richfield Co.

• Decision Date: 13 April 1994
• Docket Number: No. 3-91-504-CV,3-91-504-CV
• Citation: 876 S.W.2d 473
• Parties: 128 Oil & Gas Rep. 627 RAILROAD COMMISSION OF TEXAS, Appellant, v. ARCO OIL AND GAS COMPANY, A division of ATLANTIC RICHFIELD COMPANY, Mobil Producing Texas & New Mexico, Inc., and Oxy USA Inc., Appellees.
• Court: Texas Court of Appeals

Page 473

876 S.W.2d 473

128 Oil & Gas Rep. 627

RAILROAD COMMISSION OF TEXAS, Appellant, v. ARCO OIL AND GAS COMPANY, A division of ATLANTIC RICHFIELD COMPANY, Mobil Producing Texas & New Mexico, Inc. and Oxy USA Inc., Appellees.

No. 3-91-504-CV.

Court of Appeals of Texas Austin.

April 13, 1994.

Rehearing Overruled June 22, 1994.

Dan Morales, Atty. Gen., Diane Weidert Morris, Don Walker, Asst. Atty. Gens., Austin, for appellant.

Michael E. McElroy, McElroy & Sullivan, Austin, for ARCO Oil and Gas Co., A Division of Atlantic Richfield Co.

Ray Langenberg, Mr. Wallace H. Scott, Jr.; Scott, Douglass & Luton, Austin, for OXY USA Inc.

Philip F. Patman, Patman & Patman, Austin, for Mobil Producing Texas & New Mexico, Inc.

Before CARROLL, C.J., and JONES and KIDD, JJ.

ON MOTION FOR REHEARING

JONES, Justice.

The opinion and judgment issued herein on August 25, 1993, are withdrawn, and the following opinion is substituted for the earlier one.

Pursuant to section 2001.038 of the Administrative Procedure Act ("APA"), Tex.Gov't Code Ann. §§ 2001.001-.902 (West 1994), ¹

                ARCO Oil and Gas Company, A Division of Atlantic Richfield Company;  Mobil Producing Texas & New Mexico, Inc.;   and OXY USA Inc.  (collectively, "the oil companies"), appellees, filed suit in the district court of Travis County challenging the validity of Statewide Rule 90(b)(2) promulgated by the Railroad Commission of Texas ("the Commission"), appellant.  The trial court overruled the Commission's plea to the jurisdiction.  Following a bench trial, the trial court declared the rule invalid and enjoined its enforcement.  On appeal, the Commission asserts that the trial court lacked jurisdiction, committed procedural errors, and erred in holding the rule invalid.  We will affirm
                

FACTUAL AND PROCEDURAL BACKGROUND

The oil companies are operators in the East Texas Field, a large "water-driven" oil reservoir. As oil is removed from the reservoir, it is replaced by water moving upward from the structurally lower portion of the field. The structurally highest wells in a water-driven field have a natural advantage over structurally lower wells, because the higher wells produce for a longer period of time before water reaches them. In the East Texas Field, the structurally higher portion of the reservoir is the east side of the field.

The Commission has previously adopted special field rules for the East Texas Field, two of which affect the maximum allowable rate of oil production from wells in the field. "Field Rule 23" sets a maximum production rate of approximately twenty barrels of oil per well per day. The "Earned Salt Water Allowable" rule grants a bonus oil allowable in certain circumstances. Such special field rules have always been adopted by the Commission after a "trial type" evidentiary hearing.

For more than half a century, the Commission conducted monthly "statewide hearings," one purpose of which was to produce "general market demand orders." These monthly orders were another mechanism used to restrict the amount of oil that wells could produce, and were designed in part to prevent the production of oil from exceeding the lawful market demand. Later, the Commission used a monthly "market demand factor" to accomplish this regulation of production. The market demand factor was a percentage that was applied to each well's allowable, as determined by statutory law and the Commission's rules, to regulate the amount each well would be allowed to produce for the upcoming month.

Before 1972 all oil fields in the State were set at a factor below 86%. From 1972 until November 1990, the Commission set the Market Demand Factor for the East Texas Field and the Kelly-Snyder Field at 86%, while the factor for the rest of the fields in the State was set at 100%. ² In the fall of 1990, OXY and Mobil challenged the Commission's Market Demand Orders for October and November 1990. The district court in that case rendered a final judgment determining that the Commission's procedure at the Statewide Hearings, in combination with the adoption of monthly Market Demand Orders, did not comply with the procedural requirements of the APA for either contested cases or rulemaking. The court enjoined the Commission from using its monthly Statewide-Hearing procedure to impose restrictions on oil production. The Commission did not appeal from this judgment, but chose instead to re-adopt the same restrictions on oil production using the rulemaking procedures set forth in the APA. See APA §§ 2001.021-.038.

By order dated April 1, 1991, after endeavoring to comply with the APA's rulemaking requirements, the Commission adopted Rule 90, which provides in pertinent part:

(b) The lawful allowable for all oil wells shall be the schedule allowable multiplied by a factor of 100% except as otherwise provided in this section.

(1) The schedule allowable for all oil wells in the Kelly-Snyder Field shall be multiplied by a factor of 86%.

(2) The schedule allowable for all oil wells in the East Texas Field shall be multiplied by a factor of 86%.

....

(d) The commission, in order to prevent waste or the confiscation of property, may grant exceptions to this section by assigning a different production factor.

(1) An exception may only be granted after notice and hearing.

(2) An application for an exception to this provision shall clearly identify the wells for which an exception is sought and the proposed production factor to be assigned each well.

16 Tex.Admin.Code § 3.90(b), (d) (1993).

In its brief to this Court, the Commission characterizes Rule 90 as the "successor" to the monthly General Market Demand Orders. The oil companies take exception to this characterization, arguing that the Commission used the monthly General Market Demand Orders to restrict production in order to prevent "surface waste" that could result from production of oil in excess of the market demand, while no attempt has been made to justify Rule 90 on the basis of inadequate market demand.

The oil companies brought this suit pursuant to section 2001.038 of the APA, which permits a party whose legal rights or privileges are impaired or threatened by an agency rule to challenge the "validity or applicability" of the rule. Although the oil companies challenged the validity of Rule 90(b)(2) on numerous grounds, the trial court's eight conclusions of law were more narrow, as evidenced by the following three pivotal conclusions:

2. There is no substantial evidence to support the Commission's stated purpose in Statewide Rule 90 to prevent waste and to protect correlative rights in the East Texas Field, therefore, Rule 90(b)(2) violates (1) the Equal Protection Clause of the United States Constitution, (2) the Equal Rights Clause of the Texas Constitution, (3) the prohibition against the taking of property without just compensation in the United States Constitution and, (4) the prohibition against the taking of property without adequate compensation in the Texas Constitution.

....

4. Railroad Commission Rule 90(b)(2) was not adopted in substantial compliance with the Administrative Procedure and Texas Register Act because it lacks a reasoned justification.

....

6. Statewide Rule 90(b)(2) violates Section 85.042 of the Natural Resources Code because it is inconsistent with the top rate of production set by East Texas Field Rule 23 and the Earned Salt Water Allowable Rule of the East Texas Field Rules.

On the basis of its conclusions of law, the trial court declared Rule 90(b)(2) invalid and enjoined the Commission from enforcing it. ³

Section 2001.038 of the APA does not provide any standard by which to determine the validity of an agency rule. This Court has held, however, that an agency rule is invalid if (1) the agency had no statutory authority to promulgate it; (2) it was not promulgated pursuant to proper procedure; or (3) it is unconstitutional. See Helle v. Hightower, 735 S.W.2d 650, 654 (Tex.App.--Austin 1987, writ denied); see also Bob E. Shannon & James B. Ewbank II, The Texas Administrative Procedure and Texas Register Act Since 1976--Selected Problems, 33 Baylor L.Rev. 393, 426-27 (1981). It is obvious from the trial court's conclusions of law that it found all three of the foregoing grounds to apply to Rule 90(b)(2): conclusion of law two determined Rule 90 to be unconstitutional as a result of insufficient evidence to support the rule's factual basis; conclusion of law four determined that the procedure mandated by section 2001.033 of the APA was not followed because the order adopting the rule did not adequately state a reasoned In six points of error, the Commission attacks the trial court's judgment. In addition to challenging the three principal conclusions of law quoted above, the Commission also raises two threshold questions, one regarding the trial court's jurisdiction and the other regarding the trial procedure and standard of review used by the district court. We will address these threshold issues first.

justification of the rule; and conclusion of law six determined that the Commission lacked authority to promulgate Rule 90(b)(2) because the rule was inconsistent with existing state law.

TRIAL COURT'S JURISDICTION

In its first point of error, the Commission asserts that the doctrine of "primary jurisdiction" deprived the district court of jurisdiction over the oil companies' suit. This doctrine has been explained as follows:

[C]ourts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative tribunal prior to the decision of that question by the administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the special knowledge, experience and services of the administrative tribunal to determine technical and intricate matters of fact....

Kavanaugh v. Underwriters Life Ins. Co., 231 S.W.2d 753, 755 (Tex.Civ.App.--Waco 1950, writ ref'd) (emphasis added). In...