One Battle Is Over, But The War Over Energy Production In Southern Indiana Rages On

A few months ago, the Indiana Supreme Court came down with a decision that greatly impacts the ongoing, energy dispute in Southern Indiana.  To be specific, the Supreme Court’s decision upheld a contract between the Indiana Finance Authority (“IFA”) and Indiana Gasification, LLC for the purchase and sale of substitute natural gas (“SNG Contract”). Signed in early 2011, the SNG Contract authorized the construction of a new plant in nearby Rockport, Indiana that would allegedly generate substitute natural gas, bring a substantial number of construction, plant, and mining jobs to the region, and save energy customers money. It was heralded as “big step forward” in achieving Indiana’s goal of “becom[ing] a national leader in homegrown clean energy production,” according to the Natural Resources Defense Council.

Certain advocacy groups and recent studies, however, argue that the SNG Contract will not benefit the region. As background, the $2.65 billion dollar SNG Contract arose out of the Indiana General Assembly’s adoption of pro-SNG legislation starting in 2009. The legislation was intended to address growing concerns about the short supply of natural gas markets and the exponentially increasing prices of that resource. Since that time, however, unforeseen technological advances and increases in production of natural gas have caused supply to rise and prices to drop.  Those market forces have dropped the price of natural gas so much so that the price of synthetic or substitute natural is more expensive than natural gas. Opponents to the SNG Contract now predict that the combination of these recent changes and the SNG Contract will cost Indiana government and Indiana citizens between $1.2 to $1.9 billion dollars in gross domestic product over the next decade and reduce Indiana employment rates.

That dire prediction is why some interested parties recently sought to invalidate the SNG Contract through the court system. Opponents to the SNG Contract argued that the 30-year, $2.65 billion dollar SNG Contract should be deemed invalid and unenforceable because the definition of “retail end use customers” in the SNG Contract was not consistent with Indiana’s Substitute Natural Gas Act (“SNG Act”). The SNG Act requires that the SNG purchased by the government must be allocated to “retail end use customers,” which are defined as customers acquiring energy “at retail for the customer’s own consumption.” The original version of the SNG Contract, however, defined industrial “transport customers” as “retail end use customers,” which opponents to the SNG Contract argued was not consistent with the statutory language of the SNG Act.

Based on that argument, the Indiana Court of Appeals reversed the government’s original approval of the SNG Contract, and in response to the Court of Appeals decision, IFA and Indiana Gasification amended the SNG Contract by deleting the improper definition. All other provisions of the SNG Contract, save that definition, remained untouched. The Court of Appeals denied rehearing of the issue, even after the SNG Contract had been amended, asserting that the SNG Contract had already been invalidated. Upon motion by the IFA and Indiana Gasification, the Indiana Supreme Court of Indiana then granted a transfer so that it could examine the validity of the SNG Contract.

Like the Court of Appeals, the Supreme Court found that the original definition of “retail end use customers” of the SNG Contract was incompatible with the statutory definition laid down in the SNG Act. The Supreme Court then tackled the issue of whether the revised SNG Contract was enforceable. IFA and Indiana Gasification argued that, by amending the definitional language, the definitional problem was no longer a ground to render the SNG Contract invalid. The opponents of the SNG Contract, however, argued that the previous ruling by the Court of Appeals rendering the SNG Contract invalid made the revised SNG Contract “void and unenforceable in its entirety.”

After examining the issues, the Indiana Supreme Court held that the amended SNG Contract properly defined “retail end use customers” and was thereby compatible with the SNG Act. Moreover, the amendment rendered moot the definition issue, which had served as the basis for the appeal. The Indiana Supreme Court further explained that the argument that the SNG Contract was void after the Court of Appeals decision was unsuccessful because, when the Indiana Supreme Court grants a transfer, the underlying opinion of the lower court is, for all purposes, vacated. The Indiana Supreme Court therefore held that “upon [the] Court’s grant of transfer, any invalidation of the [retail end use customers] definitional provision was undone.” Since the SNG Contract was no longer invalid under the Court of Appeals decision and because the SNG Contract had been amended to include definitional language consistent with the SNG Act, the Supreme Court found that the controversy no longer existed and that the SNG Contract remains valid and enforceable.

The Indiana high court’s decision is essentially a win for the proponents of the SNG Contract. Under that decision, the IFA and Indiana Gasification do not have regulatory review and approval of the agreement. That being said, while the opposition to the SNG Contract may have lost the battle in the courts, it is certainly not admitting defeat. The opponents to the SNG Contract could reignite this ongoing dispute in the houses of congress. In January 2013, Indiana Senator Doug Eckerty brought forth Indiana Senate Bill 510, which is intended to void the SNG Contract. While Indiana Senate Bill 510 has already been passed in the Indiana Senate, it has not yet been passed by the house and signed into law. If passed and signed into law, that bill could potentially invalidate the SNG Contract for the Rockport facility and/or jeopardize potential funding for the project. With the recent Indiana Supreme Court decision and the battle in the courts coming to a close, it is possible that the battle over energy production in Southern Indiana could be revving up, with the houses of congress as the new theater of war.

If you have questions pertaining to the content of this article or any other questions about natural resource law, please contact the attorneys at Bowers Harrison.

Major Changes in Indiana for Oil and Gas Production Take Effect July 1, 2011

The Indiana legislature has approved a comprehensive oil and gas bill that will take effect on July 1, 2011.  The full act is available here: http://www.in.gov/legislative/bills/2011/SE/SE0071.1.html 

The enrolled Act covers a lot of territory for oil, gas, coal bed methane and coal mining operators. Some of the key provisions include:

1. The Indiana Department of Natural Resources ("DNR") shall adopt emergency rules and generally regulate coal bed methane wells.

2. Coal bed methane well permit applicants must disclose the products used in the stimulation process of coal seams.

3. The Act terminates the restriction on the extraction of coal bed methane from a well for oil and gas purposes.

4. The Act requires DNR to give certain written notices to interested persons regarding applications for coal bed methane permits.

5. The Act modifies the definition of "waste" to include gas production in a manner that unreasonably reduces the quantity of commercially minable resources.

6. Allows DNR to require an owner or operator to modify well locations in certain circumstances.

7. Establishes coal seam protection requirements with respect to producing vertical oil and gas wells.

8. Limits the exercise of rights in certain circumstances under a coal bed methane estate if the exercise affects miner safety or coal resources.

If you have any questions regarding this issue or any other natural resource and energy law issues, please contact the author, Mark E. Miller, or the Bowers Harrison attorney with whom you usually work.