Brief⁽¹⁾

Sub. for H.B. 2045 would amend certain provisions of the Underground Storage of Natural Gas Act.

Definition of "native gas." The bill would delete reference to "native gas," which is defined in existing law as gas that has not been previously withdrawn from the earth. The definition of "natural gas" in existing law would be retained.

Eminent Domain-Findings of the Kansas Corporation Commission. A natural gas public utility (hereafter, utility) seeking to exercise eminent domain on property for underground storage of natural gas must obtain a certificate from the Commission. The utility must obtain this certificate, which sets out certain findings by the Commission, as a necessary precondition for filing a petition for eminent domain in the district court. The bill would require the Commission to make certain findings that differ from those specified in existing law.

• �The bill would not amend the first finding-that the underground stratum or formation sought to be acquired is suitable for the underground storage of natural gas and that its use for such purpose is in the public interest. However, the bill would define "suitable for underground storage of natural gas" as strata or formations which, based on tests approved by the Commission, are found by the Commission to be capable of preventing or substantially minimizing the potential for natural gas to migrate to other strata or formations. The bill would authorize the Commission to require an independent study to be conducted if the Commission determined such a study would be necessary to assist it in making the required finding. Under existing law, the Commission would not be required, as a basis for this finding, to approve tests concerning the capability of the prospective storage facility to prevent or minimize the potential for migrating gas.



• �The bill would amend the second finding to reflect the deletion of "native gas" in the definition. The apparent effect is that the amount of all natural gas, whether or not in its original state, would have to be determined by the Commission and would therefore be used in the valuation of property. Under existing law, the Commission's finding would only address native gas--gas which has not been previously withdrawn from the earth.



• �The bill would add the finding by the Commission that the utility must indicate those measures it will use to protect the lease if the utility proposes to wash out a salt cavern for storage.

Assessment of Costs and Filing Requirements. The bill would require the applicant utility to pay any or all of the costs of any study conducted to assist in the Commission's finding that a stratum or formation is suitable for underground storage of natural gas, in addition to any costs associated with filing in each affected county register of deeds the Commission's certificate establishing this finding. These costs must be paid before the Commission issues the certificate. Existing law does not require that the applicant utility be assessed costs for the studies (as none are presently required) and filing of the certificate in each affected county register of deeds. Moreover, existing law does not require payment of costs associated with the proceeding as a precondition of the Commission issuing a certificate.

Payment of Damages--Eminent Domain. The bill would amend the law with respect to the interest being condemned and the factors to be considered in valuing the property subject to eminent domain proceedings.

• �Leasehold Interest. The bill would provide that the property interest condemned and compensation for the interest would be on a leasehold basis (land acquired under lease) unless the property owner agrees to another basis. The leasehold interest would include a defined subsurface stratum or formation, royalties on liquids extracted from the stratum or formation, and the use of needed surface to permit natural gas storage operations. The award to the property owner must provide for annual rental payments for the use of the acquired interests. The term of the interest would continue until the underground storage facility is abandoned. Under existing law, the interest could be more encompassing, such as a fee or easement (the right held by a person to make use of another person's land for a limited purpose). Moreover, current statutes make no provision for annual rental payments for use of the acquired interests.



• �Valuation of Property. The bill would allow the court to consider seven factors in determining compensation to property owners in an eminent domain proceeding. These factors are outlined in the bill and would augment factors subject to consideration in the Eminent Domain Procedure Act. As with the factors to be considered in the Commission's findings, the factors to be used in property valuation for condemnation would no longer include the value of recoverable native gas (definition deleted) but any natural gas in the property to be appropriated. Moreover, the appraisers would use as evidence for this valuation findings from professional engineering studies presented by any interested party. The unitary approach is currently used in valuing the land for purposes of compensating property owners in an eminent domain proceeding. The factors set forth in the Eminent Domain Procedure Act form the basis for the property valuation. The amount of recoverable gas to be valued is presently based on prima facie evidence which is a higher standard of evidence than is proposed in the bill.



• �Site of Eminent Domain Proceedings. The bill would require the proceedings to be brought in the county where the greatest portion of property subject to condemnation is located if the affected property is located in more than one county. Under existing law, the proceedings could be brought in any of the counties in which such property is located.

Migrating Gas. The bill would amend certain provisions in the law related to the migration of natural gas to adjoining property. Specifically, amendments would pertain to advance notice of testing and compensation to owners of adjoining property rights.

• �Testing--Advance Notice. Existing law permits the utility to conduct tests to establish ownership of migrating gas. The bill would continue to authorize such testing but would require the utility to provide advance notice to owners of the adjoining property in compliance with rules and regulations adopted by the Commission.



• �Compensation. The bill would authorize compensation to owners of the rights that make up the adjoining property (mineral rights, strata or formations, and surface) for the use of and damages to the surface and substratum. Moreover, such owners may be entitled to recovery of all costs and expenses to enforce provisions of the Act if litigation results and the owners prevail. Under existing law, remedies are accorded only the owners of the stratum and surface. Moreover, the bill would require in an eminent domain proceeding appraisers to assign a fair rental value to storage space which is housing uncompensated and unauthorized (migrating) gas. Existing law includes no such requirement.

Background

The introduced version of H.B. 2045 was the same bill as 1998 H.B. 2522 considered by the House Committee on Judiciary. Both bills were introduced to address amendments by the 1993 Legislature concerning treatment of natural gas which has migrated to adjoining property and the rights accorded the injector (utility) and owners of the adjoining property rights. House Committee Chairperson, Carl Holmes, appointed a subcommittee to review major areas of controversy in the introduced version of H.B. 2045, including the basis upon which property subject to eminent domain should be compensated; how owners of adjacent property should be compensated if gas has migrated to a stratum or formation on their property; the determination of rightful ownership of the migrating gas; and the necessity of independent tests to be used by the Commission to assist it in determining the suitability of the stratum or formation for underground storage purposes. The majority of the subcommittee issued a report requesting an interim study of the issues pertaining to the bill. The House Committee did not concur with the subcommittee report and instead approved amendments to the introduced version of the bill. One major difference between the introduced version of the bill and the substitute version is that the substitute bill retains the injector's (utility's) title to the migrating gas in the event of a condemnation proceeding. The introduced version of the bill assigned that title to the owner of the adjoining property--a provision adamantly opposed by the utility company representatives. Another major difference between the two versions of the bill is that the introduced version required the condemnation award to include the sum of factors specified in the bill. Opponents contended this approach overvalued the property subject to eminent domain. The substitute bill would require consideration, but not summation, of those factors in determining compensation and damages.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html