First-step analysis: energy disputes in USA

General

Describe the areas of energy development in the country.

The United States has a diverse portfolio of energy development, including oil, natural gas, coal, nuclear, wind, geothermal and solar. Fossil fuel development is predominant in the United States, although federal and state governments are beginning to shift their focus to the development of renewable energy resources. Indeed, over the past few 20 years, utility-scale wind and solar projects across the United States have increased exponentially. Offshore wind development has also risen in recent years, particularly off the Eastern Seaboard of the United States. Government tax incentives have contributed to the success of these projects, as well as the nation’s heightened interest in combating the effects of climate change.

Describe the government’s role in the ownership and development of energy resources. Outline the current energy policy.

The United States strongly emphasises private ownership and development of energy resources. Still, there is some government involvement. At the federal level, the Department of the Interior largely oversees the management of natural resources under federal and Indian lands, and includes several departments such as the Bureau of Land Management, which is responsible for domestic production from federal onshore oil and gas wells, as well as coal leasing, the Office of Surface Mining Reclamation and Enforcement, which regulates surface coal mining, the Bureau of Ocean Energy Management, which manages offshore conventional and renewable energy and marine mineral resources, the Bureau of Safety and Environmental Enforcement, which oversees offshore resource conservation and protection related to energy exploration and development, and the Federal Aviation Administration, which regulates potential obstructions to airspace in relation to wind turbines.

The federal government also plays a key role in incentivising the development of renewable energy resources. The two most significant incentives are the Production Tax Credit, which authorises a developer to take an income tax credit against its corporate income for each kilowatt-hour of electricity produced, and the Investment Tax Credit, which is a tax credit based on a certain percentage of a project’s depreciable property. Federal tax credits have been instrumental in ensuring the economic feasibility of wind and solar projects. However, Congress has displayed only wavering support for these incentives and has frequently allowed them to expire, leading to regular cycles of boom and bust for renewables. At the end of 2020, Congress enacted its most recent extension of deadlines for developers of solar, wind, and other renewable energy projects to start construction of new projects to qualify for federal tax credits.

In addition, the federal government regulates energy development through a general energy policy to promote domestic exploration and production of energy while also protecting the environment. The Environmental Protection Agency (EPA) serves to protect human health and the environment by creating and enforcing regulations based on US legislation, such as the Clean Water Act, the Safe Drinking Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, and the National Environmental Protection Act. The United States Army Corps of Engineers is responsible for water resource conservation and protection and the United States Fish and Wildlife Service oversees the protection of fish, wildlife, and natural habitats. Most states also have an agency parallel to the EPA, which oversees the protection of the state’s natural resources.

Moreover, state regulation is the primary method of oversight for the development of private energy resources. A state may have its own agency that regulates the ownership and development of energy resources. For example, the Texas Railroad Commission and the Oklahoma Corporation Commission govern oil and gas development in their respective states. For example, most states have a governing body that regulates the rates and services of electricity. In Texas, the Public Utility Commission of Texas regulates the state’s electric, telecommunication, and water and sewer utilities.

Commercial/civil law – substantive

Describe any industry-standard form contracts used in the energy sector in your jurisdiction.

Common standard-form contracts include joint operating agreements (JOAs), oil and gas leases, farmout agreements, assignments and surface use agreements, although the terms may be negotiated. The most commonly used JOAs are based on the American Association of Professional Landmen (AAPL) Form 610, the Association of International Petroleum Negotiators (AIPN) International Model (2012), AAPL Form 710 and the AIPN International Model (2014).

Other commonly used model contracts are created by the American Petroleum Institute, the International Association of Drilling Contractors, an industry group including producers, manufacturers and suppliers of oilfield equipment and services, and the North American Energy Standards Board (NAESB). Commodity transactions are often conducted using forms promulgated by the International Swaps and Derivatives Association (ISDA).

What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?

Generally, there is no federal contract law; instead, states determine rules of contract interpretation. Some states have adopted the Uniform Commercial Code (UCC) for disputes related to the sale of goods, while others follow general common law contract rules. All states generally follow common law rules for other contracts such as JOAs or contracts in manuscript form.

Under both rules, contractual terms are given their plain and ordinary meaning, interpreted as a reasonable person would understand them. In most states, the parol evidence rule prevents parties to a written contract from using extrinsic evidence to aid in the interpretation of the contract. If the language of the contract is unambiguous, courts will enforce the contract as written. If the contract’s terms are ambiguous, they are construed against the parties who draft the contracts. Accordingly, in disputes among landowner-lessors and energy-company lessees, ambiguous contracts are often construed against lessees as the scriveners of the contract.

Under common law, other considerations may be relevant, such as previous dealings between parties, the course of performance of the contract, and industry norms. However, under the UCC, these considerations may only explain or supplement, not contradict, contractual terms.

Describe any commonly recognised industry standards for establishing liability.

Subsurface oil and gas are subject to the common law rule of capture: a landowner has the right to oil and gas under his or her property, even if the oil and gas migrated from adjacent tracts of land. The first person to extract oil and gas from the land is its owner. A landowner who extracts hydrocarbons from a well on his or her land will not be liable for draining adjacent tracts of land. However, this right of appropriation does not cover negligence and waste (eg, letting gas escape). In some states, the common law rule of capture is modified by regulatory rules such as well-spacing requirements, forced pooling and unitisation.

As for production matters, oil and gas lessees are held to a reasonably prudent operator standard, rather than a fiduciary standard. They must consider both their own interests and those of their lessors.

Lessees may also be subject to implied contractual covenants, which vary from state to state. The most common implied covenants are to reasonably develop the leasehold; to protect the leasehold against drainage; to market oil and gas as a reasonable and prudent operator; and to manage and administer the lease.

Industry contracts in the commodity marketing and trading sector from ISDA, the NAESB and other organisations regularly limit liability for incidental, consequential, indirect or punitive damages, or for lost profits. Indemnity agreements may also offset liabilities between parties.

Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?

US contract law is generally hostile to concepts excusing performance during periods of commodity price or supply volatility. Under common law and the Uniform Commercial Code, unless otherwise agreed, price increases and supply volatility are considered foreseeable risks and do not excuse contract performance.

Force majeure clauses are common in energy contracts but they only excuse contract obligations when performance is prevented by unforeseeable events. Force majeure generally will not excuse performance due to predictable risks. Absent contrary language in an oil and gas lease, some states recognise the temporary cessation of production doctrine, which provides that circumstances causing a well to cease production temporarily will not automatically terminate a lease. While generally not applicable to strictly economic circumstances, courts have applied this doctrine to a wide variety of reasons for stoppage.

What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?

Energy companies confront US nuisance suits with varied success. Common law, as interpreted and developed in each state, governs private nuisance claims. Generally, an activity is a nuisance if it unreasonably interferes with the enjoyment and use of one’s property. Because this question focuses on reasonableness, outcomes in nuisance suits are largely determined by the trier of fact, typically a jury, on a case-by-case basis. For example, in Crosstex North Texas Pipeline, LP v Gardiner, the plaintiffs brought a nuisance suit under Texas law alleging that the defendant’s pipeline activities, specifically the operation of a compressor near the plaintiffs’ land, caused noise pollution. The jury found for the plaintiffs, but the appellate court reversed and remanded, citing factual insufficiency in light of the care shown by the defendant in building and maintaining the compressor. Contrastingly, in Parr v Aruba Petroleum, plaintiffs won a US$3 million US jury verdict for a private nuisance claim that alleged the plaintiffs were affected by the defendant’s emissions and spills. However, on appeal the court reversed and rendered a take-nothing judgment upon a finding that the plaintiff failed to establish that the defendant actually intended or desired to create the alleged interference.

There have also been several reported cases alleging that wind farms constitute a nuisance. The principal Texas case is Rankin v FPL Energy LLC, where the plaintiffs’ principal objection to the wind farm was that the wind turbines would destroy their view, cause excessive noise and reduce the value of their property. The appellate court upheld the jury’s ruling in favour of the defendant. It agreed with the trial court on the major issue: aesthetics is not admissible as evidence of nuisance under virtually any circumstances.

In the United States, there is no privity requirement to bring nuisance or negligence lawsuits. Anyone affected by energy development activities, such as homeowners, may have standing to bring such lawsuits if they allege damage caused by these activities.

One recent area of development in nuisance litigation has been climate change-related nuisance claims against energy companies. Generally, the plaintiffs in these cases claim that energy companies have contributed to climate change by virtue of the greenhouse gases emitted in the production or use of the companies’ oil and gas products. In some cases, the plaintiffs are seeking to obstruct hydrocarbon energy development but have not yet articulated the scope of the requested injunctions. The viability of these claims is a developing area of the law. For example, the City of New York’s climate change-related nuisance claim was dismissed on the basis that the Clean Air Act displaced all federal common law claims, and that decision is currently on appeal. Several other federal courts have remanded nuisance claims so that they may be determined by the state courts. Those cases are on appeal, and the United States Supreme Court has granted certiorari in the Baltimore case on a narrow procedural question regarding the reviewability of removal arguments.  In that case, the Fourth Circuit had upheld the lower court’s remand after determining that federal officer removal was the only reviewable basis for removal. 

How may parties limit remedies by agreement?

Parties have wide latitude to limit their remedies by contract. Although the limitation of remedies must adhere to a standard of conscionability and exclusive contractual remedies must not fail their essential purpose, parties may limit remedies to liquidated damages, replacement or refund, or exclusion of or caps on some damages (eg, consequential).

The definition of certain kinds of damages is often subject to dispute. For example, consequential damages often denote damages unaccounted for by contract that result naturally but not necessarily from a breach of contract. However, parties often dispute whether their contracts contemplate naturally resulting damage, a prerequisite for recovery. If the losses are contemplated, they are recoverable. See McKinney & Moore, Inc v City of Longview.

Is strict liability applicable for damage resulting from any activities in the energy sector?

Courts apply strict liability standards to activities that are deemed abnormally dangerous or ultra-hazardous. In deciding whether an activity is abnormally dangerous, most courts apply a balancing test based on the following factors:

• the existence of a high degree of risk of some harm to the person, land or chattels of others;
• the likelihood that the harm that results will be great;
• the inability to eliminate the risk by exercise of reasonable care;
• the extent to which the activity is not a matter of common usage;
• the inappropriateness of the activity to the place; and
• the extent to which its value to the community is outweighed by its dangerous attributes.

Generally, US courts find that traditional activities in the energy industry are not abnormally dangerous, and strict liability standards are seldom used. However, some pockets of strict liability exist. The Oil Pollution Act imposes strict liability for oil pollution on owners and operators of vessels. The Trans-Alaska Authorization Act imposes strict liability on owners of the Trans-Alaska Pipeline right of way for all damages resulting from activities along or near the right of way. Moreover, oil tankers carrying Alaskan oil transported through the pipeline are also strictly liable for pollution damage. Some states also impose strict liability on oil and gas operators for any surface damage caused (eg, New Mexico’s Surface Owner Protection Act).

The recent boom in hydraulic fracturing has spurred litigation on whether such activities are abnormally dangerous. Though the applicability of strict liability is a question of law to be decided by judges, recent litigation suggests that judges are unwilling to decide this issue without a developed record of facts. See Ely v Cabot Oil & Gas Corp (after initially declining to decide the issue without a more developed record, holding after further discovery that (1) ‘natural gas drilling operations and hydraulic fracturing are not abnormally dangerous activities’; and (2) claims for property damage and injury resulting from such operations ‘should continue to be limited to, and considered against, the standards governing negligence’ rather than strict liability); and Kamuck v Shell Energy Holdings GP, LLC (refusing to decide on the pleadings whether fracking is abnormally dangerous, but rather deciding to wait until the close of discovery).

Commercial/civil law – procedural

How do courts in your jurisdiction resolve competing clauses in multiple contracts relating to a single transaction, lease, licence or concession, with respect to choice of forum, choice of law or mode of dispute resolution?

US courts look to the reasonableness of the venue when comparing conflicting choice-of-forum clauses. Jurisdiction must be met for the specified venues, and then the court considers whether the venue selected by the plaintiff is reasonable, based on factors such as costs, witness location and segregation of claims into multiple venues. Some jurisdictions, such as Texas, follow the ‘dominant jurisdiction doctrine’, which applies when a suit involving identical subject matter is filed in different courts. The court where the suit was first filed retains the dominant jurisdiction.

If a conflict between choice-of-law provisions arises, courts generally apply the conflicts of law principles of the forum court. Still, the false conflict doctrine allows for a court to avoid the choice-of-law inquiry where the laws of the involved states would result in the same decision. Some jurisdictions require that the presumptive local law apply, whereas others apply the law of the interested state.

When the mode of dispute is at issue, courts examine provisions regarding alternative dispute resolution. If language is broad enough to encompass the issue in dispute, the courts will generally find that the clause is enforceable.

If an arbitration clause conflicts with the applicable forum laws, a court may invalidate an arbitration provision that allows for arbitration in another state when the contract performance occurred in the forum state. See Keystone v Triad Sys Corp (holding that California arbitration provision violated public policy because Montana had greater interest in dispute); but compare Cahill v Alt Wines, Inc; Allen v World Inspection Network Int’l, Inc. (holding that the Federal Arbitration Act pre-empted state legislation, nullifying certain choice-of-forum provisions).

When there is a conflict between agreements and their choice-of-law or choice-of-forum clauses, some jurisdictions follow the most recent contract if there is no language therein referencing the first contract. Other jurisdictions may rescind both contracts if there is a mutual mistake by the parties drafting the conflicting provisions. If the conflicting provisions can be defined by scope, the court may try to enforce the provision by the subject it covers, such as when one contract’s choice-of-law provision governs torts and the other’s applies to breach of contract.

Are stepped and split dispute clauses common? Are they enforceable under the law of your jurisdiction?

While both split and stepped-up dispute clauses are used in the United States, the stepped-up dispute clause is standard in energy disputes. A stepped-up dispute clause requires a single issue to travel through various steps, such as an internal company reporting system or mediation, prior to litigation. A split dispute resolution clause involves an agreement to have separate issues resolved through separate means; for instance, contracting parties may agree that a dispute arising from an event of default should be referred to arbitration and all other disputes subject to litigation.

These clauses are generally enforced when clear and drafted as a condition precedent to subsequent procedures in the dispute-solving scheme. These clauses will not likely be enforced if ambiguous, vague or used for delay.

How is expert evidence used in your courts? What are the rules on engagement and use of experts?

Federal Rule of Evidence 702 governs the admissibility of expert-witness testimony. A qualified expert may offer opinion testimony if it is reliable and relevant, meaning the testimony must be helpful, based on adequate data or facts, supported by trustworthy methods and principles and based on a reliable application of the methods and principles to the specific facts at issue.

The leading US Supreme Court case Daubert v Merrell Dow Pharmaceuticals, Inc places judges in the role of gatekeepers to determine whether expert evidence meets Rule 702 before testimony is introduced to a jury.

Federal Rule of Evidence 403 works in conjunction with Rule 702 to safeguard against evidence that is irrelevant, prejudicial, confusing or causes delay. This Rule may exclude expert evidence when the testimony falls within the common understanding of the jury, when expert testimony would complicate an issue or when the evidence is otherwise unduly prejudicial.

Conversely, state courts vary on the stringency of admitting expert testimony. The majority, including Texas and Oklahoma, follow Daubert. The minority follow a ‘general acceptance’ test from Frye v US. The Frye test sets a lower bar for expert-testimony admissibility, requiring that the expert witness’ methods are ‘generally accepted’ by the relevant scientific community. In practice, a jurisdiction following Frye may allow expert testimony based solely on the expert’s education, even regarding a specialised matter. A jurisdiction following Daubert would require more, such as experience in a specialist field, as well as the additional criteria discussed above.

For example, a court applying Daubert excluded testimony about the operation of a specialised computer program used to track well casing when an expert witness had years of experience in the field but no specialist knowledge about the program (see Express Energy Servs Operating v Hall Drilling). Conversely, under the same Daubert test, a court allowed expert testimony on an oil rig’s defective design when the expert was a licensed mechanical engineer with almost two decades of experience and worked with similar rigs (see Smith v Central Mine Equip). Notably, an expert may be qualified under Daubert to testify in one area and prohibited from addressing others, even within the same trial (see In re Laurel Valley Oil Co).

What interim and emergency relief may a court in your jurisdiction grant for energy disputes?

Writs of mandamus, interim orders, temporary restraining orders and injunctions are available options for interim and emergency relief. A writ of mandamus may be sought by a party before final judgment has been entered, when the party disagrees with the judge’s ruling regarding a matter of law. The party appeals to the appellate court to issue an order to correct the lower court judge’s decision; however, granting a writ of mandamus may be authorised only under exceptional circumstances. Temporary restraining orders, temporary injunctions and permanent injunctions prevent an entity or individual from acting (or omitting to act) in a certain manner for a designated period of time.

For example, an injunction can be used in some states to access another’s land or receive revenue payments while a mineral dispute is pending. See Cason v Chesapeake Operating; Genesis Producing Co v Smith Big Oil Corp. A writ of mandamus may be used in some states to request that an agency issue a drilling permit (see Devon Corp v Miller).

An emerging trend in energy disputes involves requests for emergency arbitration, which may be filed with the arbitral tribunal even before a request for arbitration is filed. This mechanism is sometimes used when there is a need for immediate interim relief for emergency situations, such as an interruption of gas supplies needed for energy creation or the withdrawal of a licence by the state.

What is the enforcement process for foreign judgments and foreign arbitral awards in energy disputes in your jurisdiction?

Foreign arbitral awards are governed by the New York Convention, also known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The enforcement of an arbitral award issued under the New York Convention is governed by the Federal Arbitration Act, and applies only to the signatories. Enforcement depends on reciprocity, requiring that the jurisdiction of the foreign arbitral award be a party to the New York Convention.

The United States also ratified the 2005 Hague Convention on Choice of Court Agreements in 2009, whose purpose is to promote security in international business transactions through the cooperation of enforcing foreign judgments and to unify jurisdictional rules on international transactions and enforce foreign judgments for those who have ratified the agreement.

Federal courts will follow state law in recognising and enforcing foreign judgments and awards. Thirty-two states, including Texas, Oklahoma and Pennsylvania, follow the Uniform Foreign Money-Judgments Recognition Act (UFMJRA), agreeing to enforce foreign money judgments. This enables enforcement by extending the Full Faith and Credit Clause of the US Constitution to specific foreign judgments protected under the UFMJRA.

Other states follow the Restatement (Third) of Foreign Relations of the US – as do states with foreign judgments that are not recognised under UFMJRA – which permits enforcement of foreign judgments that involve money, a person’s status or a property interest. Although only in a minority of states, reciprocity may play a factor in enforcement. Some courts require reciprocity between its court and the foreign jurisdiction where the judgment was issued.

To enforce a judgment or arbitral award, the party seeking enforcement must file in a court with proper jurisdiction. Typically, little evidence is required in support. The party bringing the action must present proof of a final foreign judgment against a US defendant, or a certified copy of the arbitration agreement and award for an arbitral award. A jury and trial are not required and resolution typically occurs within weeks or months.

Are there any arbitration institutions that specifically administer energy disputes in your jurisdiction?

There are no energy-specific arbitration institutions; however, there are several institutions – national, regional and local – that support US energy disputes. Notably, the American Arbitration Association, International Institute for Conflict Prevention and Resolution and JAMS provide administrative support structures to host mediation and arbitration. States that focus on energy have some energy-specific centres, such as the Center for American and International Law in Texas or the Houston Maritime Arbitrators Association, but most arbitration centres provide a wide array of mediators or arbitrators qualified in various fields.

Is there any general preference for litigation over arbitration or vice versa in the energy sector in your jurisdiction?

There is a mildly growing preference for domestic arbitration in the energy sector, rather than cross-border and international arbitration. Domestically, there is still a preference for litigation to solve energy disputes; however, some companies are trending towards arbitration with limited discovery because of its potential cost savings and faster resolutions. Obtaining an arbitrator experienced in energy-specific customs is preferable when resolving complex energy disputes that raise difficult technical questions.

Are statements made in settlement discussions (including mediation) confidential, discoverable or without prejudice?

Federal Rule of Evidence 408 governs compromise offers and negotiations. Settlement and negotiation discussions involving an offer or acceptance of an offer as an attempt to compromise over the claim are confidential, undiscoverable, inadmissible as evidence and otherwise without prejudice – except in criminal cases – if entered as evidence to prove the validity or amount of a claim in dispute, or to impeach a witness by a prior inconsistent statement or contradiction. A majority of states have enacted a similar rule regarding settlements and offers.

Confidentiality of mediation discussions is less clear. While some states such as California, Texas and Louisiana have enacted statutes to broadly protect communications in mediation, federal courts do not have a mediation-specific statute except Rule 408. This protection does not expand to discussions that may be used to prove bias or prejudice of a witness.

Are there any data protection, trade secret or other privacy issues for the purposes of e-disclosure/e-discovery in a proceeding?

The Uniform Trade Secrets Act provides remedies to help protect trade secrets and confidential data, including seismic data, well logs, fracture designs, and land and lease files. Courts may also grant a protective order for discovery proceedings, conduct in-camera hearings, seal the relevant records and require court approval before a party can disclose information regarding the trade secret. Such protections have been adopted by all but two states: New York and Massachusetts. They instead use a multi-factor common law test to define trade secrets.

What are the rules in your jurisdiction regarding attorney-client privilege and work product privileges?

The Federal Rules of Evidence, Federal Rules of Civil Procedure, federal and state common law, and American Bar Association Rules all govern the attorney–client and work product privileges.

Federal Rule of Evidence 502 provides that the attorney–client privilege is held by the client and protects confidential communications involving legal advice between the party and his or her attorney. Federal courts have held that the privilege can include communications between a client or a client’s representative and a lawyer or the lawyer’s representative as long as the other conditions for attorney–client privilege are fulfilled. In a business context when the business is the client, communication with employees may also be protected if it is clear the communication was for the primary purpose of securing legal advice. This privilege can be waived (eg, providing privileged information to a testifying expert witness or third parties not affiliated with the client).

Under Rule 502 and Federal Rule of Civil Procedure 26(b)(3), work-product privilege protects materials created in preparation for litigation, such as attorney-created documents and tangible items. The party claiming the privilege has an obligation to show the privileged information was prepared in preparation for anticipated discovery and litigation. The work-product privilege is waivable, including by disclosure to a non-party or by court order, when the requesting party shows a substantial need and undue hardship caused by its non-production. Unlike the attorney–client privilege, the ability to waive the work-product privilege belongs to the attorney.

Inadvertent disclosures of privileged material do not qualify as a waiver when the privilege holder reasonably tried to prevent disclosure and took reasonable measures to correct the disclosure. US courts are split on whether waiver requires the disclosure to be intentional and whether inadvertent disclosure waives the privilege for the single communication or the whole subject matter of that communication.

State courts have generally adopted similar rules to the above. For example, in In re ExxonMobil Corp, a Texas court held that Exxon had waived its attorney–client privilege over title-opinion documents when contract landmen from outside the company viewed title opinions drafted by in-house counsel, even though the landmen were subject to confidentiality agreements. Conversely, the court also found that the attorney–client privilege was not waived when in-house attorneys sent drafts of a unit operating agreement to employees to review that were intended to be distributed to outside parties. Instead, the court found that privilege was not waived because the documents were not actually distributed to persons outside the company, even though it was the ultimate intent.

Rule 1.6 of the American Bar Association’s Model Rules of Professional Conduct provides that an attorney will not share information regarding the representation of his or her client without consent or unless an exception applies, such as disclosure to prevent death, commission of a crime, or to establish a defence in a malpractice claim. Such protection also exists at the state level.

Must some energy disputes, as a matter of jurisdiction, first be heard before an administrative agency?

Federal agencies may have exclusive, primary or concurrent jurisdiction depending on the nature of the energy dispute. For example, the Federal Energy Regulatory Commission (FERC) has exclusive jurisdiction over the transmission of electric energy in interstate commerce and wholesale sales of electricity. For certain contractual disputes, such as breach of contract for failure to pay, FERC and a state court may have concurrent jurisdiction. If FERC’s regulatory expertise is necessary to interpret the contract to resolve the dispute, it may assert primary jurisdiction to resolve the dispute on the merits or issue an opinion interpreting the contract that may be used in the state court action. Other Federal agencies, including the Bureau of Land Management, Bureau of Indian Affairs, and United States Forest Service, have appellate procedures for agency decisions, and require that agency administrative remedies be exhausted prior to bringing suit in federal court.

Multiple federal agencies may have concurrent jurisdiction, such as the anti-manipulation authority shared by FERC and the US Commodity Futures Trading Commission (CFTC) over certain commodity trading. Unlike FERC’s administrative action, the CFTC can bring criminal and administrative actions against a violator. While the entities work to share information, both may investigate or initiate enforcement actions for the same conduct. For example, in US Commodity Futures Trading Commission v Amaranth Advisors, LLC, FERC and CFTC clashed over FERC’s jurisdiction to challenge the defendant’s activities in certain derivative markets. CFTC has exclusive jurisdiction to regulate trading of natural gas futures contracts, but FERC brought an administrative action based on the alleged effect the manipulative actions had on FERC-jurisdictional transactions. As recommended by the court, these agencies continue to work together to coordinate investigations and communicate information.

Regulatory

Identify the principal agencies that regulate the energy sector and briefly describe their general jurisdiction.

At the federal level, the Department of Energy has large responsibilities regarding US policy. Additional regulatory bodies handle specific aspects of the energy industry including safety regulations, permitting, land use regulations, and enforcement. These include: the Federal Energy Regulatory Commission (FERC), the Environment Protection Agency (EPA), the Bureau of Land Management (BLM), United States Forest Service, the Bureau of Indian Affairs (BIA), the United States Army Corps of Engineers, and the Department of Transportation. Many states also have their own agencies, such as the Texas Railroad Commission, which work with the federal government to regulate the energy sector and may impose supplementary requirements. Additionally, all energy-related operations located on federal and first nations lands must work with the federal Bureau of Land Management.

FERC regulates and oversees markets for natural gas, oil, coal, electric power, interstate pipelines, renewable energy and hydropower projects. Each state has its own public utility commission that works with FERC to regulate energy operations and safety. State public utility commissions regulate the following: retail sales of electricity and natural gas, construction of energy facilities and local pipelines, abandoned oil facilities, local and regional power systems and cooperatives, electric transmission and reliability, nuclear power plants and pipeline safety.

The EPA writes and enforces environmental regulations, sets national standards and educates states, industry and individuals. The EPA is responsible for regulating a broad range of energy exploration, development and production, as required under federal statutes such as the Clean Air Act, the Clean Water Act and the Comprehensive Environmental Response Compensation and Liability Act. States also have their own environmental regulatory agencies such as the Texas Commission on Environmental Quality and the Oklahoma Department of Environmental Quality.

BLM, the BIA and the Forest Service manage federally owned land. Consistent with this management, these agencies make oil, gas and mining leasing decisions; issue permits; and regulate exploration and development activities.

Do new entrants to the market have rights to access infrastructure? If so, may the regulator intervene to facilitate access?

New entrants into the US market have rights to access natural gas pipelines. Interstate pipelines must offer access to their transportation infrastructure to all other market players equally, referred to as ‘open access’ to the pipelines. This requirement allows marketers, producers, end users and local distribution companies to contract for transportation of their natural gas via interstate pipeline, on an equal basis. State laws also require open access for those facilities that are constructed under the power of eminent domain. However, there are gathering pipeline systems available for use by non-utilities that are not open access.

For renewable energy projects, transmission access to the electrical grid is crucial to viability. Without it, a wind or solar development may be unable to interconnect with the electrical grid and sell its electricity to consumers. The Federal Energy Regulatory Commission (FERC) has jurisdictional authority over transmission of electric energy in interstate commerce. However, FERC does not exercise exclusive authority over all transmission of electricity in interstate commerce. Rather, FERC regulates the transmission of wholesale and unbundled retail electricity in interstate commerce, and it allows states to regulate the transmission of bundled retail electricity in interstate commerce.

What is the mechanism for judicial review of decisions relating to the sector taken by administrative agencies and other public bodies? Are non-judicial procedures to challenge the decisions of the energy regulator available?

Federal and state administrative agencies have the power to make decisions that affect the issuance or denial of benefits, such as leases and permits, and the imposition of obligations. Entities wanting to appeal those decisions may request an administrative hearing. At the hearing, an administrative law judge will review the case and make a ruling.

A party may appeal the administrative law judge’s ruling to a court of competent jurisdiction, unless a statute specifically forbids such action. However, before filing an appeal to the ruling, it is essential to first exhaust all of the available administrative remedies. For example, before a party may file for relief in court in Texas state courts for the denial of a drilling permit, the party must first apply to the Railroad Commission, request and hold a hearing before two examiners (typically one engineer and one attorney) who then issue a report to the Commissioners, and, if necessary, request a rehearing.

On appeal, the state court will presume that the government agency’s decision was correct. The burden of proof is on the contesting party to show that the agency’s decision is invalid because it is unreasonable, unlawful, arbitrary, unsupported or wrong. The court will use evidence from the administrative record to determine if the agency was acting within its authority, complying with statutes and not acting arbitrarily. New evidence and witnesses are usually precluded.

Upon a showing that the agency acted in violation of its authority or otherwise acted unlawfully, the reviewing court may reverse, modify, vacate or remand the agency’s action. The court can also issue a mandate requiring the agency to issue a certificate, comply with a statute or regulation, or conduct further proceedings.

If the appeal is unsuccessful, another appeal may be requested. However, further judicial review is discretionary. An appeals court may choose not to hear an appeal when a lower court has already reviewed an administrative agency’s decision.

Many Federal agencies employ similar procedures. For example, decisions concerning the issuance of, or obligations under, permits, leases and contracts made by the officials within the Bureau of Land Management or the Bureau of Indian Affairs may be appealed to applicable State or Regional Directors, and then to the Department of the Interior’s Board of Land Appeals (IBLA) or Board of Indian Appeals (IBIA), respectively. The IBLA and IBIA review evaluates whether the underlying decision was arbitrary and capricious or contrary to law. Once the agency appellate procedure is exhausted, the decision is considered final and becomes subject to judicial review.

Some federal and other state administrative and judicial appeals, however, follow different practices.

Appeals from regulatory proceedings before the FERC generally proceed directly to a US court of appeals, bypassing federal district court review. An exception to this general approach relates to allegations of market manipulation in wholesale electricity matters. Respondents in such matters have an option to proceed through an administrative process or seek de novo review in a federal district court. The administrative option involves a FERC administrative law judge and then FERC itself issuing orders, and appeals are taken directly to a US court of appeals. If the respondent elects de novo review, then FERC assesses a penalty that is subject to review at a federal district court and any appeals would then proceed to a US court of appeals. Note that FERC does not afford respondents in alleged manipulation cases involving natural gas with the same de novo review option.

What is the legal and regulatory position on hydraulic fracturing in your jurisdiction?

The United States is generally open to hydraulic fracturing for natural gas recovery. The Environmental Protection Agency works with states to provide oversight, rulemaking and guidance. In some states, energy companies are required to disclose the chemicals used in the hydraulic fracturing process. Specific hydraulic fracturing activities may be challenged in state or federal courts. Some states, such as Maryland, Washington, Vermont and New York have banned or placed moratoriums on the practice. However, the constitutionality of such prohibitions is currently being litigated in both state and federal courts. The Texas legislature, for example, has expressly pre-empted the authority of municipalities and other political subdivisions to regulate hydraulic fracturing. Similarly, the Colorado Supreme Court struck down a ban by Fort Collins, Colorado because it was pre-empted by state law.

Describe any statutory or regulatory protection for indigenous groups.

The United States has the sole sovereign to sovereign relationship with indigenous tribal governments it recognises. There are 573 recognised tribal nations in the US, many having entered treaties. In many instances, real property held by the tribal nation or its members often is subject to a trust relationship where the property is held by the United States in trust for the beneficial owner. Land also may be held in fee simple by the tribal nation and its members as with any other domestic government or citizen.

When federal action occurs or is requested, as with lease or permit issuance, and regardless of location, the federal government has a mandatory tribal consultation obligation prior to taking action.

Among other laws, executive orders and policies, the following statutes, both procedural and substantive, protect indigenous groups: National Historic Preservation Act, Native American Graves Protection and Repatriation Act, American Indian Religious Freedom Act, National Environmental Policy Act, and Archaeological Resources Protection Act of 1979. These laws establish procedures for managing discovered cultural artefacts.

Describe any legal or regulatory barriers to entry for foreign companies looking to participate in energy development in your jurisdiction.

The United States is open to investment and imposes few impediments to foreign ownership in energy development. The United States does not discriminate between nationals and foreign individuals in the operation of private companies and the procedure for establishing an energy business is the same for US and foreign investors.

However, the Committee on Foreign Investment in the United States (CFIUS) may review any transaction or investment that could result in control of a US business by a foreign company that involves critical infrastructure or national security concerns. For example, in 2012, a Chinese-owned corporation was ordered to remove itself from four small wind farm projects located near a US Navy facility. While the decision to block or permit foreign investment turns on a host of factors – mostly related to national security – a project is unlikely to be blocked as a result.

Moreover, the domestic shipping industry of the United States, which often moves crude oil and refined products for energy companies between US ports via barges and ocean-going vessels, is subject to limited foreign investment and control under the Jones Act.

What criminal, health and safety, and environmental liability do companies in the energy sector most commonly face, and what are the associated penalties?

Energy companies must comply with federal, state and local environmental, health and safety laws. The US Environmental Protection Agency is the primary federal agency that issues environmental regulations, administers environmental regulatory and permitting programmes, and enforces alleged violations of environmental laws. Most environmental statutes, including those established to regulate clean air, clean water and hazardous waste, provide for criminal, civil or administrative penalties. Typically, criminal prosecutions are reserved for alleged violations involving knowing or wilful conduct. However, criminal penalties may be assessed for negligent conduct under some environmental statutes, including the federal Clean Air Act and the federal Clean Water Act. As an example, a negligent violation prosecution might be brought for alleged negligence resulting in an industrial explosion, fire or release of pollution. In addition to federal enforcement, state and local governments may enforce environmental laws.

The US Occupational Health and Safety Administration (OSHA) is the primary federal agency that issues worker health and safety regulations and that investigates and enforces alleged violations of worker health and safety laws. Most OSHA enforcement actions are civil or administrative. However, OSHA may initiate criminal enforcement for alleged wilful violations of certain standards that result in workplace fatalities. As with environmental laws, state and local governments may enforce worker health and safety laws. For both environmental and worker health and safety criminal prosecutions, convicted corporate defendants may be made to pay monetary fines, and they may also be barred from entering into federal government contracts. Convicted individual defendants may be made to pay monetary fines, be subject to imprisonment, or both.

Other

Describe any actual or anticipated sovereign boundary disputes involving your jurisdiction that could affect the energy sector.

The United States has an exclusive economic zone that extends 200 nautical miles from its territorial sea baseline. Within the zone, the United States has sovereign rights to natural resources. Historically, the United States and Mexico had a moratorium on exploiting resources near the US–Mexico boundary line in the Gulf of Mexico.

In 2012, the United States and Mexico signed the US–Mexico Transboundary Hydrocarbons Agreement, which lifted the moratorium and created options for joint development of transboundary resources. The US–Mexico agreement does not, however, resolve disputes between the United States, Mexico and Cuba. After the United States and Cuba formally resumed diplomatic relations in 2015, the United States and Cuba signed a bilateral treaty in January 2017 that delimited the last remaining section of the US–Cuba maritime boundary that had not previously been agreed. However, as at the date of publication, the treaty has not yet entered into force. And, in January 2021, the Trump administration named Cuba a State Sponsor of Terrorism.

Is your jurisdiction party to the Energy Charter Treaty or any other energy treaty?

Although the United States is not party to the Energy Charter Treaty, it has observer status to the charter. Until recently, the United States, along with Canada and Mexico, were parties to the North American Free Trade Agreement (NAFTA), which contained a chapter on energy and basic petrochemicals. This NAFTA chapter dictated free trade principles with which the party countries must comply.

In October 2018, the United States, Canada and Mexico announced the framework of a new deal that will replace NAFTA called the United States–Mexico–Canada Agreement (USMCA). On 30 November 2018, the United States, Canada and Mexico signed the treaty. A revised version of the treaty was signed on 10 December 2019. The treaty is still pending ratification by the United States Senate. The USMCA has been largely supported by the energy industry as retaining the free trade principles related to energy from NAFTA, while also including protections for investors in foreign countries. In particular, United States energy companies can be eligible for Investor-State Dispute Settlement processes for their investments in Mexico. The United States also entered into the Transit Pipeline Treaty with Canada that reinforces both countries’ commitments to a natural gas pipeline traversing both countries’ territories.

Additionally, the United States is party to several treaties that involve the nuclear energy sector, including agreements entered into pursuant to section 123 of the US Atomic Energy Act. This Act requires the United States to enter into agreements with other countries before any kind of nuclear cooperation may occur. These agreements require other countries to commit themselves to nuclear non-proliferation principles.

In 2016, the United States and 195 other nations entered into the Paris Agreement under the United Nations Framework Convention on Climate Change. The Paris Climate Agreement’s major aim is to decrease the rate of global warming through energy and climate policy. The agreement encourages participating nations to reduce their carbon footprint and increase their use of renewable energy sources. In November 2019, the United States, under the direction of the Trump administration, formally withdrew from the Paris Climate Agreement. The new administration, led by President Joe Biden, has vowed to rejoin the Paris Climate Agreement in 2021.

Describe any available measures for protecting investors in the energy industry in your jurisdiction.

Federal and state law protects investors from burdensome and unjustified use of governments’ eminent domain and condemnation powers. Under the US Constitution, the federal government cannot take private property for public use without just compensation. States, however, may generally make their own determinations for public use, and just compensation is regularly interpreted to mean fair market value.

Companies that sell their securities on public exchanges, regardless of sector, must regularly disclose information about their financial condition, operations, and various other areas of their business to the public and to the companies’ shareholders. These disclosure regulations are enforced by the US Securities and Exchange Commission, which may bring enforcement actions and punish companies that issue false, incomplete or misleading information. Additionally, the US Clean Energy Loan Guarantee Program authorises the Department of Energy to guarantee loans for projects that employ new and improved energy technologies and avoid or reduce air pollutants or greenhouse gases. The availability of loan guarantees for clean energy projects fluctuates significantly based on the policies of the current political administration.

Describe any legal standards or best practices regarding cybersecurity relevant to the energy industry in your jurisdiction, including those related to the applicable standard of care.

The US energy sector has a strong record of developing cybersecurity best practices. In 2015, the Department of Energy (DOE) released a guide to help the energy sector establish and align cybersecurity practices to meet the objectives of the National Institutes of Standards and Technology’s voluntary Cybersecurity Framework (NIST). This framework was created through industry and government collaboration, and provides high-level, strategic recommendations for managing cybersecurity risks. The Department also provides the Cybersecurity Capability Maturity Model (C2M2). During 2020, a working group reviewed and updated the model and expects to release version 2.0 of the C2M2. This model organises cybersecurity competency into 10 domains and provides a structured set of cybersecurity best practices for each domain. The domains are as follows:

• risk management;
• asset, change, and configuration management;
• identity and access management;
• threat and vulnerability management;
• situational awareness;
• information sharing and communications;
• event and incident response, continuity of operations;
• supply chain and external dependencies management;
• workforce management; and
• cybersecurity program management.

The DOE has also created an industry-specific version of the C2M2 for the electricity subsector and the oil and natural gas subsector. The practices recommended are organised in a progressive fashion such that an organisation can begin using the model regardless of its current state of cybersecurity efforts. The C2M2 model can be used across corporate information technology networks as well as operational technology networks.

In addition to DOE guidance that applies to all sectors of the energy infrastructure, specific subsectors are regulated by separate standards. For example, the Transportation Security Administration (TSA)’s Pipeline Security Guidelines issued in March 2018 has an advisory section on Pipeline Cyber Asset Security Measures. It is based on the NIST Cybersecurity Framework and lists cybersecurity measures pipeline operators should apply to pipeline cyber assets, responding to the emerging cyber threats against operational technologies. In May 2019, the Government Accountability Office reported weaknesses in the TSA’s guidelines regarding the lack of protocols for reviewing and updating the guidelines, need for a strategic workforce plan to conduct reviews, updates to the risk assessment methodology, and method for monitoring reviews and performance. The TSA has not yet released updates to the guidelines to address these concerns.

In addition, the North American Electric Reliability Corporation (NERC), an enforcement arm of the Federal Energy Regulatory Commission (FERC), promulgates the Critical Infrastructure Protection Guidelines (‘Critical Infrastructure Protection Reliability Standards’ or CIP), which detail cybersecurity requirements for the most crucial assets on the energy grid. In June 2019, FERC continued to bolster the cybersecurity of the bulk electric system by expanding the reporting requirements for incidents involving attempts to compromise operation of the grid. In August 2019, Government Accountability Office issued a report on Critical Infrastructure protection, which made key recommendations including a call for the DOE to develop a plan implementing a national cybersecurity strategy and a comprehensive assessment of cybersecurity risks facing the grid. In response, the FERC staff issued a white paper in June 2020 outlining the current cybersecurity standards and recommendations for incentives for utility companies to implement the standards. These CIP standards address bulk electric system (BES) cyber system categorisation, security management controls, personnel and training, electronic security perimeters, physical security of BES cyber systems, system security management, incident reporting and response planning, recovery plans for BES cyber systems, configuration change management and vulnerability assessments, information protection, and most recently effective in June 2020 were standards for supply chain risk management. The FERC, NERC and regional entities released a report in September 2020 outlining best practices for preparing an Incident Response and Recovery (IRR) plans. The report elaborates on the following pars of an IRR plan: preparation; detection and analysis; containment and eradication; and post-incident activity. We expect further updates and developments in this space based on the recent activity from FERC and NERC.

Update and trends

List any major developments (case law, statute or regulation) that are anticipated to affect the energy sector in your jurisdiction in the next 12 months, including any developments related to the taxation of energy projects. What is the anticipated impact of climate change regulations, treaties and public opinion on energy disputes?

In the next 12 months, several developments in particular are expected to affect the energy sector in the United States.

The first development in the United States is the national elections for President and Congressional members, which affect control of the White House, the House of Representatives and Senate. In November 2020, Americans voted in President-elect Biden, who is expected to emphasise renewable energy. He will likely have support in the House of Representative, where the Democratic Party retains a slim majority, and in the Senate, where runoff elections in Georgia gave the Democratic Party a one vote majority by virtue of Vice-President Kamela Harris’ tie breaking vote. 

Previously, the Trump administration had placed renewed emphasis on fossil fuels. The Trump administration policy faced challenges in the courts, bearing both success and failure. On a national basis, environmental groups continue to challenge development of all energy forms on federal lands using a variety of litigation strategies. For instance, nearly every new mineral lease or application to drill or transport was challenged for failure to adequately consider greenhouse gas emissions, including those from downstream energy consumption. Certain states, municipalities and environmental agencies also joined forces to oppose energy development on private land.

Renewable energy initiatives were affected by the Trump administration’s shift in focus from clean energy to fossil fuel production. In addition to the withdrawal from the Paris Climate Agreement, as noted above, in his 2018 State of the Union address, President Trump announced that his administration had ‘ended the war on beautiful clean’ coal despite the fact that no coal is clean and that low natural gas prices continued to displace coal in energy markets. In the debates leading up to the 2020 Presidential Election, President Trump claimed wind turbines were expensive, noisy, and spewed ‘tremendous fumes’ into the atmosphere. While the President’s claims were largely refuted by the renewable energy industry, such statements could potentially have a negative effect on popular opinion on future wind development.

We expect the Biden administration to begin to roll back many of the regulations and policies of the Trump administration. Further, the Biden administration appears to be much friendlier to the solar and wind industry. In addition to rejoining the Paris Climate Agreement, President-elect Biden has vowed to increase investment in renewable and clean energy resources by $400 billion over 10 years. Whether this will come to fruition remains to be seen.