06/09/08
Combined Heat and Power: A Spontaneous Solution
Ann L. Trowbridge, Day Carter & Murphy, LLP
The California Public Utilities Commission (CPUC) has said, and rightly so, that climate change is the “preeminent” environmental issue of our time. In the face of such a challenge, everyone – independent energy producers, investor owned utilities, regulators and consumers – needs to work together to find solutions, including reducing carbon emissions associated with energy production.
A vital part of the solution exists right now in Combined Heat and Power (CHP). Because it uses a single fuel input to produce two useful energy outputs, CHP uses less fuel than traditional combined cycle gas turbines and boilers and, therefore, emits less carbon. CHP, with state-of-the-art combustion technologies and the efficient use of waste heat, is more efficient than natural gas combined cycle power plants. The February 2008 Recommendation of the Economic and Technology Advancement and Advisory Committee finds that well-designed CHP has the potential to emit 25% to 45% less carbon dioxide than combined cycle power plants, easily exceeding the carbon emission performance standard adopted pursuant to SB 1368.
Everyone’s focus should be on maximizing the potential for CHP to help solve today’s preeminent environmental challenge. This includes meaningful consideration of the greenhouse gas (GHG) emissions that are avoided through use of CHP. No one wins if the state can’t move past historical anti-competitive concerns regarding CHP, which have resulted in a number of well-recognized barriers to installation (e.g., nonbypassable charges and difficulties in selling power to the grid).
The CPUC clearly sees the potential for CHP to help the state achieve GHG emission reductions: “We want to avoid unintended negative consequences for CHP, which may be a valuable source of additional GHG emissions reductions in California.” The California Energy Commission (CEC) similarly recognizes CHP’s potential: “Combined heat and power, in particular, offers low levels of greenhouse gas emissions, taking advantage of fuel that is already being used for other purposes.”
The CPUC and CEC are not alone in recognizing that CHP can play an important role in reducing carbon emissions. In its March 2006 report to Governor Schwarzenegger and the Legislature, the Climate Action Team determined that encouraging CHP is a strategy important to reducing GHG emissions. The Sierra Club, in its 2006 Energy Resources Policy, also analyzed available and potential options for reducing the use of fossil fuel and emissions of GHGs. As a result of that work, the Sierra Club identified CHP is a “key approach” for immediate action and a preferred energy supply option.
Additionally, last year, the Legislature memorialized in AB 1613, the Waste Heat and Carbon Emissions Reduction Act, its intent that CHP play a meaningful role in achieving the state’s GHG reduction strategies. AB 1613 calls for (1) “dramatically” advancing the efficiency of the use of natural gas by capturing unused waste heat, (2) reducing wasteful consumption of energy through improved utilization of waste heat, particularly when doing so reduces emissions of GHGs, and (3) supporting and facilitating customer- and utility-owned CHP.
The 2005 Assessment of California Combined Heat and Power Market and Policy Options for Increased Penetration includes a combined forecast for onsite and export CHP for the 2005 through 2020 period of nearly 5,400 MW. There clearly is room for CHP to play a significant role in reducing GHG emissions.
CHP is a proven technology, poised to realize its potential. Let’s not wait for hindsight to show us what could have been.
California Onsite Generation, August 2007
CHP DG: Can’t Buy Me Love
Ann L. Trowbridge, Day Carter & Murphy LLP
For years, California has authorized and, in some cases even encouraged, the provision of energy by sources other than the investor owned utilities (IOUs). Customers have always had the ability to install on-site generation. Publicly-owned utilities have for decades had the authority to provide electricity. And, for several years beginning in the late 1990’s, energy service providers were able to contract directly with customers. In the post-energy crisis world, participation by alternate energy providers in the development and implementation of energy policies and plans means scrambling to preserve the ability to provide some level of service without penalty. For the most part, consideration of how all the pieces might fit together in a manner that results in the most efficient, reliable and cost effective approach to energy supply is entirely avoided. This is true even for small, onsite combined heat and power (CHP) distributed generation (DG).
For years, the Legislature, the California Public Utilities Commission and the California Energy Commission lauded the environmental, efficiency and system reliability benefits of CHP DG. Historically, these entities acted affirmatively to encourage and support CHP DG. The Legislature authorized exemptions from Competition Transition Charges, initiated the Self-Generation Incentive Program (SGIP) and approved exemptions from stand-by reservation charges. The CPUC implemented the SGIP, extended the stand-by charge exemptions and approved certain exceptions from energy-crisis related exit fees.
In recent years, there has been a complete CHP DG policy about face. The California Solar Initiative pushed solar way ahead of virtually every other technology to the preferred resource position. The CHP community has faced wild swings at the Legislature between support for and opposition to inclusion of CHP in the extended SGIP. As it stands right now, the incentives for CHP go away at the end of this year. Development of a DG cost-benefit methodology and related DG tariffs required by law is years overdue. And, perhaps scariest of all, the IOUs propose, in the Long-Term Procurement Proceeding (LTPP), to impose non-bypassable charges (NBCs) related to procurement of new energy and reliability resources on all departing customers, including those who install CHP DG.
This is an unprecedented concept. Before the energy crisis, the IOUs somehow managed to conduct routine, course of business procurement, such as the procurement under consideration in the LTPP, without penalizing departing customers. In the new proceeding considering whether direct access should again be allowed, the Commission reiterated its commitment to competition. Those words will be stripped of any meaning if the Commission allows the IOUs to punish departing customers using NBCs.
And what about the 2005 Integrated Energy Policy Report (IEPR), which states CHP (large and small) has a market potential of 5,400 MW by 2020 and sets forth a number of recommendations for promoting CHP, including the establishment of annual IOU CHP procurement targets? The IOUs all but ignore these important recommendations in their LTPP filings, citing the lack of policies that lead to increased CHP installations. California needs to move beyond such circular arguments and stop coddling the IOUs. Increased CHP DG installations are not going to send the IOUs into a tailspin, even at a rate of 5,400 MW by 2020 – the combined load growth of the three largest IOUs far exceeds that number.
It’s time to get back to basics. CHP DG continues to provide many benefits, some of which are more important than ever. Its lower carbon emissions – which are touted by the Sierra Club, Greenpeace and the American Council on Energy Efficiency and the Economy – will help the state achieve its climate change goals. Because it is located close to the point of use, it improves the safety and reliability of an aging grid. There is simply no good reason to miss out on CHP’s potential.
Ideally, the state and IOUs should treat CHP DG as an energy efficiency measure, which would avoid the need to even talk about penalties for customers who install DG and would create an environment where CHP DG would be installed. At a minimum, the IOUs should be required to prepare prudent forecasts of CHP DG, taking into consideration the recommendations of the 2005 IEPR, and avoid procuring energy and reliability resources for and incurring costs on behalf of load they reasonably expect will install CHP DG. It is absolutely time for California to begin implementing policies that will allow the state to achieve the very real benefits of CHP DG, and the pending Long-Term Procurement Proceeding is a good place to start.
[1] CPUC Decision No. 08-03-018, pp. 9-10.
[2] 2007 Integrated Energy Policy Report, CEC, p. 7 (CEC-100-2007-008-CMF).
SEISMIC TRESPASS - "But All My Friends Do It."
By
Julie A. Carter
Day Carter & Murphy LLP
Seismic surveys and other geophysical operations are a common and important element of oil and gas exploration. Yet, confusion and differences of opinion regarding the law relating to geophysical operations, together with the lack of clear law on the subject permeate nearly every aspect of a geophysical seismic shoot. As a result, varied and inconsistent practices with respect to the permitting of geophysical operations and the payment of damages, for example, have developed. Merely following the practices of other operators, therefore, may not be a wise practice. This article briefly examines the legal relationship between the mineral rights owner and other interested parties when it comes to seismic operations.
SURFACE ACCESS
Seismic exploration takes place primarily on the surface of the land. For example, explosives are set off in small boreholes in the ground, generating seismic waves which are rebounded and recorded some distance away from the explosion. Although seismic operations take place almost exclusively on the surface of the land, it is the mineral rights owner who is the party with the authority to grant permission to conduct a seismic operation.
Upon the severance of the title to the minerals from the surface, a superior right of entry arises in the mineral owner. The rationale is that unless the owner of the minerals was to enjoy a right to enter upon the surface to work the minerals, that severance would not occur. This superior right includes a right to enter the surface to evaluate the minerals in order to determine whether the interest is worth further exploration. Yates v. Gulf Oil Corp. 182 F.2d 286 (Tex C.A. 1950) holding that there exists an implied right of the mineral rights owner to enter the lands under which his subsurface rights exist for the purpose of conducting geophysical exploration.] While the mineral owner generally possesses the right to authorize geophysical operation, in the event of severed surface and mineral estates, you should nevertheless review the severance document to confirm there were no restrictions or limitations placed on the exercise of such right by the mineral owner.
Notwithstanding this relatively clear legal principal, seismic survey crews routinely approach surface owners prior to the surface entry seeking their consent. If the mineral rights owner has not also given its consent, any seismic operations on that property will constitute a trespass. Moreover, if the mineral owner has given its consent through a lease or otherwise, also seeking the unnecessary consent of a surface owner can lead to additional problems where the surface owner denies permission or imposes new conditions for such entry. In short, in approaching a surface owner for consent, a seismic crew should be careful not to inadvertently grant the surface owner more legal rights or at least negotiating leverage than the surface owner is entitled.
Although there are no California cases dealing specifically with surface access issues related to seismic operations, the Texas court in Phillips Petroleum Company v. Cowden 241 F.2d 586 (1957) clearly held that the consent of the severed surface owner alone was insufficient. Further, the Texas court rejected Phillips’ argument that only the surface owner’s consent is required where the surface entry and seismic operations were intended to evaluate minerals underlying adjacent properties which were not owned by the defendant-mineral owner. The court held that although a mineral owner may not permit others to invade the surface for the purpose of exploring neighboring property, this at most gives the surface owner a concurrent, but not exclusive, right to forbid such operations. Thus, for large seismic shoots involving sources and receivers on adjacent lands, it is advisable the consent of both mineral and surface owners be obtained.
TENANTS IN COMMON
When two or more parties own the mineral rights, the question arises as to whether all mineral rights owners must consent to the geophysical operations. Generally, each cotenant has the right to possession of the whole of the estate, but must account to the other cotenants. For example, one cotenant, regardless of how small his or her fractional interest, may drill an oil well on his or her property without the consent of the cotenants subject to an obligation to account to the other cotenants for the net profits of the activity. Accordingly, it is likely that any one mineral owner may grant permission to conduct a seismic operation on the property without the consent of the other cotenants, but the consenting mineral owner may be open for an action for an accounting or compensation to the cotenants.
Nevertheless, certain practical considerations may affect whether or not an operator will rely on the consent of less than all the cotenants to conduct geophysical operations. If less than all the cotenants have consented, then the right is not exclusive. Any of the nonconsenting cotenants would be free to authorize a third party to conduct geophysical operations on the property, which raises the risk of a competitor invading or interfering with the project. Further, if the seismic survey dictates the leasing and further exploration of the property, the nonconsenting cotenant may be even more difficult, and may drive even a harder bargain, during subsequent lease negotiations. Such considerations may influence the extent to which efforts are made at the outset to obtain the consent of all of the cotenant mineral owners.
ADJACENT OWNER
For 3D seismic operations to accurately image a geologic structure, seismic data must be gathered from alongside the structure as well as the structure itself. Thus, the very nature of 3-D seismic requires a larger geographical area, which means more parties will potentially be affected. It also means that minerals will likely be evaluated by the survey which are not located beneath the lands on which the sources and receivers are actually placed. To avoid a seismic trespass, therefore, the consent of each potentially affected mineral owner/lessee must be obtained even if their lands are not the principal subject matter of the survey.
The situation often arises where the sources are on Tract A, the receivers are on Tract C and the vibrations resulting in recorded data are from Tracts A, B, and C. The question arises whether there has been a trespass against the nonconsenting owner of Tract B. Generally, to have a trespass, there must be a physical entry. Early cases held there was no trespass against Tract B since there was no actual entry onto the property and no physical damage to the property. Kennedy v. General Geophysical Co., 213 SW.2d 707 (Tex App. 1948). The trend, however, has been to find relief for the owner of Tract B under various theories including trespass, assumpsit, loss of speculative value, interference with the right to contract, invasion of privacy, unlawful acquisition of a trade secret, and misappropriation. Although no California case has arisen, it is likely that a California court will follow the trend and either dispense with the physical entry requirement or find that the sound waves emanating from the explosives or other sources are in fact a physical entry.
DAMAGES
The law in California appears to be wide open as to what damages may accrue, if any, for a seismic trespass. The party committing the trespass of course has gained valuable knowledge. It is less clear what the mineral owner has lost. Damages will necessarily depend on the facts of each case and the theory upon which the cause of action is based. In Cassinos v. Union Oil Co., 14 Cal. App. 4th 1770 (1983) (trespass resulting from injection of wastewater), the court expressed substantial flexibility in the determination of damages in trespass cases, and indicated that the particular facts of the case will have bearing. Damages may include obtaining the data, reasonable value of the exploration right, loss of speculative value for leasing and further development, reasonable value of the information gained by defendant and, in cases of bad faith, punitive damages.
The court, in Phillips, supra, found the damages to be the reasonable market value of the use made of the property independent of the benefits that appellants actually received. The court disregarded the fact that the tests were not designed or calculated to evaluate the defendant’s minerals, and that the data obtained from the nonconsenting land was of such poor quality that it was unreliable and essentially worthless. Thus, Phillips provides authority for a cause of action concerning indirect acquisition of seismic data through the use of nearby lands. The court did limit compensation to only that part of the property that was “occupied” by the exploration operation.
Another argument could be that the mineral owner has lost the speculative value of his minerals. Damages for speculative value are rarely granted as they cannot be determined with certainty. If the information is made public, a cause of action for slander of title may also be available. Courts, however, appear reluctant to grant damages based on loss of market value primarily based on lack of evidence as to damage. Still, it seems a good argument exists that there should be recoverable damages in the form of diminution in value of land based on the loss of speculative value; not knowing whether oil and gas is under their land is more valuable than knowing there is none.
To help protect against an action, a lessee should delete or blackout any areas where information was gained without consent and take any other action possible to avoid the acquisition of data from unpermitted tracts. This action helps with an argument that lessor cannot establish any damage to his property rights since no information detrimental to lessor has been revealed and thus only nominal damages may be awarded. This can be very difficult where doing so also results in a loss of valuable information in the survey area.
