Using Eminent Domain for Pipelines? That’s Right of Way Done Wrong –

Using Eminent Domain for Pipelines? That’s Right of Way Done Wrong –

Using Eminent Domain for Pipelines? That’s Right of Way Done Wrong

New York is a no-fracking zone—and many landowners are even losing money on gas flowing from other states.


Elmira, N.Y.

Last month the New York State Assembly voted to create a legislative moratorium on high-volume hydraulic fracturing, or fracking, until 2015 to further assess health and environmental concerns. The Senate may follow suit. The current executive moratorium has been in place since 2008.

But outside of Albany, many farmers and landowners have welcomed the revenues that have come with the drilling of the Trenton Black River formation and would likewise welcome drilling in the Marcellus and Utica formations, two of the largest natural-gas deposits in the nation, which have gone underdeveloped in the state since 2008. During this four-and-a-half-year wait, many farmers in rural New York have gone out of business, the oldest generation has begun to die off and the unemployment rate has hit near record highs.
In addition to being denied revenues from the oil and gas deposits beneath their feet, many New York farmers and landowners are also not being justly compensated for the pipelines running through their fields. Regardless of one’s stance on high-volume fracking, private companies should not be able to use eminent domain to seize land-use rights for pipelines at one price—deemed fair by the courts—only to turn around and sell those rights at a substantial profit.
I first became aware of this abuse of eminent domain in 2008, when I was approached by a landowner seeking legal representation concerning a proposed natural-gas pipeline on his farm in upstate New York. He explained to me that a pipeline company had offered him around $5 per linear foot to purchase a perpetual right of way for a gas pipeline. At 1,200 feet of right of way, my client would receive about $6,000.
After researching the issue, I discovered that the federal government and some Indian tribes—who by law are not subject to eminent domain—were not granting perpetual rights of way. Instead they were granting 10-year leases with rights of renewal and were charging rent accordingly.
This approach seemed reasonable, so on behalf of the landowner I requested a similar arrangement. To my surprise we were roundly rebuffed by the pipeline company, which then broke off negotiations and delivered to my clients a letter offering $1,000 per acre for a perpetual right of way. At 30-feet wide by about 1,200-feet long, the total area amounted to about 36,000 square feet or 0.826 of an acre. In other words, the $6,000 offer had been cut to $826.
The pipeline company’s attorney explained that his client had elected to exercise its right of “eminent domain” to condemn a perpetual right of way and that the $826 was the real-estate appraisal for the right of way. Pipeline rights of way are bought and sold on the open market by the linear foot among private pipeline companies, yet here my client was being offered a far lower price based on the per-acre value of the area to be used by the right of way.

State law determines just compensation in eminent-domain proceedings. In New York, as in many states, the courts use a system of “before and after” to determine the value to be paid for the right of way. The courts determine the highest and best use of the land underneath the right of way, then they value the land before the right of way is applied and after it is in place. The difference is paid to the landowner as his “just compensation.”

Valuing the right of way in this manner results in an extraordinary double-standard. Because a farmer can grow crops on the land again once the pipeline is in place, the loss to a farmer is deemed temporary and the land is worth, for all intents and purposes, the same before and after. Effectively the farmer receives a pittance for the right of way while the pipeline company enjoys a windfall of economic opportunity.

Clearly, the real value is not in the land but in the economic opportunity the right of way grants to the business entity. How is it “just compensation” that the farmer should be paid a fraction of the acreage value of his portion of the right of way, when anytime after eminent domain the pipeline company could sell the farmer’s right of way on a linear-foot basis at a substantial profit?

When the hammer of eminent domain is not available, the true market value arises. For example, in 2010 the 33-mile Laser Northeast pipeline, running from Susquehanna County, Pa., to the Millennium pipeline in Broome County, N.Y., did not have the right of eminent domain. The line is what is called a gas gathering line, which under New York law is not allowed the right of eminent domain. A coalition of landowners that I represented was therefore able to negotiate a 20-year right of way with a 20-year renewal.
The landowners were given the option of taking a lump sum or annual rentals. The lump-sum totals were about $55 per linear foot for the first 20 years and $65 per linear foot for the second 20 years. For nine miles of right of way in New York State, the company paid around $2.6 million for the first term. Annual rental rates were $3.50 per linear foot, indexed for inflation.
How did the pipeline company fare in this deal? It built its pipeline within a year for a total reported cost, including the rights of way, of $150 million. Last year it reportedly sold the rights of way and the pipeline within it for $750 million. The pipeline company did very well and the landowners were paid fairly.
How would this compare if Laser Northeast had eminent-domain powers? It would likely have paid around $1,000 per acre for 32 acres, for a total of about $32,727. Which of the above methods affords just compensation?
If New York state’s landowners must suffer the indignity of being denied the opportunity to develop their natural-gas deposits, they should at least be fairly compensated for the economic opportunity taken from them as other states’ gas passes through their lands.
Mr. Denton, an attorney, is co-founder of the Landowner Coalition Movement in New York State.

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