Title of Regulation: 4VAC25-165. Regulations Governing the Use of Arbitration to Resolve Coalbed Methane Gas Ownership Disputes (adding 4VAC25-165-10 through 4VAC25-165-130).

Statutory Authority: § 45.1-361.15 of the Code of Virginia.

Public Hearing Information:

November 28, 2012 - 10 a.m. - Conference Center, Russell County Office Building, 139 Highland Drive, Lebanon, VA

Public Comment Deadline: December 21, 2012.

Agency Contact: Michael Skiffington, Regulatory Coordinator, Department of Mines, Minerals and Energy, 1100 Bank Street, 8th Floor, Richmond, VA 23219-3402, telephone (804) 692-3212, FAX (804) 692-3237, TTY (800) 828-1120, or email mike.skiffington@dmme.virginia.gov.

Basis: Chapter 442 of the 2010 Acts of Assembly, which directs the Virginia Gas and Oil Board (VGOB) to adopt regulations to implement the arbitration process created in that act within 280 days of its enactment, mandates these regulations. Also, the Director of DMME is generally empowered with regulatory authority under §§ 45.1-161.3 and 45.1-361.4 of the Code of Virginia. VGOB possesses authority to issue regulations under § 45.1-361.15 of the Code of Virginia. On June 14, 2011, the VGOB voted to adopt proposed regulations pursuant to Chapter 442 of the 2010 Acts of Assembly. On July 19, 2011, the VGOB voted to make one minor change to the proposed regulations.

Purpose: The purpose of this regulation is to administer the arbitration process mandated in Chapter 442 of the 2010 Acts of Assembly. The act creates a voluntary arbitration process for parties with conflicting claims of ownership of coalbed methane gas. Currently, there are approximately $26 million in royalties held in escrow, most of which is due to unresolved claims of ownership. Creating an arbitration system that is an effective alternative to litigation can help reduce the amount of funds in escrow. To date, VGOB has not received a request for arbitration.

Substance: The regulation will establish the arbitration process. It will detail how interest is calculated to determine if sufficient funds are available to fund the arbitration, how the process works, and what happens once a determination is issued.

Issues: The primary advantage of this statutorily mandated regulation is that landowners and mineral owners in Southwest Virginia have another potential avenue to voluntarily resolve disputes over the ownership of coalbed methane gas. Another potential benefit to citizens, relevant businesses, and the Commonwealth would be a decrease of funds currently held in escrow as the result of arbitration determinations. There are no disadvantages to this regulation.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. Chapter 442 of the 2010 Acts of Assembly directs the Virginia Gas and Oil Board (Board) to adopt regulations to implement the arbitration process created in that act within 280 days of its enactment. The Board proposes these regulations in order to establish guidelines for the voluntary arbitration process. Some of the key provisions include how arbitrations are funded, the qualifications of the arbitrator, and procedures associated with the arbitration itself. Except for one minor change, these proposed regulations are identical to the existing emergency regulations currently in effect.

Result of Analysis. The benefits likely exceed the costs for all proposed changes.

Estimated Economic Impact. The purpose of this regulation is to administer the arbitration process mandated in Chapter 442 of the 2010 Acts of Assembly. The act creates a voluntary arbitration process for parties with conflicting claims of ownership of coalbed methane gas. Currently, there are approximately $26 million in royalties held in escrow, most of which are due to unresolved claims of ownership. The creation of an arbitration system that is an effective alternative to litigation could potentially help reduce the amount of funds in escrow and legal costs for the parties involved. Emergency regulations which are effectively the same as these proposed regulations have been in effect since December 20, 2010. To date, the Board has not received any requests for arbitration.

Since the proposed arbitration system is voluntary, it will be used if all affected parties believe it would be to their benefit. Thus the proposed creation of this system would be net beneficial if it is used in practice, and neutral in impact if it is not. Since the emergency regulations have been in effect since December 20, 2010 and thus far no parties have approached the Board requesting arbitration, the initial evidence indicates that the use of the proposed arbitration may be limited in practice.

Businesses and Entities Affected. Due to family heirships, the Department of Mines, Minerals and Energy (Department) estimates there could be anywhere from 8,000 to 12,000 entities primarily affected by these regulations. Most of these entities are landowners and energy firms with conflicting claims of ownership of coalbed methane gas. The Board, though, has not yet received any requests for arbitration. Potential affected small businesses could include land management groups or small coal companies.

Localities Particularly Affected. Coalbeds in the Commonwealth primarily occur in the following seven counties: Buchanan, Dickenson, Lee, Russell, Scott, Tazewell, and Wise.

Projected Impact on Employment. The proposed amendments are unlikely to significantly affect employment.

Effects on the Use and Value of Private Property. To the extent that affected parties pursue the proposed arbitration process, legal costs may be reduced and funds currently in escrow may be more quickly distributed.

Small Businesses: Costs and Other Effects. The proposed regulations will not increase costs for small businesses.

Small Businesses: Alternative Method that Minimizes Adverse Impact. The proposed regulations will not produce an adverse impact for small businesses.

Real Estate Development Costs. To the extent that affected parties pursue the proposed arbitration process, the cost of developing land for coalbed methane gas extraction may be moderately reduced due to savings in legal costs associated with the ownership disputes.

Legal Mandate. The Department of Planning and Budget (DPB) has analyzed the economic impact of this proposed regulation in accordance with § 2.2-4007.04 of the Administrative Process Act and Executive Order Number 14 (10). Section 2.2-4007.04 requires that such economic impact analyses include, but need not be limited to, the projected number of businesses or other entities to whom the regulation would apply, the identity of any localities and types of businesses or other entities particularly affected, the projected number of persons and employment positions to be affected, the projected costs to affected businesses or entities to implement or comply with the regulation, and the impact on the use and value of private property. Further, if the proposed regulation has adverse effect on small businesses, § 2.2-4007.04 requires that such economic impact analyses include (i) an identification and estimate of the number of small businesses subject to the regulation; (ii) the projected reporting, recordkeeping, and other administrative costs required for small businesses to comply with the regulation, including the type of professional skills necessary for preparing required reports and other documents; (iii) a statement of the probable effect of the regulation on affected small businesses; and (iv) a description of any less intrusive or less costly alternative methods of achieving the purpose of the regulation. The analysis presented above represents DPB's best estimate of these economic impacts.

Agency's Response to Economic Impact Analysis: The Department of Mines, Minerals and Energy concurs with the economic impact analysis conducted by the Department of Planning and Budget.

Summary:

The proposed regulations implement a voluntary arbitration process for parties with conflicting claims of ownership of coalbed methane gas as directed by Chapter 442 of the 2010 Acts of Assembly. Key provisions include how arbitrations are funded, the qualifications of the arbitrator, and procedures associated with the arbitration process.

CHAPTER 165
REGULATIONS GOVERNING THE USE OF ARBITRATION TO RESOLVE COALBED METHANE GAS OWNERSHIP DISPUTES

4VAC25-165-10. Definitions.

The following words and terms when used in this regulation shall have the following meanings unless the context clearly indicates otherwise.

"Accrued interest" means funds accrued during the preceding 36 months on total proceeds held in the general escrow account. Accrued interest does not include escrow account fees or administrative costs of the board related to the general escrow account.

"Act" means the Virginia Gas and Oil Act of 1990, Chapter 22.1 (§ 45.1-361.1 et seq.) of Title 45.1 of the Code of Virginia.

"Arbitrator" means a qualified individual appointed by a court to render a determination in an ownership dispute concerning coalbed methane gas.

"Board" means the Virginia Gas and Oil Board.

"Claimant" means a person or entity in a dispute over ownership of coalbed methane gas who has agreed to arbitration to resolve the dispute.

"Court" means a circuit court in the Commonwealth of Virginia wherein the majority of the subject tract of land is located.

"Department" means the Department of Mines, Minerals and Energy.

"Escrow account" means the account established by the board pursuant to §§ 45.1-361.21 and 45.1-361.22 (2) of the Code of Virginia.

"Ex parte communication" means any form of communication between an arbitrator and a claimant without the presence of the opposing claimant.

"Operator" means the gas or oil owner designated by the board to operate in or on a pooled unit.

4VAC25-165-20. Costs of arbitration.

Arbitrations shall be funded from accrued interest. The department shall determine on a case-by-case basis if sufficient funds exist to conduct an arbitration. Sufficiency of funds shall be determined by the amount of accrued interest available at the time arbitration is requested, less estimated costs of pending arbitrations. If sufficient funds are not available, the department shall maintain a waiting list of parties willing to arbitrate.

4VAC25-165-30. Qualification of arbitrators.

The department shall review all applications from potential arbitrators pursuant to § 45.1-361.22:1 C of the Code of Virginia. Applications shall be submitted on a form prescribed by the department. In order to qualify, applicants must demonstrate substantial expertise in mineral title examination. Substantial expertise shall be determined on an individual basis. The department shall notify applicants deemed to be qualified.

The department shall maintain a list of qualified arbitrators and update it annually. The list shall be supplied to the court when the board issues an order for arbitration. Pursuant to § 45.1-361.22:1 C of the Code of Virginia, the court has the discretion to appoint an individual not on the list of qualified arbitrators.

In order to maintain a current, accurate list, qualified arbitrators shall at least annually update their disclosures to the department.

4VAC25-165-40. Agreement to arbitrate.

Claimants shall submit their request of arbitration to the board on a form prescribed by the department. Claimants shall also provide an affidavit pursuant to § 45.1-361.22:1 A of the Code of Virginia.

4VAC25-165-50. Conflicts of interest.

In addition to the limitations set forth in § 45.1-361.22:1 A of the Code of Virginia, an arbitrator may not hear an arbitration if the arbitrator is related to one of the claimants, has a personal interest in the subject of the arbitration, or if other circumstances exist that might affect the arbitrator's ability to render a fair determination. If evidence of a conflict exists under this section, a claimant may petition the court to appoint a different arbitrator.

4VAC25-165-60. Location.

The arbitrator shall determine an appropriate time and place for the arbitration. The arbitration shall take place in the jurisdiction where the majority of the subject tract is located, unless all claimants agree to an alternate location. Notice to claimants shall be given pursuant to the requirements of § 45.1-361.22:1 D of the Code of Virginia.

4VAC25-165-70. Postponement of arbitration.

Any request for postponement may be granted by the arbitrator if all claimants consent, or if good cause for a postponement is shown to the satisfaction of the arbitrator. Requests for postponement for cause should be made to the arbitrator at least 15 days before the hearing, unless the circumstances requiring the postponement do not allow 15 days notice. Whenever a postponement is granted, the arbitrator will promptly reschedule the hearing and notify the board and the claimants.

4VAC25-165-80. Discovery.

Pursuant to §§ 8.01-581.06 and 45.1-361.22:1 D of the Code of Virginia, the arbitrator may issue subpoenas, administer oaths, and take depositions. Additionally, any documents a claimant intends to introduce at the arbitration must be shared with the opposing claimant and the arbitrator not less than five days prior to the arbitration. If this provision is found not to be met, the arbitrator may elect to continue the arbitration.

4VAC25-165-90. Extension of arbitration.

If, pursuant to § 45.1-361.22:1 E of the Code of Virginia, the claimants agree that the arbitrator may take longer than six months from the date the board ordered the arbitration to render a determination, the arbitrator shall notify the board of this extension.

4VAC25-165-100. Determination of arbitrator.

Pursuant to § 45.1-361.22:1 E of the Code of Virginia, the determination of the arbitrator shall be in writing and sent to the board and each party to whom notice is required to be given. The determination shall include, at a minimum, a finding of facts and an explanation for the basis of the determination. A copy of the determination shall be placed on the department's website. The arbitrator shall record the determination with the clerk's office of the court.

4VAC25-165-110. Ex parte communications.

There shall be no direct communication between the claimants and the arbitrator concerning the merits of the dispute other than at the arbitration hearing. If an ex parte communication occurs between a party and the arbitrator outside of the arbitration hearing, the arbitrator shall notify the other parties of the date, time, place, and content of the communication.

4VAC25-165-120. Fees.

Arbitrators shall be paid at the rate of no more than $250 per hour. Expenses of the arbitrator incurred during the course of the arbitration shall be reimbursed in accordance with the State Travel Regulations prescribed by the Department of Accounts. Arbitrators shall submit a complete W-9 form to the department before payment is made.

Pursuant to § 45.1-361.22:1 F of the Code of Virginia, payment of fees and expenses of the arbitration may be delayed if there are intervening disbursements from the general escrow account under § 45.1-361.22 (5)(i) or (iii) of the Code of Virginia that reduce the interest balance below the amount of fees and expenses requested.

4VAC25-165-130. Disbursement of proceeds.

Within 30 days of receipt of an affidavit from the claimants affirming the determination, the operator shall petition the board for disbursement pursuant to § 45.1-361.22 (5) of the Code of Virginia.

FORMS (4VAC25-165)

Arbitrator Qualification Form, DGO-ARB (rev. 5/10).

Agreement to Arbitrate Form, DGO-ARB2 (rev. 7/10).