Still Time for Business Tax Planning

As 2015 draws to a close, there is still time to reduce your 2015 tax bill and plan ahead for 2016. This memo highlights several potential tax-saving opportunities for business owners to consider.

• Defer Income into 2016. Deferring income to the next taxable year is sometimes a useful year-end planning tool. If you expect your taxable income to be higher in 2015 than in 2016, or if you anticipate being in the same or a higher tax bracket in 2015 than in 2016, you may benefit by deferring income into 2016. Of course, in the case of an individual taxpayer, exposure to the alternative minimum tax could reverse the standard planning. Some ways to defer income include:

o Use of Cash Method of Accounting: By adopting the cash method of accounting rather than the accrual method, you can put yourself in a better position to accelerate deductions and defer income. Because an automatic change to the cash method can be made by the due date of the return, including any filing extensions, there is still time to implement this planning idea. The following three types of businesses can make an automatic change to the cash method:
      small businesses with average annual gross receipts of $1 million or less (including those with inventories that are a material income producing factor);
      C corporations with average annual gross receipts of $5 million or less in which inventories are not a material income producing factor; and
      taxpayers with average annual gross receipts of $10 million or less.

Provided inventories are not a material income producing factor, sole proprietors, limited liability companies (LLCs), partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts.

If you are already on the cash method or if you qualify for a change and elect to change to the cash method, delay year-end billing to clients so that payments are not received until 2016.

o Installment Sales: Generally, a sale occurs when you transfer property. If a gain will be realized on the sale, the installment method permits income recognition to normally be deferred until payments are received. Consequently, if you sell property prior to the end of 2015 and will receive one or more payments in future years, you should consider reporting the gain on the property using the installment method to defer payments (and tax) until next year or later.

o Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. Unless you have constructive receipt of dividends before year-end, they will not be taxed to you in 2015.

• Accelerating Income into 2015. You may benefit from accelerating income into 2015. For example, if you anticipate being in a higher tax bracket in 2016, or perhaps you need additional income in 2015 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. However, accelerating income into 2015 could be disadvantageous if you expect to be in the same or lower tax bracket for 2016.

If you report your business income and expenses on a cash basis, send bills and pursue collection before the end of 2015. Inquire as to whether some of your clients or customers are willing to pay for January 2016 goods or services in advance. Any income received using these steps will shift income from 2016 to 2015.

o Qualifying Dividends: Qualified dividends are subject to rates similar to the capital gains rates. That is, for taxpayers below the 39.6% tax bracket, qualified dividend income is subject to a 15% rate. For taxpayers in the 39.6% bracket, the rate is 20%. However, qualified dividends may be subject to an additional 3.8% net investment income tax as well. Qualified dividends are typically dividends from domestic and certain foreign corporations. If you are not in the highest bracket for 2015, but you expect to be in 2016, consideration should be made as to authorizing any dividend payment prior to the end of 2015 to utilize the 15% favorable tax rate vs. the 20% rate at higher income levels.

• Business Deductions.

o Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 10%-of-adjusted gross income floor. Self Employed Health Insurance includes eligible long term health care premiums.

o Equipment Purchases: If you purchase equipment, you may make a “Section 179 election,” which allows you to expense otherwise depreciable business property. For 2015, you may elect to expense up to $25,000 of equipment costs (with a phase-out for purchases in excess of $200,000) if the asset was placed in service during 2015.

Even though the Section 179 expense amount and phase-out have been much higher in the past, if Congress acts soon it could raise the 2015 Section 179 amounts. As of this writing, however, the recently enacted Bipartisan Budget Act of 2015 did not include any increase which makes it less likely that such legislation will be passed and if so whether that legislation would have retroactive application.

Even if expensing equipment purchases is not available under Section 179, careful timing of equipment purchases can result in favorable depreciation deductions in 2015. Generally, under the “half-year convention,” one may deduct six months' worth of depreciation for equipment that is placed in service on or before the last day of the tax year (if more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.)

o Home Office Deduction: Expenses attributable to using the home office as a business office are deductible if the home office is used regularly and exclusively: (i) as a taxpayer's principal place of business for any trade or business; (ii) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (iii) in the case of a separate structure not attached to the residence, in connection with a trade or business. If you have been using part of your home as a business office, you should consider the amount of any deduction you should take because an IRS safe harbor could be used to minimize audit risk.

o NOL Carryback Period: If your business suffers net operating losses for 2015, you generally apply those losses against taxable income going back two tax years. For example, the loss could be used to reduce taxable income (i.e., generate tax refunds) for tax years as far back as 2013. Certain “eligible losses” can be carried back three years; farming losses can be carried back five years.

o Bad Debts: If you use the accrual method, you can accelerate deductions into 2015 by looking at the business’ accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2015 year-end financial statements. For non-business bad debts (such as uncollectible loans), the debts must be wholly worthless to be deductible, and will probably only be deductible as a capital loss.

• Planning for 2015 Tax Increases and Potential Expiration of Tax Relief Provisions.

o Built-In Gains Tax for S Corporations (that previously were C corporations: An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who are taxed on their pro-rata shares of the S corporation's income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate on all unrealized gains that were built in at the time of the election if the gains are recognized during a special look back period which is generally 10 years. In recent years, this special period was significantly shorter (most recently, it was five years). However, it is uncertain whether legislation will be passed to shorten the special holding period for 2015 or subsequent years and, if passed, whether that legislation would have retroactive application.

o Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property: The rule that the basis of an S corporation shareholder's stock is decreased by charitable contributions of property by the S corporation in an amount equal to the shareholder's pro rata share of the adjusted basis of the contributed property expired for contributions made in taxable years beginning after December 31, 2014. As a result, absent congressional action retroactively extending the prior rule for charitable contributions made in 2015, your stock basis will be reduced by your pro rata share of the S corporation's charitable contributions (at fair market value rather than adjusted basis). For example, if your S corporation contributed property with a $200 adjusted basis and $500 fair market value to a charity, your stock basis will be reduced by $500 instead of $200 unless Congress enacts legislation extending the prior rule.

o Exclusion of Gain Attributable to Certain Small Business Stock: Stock acquisitions that qualify as “small business stock” under § 1202 are subject to special exclusion rules upon their sale as long as a five-year holding period is satisfied. For qualified small business stock sold in 2015, the five-year look-back period is to 2010. A 50% exclusion applies for qualified small business stock acquired before February 18, 2009, and after December 31, 2014. A 75% exclusion applies for qualified small business stock acquired after February 17, 2009, and before September 28, 2010. A 100% exclusion applies for qualified small business stock acquired after September 27, 2010, and on or before December 31, 2014. For qualified small business stock acquired in 2015, only 50% of the gain is excluded from gross income (after the five-year holding period is met). Unless Congress acts before the end of 2015 to reinstate the 100% exclusion for stock acquired in 2015 (and held for at least five years), gain on the sale of such stock acquired in 2015 may be subject to the 50% exclusion rate.

The foregoing is general in nature and may or may not apply to your circumstances. Because every business is unique, you should review your situation with your tax advisers prior to implementing any strategy or making decisions concerning taxes as the year-end approaches.

If you have any questions, please do not hesitate to call.

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Get out of my sandbox! Expulsion of a LLC Member under Wyo. Stat. 17-29-602

So, you have a bad apple as a member of your Wyoming limited liability company (LLC), how do you get rid of them? The best option is usually to reach an agreement for the company or a specific member to purchase the troublemaker’s membership interest. If, however, an amicable solution cannot be reached, the company may be able to expel the member pursuant to Wyo. Stat. 17-29-602. Section 602 governs the general circumstances when dissociation of a member occurs but also provides for expulsion of a member in the following circumstances: i) pursuant to the company’s operating agreement; ii) with unanimous consent of the other members; and iii) by judicial action.

Pursuant to Section 602, the easiest course of action is to expel the member under the company’s operating agreement but, unfortunately, few operating agreements address the expulsion of troublemakers. The next simplest course of action under Section 602 is to vote them out. However, this option is only available in very limited circumstances. Specifically, voting the bad apple out pursuant to the statute is available when it is either: unlawful to carry on the company’s activities as long as the troublemaker remains a member or there has been a transfer of all of the troublemaker’s transferable membership interest. Note: even if the troublemaker’s membership interest has been fully transferred, they cannot be expelled if the transfer was: a transfer for security purposes or due to a charging order in effect under Wyo. Stat. 17-29-503.

The company may be left with the most expensive and least desirable but still possible remedy of filing a lawsuit to expel the member. In order to expel the troublemaker by judicial action, the company (as opposed to an individual member) must bring the action and prove one of the following:

(A) the member has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;

(B) the member has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s fiduciary duties or obligations under Wyo. Stat. 17-29-409; or

(C) the member has engaged in, or is engaging in, conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.

Beyond the expense and general litigation risk for the company, even if the member is judicially expelled, there are a couple of caveats that require careful consideration. First and foremost, expulsion of the troublemaker will successfully remove him from all management and other business operations BUT the troublemaker will continue to own his interest in the company as a “transferee interest” also known as an “economic interest”. See Wyo. Stat. 17-29-603. Accordingly, the former member will be entitled to certain financial information owned by the company and, perhaps more importantly, will continue to be entitled to his share of the profits, losses and distributions under the company’s operating agreement. So, effectively, the company may kick the offending member out of the sandbox but still have to pass him buckets of sand to build his castle. Secondly, if the company is member-managed, the troublemaker’s fiduciary duties as a member end with regard to matters arising and events occurring after his dissociation. Terminating fiduciary duties owed by the troublemaker may be too disadvantageous to the company for the company to expel him, particularly if the member begins competing with the company while still receiving distributions as an economic interest owner.

Expulsion of a member is, obviously, an aggressive course of action and must be thoroughly examined. The risk of litigation to the company and its other members must be studied even if expulsion occurs under the operating agreement or by unanimous vote. However, Section 602 does provide some options for a company to remove a problem member at least from the company’s management and business operations.

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Secretary of Agriculture Recommends Cancellation of Montana Oil and Gas Leases

On October 30, 2015, Secretary of Agriculture Tom Vilsack sent a letter to Secretary of the Interior Sally Jewell recommending that BLM cancel 18 long-held oil and gas leases located on Forest Service managed surface in an area of Northwestern Montana called the Badger-Two Medicine. These leases, originally issued in 1982, have been the focus of controversy for many years, largely based on their proximity to areas of cultural significance to the Blackfeet Tribe and Glacier National Park. The leases have been suspended by BLM for almost twenty years, but recent judicial decisions are forcing BLM to make a decision on the ultimate fate of the leases in the coming months.

In his Letter, which follows and relies on the earlier findings of the Advisory Council on Historic Preservation (see link to 9/23/15 blog below) Secretary Vilsack argues that permitting oil and gas development in the area would have “adverse effects” that cannot be mitigated through site-specific requirements. Secretary Vilsack pointed out that in the time since the leases were issued, “there have been many policy developments, not only with regard to historic properties of traditional religious and cultural significance to Indian tribes, but also in Federal-tribal relations. . . . The [Forest Service] has worked diligently to comply with new requirements by pursuing oral histories and contracting supporting archeological and ethnographic work, which gradually revealed the unique and special nature of the Badger-Two Medicine.” With the information gained over the last 30 years, Secretary Vilsack concludes that the leases should not have been issued in the first place and should therefore be canceled by BLM.

Although BLM has ultimate decision-making authority under the Mineral Leasing Act of 1920 on lease cancellation, Secretary Vilsack’s letter, on behalf of the Surface Managing Agency, is likely to carry significant weight. Under an order from U.S. District Judge Richard Leon, BLM has until November 23 to either lift the suspensions or cancel the leases. If BLM cancels the leases, it is likely to face further legal challenges from the lessees.

Advisory Council on Historic Preservation Recommends Cancellation of Oil and Gas Leases in Montana

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Finally – A Policy to Streamline the BLM Communization Agreement Process – IM 2015-124

Dated and effective July 17, 2015, the Bureau of Land Management (“BLM”) issued Instruction Memorandum 2015-124 (“IM-2015-124”). This BLM guidance significantly changes the way federal Communization Agreements (“CAs”) are administered and, for the most part, eliminates some of the cumbersome issues for operators applying for CAs. CAs are used to combine isolated or small federal mineral and/or tribal parcels with fee minerals to form a spacing or proration unit that complies with state law and allows for development of tracts that could not be independently developed or operated on their own.

In addition to attempting to “clean-up” the CA Process, IM-2015-124 addresses some questionable jurisdictional issues. Before IM-2015-124 was issued, there were concerns by industry that the BLM was attempting to expand its management beyond its authorized jurisdiction over federal minerals to fee minerals. For example, in some instances, the language in approved CAs appeared to require the operator to account to the BLM not only for federal minerals but for all minerals, including fee. However, IM-2015-124 now limits the CA responsibilities of the BLM to federal minerals and the Bureau of Indian Affairs to tribal minerals. We note that many of the jurisdictional issues the IM attempts to clarify were called into question by the BLM’s recently proposed rule modifying Onshore Oil and Gas Order No. 3. For more information on these inconsistencies, see Western Energy Alliance’s comment letter on the proposed changes to Onshore Order No. 3:

http://cdn.westernenergyalliance.org/sites/default/files/FINAL%2010.9.15%20OO3%20comment%20letter.IPAA_.WEA_.pdf

In any event, until the changes proposed in Onshore Order No. 3 are made final, the components of IM-2015-124 will govern. Some of the notable changes to the CA process in IM-2015-124 include:

1. An operator may self-certify that the necessary signatures have been obtained (working interest owners and record title owners in the Federal and Indian leases). Rather than submit all of the necessary signatures, an operator can submit the certification statement, word for word from IM-2015-124, to the BLM with its CA, and the BLM will rely on that statement;

2. CA: Exhibit A – the operator may identify all non-Federal/non-Indian interests as a single tract;

3. CA: Exhibit B – An operator may aggregate all of the non-Federal/non-Indian interests into a single entry entitled “Other Interests,” with total aggregate acreages; and

4. CA: Exhibit B – Due to the revisions to non-Federal/non-Indian interests in Exhibits A and B, an operator does not need to provide the lease information for those interests.

The BLM’s goal is to have all CAs in place prior to the date of first production. In fact, the BLM has required applicants appearing before the Colorado Oil and Gas Conservation (“COGCC”) to include specific language in spacing orders that addresses CAs and timing for the operator to apply and comply with the CA process. The COGCC order language usually requires an operator to submit a CA concurrent with the filing of an APD or at least 90 days before the anticipated date of first production.

Any operators actively submitting CAs to the BLM should be well-versed in the changes addressed in IM-2015-124 affecting BLM Manual 3160-9 and be prepared to submit a CA prior to production of a well affecting Federal or Indian interests.

IM-2015-124 can be found at:  http://www.blm.gov/wo/st/en/info/regulations/Instruction_Memos_and_Bulletins/national_instruction/2015/IM_2015-124.html

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Utah Congressman Rob Bishop Promises to Release Public Lands Initiative Bill

For the past several years Congressman Rob Bishop (R), representing Utah’s 1st Congressional District, has been promising to reveal a bill encapsulating what he calls the “Utah Public Lands Initiative.” His ambitious plan involves bringing together key state and national stakeholder groups, the Utah Congressional Delegation, Utah Governor Gary Herbert and state and local leaders to create a collaborative and comprehensive process for managing public lands in Utah. Bishop’s initiative has garnered support, albeit cautious, from industry as well as conservation groups. The process included the heavy involvement of counties and is somewhat unique nationally for that reason. The bill promises to support wilderness designations in exchange for measures ensuring continued access to lands for resource development. Additionally, the bill will facilitate Utah school trust land (SITLA) swaps and transfer management of some roads and federal lands to local authorities. As chair of the House Natural Resources Committee, Bishop is well positioned to advance the bill through the legislative process.

In a recent address to the Energy, Natural Resources and Environmental Law section of the Utah Bar Association, Congressman Bishop said that he would “slit his wrists” and those of his staffer if the bill has not been released by the end of 2015. He later stated that he would probably not actually slit his own wrists, but left no such ambiguity regarding the fate of his Legislative Assistant.

Congressman Bishop has declared that the bill, if passed, will provide certainty to public land managers and users. He prognosticates an end to the bitter fighting and distrust that has grown up around Utah public land use decisions in recent decades. It remains to be seen whether the actual proposed legislation can live up to the congressman’s ambitions. Its chances for success are particularly difficult to gauge given that no one has seen what the bill actually says. In any event, for our edification and for the personal safety of certain congressional aides, we are hoping to see the initial version of the bill introduced in the next few months.

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COLORADO OIL & GAS CONSERVATION LAW: THE BASICS -- A POP QUIZ

The Conservation Basics
A primary objective of the Colorado Oil & Gas Conservation Act (the “Act”) has always been conservation through prevention of waste and enforcement of efficient drilling and production practices. In other words, traditionally the Act served one important god – the resource conservation god.

Since 1994, however, the Act and those who work with it have had to serve an additional important god -- the god of public health, safety and welfare, and this one has become increasingly demanding.

Colorado mineral owners, explorers and producers, and those of us who represent them, all have a duty to make certain that the one god does not eclipse the other – to make certain that the conservation god does not become a second-class citizen in the world of oil & gas exploration, development and production in Colorado.

The Quiz – Test your knowledge of the basics
Which of the following statements are true, false, or close enough?
Question 1: The Rule of Capture…..
1. Allowed old Englishmen to pursue foxes off their land as long as the chase started on their land.
2. Came to this country on the Mayflower and helped Buffalo Bill make his name, but died with the buffalo long before oil or gas were discovered in Colorado.
3. Played a significant role in early oil & gas exploration and production in Colorado.
4. Was eliminated by passage of the Colorado Oil & Gas Conservation Act in 1951.
5. Survived passage of the original Colorado Oil & Gas Conservation Act, but was eroded by subsequent amendments to that Act.
6. Was effectively eliminated from Colorado common law by the 1994 amendments to the Colorado Oil & Gas Conservation Act
7. Has always been and remains a viable part of the Colorado common law applicable to oil & gas exploration and production.
8. With slight modification due to well location rules, applies to any well drilled in Colorado absent an applicable COGCC spacing order.
9. Says I’m entitled to produce and own whatever oil or gas I can find so long as I produce product to which I have a legal right from operations anywhere on lands that I own or have the right to be on.
Answer to Question 1: These statements are true except
• A-2 and A-4 are definitely false
• A-5 and A-6 are the difficult ones. These two are, in principle, also false, but the question is whether under COGCC practice, post 1994, the Rule of Capture has the same stature it used to have. More to the point, does it have the stature it should have if we are to serve the resource conservation god with the same fervor that the god of public health, safety and welfare is served.

Question 2: Waste
Under Colorado law, Waste of oil and gas in development and production operations is NOT which of the following?
1. Prohibited.
2. OK if necessary to protect public health, safety and welfare.
3. Any practice that leaves producible oil or gas in the ground.
4. The improper use or dissipation of reservoir energy.
5. Well spacing that is not sufficiently dense to drain the area drilled.
6. Drilling more than one well where one well can efficiently and economically do the job.
7. Tempered by market demand for produced product, i.e., it’s not waste if there’s no economic market.
Answer to Question 2: With the exceptions of #s 2 and 7, everything listed above is an accurate statement about Waste under the Act.
• 7 is easy to peg as a misstatement; the Act (unlike conservation laws in other states) specifically provides that market demand is not a factor in determining Waste.
• 2 is not so easy. It may be that in a post-1994 direct conflict the god of conservation loses the battle. It is at least food for thought by today’s COGCC practitioners, although maybe it’s not a practical issue because of modern technological advancements in production practices.

Question 3: What’s missing from the above list, i.e., what else does Colorado law categorize as waste?

Answer to Question 3: The abuse of correlative rights. The Act clearly defines abuse of correlative rights to be Waste, and that gets us to 4.

Question 4: True or False?
Protection of correlative rights means if you don’t own 100%...
1. You can still keep what you produce unless your cousin-in-law is the mineral cotenant.
2. You have to account retroactively to the other owners for their share, regardless of whether they participated in the cost of production.
3. You can still keep it all if you get there first because you’re protected by the Rule of Capture.
4. Each owner and producer in a common pool or source of supply of oil and gas is to have an equal opportunity to obtain and produce its just and equitable share of the oil and gas underlying such pool or source of supply.
Answer to Question 4: Statement 1 is definitely false, and Statement 4 is definitely true. However, the answers to Statements 2 and 3 are more challenging. Statement 2 is incorrect because the Act does not require backwards accounting at least for would-be participants who had (reasonable) notice of the drilling and production activity and who elected not to, or failed to, participate. For that reason Statement 3 is arguably correct, at least under the right circumstances. The Rule of Capture is still alive in Colorado, as long as each mineral owner had the same opportunity to produce/participate in production. This is really about the conservation god rewarding the risk-taker and is what is behind the force pooling provisions of the Act which have the effect of penalizing the non-risk taker.

Conclusion
The issues explored above are not pedantic. Nor should they be seen to be the atavistic ramblings of an ancient who worked closely with the COGCC in the old days (before 1994). These three basic concepts -- The Rule of Capture, Waste and Protection of Correlative Rights – remain essential to proper conservation of a waning resource. They are grounded in a good scientific and economic understanding of how to maximize oil and gas production while maintaining efficiency.
The irony is that serving this conservation god does not necessarily mean conflict with the duty to serve the god of public health, safety and welfare. Good resource conservation and production efficiency serve both gods. These practices not only incentivize the production of more product at less cost, they also serve to minimize surface and environmental impact in the process.

So, the message continues to be the same – oil and gas conservation basics are important for all of us involved in the Colorado oil and gas industry to understand and apply.

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Monument Making And The Presidency

Like presidents before him, President Obama is using the 1906 Antiquities Act, 16 U.S.C. § 431-433, as part of his presidential legacy. In September, 2014, Obama exercised this authority for the 12th time and expanded a national monument, created by his predecessor George W. Bush, from 87,000 square miles to more than 490,000 square miles to take the title as the president with the most acres preserved in the last 50 years. In July, 2015, President Obama designated three monuments, one requested by out-going Senator Harry Reid (NV-D) to protect 704,000 acres in southern Nevada, including a series of strange sculptures by artist Michael Heizer, petroglyphs and a migration corridor for deer and pronghorn – the Basin and Range National Monument. The President also designated the more controversial 330,780 acre Berryessa Snow Mountain National Monument in northern California on BLM and Forest Service land and a five acre monument preserving mammoth remains in Waco Texas.

House Natural Resource Chair Rob Bishop (R-UT) objected to the three monuments, scoffing that the lands were not “antiquities” and that the president’s action was a “land grab” by “the stroke of a pen.” These types of congressional complaints are as old as the Act. The 1906 Act authorizes presidents to proclaim “historic landmarks, historic and prehistoric structures, and other objects of historic or scientific interest” as national monuments and was enacted to prevent the looting and destruction of Native American sites. President Roosevelt established the first national monument in Wyoming – Devils Tower— in 1906 and followed that action with a total of 18 monuments including the designation of the Grand Canyon in 1908 to protect 800,000 acres from mining and development. The move was controversial, but in Cameron v. United States, 252 U.S. 450 (1920) the Supreme Court upheld the use of the Antiquities Act to designate the Grand Canyon. This has been the result for other legal challenges-- the statute is broadly written and courts have affirmed the president’s unilateral power to designate monuments—without public involvement or compliance with NEPA.

Preservationists see the Antiquities Act as a powerful tool to protect lands when Congress won’t act on wilderness bills and the Forest Service and BLM are hamstrung by congressional riders or litigation in the creation of quasi-wilderness lands. See for example the 11 years of litigation over the Clinton-era Roadless Rule and the 2011 congressional rider preventing the designation of “Wildlands” by then-Interior Secretary Salazar. Environmental groups their eye and the President’s ear on other monuments they would like the President to designate before he leaves office—including the 1.7 million acre Grand Canyon Watershed National Monument in Utah and Arizona, 1 million acres of desert in southern California and the 2 million acres surrounding the Canyonlands National Park in Utah.

Although the Republican House recently introduced several pieces of legislation to narrow the president’s power under the Act, (HR 1459, “Ensuring Public involvement in the Creation of National Monuments Act”) to require NEPA review of monuments greater than 5000 acres and an appropriations rider to block funding for monuments in Arizona, California, Colorado, New Mexico, Nevada, Oregon and Utah, it is unlikely that the Act will be changed. One of the last times the Act was changed, which explains the absence of Wyoming from the preceding list, was in 1950, after the creation of the monument that later became Grand Teton National Park. At that time, Wyoming’s first Senator Simpson was successful in enacting a requirement for congressional approval of all future monument designations in the state.

President Obama’s counselor, John Podesta, in 2014 remarks celebrating the Wilderness Act, indicated that President Obama’s national monument “signing pen still has some ink left in it.” If President Obama looks to the last Democratic president as an example, we can expect a lot of monument making in 2016. In his last year in office, President Clinton expanded or designated 18 monuments – the vast majority of the 22 monuments on his watch.

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1975 Hits

Preliminary Considerations in Condemnation Actions

In condemnation actions in Colorado, the condemning party must take great care to satisfy legal prerequisites prior to initiating suit and, in most cases, moving for immediate possession of the subject property. By statute, immediate possession will only be granted upon a showing that: 1) a public agency with condemnation power has properly determined that it is necessary to acquire the landowner’s property; 2) the property is being acquired for a public use; 3) immediate possession is necessary; 4) the parties have failed to agree upon compensation; and 5) the probable market value of the property to allow the court to set the amount to be deposited with the Court as security the ultimate payment of compensation. C.R.S. §§ 38-1-105(6)(a) and 38-1-109. Good faith negotiation between the condemning entity and the landowner is also mandatory prior to an exercise of the power of eminent domain. C.R.S. § 38-1-102. In addition to these statutory requirements, fundamental constitutional rights to notice and due process also constrain any attempt to condemn and take possession of private land.

While these constitutional and statutory considerations have been in place for some time, Colorado courts are applying them with renewed vigor recently. One essential lesson from this increased attention on foundational legal prerequisites is the importance of the language within the documents describing the rights to be acquired. Whether a deed in fee simple or the varied access and utility easements frequently condemned, these legal documents must be carefully drafted to provide appropriate notice to the landowner of the rights being subjected to the power of eminent domain. Not only does this satisfy the constitutional guarantee of due process, but it also benefits the parties and the court. Without a clear definition of such rights, neither the property owner nor the condemning agency can accurately determine the value to be paid for these rights or their impact on any remaining property. Properly delineating the rights being acquired can save significant expense and frustration for the condemning entity, which will be paying just compensation for the property taken. Conversely, the landowner whose property rights will be impacted by the taking will have certainty and security in their property going forward, not to mention a much smoother, shorter, and less costly trial process. Thus, when fulfilling the statutory prerequisite mandating good-faith negation between the parties prior to commencement of a condemnation suit, both the condemning entity and the landowner should discuss and work collaboratively to craft specific title language for any condemnation.

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Drafting Oil and Gas Royalty Provisions; KISS- “Keep it Simple, Stupid!”

The KISS principle that systems perform best with simple rather than complex designscan apply in the world of legal drafting. This lesson was recently learned by lawyers who drafted a complex “work-around” to avoid a judicial interpretation of standard oil and gas lease royalty language on whether post-production costs should be included in the royalty calculation. In Chesapeake Exploration, L.L.C. v. Hyder, 2015 WL 3653446, 58 Tex. Sup. Ct. J. 1182, the Texas Supreme Court rejected the “work-around” language, reaffirming its prior holding that standard gas royalty language has a particular meaning and that attempts to add language to “clarify” the parties intent to alter the language will be deemed “surplusage” and given no effect.

June 12, 2015, Texas Supreme Court addressed whether an overriding royalty (“ORR”) with “cost-free” language should bear postproduction costs. The lease included three royalty provisions: (1) a 25% royalty of the market value at the well of all oil and liquid hydrocarbons; (2) a 25% royalty “of the price actually received by Lessee” on all gas produced and sold or used; and (3) “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5%) of gross production” from directional wells drilled on the leased lands but bottomed on adjacent lands. The gas royalty provision also included additional language that the royalty is to be “free and clear of all production and post production costs and expenses” and listed various examples. The lease contained two other relevant provisions: (1) that the lessor has the continuing right to take the royalty in kind and (2) a disclaimer that “Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) shall have no application to the terms and provisions of this Lease.”

While the ultimate issue before the Court was the ORR calculation, the Court took the opportunity to weigh in on the gas royalty provision. The Court noted that the royalty provision’s “price actually received” language, which generally creates a “proceeds lease” based on the price-received for calculating royalty payments, was adequate to exempt the lessors from bearing post-production costs and that a royalty does not bear production costs. Therefore, the Court held that the additional language that the royalty “is free and clear of all production and post production costs and expenses” was either meaningless, merely emphasized the cost-free nature of the gas royalty, or “surplusage.” The import of the Court’s dicta (discussion of issues not decided) is that language in a royalty provision is given specific meaning and will be interpreted based on the language that creates the royalty and efforts to clarify the royalty with additional language may be disregarded entirely.

The real issue before the Court was whether the “cost-free” language in the ORR exempted the Hyders from paying their proportionate share of post-production costs. The parties agreed that an ORR is like a landowner’s royalty, i.e., free of production costs but bears post-production costs unless agreed otherwise.

The Hyders argued that the term “cost-free” could only apply to post-production costs because the ORR is already free of production costs. The Court, however, was not persuaded because, like the gas royalty, the term “cost-free” may simply emphasize that the ORR is free of production costs. Chesapeake argued that “cost-free” was a synonym for overriding royalty, citing numerous lease provisions from other cases to support its contention that the phrase “cost-free” could not refer to post-production costs.

The Court held that because the ORR was drafted as an “in kind” royalty to be paid on gross production with the option to take the royalty in cash, the royalty must be calculated on the volume of gas produced at the wellhead. If taken in kind, the Hyders would receive their share of gas free of post-production costs. Accordingly, if the Hyders elected instead to take their ORR in cash, the term “cost-free” must include post-production costs.

While having already resolved the question before it, the Court nonetheless chose to address the Hyders’ last argument that the lease’s disclaimer of any application of Heritage Resources showed an intent that the ORR be free of post-production costs. Heritage Resources involved a gas royalty calculated on “the market value at the well” but also added that there would be “no deductions from the value of the Lessor’s royalty by reason of any” post-production costs. The Heritage Court held that because “market value at the well” is already net of reasonable marketing costs, additional language regarding “no deductions” for post-production costs does not change the meaning of the royalty clause and can only be said to be “surplusage.”

The Court noted that Heritage Resources does not hold that a royalty cannot be free of post-production costs. Rather, Heritage Resources stands for the proposition that a lease’s effect is governed by a fair reading of its text. Accordingly, a disclaimer of Heritage Resources could not free a royalty of post-production costs when the text of the lease did not clearly do so. Thus, the primary take-away point of the Hyder case is that drafters of royalty provisions must be precise in their word choice, ecause courts will construe royalty provisions as drafted according to established industry custom and are not inclined to look to clarifying language that is redundant, emphasizes, or otherwise conflicts with the royalty provisions.

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Advisory Council on Historic Preservation Recommends Cancellation of Oil and Gas Leases in Montana

On September 21, the Advisory Council on Historic Preservation (ACHP), an independent federal agency with a key advisory role in National Historic Preservation Act (NHPA) § 106 “effects” determinations, recommended that long-ago issued federal oil and gas leases should be cancelled and that future mineral development should not occur within the Badger-Two Medicine area, located in northwestern Montana. As discussed in posts from April 16 and July 27, in 1982, BLM issued 46 oil and gas leases on Forest Service-managed surface in the Badger-Two Medicine area, an area adjacent to the Blackfeet Indian Reservation. However, in spite of numerous attempts to develop these leases, the leases were indefinitely suspended by BLM. While 29 of the leases have been voluntarily relinquished, 18 leases remain. These 18 leases, held by Louisiana-based Solenex LLC, are the focus of litigation currently pending in the Washington D.C. Federal District Court for the District of Columbia.

The ACHP recommendation raises challenging First Amendment issues concerning the accommodation owed to Native American traditional cultural beliefs under the NHPA. In its recommendation, ACHP stated that oil and gas development could irrevocably harm the 165,588-acre area, which encompasses lands within the Blackfeet Indian Reservation and the Lewis and Clark and Flathead National Forests designated as a “Traditional Cultural District” under NHPA. “The proposed undertaking and the entire Solenex leasehold is located within the Badger-Two Medicine TCD, a historic property of religious and cultural significance to the Blackfeet Tribe. . . The Blackfeet Tribal Business Council described the TCD in Resolution No. 260-2014 (2014) as ‘one of the most cultural and religiously significant areas to the Blackfeet People since time immemorial.’” AHCP Comments (9/21/15) at 4. While the ACHP recommendation argues that BLM should cancel the Solenex leases, none of which are located on the Blackfeet Reservation, the Council’s recommendation goes on to advise against any future oil and gas development in the entirety of the Badger-Two Medicine Area. The Council’s recommendation is not binding on federal agencies, in this case BLM and the U.S. Forest Service, or the courts, but under NHPA the agencies are required to “take into account” the Council’s findings in writing before making a decision. Moreover, given its important role under NHPA as the primary federal historic preservation policy advisor to the President and Congress, its recommendation is likely to carry significant weight as BLM and the Forest Service decide the future of oil and gas development in the area. Meanwhile, if BLM does decide to cancel the Solenex leases, it will be up to the courts to decide if this is authorized under the Mineral Leasing Act and what, if any, compensation is owed to the leaseholders.

ACHP’s recommendation can be found at: http://www.npca.org/assets/pdf/ACHP-Comments-and-Transmittal-Letters.pdf

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Employment Termination For Off-Duty Marijuana Use In Colorado – Is It Legal?

For Colorado employers with a zero-tolerance drug policy, employment termination for marijuana use during off-hours has been an unsettled question ever since medical marijuana first became legal in 2000. While all marijuana use—medical and recreational—is now legal in Colorado, the drug remains classified as an illegal substance under the federal Controlled Substances Act. The quandary for employers, therefore, has been whether firing an employee for marijuana use under an anti-drug policy violates Colorado’s lawful off-duty conduct statute, which generally prohibits employers from firing an employee for “engaging in any lawful activity off the premises of the employer during nonworking hours.” Colorado employers that have continued to enforce zero-tolerance drug policies based upon marijuana use have done so without the certainty of avoiding liability under this statute. The Colorado Supreme Court settled the issue earlier this summer in Coats v. Dish Network LLC, https://www.courts.state.co.us/userfiles/file/Court_Probation/Supreme_Court/Opinions/2013/13SC394.pdf by ruling that off-duty use of marijuana does not come within the scope of “lawful activities” so long as it remains illegal under federal law.

This decision establishes solid precedent for all employers because both the facts and underlying empathy weighed squarely in favor of the discharged employee. Far from a partier who just liked to get high, Brandon Coats is a quadriplegic who has been confined to a wheelchair since he was a teenager. Nine years after medical marijuana became legal in Colorado, Coats obtained a state license for medical marijuana to treat painful muscle spasms caused by his paraplegia. He used the drug in this manner in his own home, while off-duty. After Coats tested positive for marijuana use under a drug screening test administered pursuant to Dish’s zero tolerance drug policy, Dish terminated Coats’ employment. Coats then filed a wrongful termination suit against Dish based upon violation of the lawful off-duty statute. In a unanimous decision, the Colorado Supreme Court affirmed the trial court’s dismissal of the case by holding that the activity at issue must be lawful under both state and federal law. While this decision was rendered in the context of a medical marijuana case, it should apply equally in the context of legalized recreational marijuana use. This is particularly true given the express language in the constitutional amendment legalizing recreational marijuana stating that the amendment is not intended to affect employers’ ability to implement and maintain policies restricting employees’ marijuana use.

Considering the fact that employers are subject to both state and federal law with respect to their employment practices, it seems right for employees to be subject to both state and federal law when it comes to lawful activities. Furthermore, the duel legal requirement is a necessity for businesses subject to U.S. Department of Transportation regulations requiring promulgation and enforcement of anti-drug policies prohibiting marijuana use. These employers can now enforce zero-tolerance drug policies for off-duty marijuana use without fear of violating Colorado’s lawful off-duty statute. Best practices dictate advance notice of enforcement to employees by including language in a written drug policy that specifically addresses prohibited use of marijuana despite the drug’s legalization in Colorado.

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Early State Challenges to the Clean Power Plan Fall Short of Stay

On August 3, 2015, the Obama Administration through the Environmental Protection Agency (“EPA”) announced the implementation of the Clean Power Plan (“CPP”) which has the stated purpose of “establishing guidelines for states to follow in developing plans to reduce greenhouse gas emissions from fossil fuel-fired electric generating units,” or, in layman’s terms, to cut carbon emissions from power plants. The Final Rule addresses both new and existing power plants. Through the CPP, the EPA has set forth (1) carbon dioxide performance rates for fossil fuel-fired electric utility steam generating units and stationary combustion turbines; (2) state-specific carbon dioxide goals based on past carbon dioxide performance rates; and (3) guidelines for the development and implementation of state or multi-state plans that establish standards and other measures to implement these performance rates. http://www2.epa.gov/cleanpowerplan

The ultimate goal of the CPP is to reduce carbon pollution from power plants by 32% from baseline 2005 levels by 2030, and sets reduction goals for each state. In determining these reduction goals, the EPA considered each state’s current carbon dioxide emissions and fossil fuel generations. Individual state plans are due in June 2017 and multi-state plans are due in June 2018. States must begin complying with their plans by 2022, with reductions phased through a “glide path” to 2030. For western state targets see 8/5/15 post http://goo.gl/2desV2

In issuing the rule, the Obama Administration cited environmental and health effects of carbon dioxide, a primary greenhouse gas. According to the EPA, electric power facilities accounted for almost a third of greenhouse gas emissions in the U.S. in 2013. Options for meeting the rule presented by the EPA include increased reliance on alternative energy sources, transitioning from coal to natural gas, and increased energy efficiency.

However, many energy providers that currently rely on coal-fired power plants have already requested a delay in the implementation timeline set forth in the rule. They cite concerns such as increases in electricity rates, decreases in system reliability, and the loss of jobs due to the potential closure of non-compliant plants.

Fifteen coal-reliant states, led by West Virginia and including Alabama, Arkansas, Florida, Indiana, Kansas, Kentucky, Louisiana, Michigan, Nebraska, Ohio, Oklahoma, South Dakota, Wisconsin, and Wyoming filed a petition for an emergency stay of the CPP with the U.S. Court of Appeals for the District of Columbia Circuit on August 13, 2015. They argued that amendments to the Clean Air Act in 1990 prevent the EPA from regulating a carbon emissions source, such as existing power plants, under Section 111(d), as these emissions are already regulated under Section 112. The states also argued the EPA is requiring more stringent standards for existing coal-fired power plants than new power plants, thereby undermining the viability of continuing use of the existing facilities. The Court dismissed their petition on September 9, 2015, in a one sentence order stating only that the petition did not satisfy “the stringent standards that apply to petitions for extraordinary writs that seek to stay agency action.” There will be more challenges. Stay tuned.

The CPP is codified at 40 CFR Part 60 [EPA-HQ-OAR-2013-0602; FRL-XXXX-XX-OAR] and is available online at http://www2.epa.gov/sites/production/files/2015-08/documents/cpp-final-rule.pdf, and the Petition for an Emergency Stay is available at http://www.eenews.net/assets/2015/08/14/document_ew_04.pdf.

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Employer Alert: Tenth Circuit Expands Scope of Hostile Environment Claims in Flashing Case

Last week, the Tenth Circuit Court of Appeals delivered new guidance as to the type of conduct that can support a hostile work environment claim in Macias v. Southwest Cheese Co.,(10th Cir. August 24, 2015) (https://www.ca10.uscourts.gov/opinions/14/14-2109.pdf).

Hostile environment claims require discriminatory conduct that is severe or pervasive enough to create an abusive working environment. When only one or two incidents of harassment are involved, the conduct must rise to the level of “extremely serious.” Up until now, the Tenth Circuit’s opinions have only addressed satisfaction of this high standard in cases where the isolated conduct is some sort of physical assault. In Macias, however, the Tenth Circuit signaled broader application of the standard by making clear that physical contact is not required for a single incident of harassment to be actionable. Specifically, the court ruled that a male co-worker’s genital exposure to the female plaintiff could support a hostile environment claim, finding that this act “was not only physically threatening and humiliating—if true, it was also criminal. …The environment was objectively hostile, and Ms. Macias subjectively perceived it to be so, fearing that [her coworker] might expose himself to her again or assault her in some way.”

The takeaway from this decision is that every complaint or known instance of sexual harassment must be taken seriously and addressed appropriately – even if it involves only one incident. It appears that the employer in Macias failed woefully in this regard, although the opinion admittedly focuses on the facts alleged by the plaintiff without presenting the whole story. According to the opinion, the plaintiff reported the flashing to her supervisor but company management never followed up with an investigation or response. A second female employee who reported flashing by the same coworker was fired within a week (albeit for unrelated reasons, according to the employer). There’s no suggestion in the opinion of the employer’s investigation of the plaintiff’s report or any disciplinary action against the flashing coworker. Furthermore, the court suggests the employer’s prior knowledge of the flasher’s penchant for genital exposure by noting that, a year prior to the alleged workplace flashings, the same employee had taken a picture of his genitals while attending a company social function and passed the photo around to company managers who were present – including the director of human resources. Had the employer been proactive in addressing this prior instance of inappropriate behavior despite its presumably humorous intent at a party, the company might have spared its female employees the flashings and avoided at least three lawsuits alleging hostile work environment based in part on this same employee’s conduct. The lesson? Turning a blind eye to an employee’s pattern of inappropriate conduct is not likely to end well for an employer.

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Gold King Mine Accident Highlights Risks Posed by Abandoned Mines

On August 5, 2015, EPA personnel were working with a private contractor on a water quality project at the Gold King Mine near Silverton, Colorado. The intent of the project was to assess ongoing mine water leakage and to identify and evaluate options for additional mine water treatment and for reduction in the amount of mine water that flows into Cement Creek. In the course of this project, workers inadvertently damaged a tailings pond that had been built to slow and treat mine water outflow. This resulted in destruction of the pond and a discharge of over 3 million gallons of mine waste water and tailings into Cement Creek, a tributary of the Animas River.

Since this event, EPA officials have engaged in ongoing water quality testing and report that contamination levels in the Animas River have decreased to pre-spill levels. The Colorado Department of Public Health and Environment has reached similar conclusions and reports that the river has returned to “stable” conditions which means that that are no human health concerns during typical recreational exposure.

The Gold King Mine was abandoned in 1923, and according to the EPA, mine tailings were directly released into the creeks and rivers in the area until the 1930s. Prior to this 2015 accident, contaminated mine water flowed from this mine at a rate of approximately 7 gallons per minute. That rate briefly increased to more than 500 gallons per minute immediately following the accident. The EPA had previously sought to list the Gold King Mine and surrounding area as a Superfund site which would have provided additional funding for environmental remediation and clean-up. Community input, however, raised concerns about the effect of Superfund status on tourism. As a result, the EPA agreed to postpone seeking Superfund status for the site as long as measurable progress could be made to improve the water quality absent such status.

The accident at the Gold King Mine emphasizes the risks posed by the legacy of mines that were opened, operated and abandoned in the western U.S decades ago during a time when neither the technology nor the regulations necessary for effective water quality protection existed. The Gold King Mine is one of approximately 23,000 such abandoned mines in Colorado, 6127 of which have been reclaimed by the Colorado Division of Reclamation, Mining and Safety. The BLM lists 3400 abandoned mines on BLM-managed lands in Colorado. In the Upper Animas Watershed, where the Gold King Mine is located, there are approximately 400 abandoned and inactive mine sites. Numerous reclamation projects have been completed in that watershed over the last 20 years.

The BLM’s Abandoned Mine Lands Program was created in 1997 to reduce dangers to the public, public lands and the environment from health and other adverse impacts related to hard rock mines at which operations ceased prior to 1981. As of 2014, this Program had over 46,000 abandoned mine sites in its inventory. Of those, approximately one-quarter are remediated, are sites that do not require remediation, or are sites at which remediation actions have commenced.

These site clean-up and remediation actions on federal lands are governed by various federal statutes including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the federal Clean Water Act (CWA), the Federal Land Policy and Management Act (FLPMA) and the National Environmental Policy Act (NEPA). The lack of a robust federal budget for clean-up of abandoned mine sites and the liability that can attach to non-government actors who attempt clean-up of mine sites has inhibited progress towards addressing this mining legacy in Western states.

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Underground Rights are Defined in Texas

     On August 19, 2015 the Fourth District Court of Appeals in San Antonio, Texas, ruled that, because the surface estate owner controls “the matrix of the underlying earth,” it could grant an oil and gas operator the right to site wells on the surface owner’s property and drill through the earth within the boundaries of the surface owner’s property to reach adjacent minerals.

     In Lightning Oil Co. v. Anadarko E&P Onshore LLC, Case No. 04-14-00903, Lightning Oil sued Anadarko to prevent it from locating an oil and gas well on land subject to Lightning’s oil and gas lease. In 2009 Lightning leased the Briscoe Ranch from the owner of the mineral estate. Later, Anadarko obtained a surface use agreement from the owner of the Briscoe Ranch surface estate. Anadarko planned to place drilling rigs on the Briscoe Ranch, drill into an adjacent tract and complete the wells in an adjacent tract where it owned an oil and gas lease. Anadarko was not going to test or complete the well in the Briscoe Ranch tract. In the lawsuit Lightning Oil asserted that it had exclusive rights to drill through the Briscoe Ranch tract. Both the trial court and the appeals court, however, found that absent an express grant to the mineral owner, the surface owner controls the earth beneath that tract.

     This issue has not been directly addressed in Colorado, Utah or Wyoming. Wyoming’s statutes, however, provide that ownership of all pore space below the surface is vested in the owner of the surface estate. A conveyance of the surface estate in a tract of land shall be a conveyance of the pore space below the surface of that tract of land although the owner of the mineral estate has the right to inject substances to facilitate production of minerals. And no agreement conveying mineral or other interests underlying the surface shall act to convey ownership of any pore space in that tract unless the conveyance explicitly conveys that ownership interest. Although this Wyoming law was passed in 2008 with the intent of clarifying ownership of pore space underlying the surface, it indicates a legislative intent that the surface owner rather than the mineral owner controls at least some of the rights underneath a tract of land.

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Are Draft Expert Reports “Discoverable” in Water Court Proceedings?

     Pretrial discovery (where a party to a legal proceeding can see the evidence the other side will use) has been undergoing big changes in Colorado. One of the most significant recent changes to the Colorado rules of civil procedure is that draft expert reports and communications between experts and attorneys are now protected from discovery under C.R.C.P. 26 as trial preparation materials. For background see http://www.wsmtlaw.com/blog/changes-in-colorado-s-rules-of-civil-procedure-aimed-at-frontloading-litigation-to-decrease-costs.html.

     The question addressed at the annual Water Division One Bench-Bar Meeting, held on August 17, 2015, was whether this change in civil discovery would apply to Water Court proceedings. From the discussions, it appears that there is some uncertainty about whether the new C.R.C.P. 26(b)(4)(D) will protect draft water expert reports in a water court proceeding. For example, some take the position that this rule does not apply in water court proceedings because the official comment to Rule 26 expressly excludes water law from its scope. Others counter that Rule 26 generally applies in water court proceedings because the Uniform Local Rules for All State Water Court Divisions incorporates Rule 26, except as expressly modified by Local Rule 11. Arguably, the new rule protecting draft expert reports from discovery is not in direct conflict with a specific water court rule or the modifications expressed in Local Rule 11 and should therefore apply in water court proceedings.

     The water court has not had the opportunity to express its opinion on this issue yet. At the meeting, it was noted that where the general rules of civil procedure are discretionary in water court proceedings, the court would apply them unless it is convinced by the facts of a particular case that the general rule should not apply. This approach is consistent with either interpretation of the applicability of Rule 26. The comment to Rule 26 regarding its scope, which provides that a water court may use those rules, suggests that the rules are discretionary. Local Rule 12, which provides that a water court may modify the local rules on a case-by-case basis “to avoid substantial injustice or great hardship,” suggests that the local rules and those general rules, incorporated through the local rules and not independently applicable, are subject to modification on a case-by-case basis by the court. Thus, even if applicable, the new rule is subject to modification by the court.

     At the meeting, the question was asked whether the attorneys present were for or against applying this rule in water court proceedings. A number of attorneys expressed their support for the rule protecting draft expert reports from discovery, and no one expressed opposition to the rule. Thus, there may not be many challenges to the position that draft expert reports will be protected from discovery in water court proceedings, but there is room for a contrary interpretation.

     Experts and attorneys should be aware of this possibility for disclosure in water court proceedings and take some steps to ensure their draft reports and communications are protected. Given the strong support expressed by water lawyers at the Division One Bench-Bar Meeting for this protection from discovery, it may be possible for experts and attorneys to protect themselves against this uncertainty by getting all parties to stipulate that Rule 26(b)(4)(D) will apply to their case.

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CLAIMANTS MAY SUE INDUSTRY FOR DAMAGES RESULTING FROM EARTHQUAKES

On June 30, 2015, the Oklahoma Supreme Court ruled in Sandra Ladra v. New Dominion LLC, Spess Oil Co. [and other unnamed companies], that Plaintiff could sue operators of wastewater injection wells in and around Lincoln County, Oklahoma, for personal injury damages resulting from injuries she suffered from an earthquake while in her Lincoln County home. Plaintiff claimed that the Defendants' high-pressure disposal wells were responsible for the earthquake. The Court rejected the argument that the Oklahoma Corporation Commission (Oil and Gas Conservation Division) had exclusive jurisdiction and held that allowing "district courts to have jurisdiction in these types of private matters does not exert inappropriate 'oversight and control' over the OCC," and that it "conforms to the long-held rule that district courts have exclusive jurisdiction over private tort actions when regulated oil and gas operations are at issue." The Oklahoma Court's ruling also supports a finding of district court jurisdiction in a similar class action suit brought by representative plaintiff Jennifer Lin Cooper against New Dominion LLC, Spess Oil Co., and other unnamed companies which was also filed in Lincoln County, Oklahoma, earlier this year. Since the Oklahoma Court’s June ruling, the OCC and some industry members have taken preventative and regulatory steps to avoid or mitigate seismic activity.

In Colorado there have been several seismic events related to oil and gas activities, particularly near Greeley and Trinidad. Since 2011, the Colorado Oil and Gas Conservation Commission has engaged in rule-making that has increased regulatory requirements with respect to hydraulic fracturing and disposal activities. The COGCC now has enhanced technical, bonding and insurance requirements as well as geophysical reporting and seismic monitoring. The COGCC has also taken steps to shut down injection wells utilizing a ‘stoplight system’ – if a seismic event is only a magnitude 1 to 2 on the Richter Scale, underground injections wells may receive a green light from the COGCC; if the seismic activity is rated at M2 but below M5, a modified operations amber light may be given; and, if the seismic activity is measured at M5 or more, underground well operations are suspended and red-lighted by the COGCC.

Like Oklahoma, it is the Colorado courts that have jurisdiction to address private claimants’ damages claims based on concussion-related damage or injury. Moreover, Colorado law imposes strict liability for concussion damage and proscribes the outsourcing of liability. Thus, Colorado provides claimants with broad, direct damages relief. For a further discussion, see Richards, Emery Gullickson, “Finding Fault: Induced Earthquake Liability and Regulation,” COLUMBIA JOURNAL OF ENVIRONMENTAL LAW, 1 April 2015.

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ENERGY TRANSFORMATION: CLEAN POWER PLAN AND THE WEST

When candidate Obama was running in 2008, he identified energy as his top priority and described his goal as the “transformation of American energy” to address the threat of climate change. On August 2, 2015, the President and the EPA Administrator announced the final rule to implement his Clean Power Plan. The focus of the rule is the reduction of carbon emissions from 2005 levels by 32% in 2030.

The rule is issued under the authority of the Clean Air Act Section 111(d) in what many acknowledge is a big stretch for language that was drafted long before climate change was an issue. The rule came as the result of a 2012 settlement of litigation brought by environmental groups and several northeastern states against EPA. See a just-released Senate Majority Staff, Environment and Public Works Committee Report, “Obama’s Carbon Mandate: An Account of Collusion, Cutting Corners, and Costing Americans Billons” on this “sue and settle” tactic. http://goo.gl/gLaviN

The rule addresses new and existing power plants and establishes a different carbon target reduction from a 2012 baseline for each state. According to EPA, each state has the flexibility to choose how it meets its own carbon targets, but the rule is built on three EPA “building blocks”:
• Make fossil fuel power plants more efficient
• Increase generation form lower-emitting combined cycle natural gas plants for reduced generation from higher emitting coal/gas-fired power plants
• Increase generation from new zero-emitting renewable energy power sources
If a state refuses to develop a plan consistent with the rule, EPA will enforce a federal model plan. The rule encourages states to work together and to develop a “cap and trade” program, similar to a proposal that failed to pass Congress in the President’s first term.

EPA projects compliance costs for the rule of between $$5.1-8.4 billion, with an individual’s energy costs increasing by 3%-1% early in the compliance period, but dropping to a net “savings” in 2030 as a result of reduced energy consumption.

Winners and losers? Obviously coal is the big loser, but surprisingly natural gas also came up short with the Administration backing away from gas as a “bridge fuel” in favor of incentives to support wind and solar generation and demand reduction.

The rule is voluminous – existing power plants are addressed in over 1800 pages, new and modified plants are covered in 900 pages and the EPA model federal plan clocks in at 755 pages. See http://www2.epa.gov/cleanpowerplan/clean-power-plan-existing-power-plants

What does the rule mean for the West? Much to the relief of Alaska (and Hawaii) there is no carbon target for these states, yet. Several western states are already on track to meet their carbon targets by 2030 as the result of state law and/or an energy mix already reliant on renewables: California, Washington, Oregon, Nevada and South Dakota. The biggest loser among the states is North Dakota, which saw its 2030 target quadruple from an initially proposed 10.6% reduction to a 44.9% reduction in the final rule. Democratic North Dakota Senator Heidi Heitkamp described the rule as a “slap in the face.” Wyoming, which supplies 70% of the nation’s coal, saw its target double from the draft rule to a 37-44% reduction in the final rule. Wyoming elected officials uniformly attacked the plan with Wyoming Senator Barasso (R) calling it a “job crushing mandate.” Montana was also hit hard with a doubling of its draft goal to a 41% reduction. Montana’s Democratic Governor Bullock said he was “extremely disappointed” by the change, and Montana’s AFL-CIO, which had planned to attend a rally in support of the rule, withdrew in light of the impact of the changed targets on union jobs.

In Utah, where 80% of its power is coal-fired and its renewable energy is sold out of state, elected officials denounced the plan; Senator Orrin Hatch (R) said the rule is “unjustified and potentially devastating for Utah and the nation.” In Colorado, reaction to the state target of a 28% reduction was divided along party lines, with the Democratic Governor Hickenlooper saying he will work to implement the target while Republican Attorney General Cynthia Coffman is considering joining in litigation to challenge the rule. In New Mexico, Republican Governor Susana Martinez and Democratic Senator Tom Udall were united in their belief that New Mexico was ready to comply with the law. See EPA-prepared charts for good summary of state-by-state impacts. https://goo.gl/4rScB4

Opinion among green groups is divided with Environmental Defense Fund Fred Krupp praising the rule as “historic” and an example of Presidential leadership, while the climate researcher and former NOAA scientist, James Hansen, derided the rule as “practically worthless.” The New York Times, in a front page story this week seemed to be “shocked” (see “Casablanca”) that the coal industry was already planning on how to defeat the rule before the rule was published. http://goo.gl/x0yzd3

There is 100% agreement on one thing -- the Clean Power Plan is headed for the courts as soon as EPA publishes the official version of the rule in the Federal Register expected later this month.

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Massive New National Monument Proposed in Southern Utah

A coalition of environmental, recreational, political and business groups has come together to support the establishment of a 1.8 million acre national monument in the Colorado Plateau region of Southern Utah. The proposed Monument, covering an area larger than Delaware, would include areas surrounding Canyonlands National Park, Glen Canyon National Recreation Area and the Manti-La Sal National Forest. As stated on the Coalition’s website, there is an urgent need to protect this area from “[i]ncreasing pressure from oil and gas development, potash and uranium mining, and even tar sands development [which] threaten the archeological, biological, and recreational values of this unique region — not to mention threatening the source of the Southwest’s most critical watershed.” Not surprisingly, this initiative has been opposed by those in the extractive industries. The proposed monument is also being actively opposed by Utah’s Congressional delegation and Utah Governor Gary Herbert.

For the time being, President Obama has said that there will be no designation of the proposed Greater Canyonlands Monument. However, earlier this month, the President announced the creation of three new national monuments, including the 704,000 acre Basin and Range National Monument in neighboring Nevada. This action nearly doubled the amount of land protected by the President under the Antiquities Act during his administration. Those concerned about the formation of the Greater Canyonlands National Monument are left to wonder whether this move by the President is signaling a shift in policy that may lead to the Monument’s eventual formation. Only time will tell.

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Judge Orders “Accelerated” Review of Long-Disputed Montana Oil and Gas Leases

On July 27, 2015, U.S. District Judge Richard Leon ordered the BLM to develop an “accelerated schedule” within the next 21 days to be used to decide whether to authorize development of 18 federal oil and gas leases that were originally issued in 1982, but have been suspended for several decades. As discussed earlier [insert link to NRP post from 4/16/15], while the leases were originally issued over 30 years ago, they were suspended by the BLM in 1992 following controversy over whether any development should occur in the area.

Solenex, LLC, who holds record title to the leases, filed suit in 2013, arguing that the BLM’s decades-long suspension is unlawful and violates the Mineral Leasing Act. On Monday, Judge Leon denied Solenex’s request to order BLM to lift the suspension, instead ordering the BLM and Forest Service to develop a schedule outlining when a final decision will be made. Calling the BLM’s failure to make a decision on the suspension “unreasonable,” Judge Leon stated “[n]o combination of excuses could possibly justify such ineptitude or recalcitrance for such an epic period of time.”

Judge Leon’s order requires the BLM and Forest Service to come up with an “accelerated and fixed schedule” in the next 21 days that identifies the tasks that still need to be completed before a final decision can be made and how long those tasks are expected to take. Attorneys for Solenex have stated that they are disappointed the court did not order the suspensions lifted, but are thankful that the court is taking the issue seriously.

Blackfeet tribal Chairman Harry Barnes stated that the tribe, which considers the area in which the leases are located to be a sacred cultural site, will continue to protest any oil and gas development in the area. “The tribe will never let any drilling go ahead . . . We've fought it for too long, and we're going to continue to fight it.”

  1834 Hits
1834 Hits