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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

Reply Memorandum Filed In Bluegrass Pipeline Eminent Domain Case  Posted: March 7, 2014

COMMONWEALTH OF KENTUCKY
FRANKLIN CIRCUIT COURT
CIVIL ACTION NO. 13-CI-1402
DIVISION NO. I

KENTUCKIANS UNITED TO
RESTRAIN EMINENT DOMAIN, INC. PLAINTIFF

V. PLAINTIFF’S REPLY MEMORANDUM IN SUPPORT OF SUMMARY JUDGMENT

BLUEGRASS PIPELINE COMPANY, LLC
DEFENDANT

* * * * *

Comes the Plaintiff, Kentuckians United to Restrain Eminent Domain, Inc. (“KURED”), and pursuant to the February 26, 2014 Order of this Court, tenders this reply in support of Plaintiff’s Motion For Summary Judgment. For the reasons set forth below and those contained in the Memorandum In Support of Plaintiff’s Motion for Summary Judgment, KURED respectfully requests that this Court enter an order granting summary judgment on behalf of Plaintiff.

ARGUMENT

Summary Judgment is appropriate in this instance since there are no controverted issues of material fact, and Defendant Bluegrass Pipeline Company, LLC (“Bluegrass”) has had more than adequate opportunity to discover both the gravamen of this complaint and the information necessary to evaluate whether associational standing exists. This action presents discrete questions of law concerning the construction and scope of KRS 278.502, against a factual backdrop that is not disputed as to any material fact.

I. KURED HAS ASSOCIATIONAL STANDING TO MAINTAIN THIS ACTION

Kentucky Courts recognize the right of an association to represent the interests of its members. As noted by the Kentucky Supreme Court in Interactive Gaming Council v. Commonwealth ex rel. Brown, 2014 Ky. App. LEXIS 2 (Ky. 2014), “[w]hile Kentucky has generally recognized associational standing, it has never officially adopted a precise test to determine whether an association has standing in a particular circumstance.” The Court “has simply cautioned that ‘at a minimum, to establish associational standing at least one member of the association must individually have standing to sue in his or her own right.’” Id.

KURED has associational standing to maintain this action on behalf of its membership, including Penny Greathouse. Ms. Greathouse would otherwise have standing to sue in her own right; the interests KURED seeks to protect are germane to the organization's purpose; and neither the claim asserted nor the relief requested requires the participation of the individual members in the lawsuit. Id. at 356-7.

A. THE EVIDENCE DEMONSTRATES THAT KURED IS A MEMBERSHIP ORGANIZATION AND PENNY GREATHOUSE IS A MEMBER OF KURED; BLUEGRASS HAS FAILED TO PROVIDE AFFIRMATIVE EVIDENCE TO THE CONTRARY

Bluegrass attempts to create a factual dispute concerning the associational standing of KURED where none exists. As the sworn response of KURED Chair Lisa Aug to the discovery served on KURED by Bluegrass reflects, Penny Greathouse is in fact a member of KURED:

INTERROGATORY NO. 4: Identify by address all real estate owned by any of the members, officers or directors of KURED.

ANSWER: Plaintiffs object to this interrogatory as being overbroad and as not being relevant to the subject matter involved in the pending action and not being reasonably calculated to lead to the discovery of admissible evidence. Plaintiffs have identified a representative member of KURED, Penny Greathouse, and KURED has representational standing to represent the interests of Penny Greathouse.

Plaintiff’s Response To Defendant’s First Set Of Interrogatories, Requests For Production of Documents, And Requests for Admissions, at pp 2-3 (Emphasis Added). A copy of these responses is attached to Plaintiffs’ Response to Motion of Bluegrass Pipeline Company LLC To Continue Hearing And To Compel Discovery.

Additionally, the responses to Interrogatory No. 7 and 8, and Responses to Requests For Admission 3 and 4, make clear that KURED has members, and that Penny Greathouse is a member of KURED. The sworn responses contained in the Plaintiff’s Response To Defendant’s First Set Of Interrogatories, Requests For Production of Documents, And Requests for Admissions, demonstrate clearly that KURED is a membership organization.

Contrary to the suggestion of Bluegrass, the Articles of Incorporation for KURED also notes that the organization has members, both in Article V, where it is noted that “[n]o part of the net earnings of the corporation shall inure to the benefit of or be distributable to its members” (emphasis added), and again in Article X where it is noted that “[t]he directors, officers, employees and members of this Corporation shall not be held personally liable for any debt or obligation of the Corporation solely because of their position in the Corporation.” (Emphasis added). Bluegrass is simply mistaken in asserting that Ms. Greathouse is not a member of KURED and that KURED is not a membership organization. As noted by the Court in Steelvest, Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476, “a party opposing a properly supported summary judgment motion cannot defeat it without presenting at least some affirmative evidence showing that there is a genuine issue of material fact for trial.” Id. at 482. Having produced no affirmative evidence showing that there is a genuine issue of fact concerning the membership status of Penny Greathouse, the sworn statement of KURED Chair Lisa Aug that Ms. Greathouse is a member of KURED is sufficient to establish that fact.

B. KURED MEETS THE STANDARDS FOR ASSOCIATIONAL STANDING

Associational standing requires that the interests sought to be protected by the association are germane to its purposes. As the Articles of Incorporation of KURED reflect, the purpose of KURED is “to protect Kentuckians from the threat of and attempts to exercise eminent domain by entities not in public service to Kentuckians.” KURED member Penny Greathouse has, in a sworn affidavit, expressed her uncertainty and insecurity in the face of a request by Bluegrass for a pipeline easement, in light of the public statements by Bluegrass in and outside of this litigation that it possesses the power of eminent domain under Kentucky law. Representation of Ms. Greathouse’s interests in this action is squarely within the ambit of the interests that KURED seeks to vindicate, and her individual participation in the disposition of these questions of law is not necessary.

C. MS. GREATHOUSE HAS STANDING IN HER OWN RIGHT TO MAINTAIN THIS ACTION FOR A DECLARATION OF RIGHTS AGAINST BLUEGRASS

As the Kentucky Supreme Court noted in Interactive Gaming Council v. Commonwealth ex rel. Brown, 2014 Ky. App. LEXIS 2 (Ky. 2014), associational standing requires that at least one individual member of the association would have standing in his or her own right to bring the action. It is apparent that Ms. Greathouse would have standing to do so. Bluegrass has admitted that she is a landowner who has been asked on more than one occasion to grant an easement by Bluegrass for the proposed natural gas liquids pipeline. Her affidavit reflects that she had been approached on four separate occasions by a representative of Bluegrass, and that she is uncertain regarding whether Bluegrass has the right to eminent domain “as they have claimed” and that the answer to that question has “a significant bearing on whether I will agree to negotiate an easement with Bluegrass Pipeline, and the terms of that negotiation.” Affidavit of Penny Greathouse, annexed to Complaint And Petition For A Declaration of Rights.

As noted by the Interactive Gaming Council Court,

"Standing is a legal term defined as a "sufficient legal interest in an otherwise justiciable controversy to obtain some judicial decision in the controversy." Kraus v. Kentucky State Senate, 872 S.W.2d 433, 439 (Ky. 1993). Standing and justiciability are separate, but interrelated concepts. Justiciability focuses on whether there is a live controversy for the court to decide. "Questions which may never arise or which are merely advisory, academic, hypothetical, incidental or remote, or which will not be decisive of a present controversy" do not present justiciable controversies. Hughes v. Welch, 664 S.W.2d 205, 208 (Ky. App. 1984).

Standing, a subset of justiciability, focuses on whether the parties before the court have a personal stake in the outcome of controversy. "In order to have standing to sue, a plaintiff need only have a real and substantial interest in the subject matter of the litigation, as opposed to a mere expectancy." Rose v. Council for Better Educ., Inc., 790 S.W.2d 186, 202 (Ky. 1989). "The purpose of requiring standing is to make sure that the party litigating the case has a 'personal stake in the outcome of the controversy' such that he or she will litigate vigorously and effectively for the personal issues." Bailey, 394 S.W.3d at 362 (Noble, J. dissenting) (quoting Baker v. Carr, 369 U.S. 186, 204, 82 S.Ct. 691, 7 L.Ed.2d 663 (1962). The determination of a party's standing requires consideration of the facts of each individual case. Rose, 790 S.W.2d at 202."

Interactive Gaming Council v. Commonwealth ex rel. Brown, 2014 Ky. App. LEXIS 2 (Ky. 2014).

Ms. Greathouse has demonstrated a personal stake in the outcome of the controversy, and that interest is immediate and substantial. The question of the power of Bluegrass to condemn property is not hypothetical or academic, but has an immediate and significant effect on the decision of Ms. Greathouse and other KURED members regarding whether and on what terms to consider granting an easement to Bluegrass.

Bluegrass relies on the case of Veith v. Louisville, 355 S.W.2d 295 (Ky. 1962) in support of the contention that no justiciable controversy exists, but the facts of that case differ markedly from the matter at hand, and the existence of a justiciable controversy is determined on a case-by-case basis. The Veith court, considering a “sweeping declaration” by a trial court that went far afield of the actual controversy presented, noted that

"Nothing specific is alleged concerning when such action may be taken, who will benefit thereby, or what will be the form of the increased allowance or the amount thereof. As we shall see, the possible development of a legal issue sometime in the future is too remote to constitute a real controversy. The matter presented for adjudication between these parties consisted of no more than an academic dispute concerning certain general legislative or executive powers of the defendants. The sweeping language of the judgment demonstrates that no one’s rights were being finally adjudicated but that the court was rendering an advisory opinion on a hypothetical question."

Veith, supra, at 296.

By contrast, this case presents a concrete controversy regarding the claim by Bluegrass to the power of eminent domain, in which this Court is being asked not to “decide speculative rights or duties which may or may not arise in the future, but only rights and duties about which there is a present actual controversy presented by adversary parties, and in which a binding judgment concluding the controversy may be entered." The existence vel non of the power of condemnation has a current and material impact on ongoing negotiations between Bluegrass and KURED members, and a declaration of rights as between KURED and Bluegrass would both be binding and would conclude the controversy.

D. THIS CASE IS NOT MOOT AND SHOULD BE DECIDED ON THE MERITS

Bluegrass asserts that even if Ms. Greathouse at one time had standing to seek a declaration of rights with respect to Bluegrass’ claim of eminent domain power, that the matter is moot since the proposed pipeline route has been changed to avoid “the only property in which Penny Greathouse has an ownership interest that Bluegrass Pipeline has discussed with her[.]” Affidavit of Richard Ellis, Exhibit E, at p. 2. According to the Ellis Affidavit, Bluegrass continues to negotiate with Greathouse Farms, LLC, which owns property adjacent to that owned by Ed and Penny Greathouse, and Ed Greathouse Jr. for which an easement has been requested.

Mr. Ellis’ affidavit indicates that “[w]hile Bluegrass Pipeline has continued to discuss the purchase of an easement from Greathouse Farms, LLC, it has no present intent to acquire an easement on the property owned by Penny Greathouse that is described in the deed attached hereto as Exhibit 1.” (Emphasis added). Notably, Bluegrass does not disclaim any future interest in acquiring an easement from Penny Greathouse regarding her property, and the continued negotiation for an easement on property managed by her husband and adjoining the tract for which she was approached by Bluegrass, reflects that Bluegrass has a current and continued interest in acquiring property in the immediate vicinity of her land.

Even if the proposed change in routing would be considered by this Court to moot the controversy, this Court should notwithstanding consider the merits of this case, since as noted in Lexington Herald-Leader Co., Inc. v. Meigs, Ky., 660 S.W.2d 658 (1983), addressing the merits of a controversy that was moot is appropriate under "the standard, 'capable of repetition, yet evading review’ since the case involved "important questions[.]” Id. at 493. Until the proposed pipeline is actually in the ground, the routing of the pipeline is not fixed (and in fact has been changed many times, according to Bluegrass), and the possibility the Bluegrass will again seek an easement, by agreement or by force of law, from Ms. Greathouse continues to exist and militates against a finding of mootness.

II. A DECLARATION OF RIGHTS IS APPROPRIATE IN THIS CASE

Bluegrass suggests that this Court should refrain from exercising the power to declare the rights of KURED and Bluegrass since “another statutory remedy” exists. In Bluegrass’s view, no declaration of rights would ever be appropriate regarding its claim of eminent domain power (a claim that Bluegrass reasserts both in the responsive pleading and in the Affidavit of Rob Hawksworth), because a property owner against whom an action has been filed under the Eminent Domain Act would have the ability to challenge the claimed right to condemn in that proceeding.

As noted previously, the Declaratory Judgment Act is remedial in purpose, and the purpose is “to make courts more serviceable to the people by way of settling controversies, and affording relief from uncertainty and insecurity with respect to rights, duties, and relations, and are to be liberally interpreted and administered.” The uncertainty regarding the power of eminent domain is current and has an effect on the decision whether and how to negotiate, and Ms. Greathouse should not be required to wait until after a condemnation action has been filed against her in order to test the validity of Bluegrass’ claim to condemnation power. This Court has broad discretion in determining whether to declare the rights of the parties, and as noted in KRS 418.065,

"The court may refuse to exercise the power to declare rights, duties or other legal relations in any case where a decision under it would not terminate the uncertainty or controversy which gave rise to the action, or in any case where the declaration or construction is not necessary or proper at the time under all the circumstances."

The ability of a landowner to challenge the claim of eminent domain power in defending a suit brought under KRS 416.540 et seq., is not an exclusive remedy, nor is it an adequate remedy since the uncertainty regarding the claim to that power clouds current discussions and negotiations that Bluegrass asserts are “voluntary.” As the Court did in the seminal “public use” case of Owensboro v. McCormick, 581 S.W.2d 3 (Ky. 1979), this Court should entertain the petition for a declaration of rights as to the scope of authority granted under KRS 278.502, and end the uncertainty and controversy created by Bluegrass’ refusal to disclaim the ability or power to condemn properties for the pipeline project.

III. BLUEGRASS PIPELINE LACKS THE POWER OF EMINENT DOMAIN

In an August 1, 2013 Letter from Wendell Hunt to Franklin County Judge Executive Ted Collins, Hunt stated that “In Kentucky, we have eminent domain power as provided by Kentucky Revised Statutes (KRS): KRS [Section] 278.502, KRS [Section] 416.675(2)(d) and KRS [Section] 278.470.” In truth, only one of those three statutes grants eminent domain power, and the Bluegrass Pipeline falls outside of the limited purposes and parties to whom the General Assembly has delegated that power.

A. THE TERMS “OIL OR GAS” AND “OIL AND GAS PRODUCTS” AS USED IN KRS 278.502 DO NOT INCLUDE NATURAL GAS LIQUIDS AND INCLUSION SHOULD NOT BE IMPLIED IN A STATUTE GRANTING EMINENT DOMAIN POWERS

Whether pipelines transporting “natural gas liquids” were intended by the Kentucky General Assembly to fall within the terms “oil or gas” and “oil and gas products” is a matter of statutory construction. Lacking a definition of the terms in KRS 278.502, this Court employs cardinal rules of construction in determining whether, as a matter of law, the General Assembly intended to include natural gas liquids in the terms “oil or gas” and “oil and gas products.” As noted by the Court in Wade v. Poma Glass & Specialty Windows, Inc., 394 S.W.3d 886 (Ky. 2012),

"[S]tatutory construction [ ] is a matter of law, which a reviewing court reviews de novo. The cardinal rule of statutory construction is that the intention of the legislature should be ascertained and given effect. To determine legislative intent, the reviewing court looks first to the language of the statute, giving the words their plain and ordinary meaning. It reads the statute as a whole and in context with other parts of the law. Only if the statute is ambiguous or otherwise frustrates a plain reading, does it resort to extrinsic aids such as the statute's legislative history; the canons of construction; or, especially in the case of model or uniform statutes, interpretations by other courts. A statute is ambiguous when the undefined words or terms in a statute give rise to two mutually exclusive, yet reasonable constructions."

Id. at 889.

In this instance, where the Court is asked to review the scope of eminent domain powers delegated by the General Assembly to a class of non-governmental actors and activities, the Court is guided by the principle that any statute delegation the power of condemnation is to be strictly construed, and that the power will not be conferred by implication. As noted in Sprint Communs. Co., L.P. v. Leggett, 307 S.W.3d 109 (Ky. 2010):

"Because of the strong constitutional underpinning of personal property rights in Kentucky, we strictly construe statutes which empower the government to take a citizen's property, or which delegate such power to corporations engaged in work for the benefit of the public. See Bell's Committee v. Board of Education of Harrodsburg, 192 Ky. 700, 234 S.W. 311, 312 (1921)(holding that "[t]he delegation of the power (to take property by condemnation) is usually exercised by the Legislature through a statutory enactment, and such statutes are to be strictly construed, since the power will not be conferred by implication.")."

Id. at 115.

Bluegrass asks this Court to imply that the power of condemnation extends to natural gas liquids (NGLs), when the statute limits that power to pipelines transporting oil, gas, and products of oil and gas, and where the General Assembly has elsewhere recognized, for purposes of imposition of natural resources severance taxes and for purposes of remediation of environmental releases, that NGLs are distinct from both oil and gas. This Court should reject the effort to expand the scope of power accorded in KRS 278.502 by implication.

Bluegrass cites to KRS Chapter 353, and the definition of the terms “oil” and “gas” a support for the claimed right to condemn. The definitions contained in KRS 353.510 are limited, by their terms, to “KRS 353.500 to 353.720” and do not define the terms as used in KRS 278.502. While the General Assembly might broadly define both terms in a regulatory statute addressing conservation, the distinction drawn in the taxation and remediation statutes is indicative that outside of the ambit of KRS Chapter 353, the General Assembly has acknowledged NGLs to be distinct from oil or gas. The distinction appears outside of the severance tax context as well, in the award of economic incentives in KRS § 154.27-010(7), and in KRS 224.01-400, which defines "Hazardous substance" in a manner that exempts “petroleum, including crude oil or any fraction thereof which is not otherwise specifically listed or designated as a hazardous substance under this section, and shall not include natural gas, natural gas liquids, liquified natural gas, or synthetic gas usable for fuel, or mixtures of natural gas and synthetic gas[.]” NGLs are thus recognized by the General Assembly to be distinct from petroleum, crude oil, and natural gas.

Bluegrass argues that natural gas liquids are “products” of oil and gas, yet notes that Black’s Law Dictionary defines products as including “the result of fabrication or processing.” NGLs are not produced by fabricating oil or gas, or by processing either oil or gas into a product, but are co-produced from some wells and are separated from methane.

Where the General Assembly intended to include or exclude NGLs in a statute, it has done so explicitly. Given the admonition against implying eminent domain power where it has not been expressly granted, this Court should confine the exercise of eminent domain under KRS 278.502 to oil, gas, and products made from oil and gas.

Bluegrass indicates that the case law supports its claim, citing to a Kansas decision construing “gas” to include anhydrous ammonia as supporting a liberal interpretation of the term. More to the point is the decision in Crosstex NGL Pipeline L.P. v. Reins Road Farms-1, LTD, 404 S.W.3d 754 (Tex. App. 2013) in which the Court considered and rejected the argument that natural gas liquids were “crude petroleum” under that state’s common carrier statute and that Crosstex was thus empowered to condemn property in support of a 12-inch natural gas liquids pipeline.

Nor does the Milam decision support the premise that natural gas liquids are “oil,” “gas,” or products of either. The Milam Court was asked to import into KTS 278.502 a distinction among types of oil or gas pipelines (i.e. gathering lines v. transmission lines) that would limit the scope of the power expressly provided by statute to “pipelines.” Here, Bluegrass asks this Court to imply the inclusion of NGLs into a statute that on its face limits the granted power to oil and gas; a statute enacted and amended by the legislative body that has in other laws determined not to include such substances as “oil” or “gas.” Rather than “artificially limit[ing]” the grant of eminent domain, this Court is asked to construe the grant narrowly, consistent with the applicable canon of construction, inasmuch as it grants to non-governmental private entities the power to deprive others of their property rights.

B. BLUEGRASS PIPELINE WILL NOT BE “IN PUBLIC SERVICE” AS THAT
TERM IS UTILIZED IN KRS 278.502

Bluegrass Pipeline notes that it will be a “common carrier” under the Interstate Commerce Act, and will be regulated by the Federal Energy Regulatory Commission, and thus will be a public use. The question before the Court, however, is whether the proposed activity will be “in public service,” which is a standard distinct from and in addition to the constitutional requirement, codified at KRS 416.675, that any grants of eminent domain power elsewhere in the Kentucky Revised Statutes is bounded by the requirement that the property taken be for “public use.” See: Owensboro v. McCormick, 581 S.W.2d 3 (Ky. 1979). Common carrier status under either state or federal law conveys no power of condemnation under Kentucky law.

A. KRS 416.675 PROVIDES NO GRANT OF CONDEMNATION POWER

Initially, KRS 416.675 provides no grant of eminent domain power. Instead, it acts to constrain any grants found elsewhere in state statutes, providing in pertinent part that:

" Public use required -- No condemnation for indirect benefit –Exemption.

(1) Every grant of authority contained in the Kentucky Revised Statutes to exercise the power of eminent domain shall be subject to the condition that the authority be exercised only to effectuate a public use of the condemned property.

(2) "Public use" shall mean the following:

* * *

(d) The use of the property for the creation or operation of public utilities or common carriers; or

(e) Other use of the property expressly authorized by statute.

KRS 416.675 (2006).

It is apparent that KRS 416.675 does not provide an independent grant of condemnation authority, but instead by its plain language imposes “conditions” on those grants of eminent domain authority found elsewhere in the Kentucky Revised Statutes. KRS 416.675(2)(d) and (e) do not grant Bluegrass Pipeline Company LLC any power or right to invoke eminent domain in order to obtain easements for the Bluegrass Pipeline project, but merely reiterates constitutional limitations on rights that might otherwise be accorded by state law to a condemnor.

B. COMMON CARRIER STATUS UNDER FEDERAL LAW DOES NOT CONFER
COMMON CARRIER STATUS UNDER KRS 278.470, NOR DOES THE POSSIBILITY
OF ONE IN-STATE INDUSTRIAL CUSTOMER POTENTIALLY CONNECTING WITH
THE PIPELINE BRING THE PIPELINE WITHIN THE AMBIT OF KRS 278.470

The possible status of Bluegrass Pipeline as “common carrier” under the Interstate Commerce Act does not resolve whether, for purposes of Kentucky law, and more specifically, KRS 278.470 and related statutes, the pipeline would be recognized as a common carrier under state law. Accepting at face value the assertion by Bluegrass Pipeline that it intends to operate as a “common carrier” under the Interstate Commerce Act and to tariff the pipeline under the rules of the Federal Energy Regulatory Commission, whether the Bluegrass Pipeline is a “common carrier” under Kentucky law is a matter of state law interpretation and application.

As a preliminary matter, even if the Bluegrass Pipeline were to be considered a “common carrier” within the meaning of KRS 278.470, that categorization does not convey eminent domain powers, which are conferred under KRS 278.502 only to entities that are “in public service.” Bluegrass Pipeline conflates “public use” with “in public service” throughout, failing to acknowledge that the earlier statute conveying condemnation powers on oil and gas pipelines, KS Section 3766b-1, granted the power of condemnation for construction, maintenance or operation of oil or gas well or wells or pipe line or lines for conveying, transporting or delivering oil or gas, or both oil and gas, and declared all such uses “to be a public use[.]” As noted infra, the requirement that an oil or gas pipeline be “in public service” in order to claim eminent domain powers is a requirement distinct from and in addition to the General Assembly’s declaration in KRS 278.470 that every company receiving, transporting, or delivering oil or natural gas for public consumption is a common carrier, and such activities are deemed “a public use.”

As to possible common carrier status of the proposed pipeline, federal law recognizes a distinction between pipelines transporting natural gas, and those transporting other liquids in interstate commerce, including NGLs. 15 USC 717f(c), part of the Natural Gas Act of 1938, authorizes the Federal Energy Regulatory Commission (FERC) to issue certificates of “public convenience and necessity” for “the construction or extension of any facilities ... for the transportation in interstate commerce of natural gas.” 15 USC 717a(5) defines “natural gas” to mean “either natural gas unmixed, or any mixture of natural and artificial gas.” In contrast, interstate NGL pipelines are not regulated under the Natural Gas Act, but are instead governed under the Interstate Commerce Act, which requires no Certificate of Public Convenience and Necessity and unlike the Natural Gas Act does not convey a federal power of eminent domain to interstate NGL pipelines.

Whether this pipeline would be a common carrier under Kentucky law hinges on the interpretation of KRS 278.470, which is the second of three statutory bases claimed in the Wendell Hunt letter to confer the power of eminent domain, yet contains no such grant of authority. KRS
278.470 provides in full that:

"Every company receiving, transporting or delivering a supply of oil or natural gas for public consumption is declared to be a common carrier, and the receipt, transportation and delivery of natural gas into, through and from a pipeline operated by any such company is declared to be a public use."

Initially, common carrier status is conferred on pipelines transporting “oil or natural gas,” and NGLs are neither, so that they are not accorded common carrier status by this statute.

Additionally, case law interpreting the constraint that the transportation of oil or natural gas must be “for public consumption,” suggests that the transportation must be for ultimate use by the public in Kentucky.

Relying on a December 19, 2013 letter from Albert Chao of Westlake Chemical Corporation, reproduced at Exhibit B to the Bluegrass Pipeline Response, Bluegrass claims that it will provide service “to the public – including the public in Kentucky.” The Westlake Chemical letter hardly demonstrates that the Bluegrass Pipeline will be serving “the public,” but rather that the Bluegrass Pipeline is “another potential source of economic feedstock for both our Kentucky plant and others in the industry.” There is no indication that Westlake, or any other Kentucky industrial plant, has purchased or committed to purchase firm, or even interruptible, service from the Bluegrass Pipeline. Instead the December 19, 2013 letter reflects that Westlake intends to purchase ethane from the Marcellus shale basin in the northeast from the ATEX pipeline. Taking the December 19, 2013 letter in the most favorable light, it indicates only that one potential customer might in the future be allowed to interconnect with the pipeline.

It is clear from the applicable case law that one possible industrial customer does not “the public” make. In In Re: Langford, a Bankruptcy Court decision from the Western District of Kentucky, the Court construed KRS 278.470 to apply only to “companies engaged in the transportation of gas ‘for public consumption’—that is, for ultimate use by Kentucky consumers.” In Re: Langford v. Equitable Life Assurance Society of the United States, U.S Bankruptcy Court W.D. Ky. 32 B.R. 746; 1982 Bankr. LEXIS 5436 (1982).

Since Bluegrass is not transporting “a supply of oil or natural gas” but instead proposes to transport NGLs, and is not transporting “for public consumption” by Kentuckians, it is not a “common carrier” under KRS 278.470, nor is the proposed activity a “public use.” It is not disputed that Bluegrass proposes to transport a supply of NGLs from a limited number of producers in the Marcellus and Utica shale producing areas for processing in Louisiana at a fractionation facility it proposes to construct and operate, and then for sale to a limited population of industrial end users. The possibility of one industrial end-user in Kentucky does not transform the pipeline into one transporting for consumption by the public in Kentucky.

C. THE REQUIREMENT THAT A PIPELINE BE TRANSPORTING “IN PUBLIC SERVICE” LIMITS THE AVAILABILITY OF THE EMINENT DOMAIN POWER TO UTILITIES

The phrasing, context and history of the limitation of the grant of eminent domain power to those pipelines “in public service” strongly suggests that the General Assembly intended by that choice of words to restrict the powers granted under that section to utilities under the jurisdiction of the Public Service Commission.

Initially, the grant of power is not in KRS Chapter 416, which provides numerous general statutory grants of condemnation authority, including railroads (KRS 416.010), roads (416.100, 416.110, 416.350), dams and other structures for electricity and navigation (416.130), suppliers of water, electricity, gas or gasoline for light, heat, domestic use or power (KRS 416.140), telephone companies (KRS 416.150), cemeteries (416.210), water associations (416.340), and relocation of public utility facilities (416.360). Instead, in a Chapter (278) creating a “Public Service” Commission to regulate rates and service obligations of utilities, condemnation powers are accorded only to oil or gas pipelines “in public service.” Irrespective of the title or chapter headings, it is the textual limitation of the power of condemnation to those pipelines “in public service,” a limit imposed in 1948 when previous law declared all pipelines were in public use and garbed with eminent domain authority, in a chapter intended to create and empower a Commission to regulate providers of “public service[s]” that suggests that the phrase was intended to bound the grant of authority to regulated utilities in public service.

Bluegrass Pipeline is mistaken in arguing that the decision of the sponsor of a floor amendment in the House of Representatives during consideration of the 1992 amendment to KRS 278.502 that added the phrase “oil and gas products” to the statute, evidenced an intent on the part of the General Assembly that the powers should not be limited to utilities. The amendment was not called by its sponsor for consideration, and it is pure conjecture to infer from the decision of the sponsor of that floor amendment, an intent to preserve non-utility access to condemnation powers. It is just as likely that the sponsor determined such clarification to be unnecessary in light of the existing limitation that the pipeline be “in public service.” That a House floor amendment was not called during consideration of a bill hardly constitutes a decision by “the General Assembly” to decline to limit the statute to utilities.

Case law and the statutory evolution of what is now KRS 278.502 underscores that the requirement to be “in public service” is intended to limit use of the power to entities in public service, i.e. utilities. In several cases challenging the application of Kentucky Statute (KS) Section 4077, which imposed a franchise tax on a list of enumerated companies, to pipe line companies, the Courts have had occasion to review the grant of eminent domain power in former Kentucky Statute 3766b-1. The franchise tax applied to a number of enumerated activities, including a “pipe line company” and on “every other like company, corporation or association, also every other corporation, company or association having or exercising any special or exclusive privilege or franchise not allowed by law to natural persons, or performing any public service[.]” In the case of Louisville Tank Line v. Commonwealth, 123 Ky. 81 (1906), the Court construed the franchise tax to apply to several classes of businesses – to all enumerated businesses, all businesses engaged in "like" or similar business to any enumerated, to every other concern exercising an exclusive or special privilege or franchise; and finally, on any private corporation performing a public service. The Court rejected the argument that the tax was confined either to "public service" corporations, or those exercising an exclusive privilege. Id. pp. 84-5. The argument was raised again in State Tax Com. v. Petroleum Exploration, 253 Ky. 119, and the Court there considered the interplay of the franchise tax and eminent domain law, KS Section 3766b-1 providing that corporations and companies “organized for the purpose of constructing, maintaining or operating oil or gas well or wells or pipe line or lines for conveying, transporting or delivering oil or gas, or both oil and gas, are hereby vested with the right and power to condemn lands… such being hereby declared to be a public use[.]”

The operator, who owned a private gas transmission line and delivered its produced gas at wholesale for sale to residents of Lexington, sought to avoid payment of the franchise tax, arguing that the franchise tax in KS Section 4077 applied only to corporations engaged in public service or having some special or exclusive privilege not allowed by law to natural persons, and not to ordinary commercial or private trading corporations.

The Court reviewed the grant of eminent domain in KS Section 3766b-1, noting that all lines for conveying, transporting or delivering oil or gas, or both oil and gas were determined to be a “public use” and were granted condemnation power. That the appellee did not sell directly to the public, but sold to others who, in turn, deliver the gas to the public, was determined not to be material to the characterization of the activity as one of performing a “public service.”

The case of Producers Pipe Line Co. v. Martin, (W.D. Ky. 1938), 22 F. Supp. 44, again considered KS Section 4077, and interpreted the scope of that franchise tax to apply only to the enumerated corporations if they were exercising a special privilege. Finding that the pipeline in question was private, and transported purchased oil to a refinery, the Court concluded that the power of eminent domain did not attach and that therefore the was no special or exclusive privilege not allowed by law to natural persons. The decision was reversed by the Sixth Circuit Court of Appeals in Martin v. Producers Pipe Line Co., 113 F.2d 817 (6th Cir. 1940), concluding that all enumerated companies in Section 4077 were subject to the tax, and also that, despite not having employed the power, by the plain terms of Section 3611b-1, the company possessed the power of eminent domain and was thus subject to the franchise and privilege tax:

"Under § 3766b-1 of Carroll's Kentucky Statutes, appellee is vested with the power of eminent domain. The provision gives that power to all corporations "organized for the purpose of constructing, maintaining or operating oil or gas well or wells or pipe line or lines for conveying, transporting or delivering oil or gas, or both." The section declares that the operation of pipe lines conveying oil or gas is a public use. While appellee has never exercised this power, having secured its right of way by contract with private owners, within the plain terms of the section it has a special privilege which is not allowed by law to natural persons."

Id. at 820.

The 1946 Texas Co. v. Commonwealth decision considered whether a pipe line serving only a company's refinery and carrying no oil for others, is a public service line and is not subject to a franchise tax under KS 4077 (by then recodified at KRS 136.120). The Court rejected the argument that since every barrel of oil it transported through this line belonged to the Company before entering the line it was not a pipe line within the meaning of the statute, and the line was performing no public service and the Company was not subject to a franchise tax thereon, since it possessed the power of eminent domain under KS Section 3766b-1, which by then was recodified at KRS 278.500. Texas Co. v. Commonwealth, 303 Ky. 590, 592 (1946).

KRS 278.500 was repealed by the General Assembly in 1948, Acts 1948, ch. 184, § 1 and Acts 1948, ch. 186, § 1, and was replaced by KRS 278.502 that same year. Acts 1948, ch. 186, § 1.

The inclusion of the phrase “in public service” into the current KRS 278.502 served to bound and limit a previous grant of eminent domain power to any oil or gas pipeline, requiring now that in addition to the constitutional constraint of being a “public use,” the pipeline would need to be “in public service.” It is no longer the case after 1948 that any oil or gas pipeline possesses the power of eminent domain simply by virtue of being declared a “public use” or a “common carrier.” The Bluegrass Pipeline is intended to transport NGLs to a to-be-constructed Moss Lake fractionation facility in the Gulf of Mexico, for sale or export to a discrete set of industrial end-users. It is not delivering oil or gas, or oil or gas products, for public distribution and use, and is not “in public service” to Kentuckians so as to be eligible to utilize KRS 278.502.

CONCLUSION AND PRAYER FOR RELIEF

WHEREFORE, for the reasons above stated, Plaintiff respectfully requests that this Court:

1. Accept jurisdiction over this complaint and petition for a declaration of rights;

2. Grant Summary Judgment on behalf of Plaintiff and declare that Bluegrass Pipeline LLC does not possess any power or authority under the laws of the Commonwealth of Kentucky to utilize eminent domain to condemn the properties of Penny Greathouse or other members of KURE in support of the proposed Bluegrass NGL Pipeline project, and specifically, that KRS 278.502, KRS 416.675, and KRS 278.470 confer no eminent domain authority to Bluegrass Pipeline LLC for such actions; and

3. Grant such other relief pursuant to KRS 418.055 based on the declaratory judgment, order, or decree, as the Court deems necessary or proper, and to which Plaintiff may appear entitled.

Respectfully submitted,

____________________________
TOM FITZGERALD
Kentucky Resources Council, Inc.
213 St. Clair Street, Suite 200
Post Office Box 1070
Frankfort, Kentucky 40602-1070
(502) 875-2428
fitzkrc@aol.com

Counsel for Plaintiff Kentuckians
United To Restrain Eminent Domain, Inc.


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