In the Courts

Water Cases

Cactus Water Servs., LLC v. COG Operating, LLC, No. 08-22-00037-CV, 2023 WL 4846861 (Tex. App.—El Paso July 28, 2023, no pet. h.).

COG Operating, LLC (“COG”), a mineral lessee, has the exclusive right to explore for and produce oil and gas on approximately 37,000 acres of land in Reeves County, Texas. COG routinely disposes of its oil and gas waste, including produced water. Cactus Water Services, LLC (“Cactus”) was transferred the right to sell all water “produced from oil and gas wells and formations on or under the [covered properties].” After Cactus notified COG of its rights to the produced water, COG initiated this suit, claiming it had sole right to the produced water under the mineral leases. Cactus counterclaimed, stating it had the sole right to the produced water.

Cactus argued that COG’s mineral leases give rights to “oil, gas, and other hydrocarbons” or just “oil and gas,” and as water is not a hydrocarbon, rights to the produced water are not included in the mineral leases. Cactus also claims that because COG’s mineral leases expressly limit its use of surface water, COG cannot sell produced water to third parties. COG argued that produced water is part of the “single, combined product stream that arises from its wells,” and it owns the produced water as a waste byproduct.

To determine who had rights to the produced water, the Court analyzed whether produced water is water or waste. As none of the leases defined water or produced water, the Court looked to Texas statutes and regulations. The Court determined that the relevant definitions of “oil and gas waste” in the Texas Water Code, the Texas Natural Resources Code, and the Railroad Commission rules include produced water. Further, produced water is defined as a type of oil and gas waste, and characterizing produced water as oil and gas waste conforms with industry practice. The Court held that a mineral lease granting the rights to “oil, gas, and other hydrocarbons” or “oil and gas” includes the rights and duties associated with disposing of its waste, which includes produced water. As such, the leases that conveyed produced water rights to Cactus were ineffective, and COG, the mineral lessee, had rights to the produced water.

City of Lake Jackson v. Adaway, No. 01-22-00033-CV, 2023 WL 3588383 (Tex. App.—Houston [1st Dist.] May 23, 2023, no pet.).

In this case, several landowners sued the City of Lake Jackson (the “City”) and the Velasco Drainage District (the “Drainage District”), alleging that the governmental entities took flood mitigation actions during Hurricane Harvey that resulted in flooding to the landowners’ property. The City and Drainage District both submitted pleas to the jurisdiction, claiming they were immune from suit under governmental immunity. The trial court denied both the City and the Drainage District’s pleas to the jurisdiction, and on appeal, the governmental entities argued that their governmental immunity was not waived, the landowners did not show causation, and several exceptions to waivers of immunity apply.

The landowners alleged constitutional taking claims as well as intentional nuisance and trespass. In addition to the constitutional claims, the landowners also alleged negligence, negligent trespass, and negligent nuisance. The Court analyzed each of these claims for a waiver of governmental immunity.

Under the Court’s analysis, to waive governmental immunity for the constitutional takings claim, the landowners would have had to show that (1) the governmental entities took the flood mitigation actions with a substantial knowledge or certainty that such actions would cause flooding to the landowners’ properties; (2) the governmental entities’ actions were the proximate cause of the damage to the landowners’ properties; and (3) the public-necessity doctrine (a doctrine allowing property to be taken or damaged “in the furtherance of the public interest”) does not apply. The Court held that the landowners had sufficiently pled a constitutional takings claim because fact issues existed as to the governmental entities’ knowledge of the effects of the flooding and whether their actions were the proximate cause of the flooding to the landowners’ properties. The Court also held that the public-necessity doctrine is an affirmative defense that should be proven on the merits. The Court affirmed the trial court’s denial of the City and Drainage District’s pleas to the jurisdiction with regard to the constitutional takings claim.

For the negligence claims, the Court found that the actions the City and Drainage District took, closing a metal flap gate, pumping water into a canal, and building a sandbag dam, fall within a municipality’s enumerated governmental functions of maintaining sanitary and storm sewers, waterworks, and dams and reservoirs. Because governmental entities are immune from liability for governmental functions under governmental immunity, the Court reversed the trial court’s denial of the City and Drainage District’s pleas to the jurisdiction for these claims.

Litigation Cases

It’s Back-to-School time, which for us at In the Courts means it’s also Back-to-Courts time! Because much like schoolchildren, judges also enjoy a nice summer vacation.

We don’t have much in the way of decisions to talk about, because rather than writing opinions over the summer, our appellate-court judges were enjoying the beach. So instead of looking back, let’s take a few minutes to look forward and discuss the decisions we can expect from the Texas Supreme Court over the next few months:

City of San Antonio v. Campbellton Road, Ltd., 647 S.W.3d 751 (Tex. App.—San Antonio 2022).

Earlier this month, the Texas Supreme Court granted developer Campbellton Road’s petition for review of the San Antonio Court of Appeals’ decision in this case involving the City’s agreement with Campbellton to provide sewer service to its proposed new subdivision in southeast San Antonio.

Campbellton sought to develop 585 acres into two residential subdivisions, and entered into a contract with San Antonio Water System (“SAWS”), the water and wastewater utility for the City of San Antonio, to provide water and sewer connections. In exchange for SAWS’ promise to reserve capacity to provide sewer connections to the subdivision, Campbellton promised to build and convey oversized wastewater facilities to SAWS. But when Campbellton asked to connect the new subdivision to the sewer system, SAWS answered that it had already allocated capacity to other customers, asserting that the contract had expired years earlier.

Campbellton sued the City for breach of contract, relying on the Texas Local Government Contract Claims Act, Tex. Loc. Gov’t Code §§ 271.151–.159, for a waiver of the City’s governmental immunity.

The Court of Appeals rejected Campbellton’s argument that the Contract Claims Act applied, concluding that the City received no goods or services from the contract. Rather, the improvements to the lift stations that the contract required Campbellton to construct were in furtherance of Campbellton’s desire to develop its property and obtain sewer service from SAWS. Any benefit the City received was merely indirect and not part of the essential terms of the agreement.

The Supreme Court has scheduled oral argument for November 20.

San Jacinto River Auth. v. City of Conroe, No. 09-20-00180-CV, 2022 WL 1177645 (Tex. App.—Beaumont 2022).

The same day that it granted the petition for review in Campbellton Road, the Supreme Court also granted the petition in another case involving the Contract Claims Act: SJRA v. City of Conroe.

This case is the latest chapter in the long-running litigation between SJRA and the Cities of Conroe, Magnolia, and Splendora arising from SJRA’s Groundwater Reduction Plan and contracts between the Cities and SJRA. Claiming that the GRP breached their contracts with them, the Cities refused to pay increased groundwater rates charged by SJRA. SJRA responded by filing suit for breach of contract.

The Cities sought dismissal based on governmental immunity, claiming that the Contract Claims Act did not apply because SJRA did not engage in mandatory mediation required by the contracts. In addition, the Cities argued that the Contract Claims Act did not apply because the contract, which sets rates based on a formula that includes a number of variables, does not state an essential term of the contract, i.e., the price.

The Court of Appeals did not reach the Cities’ second argument, instead concluding only that SJRA’s failure to mediate prior to suit as required by the contract prevented it from invoking the Contract Claims Act’s waiver of the Cities’ immunity. Accordingly, the Court of Appeals affirmed the trial court’s dismissal of SJRA’s breach-of-contract claims against the Cities.

But both issues are presented for review to the Supreme Court. Accordingly, the Court may address whether a water supply contract that sets the rate based on a formula, rather than a stated price, states the essential terms of the contract so as to bring the contract within the scope of the Contract Claims Act. The Court’s answer to that question, if one is given, may be of interest to other entities with similar contract language that sets rates based on a formula.

The Supreme Court has set oral argument for January 9.

City of Denton v. Grim, No. 05-20-00945-CV, 2022 WL 3714517 (Tex. App.—Dallas 2022).

The Supreme Court also granted the petition filed by the City of Denton in a case brought by two former employees of its electric utility under the Whistleblower Act. According to the employees, they were fired for accusing a member of the city council of leaking documents to the Denton Record-Chronicle.

The City argued that the Whistleblower Act does not apply to the employees’ claim because the alleged violation of law they reported was committed by a city councilmember who was acting for her own personal purposes, and not as someone employed by the City.

The Court of Appeals rejected this argument, concluding that leaking confidential documents to a newspaper could fall within the councilmember’s official duties insofar as it relates to her votes. Accordingly, the court held that even when a councilmember acts ultra vires, her acts are still the actions of the City for purposes of the Whistleblower Act.

Oral argument is set for January 10.

Air and Waste Case

Montana’s Oil and Gas Policies to Change due to State Constitutional Right to a Safe Environment; Held v. Montana, No. CDV-2020-307 (1st Dist. Ct. Mont., Aug. 14, 2023).

In March 2020, a group of Montana youths filed a complaint for declaratory and injunctive relief against the State of Montana, Governor of Montana, and several State agencies. Because Montana’s state constitution explicitly includes a right to a safe environment, the petitioners challenged the constitutionality of the Montana Energy Policy Act (“MEPA”), which forbids the State and its agents from considering the impacts of greenhouse gas emissions or climate change in their environmental reviews. The group was found to have standing to sue as Montana is one of three states that have a constitutional right to a safe environment; eight other states are currently considering a similar addition to their state constitution. After over two years of back-and-forth filings, the complaint headed to trial on June 12, 2023 and ended on June 20, 2023. The Judge’s 103-page order was released on August 14, 2023, finding in favor of the plaintiffs, and ruling that MEPA infringes on Montana’s young people’s constitutional right to a safe environment. This ruling will ultimately invalidate statutes prohibiting analysis and remedies based on greenhouse gas emission and climate change impacts. As this is a narrow finding which has been rejected in similar cases where there was no explicit right to a safe environment, it sets a new precedent to consider climate change in more instances, though the Montana Attorney General has indicated the State’s intent to appeal.

Utility Case

ERCOT Shareholders Challenge Commission Order in District Court.

On March 15, 2023, Texas Industrial Energy Consumers (“TIEC”)—an industrial energy consumer coalition that participates in the Electric Reliability Council of Texas (“ERCOT”) stakeholder process—filed an administrative appeal in the 455th District Court of Travis County, Texas of a Public Utility Commission of Texas (“PUC”) Order approving amendments to ERCOT’s corporate bylaws (“Bylaws amendments”). Significantly, the Bylaws amendments eliminated ERCOT Corporate Members’ right to approve future amendments to the Bylaws. TIEC and municipal intervenors asserted the Order violated the substantial evidence rule and should be reversed accordingly.

ERCOT is a “membership-based” nonprofit corporation subject to Chapter 22 of the Texas Business Organizations Code (“TBOC”). As such, it has corporate bylaws that dictate internal ERCOT procedures. Among other functions, the bylaws establish the Technical Advisory Committee (“TAC”)—composed of ERCOT Corporate Members including TIEC and city coalitions—to form subcommittees, collaborate, and ultimately provide the ERCOT Board policy direction. Prior to the Bylaws amendments, all ERCOT bylaw amendments required Corporate Member approval.

The ERCOT Board initially introduced the Bylaws amendments at the direction of former Commission Chairman Peter Lake, who insisted the legislature intended to remove Corporate Member control over ERCOT corporate governance. In filed comments, Corporate Members emphatically rejected the amendments, emphasizing the proposals violate Texas law and have a detrimental impact on the electric grid. Nevertheless, although no Corporate Member vote ever took place, ERCOT unilaterally filed with the Commission a petition to approve the Bylaws amendments. One day later, the Commission issued the Order approving ERCOT’s petition.

TIEC and municipal intervenors asserted that the Commission violated the substantial evidence rule because, among other things, it compelled ERCOT to adopt Bylaws amendments in violation of Texas law. Specifically, the TBOC requires that a nonprofit corporation board amend bylaws in accordance with the corporation’s bylaws. Therefore, because ERCOT failed to obtain Corporate Member approval of the Bylaws amendments, it violated the TBOC. Additionally, when the Commission issued the Order approving the Bylaws amendments, it failed to follow Commission procedure. Indeed, it convened no hearing, established no evidentiary record, and afforded parties no opportunity to present evidence. TIEC and municipal intervenors asserted the Order must therefore be reversed.
Due to significant policy implications, ERCOT market participants are following the litigation closely. Municipal intervenors asserted the Order marginalizes stakeholders essential to a reliable electric grid, reduces confidence in the electric power market, and facilitates the elimination of the stakeholder process. As such, it chills stakeholder collaboration and policy guidance at a time of transformational market redesign. According to the Corporate Members, the Commission jeopardized the Texas electric grid accordingly. The parties are currently briefing the issues and the court will hold a hearing in December.

“In the Courts” is prepared by Lora Naismith in the Firm’s Water Practice Group; James Parker in the Firm’s Litigation Practice Group; and Rick Arnett in the Firm’s Energy and Utility Practice Group. If you would like additional information or have questions related to these cases or other matters, please contact Lora at 512.322.5850 or lnaismith@lglawfirm.com, or James at 512.322.5878 or jparker@lglawfirm.com, or Rick at 512.322.5855 or rarnett@lglawfirm.com.