November 2002

Disclaimer: Agrilaw is a syndicated column produced by the full service London law firm of Cohen Highley LLP.  Paul G. Vogel, a partner in the firm, practises in the area of commercial litigation and environmental law.   Agrilaw is intended to provide information to farmers on subjects of interest and importance. The opinions expressed are not intended as legal advice.  Before acting on any information contained in AgriLaw, readers should obtain legal advice with respect to their own particular circumstances.

Should you need to discuss a energy regulation related matter, please contact Paul Vogel or John Goudy by e-mail or by telephone at (519) 672-9330.  If corresponding by e-mail, be sure to include your name, your telephone number and a brief message.

Increasing demand for natural gas in North American markets is resulting in an increased demand for underground natural gas storage. As gas utilities look to depleted oil and natural gas pools to satisfy their underground storage requirements, agricultural landowners who have leased these storage rights and continue to own the surface rights are concerned about their entitlement to “just and equitable” compensation. What is “just and equitable” compensation for their storage rights and for the impacts of storage facilities on the lives and agricultural operations of these landowners?

Approximately 160 landowners belonging to the Lambton County Storage Association (LCSA) and owning land in Union Gas’ Lambton County underground storage pools have applied to the Ontario Energy Board (OEB) for determination of “just and equitable” compensation. In their recently filed amended application, these landowners are seeking “just and equitable” compensation not only for their storage rights but also for the impacts of wellheads, pipeline infrastructure and access roadways on their properties.

As far back as 1964, the OEB determined that landowners who have leased subsurface storage rights should be entitled to compensation which takes into consideration the “use and usefulness” of storage. Despite the increasing usage of natural gas, landowners have continued to receive annual payments for their storage rights under storage leases reflecting only increases in costs of living but failing to reflect the increased profitability of underground gas storage operations. LCSA landowners are requesting that the OEB award them a royalty interest in these increased profits. In addition, for landowners without leases within existing storage pools, these landowners are requesting that the OEB require acquisition of appropriate lease rights at compensation equivalent to amounts being paid for such rights to other storage and commercial operators.

With respect to surface storage facilities, LCSA landowners are requesting that the OEB award them compensation which reflects the appreciating value of the land rights appropriated and considers continuing negative impacts on soil productivity and required changes in farm practices with resulting financial loss; opportunity costs with respect to both value-added agricultural activities and future development; and sociological impacts, including diminishment of quality of life.

Expert evidence filed by these landowners in support of their application establishes current land values for surface facilities through reference to amounts paid by gas utilities for equivalent facilities discounted to provide an appropriate annual lease value. Other expert evidence addresses the continuing impacts associated with the construction and operation of these facilities including interference with systematic drainage, limitations imposed on crop selection, disruption of the scheduling of agricultural operations, altered cropping patterns and increased headlands. A sociological impact assessment undertaken by LCSA describes the fear, anxiety, uncertainty, anger, frustration and sense of powerlessness experienced by landowners resulting from the imposition of these facilities on them, their lack of choice, impacts on their agricultural operations and their ongoing concerns about these facilities. Additional expert evidence addresses limitations imposed by these facilities on more intensive or value-added agricultural-related land uses (eg. greenhouses, larger livestock facilities, home-based industries and on-site agricultural processing) as well as other farm-related operations (eg. bed and breakfast establishments, farm markets, retail sales of produce, crafts, jams, etc.). Also considered in this evidence are restrictions imposed by these facilities on non-agricultural or non-farm uses permitted under area official plans and zoning by-laws including agricultural service and supply establishments, non-farm residential use and potential for recreational or institutional uses such as golf courses.

In their request that these various factors be considered in awarding “just and equitable” compensation, LCSA landowners have provided to the OEB an analysis and valuation by an agricultural economist of these various impacts. LCSA landowners are requesting that the OEB require that the annual facilities payment under their gas storage leases reflect the current value of land rights, disturbance damages and production losses which include an assessment of crop losses attributable to the construction and operation of storage facilities; their higher operating costs around such facilities; and the opportunity costs and life quality impacts which result from these facilities.

The position of LCSA landowners is that the current system of compensating gas storage landowners is seriously flawed and that a fresh approach to compensation is required. If successful, the results of this application may assist other gas storage landowners in addressing the inequities of current compensation.