Railroad Com'n of Texas v. Wbd Oil & Gas

• Decision Date: 13 February 2003
• Docket Number: No. 01-0177.,01-0177.
• Citation: 104 S.W.3d 69
• Parties: RAILROAD COMMISSION OF TEXAS and Greg Abbott in His Official Capacity as Attorney General for the State of Texas, Petitioners, v. WBD OIL & GAS CO. and WBD Oil & Gas Co., Inc., Respondents.
• Court: Texas Supreme Court

Page 69

104 S.W.3d 69

RAILROAD COMMISSION OF TEXAS and Greg Abbott in His Official Capacity as Attorney General for the State of Texas, Petitioners, v. WBD OIL & GAS CO. and WBD Oil & Gas Co., Inc., Respondents.

No. 01-0177.

Supreme Court of Texas.

Argued January 9, 2002.

Decided February 13, 2003.

Rehearing Denied June 5, 2003.

Jamie Nielson, Austin, Ronald C. Schultz, Dubai, Howard G. Baldwin, First Assistant Attorney General, Jeffrey S. Boyd, Office of the Attorney General, Austin, for petitioners.

Philip F. Patman, Ana Marie Marsland-Griffith, Patman & Osborn, Austin, Rick A. Mayer, The Woodlands, for Anadarko Petroleum Corp.

Don Walker, Asst. Atty. Gen., for the Railroad Commission.

James Douglas Ray, Charles E. Hampton, Michael P. Marcin, Gammage, Hampton, Marcin & Ray, Travis Phillips, The Law Offices of Travis R. Phillips, Austin Robert A. Gammage, Hill Gilstrap, PC, Arlington, for respondents.

Justice HECHT delivered the opinion of the Court, in which Chief Justice PHILLIPS, Justice ENOCH, Justice OWEN, Justice O'NEILL, Justice JEFFERSON, Justice SCHNEIDER, and Justice SMITH joined.

To regulate oil and gas production, the Railroad Commission of Texas has adopted general rules applicable throughout the State,¹ but because these general rules cannot adequately address the widely varying conditions found in the thousands of oil and gas reservoirs in Texas, the Commission may issue orders with detailed regulations for a specific field, which the Commission calls field rules. In determining field rules, the Commission has historically followed the procedures used for adjudication rather than for rulemaking. Under the Administrative Procedure Act,² judicial review of adjudicated decisions is more limited in timing and scope than judicial review of rules. The question before us is whether field rules are subject to review as rules. The trial court thought not, but a divided court of appeals disagreed.³ We agree with the trial court and consequently reverse and remand the case to the court of appeals for further proceedings.

I

The discovery gas well in the Panhandle Field — the Canadian River Gas Company Masterson No. 1 well in Potter County — was completed in 1918 to little delight because there was then, and for many years afterward, no significant market for gas. On the other hand, the 1921 completion of the discovery oil well in the field — the Gulf Production Company S.B. Burnett No. 2 well in Carson County — set off massive drilling and production throughout the area. It was customary at the time for oil wells to be completed and the casing perforated both in lower oil horizons and higher gas horizons so that gas and oil were produced together. The so-called "wet" or casinghead gas from the well was processed to remove whatever liquid condensate or "natural gasoline" could be extracted under pressure, and the remaining "dry" gas — some 90% of the volume — was vented or flared. The gas lost by this lamentable practice could reach, by one 1934 estimate, 1 billion cubic feet per day. In 1935, the Legislature prohibited such wasteful operations.⁴ About the same time, the Commission began issuing a series of orders adopting field rules to regulate the production of oil and gas in the Panhandle Field, and specifically, to prohibit perforating oil well casing in higher gas strata so as to produce gas and oil together.

By 1986, the Panhandle Field had been divided into thirteen separately designated fields (several simply on county lines) together containing 10,796 producing oil wells and 3,510 producing gas wells. From information the Commission had obtained and from operators' requests for clarification of the field rules, the Commission had grown concerned about persisting "high-perforation" practices⁵ as well as the adequacy of the field rules in other respects. Accordingly, in January 1986 the Commission initiated Docket No. 10-87,017 by notifying all operators in the Panhandle Fields, as well as all other interested persons and the public, that it would hold a hearing to consider consolidating the fields and changing the field rules. The Commission's notice set out possible changes in the rules but warned that it would adopt "such rules, regulations, and orders as in its judgment the evidence presented may justify and such rules, regulations and orders may differ from those specifically proposed or mentioned in this notice." Operators were "urged to present data and opinions" and admonished to conduct any necessary discovery diligently. The notice scheduled a prehearing conference for the purpose of organizing the participants and determining when and how the trial-type hearing would be conducted. The hearing began in January 1987, and in March 1989 the Commission issued its final order, adopting findings and conclusions and changing the field rules. In part, the new rules changed completion requirements, well spacing, and allowable production. Several parties sought review of the order in district court, but that case was dismissed in January 1990.⁶

The notice, hearing, order, and appeal were in all respects typical of the adjudicative — what the APA calls "contested case" — procedures the Commission has long followed in determining field rules.⁷ Such proceedings can be initiated by an operator or by the Commission.⁸ Notice is given, usually by mail, to all operators in the field and other persons whose rights could be affected. Persons with a "justiciable or administratively cognizable interest" may intervene.⁹ The hearing is conducted like a trial, with witnesses giving sworn testimony subject to cross-examination and a verbatim record kept.¹⁰ According to the Commission, the evidence regarding the nature of a particular reservoir and the production from it is often very technical and complex. The hearing results in an order detailing regulations applicable to the specific area, which may differ from statewide regulations. Parties can seek judicial review as with any contested case decision. Persons affected by field rules may seek exceptions from the Commission based on individual circumstances, and of course when situations in a field change, the Commission may revisit the field rules as it did here.

WBD Oil & Gas Co. and WBD Oil & Gas Co., Inc. (together, "WBD") have forty marginal oil wells and one gas well in the Panhandle Fields and therefore received the Commission's notice of Docket No. 10-87,017, but decided not to participate in the hearing. WBD also received a copy of the Commission's final order but did not attempt to join in the appeal to the district court. In June 1995, however, WBD sued the Commission, challenging the validity and applicability of the 1989 field rules. WBD complained that the Commission should not be permitted to change completion requirements for existing wells. In essence, WBD asserted that the Commission had, in WBD's words, "deprived them of property without due process, and unconstitutionally interfered with vested rights through an impermissible retroactive application of agency rules or orders that were adopted in a contested case proceeding in which WBD was not a party." WBD alleged violations of several provisions of the state and federal constitutions. As grounds for the trial court's jurisdiction, WBD asserted section 2001.038 of the APA,¹¹ the Uniform Declaratory Judgments Act,¹² section 85.241 of the Texas Natural Resources Code, section 1983 of title 42 of the United States Code, the Texas Constitution, and the United States Constitution. The Commission filed a plea to the jurisdiction, arguing that WBD was improperly attempting to circumvent the APA's requirements for obtaining judicial review of a Commission order. Several operators intervened in support of the Commission's position.¹³ The trial court sustained the Commission's plea and dismissed the case.

A divided court of appeals reversed,¹⁴ holding that the trial court had jurisdiction under section 2001.038(a) of the APA, which states:

The validity or applicability of a rule ... may be determined in an action for declaratory judgment if it is alleged that the rule or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the plaintiff.¹⁵

The APA defines "rule" as "a state agency statement of general applicability that ... implements, interprets, or prescribes law or policy...."¹⁶ A field rule, the court concluded, fits this definition: it is clearly a state agency statement that prescribes law or policy, and it is generally applicable, though not statewide, because it applies to an open class of persons rather than specific individuals, is prospective, and affects individual rights only in subsequent enforcement proceedings.¹⁷ The court rejected the argument that because field rules are determined using contested case procedures, they are contested case decisions that may be appealed under APA sections 2001.171-.202 and not rules that may be challenged in a declaratory judgment action under section 2001.038.¹⁸ The court reasoned that the nature of neither the Commission proceeding nor its decision is dictated by the procedures followed, regardless of whether those procedures are mandated by law or are within the Commission's discretion¹⁹ — in other words, a rule is a rule, whether it is the product of an informational notice-and-comment rulemaking hearing or an adversarial trial-type contested case hearing. Besides, the court explained, field rules are not adjudications because their determination is inherently legislative rather than adjudicative,²⁰ and therefore the proceeding to determine them is not a contested case, defined by the APA to be "a proceeding ... in which the legal rights, duties, or privileges of a party are to be determined by a state agency after an opportunity for adjudicative hearing."²¹ Thus, the court concluded, the trial court had jurisdiction of WBD's claims under section 2001.038....