What Price A Franchise

What Price A Franchise? Condemnation Of Subsurface Rights In Public Streets

Introduction

A Los Angeles Superior Court trial judge has ruled in two cases that an oil pipeline company may exercise the power of eminent domain to directly acquire subsurface rights in public streets, without entering into a franchise agreement with the municipalities that controlled the streets.

Shell California Pipeline Company, a California public utility pipeline corporation had operated pipelines passing through the cities of Compton and Hawthorne for many years. Shell’s franchise agreements with these two cities expired periodically. Anticipating expiration, Shell attempted to negotiate renewals of the franchises in advance. However, the cities refused to renew unless Shell agreed to pay even more than the franchise fee authorized under California’s Franchise Laws.

After lengthy negotiations, Shell opted to condemn, non-exclusive, subsurface easements under the streets of the two cities for its existing pipeline. The cities argued that Shell’s exclusive remedy was to obtain a franchise under California’s Franchise Laws, either through negotiations with the cities or through court order if the cities improperly refused to negotiate.

Shell contended that, as a public utility pipeline corporation, it had the power of eminent domain and could simply condemn rights of way under public streets for its pipelines without entering into a franchise agreement with the cities and without paying periodic, franchise fees. The cost of only one years’ estimated franchise fee exceeded the estimated fair market value of the perpetual subsurface easement sought by Shell by almost $___________.

After a lengthy legal issues trial, Judge Cooperman, the Superior Court Judge assigned to Los Angeles’ Eminent Domain Department, ruled in favor of Shell.

Shell contended that, as stated by the California Supreme Court in City of Oakland v. Oakland Raiders (1982) 32 Cal.3d 60, 65, California’s Eminent Domain Law is a "comprehensive" statutory scheme intended to cover "all aspects of condemnation law and procedure."

Shell argued that the power of eminent domain as described in California’s Eminent Domain Law includes the right to condemn public property for a particular use if that use will not unreasonably interfere with the existing public use. This right is given to "any person" authorized to acquire property through eminent domain. It is not limited to public entities. CCP § 1240.510. This right includes the right to condemn subsurface rights for "public utility facilities and franchises." CCP § 1240.110(a).

In 1975, the Legislature passed Public Utilities Code § 615 expressly granting the power of eminent domain to various public utilities (including public utility, pipeline corporations like Shell). The Law Review Commission Comment to § 615 confirms that the section "authorizes condemnation of any property necessary to carry out the regulated activities of the pipeline corporation." No exception is made for public streets or other public property.

California’s Eminent Domain Law also recognizes that property may be acquired without condemnation and leaves the decision on whether to condemn to the condemnor. CCP § 1230.030. Therefore, Shell contended that the Eminent Domain Law recognizes that, for example, a public utility could acquire an interest beneath streets in ways other than through condemnation. A public utility could acquire an interest beneath streets by way of franchise under the Franchise Laws. However, a public utility could also use its power of eminent domain to acquire such an interest. The method used is left to the discretion of the condemnor.

Shell also contended that California’s Eminent Domain Law governs all acquisitions by eminent domain except where a statute has specific provisions to the contrary. Since the Franchise Laws relied on by the cities contained no such specific provisions, Shell concluded that the Eminent Domain Law governed and that it had the right to condemn subsurface rights beneath the public streets of the two cities for its pipelines.

Shell contended that it only made "common sense" to permit the exercise of the power of eminent domain in this situation. Franchises can expire. Local governments can refuse to renew them. As in this case, local governments can attempt to condition renewal only upon payment of fees in excess of those permitted by law. Streets can be abandoned by local governments, rendering the question of obtaining a franchise moot. Therefore, Shell contended that the Franchise Laws were totally inadequate to cover all possible situations and must, therefore, be read together with the Eminent Domain Law.

Finally, Shell contended that it merely sought to exercise the condemnation power to prevent abuse and exorbitant exactions sought to be imposed by the cities. The franchise fees sought by the cities exceeded the fair market value of the easement Shell required. Shell argued that the cities were simply looking for additional sources of revenue during a time when they could not practically raise other taxes further. Shell argued that its right to condemn a right of way easement for its pipelines was simply not subject to the cities’ need for additional sources of revenue.

Judge Cooperman agreed. The cases are now on appeal. They have potentially much broader ramifications due to the fact that many utilities have rights of way that eventually cross public streets of one sort or another. The cost of condemnation may be much less than the cost of obtaining franchises from the cities along the route.

Posted: 07/10/13 Joseph Dzida

Categories: CRD Attorneys