Mobil Producing Texas & New Mexico Inc. v. Railroad Commission of Texas and Bass Enterprises Production Company

MOBIL2 IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS, AT AUSTIN NO. 3-90-053-CV MOBIL PRODUCING TEXAS AND NEW MEXICO, INC., APPELLANT vs. BASS ENTERPRISES PRODUCTION CO. AND RAILROAD COMMISSION OF TEXAS, APPELLEE FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT NO. 455,311, HONORABLE PETE LOWRY, JUDGE PER CURIAM Mobil Producing Texas & New Mexico (Mobil) appeals the judgment of the district court that affirmed the Railroad Commission's grant to Bass Enterprises Production Company (Bass) of a permit to drill a well in the Brown-Bassett Field, Terrell County, Texas, as an exception to the Railroad Commission's Statewide Rule 37. We will affirm the judgment of the district court. BACKGROUND Bass applied to the Commission for an exception to Statewide Rule 37 to permit it to drill a well 660 feet from the nearest lease line, rather than the 1320 feet called for in this field. Tex. Nat. Res. Code Ann. § 85.241 (1978). Three examiners (legal, technical, geologist) held a hearing and on June 24, 1988, issued a proposal for decision (PFD) recommending denial of the application. The PFD noted that Bass sought its permit to prevent waste and to prevent confiscation. The examiners concluded that Bass failed to present any credible evidence to support its contention on confiscation and failed to satisfy its burden of proof to show a need for waste prevention. The examiners concluded that the Bass geological interpretation of the field was "unreliable," "unproven," and "discredited." Bass filed exceptions to the PFD and a motion for oral argument before the Commission. On October 10, 1988, after having heard oral argument in the case on September 20, 1988, the Commission issued a final order granting the permit. The order adopted some of the findings of fact and conclusions of law from the PFD and made some substitute findings of fact and conclusions of law. Mobil brings four points of error: (1) the Commission order is not supported by substantial evidence; (2) the trial court erred in sustaining a plea to the jurisdiction on one issue; (3) the Commission acted arbitrarily and capriciously in reversing its examiners on matters relating to technical opinion evidence; and (4) the Commission erred in failing to make a finding comparing the proposed location to a regular location on the same tract. PLEA TO THE JURISDICTION In point of error two, Mobil complains that the trial court erred in sustaining the plea to the jurisdiction as to this issue because its motion for rehearing sufficiently delimited the complaint raised in its trial court pleadings that the order was invalid because it did not contain findings of fact or conclusions of law explaining why the Commission rejected the PFD. We disagree. Under the Administrative Procedure and Texas Register Act, a motion for rehearing must be filed in the agency before appealing to district court. Tex. Rev. Civ. Stat. Ann. art. 6252-13a, § 16(e) (Supp. 1991) (hereafter cited as APTRA and section number). The motion for rehearing must include grounds of error sufficiently definite to apprise the agency of the error claimed. United Savings Ass'n v. Vandygriff, 594 S.W.2d 163, 168 (Tex. Civ. App. 1980, writ ref'd n.r.e.). A motion is sufficiently definite if it gives adequate notice of the alleged error in order to allow the agency to correct the error or to prepare to defend its decision. Suburban Utility Corp. v. Public Utility Comm'n, 652 S.W.2d 358, 365 (Tex. 1983). This court has discussed the degree of specificity required in order to preserve a point for judicial review: [T]he complaining party must in his motion for rehearing set forth succinctly at least two elements pertaining to each contention of error: (1) the particular finding of fact, conclusion of law, ruling, or other action by the agency which the complaining party asserts was error; and (2) the legal basis upon which the claim of error rests. Burke v. Central Education Agency, 725 S.W.2d 393, 397 (Tex. App. 1987, writ ref'd n.r.e.). Mobil's motion for rehearing at the Commission contained four sections labeled: "Introduction"; "Reasonableness of Commission's Decision on the Fact Questions"; "Exceptions to Substitute Findings of Fact and Conclusions of Law"; and "Conclusion." In Mobil's motion for rehearing, in the section labeled "Reasonableness of Commission's Decision on the Fact Questions," Mobil said, "[a]lthough the Commissioners possess general discretion to disagree with and reject the recommendations of Examiners, in this case where the geologic evidence presented by Bass has been so clearly evaluated by the professional staff as technically unreliable, it is arbitrary and unreasonable of the Commissioners to reject such evaluation." In its appellate brief, Mobil argues that its trial petition in essence simply added the two words "without explanation" to this sentence, and that these two words are "logically implied in the sentence as written." Therefore, Mobil contends that its motion for rehearing in the agency was adequate to defeat the plea to the jurisdiction. One problem with Mobil's argument is that the two-word phrase "without explanation" makes a significant difference in the meaning of the sentence. The sentence as written logically implies that, under certain circumstances, the Commission absolutely cannot reject a PFD without that action being arbitrary and unreasonable. Adding "without explanation" to the sentence implies that in certain circumstances, the Commission may not reject a PFD without an explanation. Mobil's motion for rehearing does not explain however, exactly what that explanation is, and how it differs from or fits into the scheme for findings of fact developed in APTRA and case law. Without more specificity, the motion for rehearing did not serve its purpose of allowing the agency to correct a mistake or defend its action. Even if we consider the two sentences to have the same meaning, the motion for rehearing would still have been inadequate to preserve error. This section is vague about the legal basis upon which the claim of error rests. It states the general principle that although the Commission has the general discretion to reject the PFD, under certain circumstances it must provide an explanation. This section of the motion for rehearing does not elaborate further on whether its legal basis for its claim is grounded in APTRA, existing case law, or is asking for an extension of existing law. In any event, were we to consider the point on its merits, those merits would overlap with our discussions of the other three points of error raised by Mobil, which we will overrule. We overrule point of error two. SUBSTANTIAL EVIDENCE The Evidence at the Hearing Bass presented two witnesses at the hearing. No objection was made to Bass tendering Mr. Zoller as an expert in petroleum geology or Mr. Platt as an expert in petroleum engineering. Mr. Zoller had studied this particular oilfield since 1961 and had completed 15 field-wide studies involving over 2400 wells. Mr. Platt prepared several exhibits for the hearing based on prior studies of the subject field, as well as his updates on these studies done by incorporating more recent well information, well-completion data, production records, well-test information, performance, flow, and permeability rates. Mr. Zoller detailed the process by which he figured the directions of the faults and the slope of the structure in order to arrive at the structure contour map of the field, admitted as Exhibit Z-3. The field is an anticline (1), approximately twenty-two miles long, broken up by numerous fault zones. On the exhibit, the fault zones under discussion were labeled A, B, C, D, with A being the westernmost. Fault A cuts off the western seventy-one acres of the Bass unit, the proposed well location, from the rest of the unit. All regular locations are to the east of fault A. Mr. Zoller detailed the process by which he figured the direction of the faults and the slope of the structure in order to arrive at the contour map. Mr. Platt then testified. He explained his permeability calculations and the correlation with the map of the structure -- the higher on the structure the higher the permeability. He also said that the changes in reservoir pressure indicated that some drainage had taken place from the reserves under the proposed location. He said that a well at a regular location would not produce enough to offset the drainage under the proposed location because all regular locations were in areas of low permeability and would not be capable of producing enough to even pay out the well costs. He also said that a well at the proposed location would be able to recover oil from areas in the eastern portion of the lease that would otherwise be unrecoverable by existing wells at regular locations. Mobil contends, in point of error one, that the Commission's order granting the Bass application is not supported by substantial evidence. Under substantial evidence review, the party challenging an agency order has the burden of proof to overcome the presumption that the order is valid and supported by substantial evidence. Continental Cars v. Texas Motor Vehicle Comm'n, 697 S.W.2d 438, 443 (Tex. App. 1985, writ ref'd n.r.e.). Substantial evidence means more than a scintilla, but the evidence may preponderate against the agency position and the record still show substantial evidence in support of the decision. Browning-Ferris v. Texas Dept. of Health, 625 S.W.2d 764, 768 (Tex. App. 1981, writ ref'd n.r.e.). The reviewing court is concerned with the reasonableness of the administrative order, not its correctness. Texas State Board of Dental Examiners v. Sizemore, 759 S.W.2d 114, 117 (Tex. 1988), cert. denied, U.S. , 109 S.Ct. 2100 (1989). The reviewing court does not substitute its judgment for that of the agency. Texas Health Facilities Comm'n v.Charter Medical, 665 S.W.2d 446, 452 (Tex. 1984). The issue is whether the evidence is such that reasonable minds could have reached the conclusion that the agency must have reached to justify its decision. Id. at 453. Appellant argues that because the examiners found the evidence presented by Bass unreliable, the Commissioners were bound by that finding. It was apparent from the vigorous cross-examination of the witnesses that the preparation of this type of map and the interpretation of the data gathered involves professional judgment and that more than one reasonable interpretation of the same data may exist. Appellant argues that a "greater scrutiny" should be used when the Commission's final order overrules a hearing examiners' PFD. However, a number of Texas cases have been adjudicated in which the agency heads did not accept the recommendations of the examiners, without a stricter standard of review being applied. See, e.g., Auto Convoy Co. v. Railroad Comm'n, 507 S.W.2d 718 (Tex. 1974); Sam Houston Electric Coop. Inc. v. PUC, 733 S.W.2d 905 (Tex. App. 1987, writ denied); Continental Cars, 697 S.W.2d at 443. Similarly, in FCC v. Allentown Broadcasting Corp., 349 U.S. 358, 364 (1955), the United States Supreme Court did not require "a very substantial preponderance of the testimony" to be present when the agency rejected an examiner's credibility findings based on demeanor of a witness. See also Pennzoil v. FERC, 789 F.2d 1128, 1135 (5th Cir. 1986) (substantial evidence standard is not modified when the agency heads and its examiners disagree). We find that reasonable minds could have reached the conclusion that the agency reached and so the decision is supported by substantial evidence. There is evidence in the record that due to the structure the proposed well is necessary to recover hydrocarbons from under the east part of the tract that would not otherwise be recoverable by an existing well or wells at regular locations as well as recovering hydrocarbons from under the proposed western location that are being subjected to drainage. The evidence supports the substitute findings of fact that wells completed high on the structure have the best average permeability; that regular locations (all east of fault A) would be in the lower part of the structure and would not be capable of producing sufficient hyrocarbons to pay out the well costs; that a well in the portion west of fault A would be higher on the structure and have a reasonable opportunity to encounter sufficient permeability to produce in a quantity necessary to offset drainage; and that a well in the portion west of fault A will prevent waste because it will be close enough to the area east of fault A to recover hydrocarbons from the area which would otherwise go unrecovered. These findings support the conclusion of law that the well is necessary to prevent waste. We overrule point of error one. ARBITRARY AND CAPRICIOUS In point of error three, Mobil contends that the Commission acted arbitrarily and capriciously when it failed to accept the recommendation of the hearing examiners. APTRA § 19(e)(6). Mobil contends that the decision was made without the Commissioners being present at the hearing to observe the witnesses or reading the record. The Commission, however, can lawfully render a decision without personally hearing a witness testify. United States v. Raddatz, 447 U.S. 667, 681 (1980). There is no evidence that the Commission did not read the record. See Statement of Facts at 46. Review under the "arbitrary and capricious" standard is limited and deferential. Examples of conduct that have been found to be arbitrary and capricious include: basing a decision on legally irrelevant factors or failing to consider statutorily-mandated relevant factors in making an agency's decision, Consumers Water v. Public Util. Comm'n of Texas, 774 S.W.2d 719, 721 (Tex. App. 1989, no writ); granting a certificate of service to a public utility for a reason other than the statutorily defined reasons, Public Utility Comm'n v. South Plains Elec. Coop., 635 S.W.2d 954, 957 (Tex. App. 1982, writ ref'd n.r.e.); in denying a permit, relying on additional requirements neither expected by applicant nor proposed by staff, Starr Co. v. Starr Indus. Serv. Inc., 584 S.W.2d 352, 355 (Tex. Civ. App. 1979, writ ref'd n.r.e.). In this case, we do not have arbitrary and capricious action. The Commission had the record of the hearing and had oral argument in front of it. It issued a decision supported by substantial evidence. That it reached a contrary conclusion to that of the examiners is not in and of itself arbitrary and capricious. We overrule point of error three. FINDINGS OF FACT AND CONCLUSIONS OF LAW In point of error four, Mobil complains that the Commission failed to make a specific finding of fact comparing the proposed location to a regular location on the same tract. Under APTRA: A final decision must include findings of fact and conclusions of law, separately stated. Findings of fact, if set forth in statutory language, must be accompanied by a concise and explicit statement of the underlying facts supporting the finding. APTRA § 16(b). Findings of fact "set forth in statutory language" refers to those findings that are statutorily required; that is, those standards that the legislature has mandated that an agency must adhere to in decision making. Charter Medical, 665 S.W.2d at 451. APTRA § 16(b) requires a statement of underlying facts only when the ultimate findings embody mandatory fact findings set out in the relevant enabling act. Id. at 451. To satisfy § 16(b), underlying findings should be clear, specific, non-conclusory, and supportive of the ultimate findings. Id. at 452. Findings required by APTRA § 16(b) have three purposes: to indicate the agency has considered all the evidence and facts; to inform the parties of the facts found in order for them to intelligently prepare and present an appeal; and to assist the court in exercising its review function. Id. The standard for reviewing statutorily-required findings is whether the reviewing court can fairly and reasonably say that the underlying findings of fact support the statutorily-required ultimate findings. The court will not set out an exact form by which agencies must make their findings. Id. If an ultimate finding is not "expressed in statutory language" then APTRA § 16(b) does not require a statement of underlying facts, even though judicial review "would be enhanced if all general conclusions of an agency were accompanied by a statement of underlying facts." Id. Findings not required by statute are reviewed on the basis that the findings meet the statutory requirement for separate findings of fact and that they are sufficient to support the Commission's conclusions and order. Imperial American Resources Fund, Inc. v. Railroad Comm'n of Texas, 557 S.W.2d 280, 286 (Tex. 1977). The court does not possess authority to reverse an agency order for its failure to find ultimate facts not required by statute. Lipsey v. Texas Dep't of Health, 727 S.W.2d 61, 69 (Tex. App. 1987, writ ref'd n.r.e.). In this case, Mobil fails to cite any statutory provision which directs the Commission to make any particular findings of fact or conclusions of law before an application for an exception to Rule 37 may be granted. Absent such legislative directives, there exist no statutorily-required findings in a Rule 37 case, and appellate review of the final order is confined to an examination whether the findings made are supported by substantial evidence. We may not impose further requirements for specific findings or findings in a particular form. As discussed above, the findings made are supported by substantial evidence. In addition, substitute finding number 12 appears to make such a comparison. The finding said that no regular location would produce in paying quantities and that a well on the proposed location would recover "otherwise unrecoverable," i.e., by wells at regular locations, hydrocarbons. This appears to be a comparison between the proposed location and a regular location by way of comparison of the proposed location to all regular locations. We overrule point of error four. We affirm the judgment of the trial court. [Before Chief Justice Carroll, Justices Aboussie and Jones] Affirmed Filed: April 24, 1991 [Do Not Publish] 1. 1 An anticline is a subsurface geological structure that rises to a rounded peak. 8 Williams & Meyers, Oil & Gas Law at 45 (1987).