The security, flexibility, “financeability,” and cost-effectiveness of a marine or hydrokinetic energy project’s onshore and offshore property rights are a key part of the project’s overall value. In capturing this value, the developer must deal with and coordinate between two sets of landowners: the governmental owner of the tidelands and submerged lands on which the energy-generating and energy-collecting portion of the facility will lie, and the owner of the upland property on which transmission, substation, and interconnection facilities will lie—which may be either a governmental or a private landowner. In both cases, the means to capture this value will often be a lease or an easement agreement (“Offshore Lease” or “Onshore Lease,” respectively). For our purposes here, Offshore Lease is a generic term that includes leases granted (1) by state agencies for submerged or submersible lands within the state’s territorial sea and beneath the state’s navigable rivers and (2) by the Department of the Interior (“DOI”) Bureau of Ocean Energy Management for areas of the U.S. Outer Continental Shelf (“OCS”).

Onshore Leases will be familiar territory for those versed in siting energy facilities. They will be typical real estate transactions involving leases negotiated with the private or governmental landowner, as necessary to site the onshore facilities needed to support the marine or hydrokinetic energy project. Such onshore site control might also take the form of a purchase of land in fee, or there may be a combination of leased land, owned land, and easements. One important strategic consideration in acquiring onshore property rights is that emerging state regulations specifically tailored to marine and hydrokinetic energy developments express a preference for compatibility with existing uses of onshore land adjacent to a development. Therefore it may be advantageous to acquire a broader interest in adjacent onshore lands than that needed for facility siting (e.g., purchasing the tract of land on which the onshore facilities are to be located rather than negotiating easements of limited scope).

Depending on where the project is located, Offshore Leases can involve one or two governmental entities. Because a state controls the submerged and submersible lands beneath its navigable rivers as well as those within its territorial sea, (States’ exclusive jurisdiction over near-shore waters varies. Within the Gulf of Mexico, Texas and Florida have exclusive jurisdiction from the baseline from which the breadth of the territorial sea is measured out to nine nautical miles and Louisiana has exclusive jurisdiction out to three imperial nautical miles. All other coastal states have exclusive jurisdiction out to three nautical miles (approximately 3.3 statute miles)) the majority of Offshore Leases will need to be negotiated with the relevant state agency charged with managing those lands. Currently, the majority of western coastal states issue such leases under traditional land-management frameworks. The one exception is Oregon, which has adopted regulations specific to ocean energy facilities. (See OAR ch. 141, div. 140)

If a project is to be located on the OCS, then the federal government also has jurisdiction over the facility siting. The DOI Minerals Management Service (“MMS”) was tasked under section 388 of the Energy Policy Act of 2005 (“EPAct”), Public Law No. 109 58, with issuing rules governing leases, easements, or rights-of-way for alternative energy (“other than oil and gas”) and alternate uses of existing facilities located on the OCS. Renewable energy projects covered by the rules issued in 2009 include, but
are not limited to, offshore wind, wave, current, and solar energy projects.

The rest of this article details the strategic considerations associated with obtaining leases from the relevant state and federal agencies, and then discusses some of the emerging issues associated with these types of leases. Because Onshore Leases supporting energy facilities will be similar for those associated with other types of energy projects, this article focuses on the emerging issues associated with Offshore Leases.

Offshore Leases on State Submerged or Submersible Lands

OREGON
In response to the flurry of proposed ocean energy facilities in Oregon, the Department of State Lands (“DSL”) adopted rules in December 2007 that are specific to leasing state submerged lands for ocean energy projects. The DSL rules, found in chapter 141, division 140, of the Oregon Administrative Rules (“OAR”), apply to ocean energy facilities and ocean energy monitoring equipment (both commercial and research or demonstration projects) on state-owned bedlands within Oregon’s territorial sea—that is, out to three nautical miles—which Oregon defines as “submerged and submersible lands.” Upon application, DSL grants either a temporary use authorization for a demonstration project or an ocean energy facility lease for a commercial project. Both authorizations depend on DSL’s formal determinations, among others, that (a) the facility meets Statewide Planning Goal 19 (pertaining to the conservation of marine resources and ecological function), the Oregon Territorial Sea Plan, and the Oregon Ocean Resources Management Plan and (b) the facility will not substantially impair uses or developments already in place within the identified area. The application process includes a required pre-application meeting with DSL staff as well as “[a]ffected ocean users and other governmental agencies,” submission of application materials,
and a review process that includes an opportunity for public comment. The division 140 rules provide for compensation to DSL in the form of a flat fee for temporary use authorizations or, for a facility lease, a royalty-based or revenue-based payment mechanism established at the discretion of the DSL director. Note that the placement in the territorial sea of ocean energy monitoring equipment or ocean energy facilities that are not part of a demonstration or commercial project is subject to DSL’s general leasing rules under OAR chapter 141, division 82 or division 125, unless the placement is part of a research project by an educational or a research institution.

Although the DSL rules provide the primary source of regulatory oversight for ocean energy projects within the state’s territorial seas, other state law may also be implicated. For example, the Oregon Water Resources Department licenses hydroelectric projects through Oregon Revised Statutes (“ORS”) chapter 543. Under ORS 543.014, wave energy projects are exempt from the chapter 543 licensing process if they are located within Oregon’s territorial seas, have a nominal generating capacity that does not exceed 5 MW, and do not require a federal hydroelectric license. Even for exempt projects, however, the Oregon Water Resources Commission retains authority to investigate, hold hearings, and review reports and data to ensure that the natural resources of Oregon are protected. ORS 543.015, 543.050(3), 543.055, 543.060.

In addition, the 2009 Oregon legislature passed House Bill 3013, implementing a program to establish state “marine reserves”—discrete ecologically significant areas along Oregon’s coastline that would be closed to all extractive and development activities. Codified at ORS 196.540 to 196.555, the marine reserves statute created pilot reserve projects at two locations near Depoe Bay and Port Orford, as well as a process to identify and study other potential sites. House Bill 2009, currently pending in the 2011
legislative session, would create as many as six additional reserve areas.

WASHINGTON
Unlike Oregon, Washington has not adopted rules specific to leasing of state lands for marine or hydrokinetic energy projects, but it may be next in line to do so because of proposed tidal projects within Puget Sound. Leases of state-owned aquatic lands are obtained through the Washington State Department of Natural Resources (“DNR”), which manages state-owned aquatic lands, including tidelands, shorelands, harbor areas, and bedlands.

Article XV, section 1, of the Washington State Constitution prohibits any sale or lease to private entities of aquatic lands beyond established harbor lines—generally those areas within or near the corporate limits of a city. Under the Aquatic Lands Act, DNR may lease other aquatic lands within the state, including offshore areas within the territorial seas. DNR is obligated to manage aquatic lands to balance public benefits for Washington citizens; under 2005 amendments to the Aquatic Lands Act, two such
enumerated benefits include promotion of water-dependent uses and utilization of renewable resources.

CALIFORINIA
In California, the State Lands Commission (“SLC”) enjoys broad authority to lease state lands. Most, but not all, potential locations for ocean and tidal energy will be on state-owned land controlled by the SLC. A notable, large exception to this, however, is the San Francisco Bay Area, where the Bay Conservation and Development Commission was granted the state authority and control. Also, major inland waterways vary in their ownership or control between the SLC, local municipal government, and private entities. For these locations, the specific entity retaining authority over the site will determine applicable procedures or requirements for leasing. The remainder of the state-owned oceanfront and offshore property in the coastal zone of California is leased by the SLC. The California Coastal Commission (“CCC”) regulates permitting
and uses over the same zone, so, in addition to obtaining a lease from the SLC, permits will be required from the CCC or its designee.

In determining whether to grant a lease, SLC considers the following factors: consistency with the public trust doctrine, protection of natural resources and other values, and preservation or enhancement of the public’s access to state lands. A lease or permit must be obtained for a number of uses, including the installation of buoys, moorings, docks, recreation facilities, piers, and wharves. Additionally, a lease or permit is also necessary to obtain rights-of-way for uses such as roadways, power lines, and pipelines. Leases or permits for submerged lands are generally issued only to riparian- or littoral-use right holders. SLC regulations also provide that such leases and permits may be granted to the most qualified applicant irrespective of riparian or littoral status. The SLC must comply with the California Environmental Quality Act (“CEQA”) before executing a lease. Generally, this will require environmental review of the potential effects of the intended use of the leased land. The environmental review required for lease execution can usually be coupled with the permitting processes, but this defers certainty on the acquisition of land use rights until later in the development process. Alternatively, environmental review for lease purposes can be completed as part of the leasing process, but this will not complete the environmental review requirements for the project. The California Coastal Act and CEQA will be applied during permitting.

Onshore facilities will also require that land use rights be acquired from the party holding them. This could be a private party, a state agency such as the SLC, or a local agency. When leases or easements must be obtained from a regulated utility (for example, an easement to cross a transmission line), such leases or easements will likely require approval by the California Public Utilities Commission, which must also satisfy CEQA before approving the lease.

Federal Leasing

Section 388 of EPAct named DOI as the lead federal agency to oversee designated alternative energy and “marine-related uses” on the OCS. Under EPAct, DOI authority to grant leases, easements, or rightsof- way on the OCS to facilitate development of alternative energy resources and allow for alternative uses of existing facilities on the OCS has been delegated to the Bureau of Ocean Energy Management (“BOEM”). Under an order issued by Secretary Salazar on January 19, 2011, BOEM assumed authority
previously delegated to the MMS to “manage and oversee alternative-energy related projects on the OCS.”

Prior to transfer of authority to BOEM, MMS issued rules governing renewable and alternate uses of the OCS. See 30 C.F.R. pt. 285. Shortly before issuing those rules, MMS and the Federal Energy Regulatory Commission (“FERC”) negotiated a memorandum of agreement clarifying each agency’s authority on the OCS. In short, BOEM issues leases for OCS projects while FERC issues license for hydrokinetic projects on the OCS. For a further discussion of BOEM’s leasing program and FERC’s licensing authority.

Issues Associated with Both State and Federal Leases

State Ownership Issues for Tidelands and the Ocean Bed

In obtaining the proprietary approvals necessary for siting a marine or hydrokinetic energy project, it is important to begin with an understanding of the boundaries of state versus private ownership, the effect on ownership when those boundaries shift, and the public trust issues that arise on state-owned lands.

Public Versus Private Ownership
The “bed” of a waterway, including the ocean, is the land underneath the water to the line or “mark” of ordinary low water or ordinary low tide in Oregon and California, or to the line of navigability in Washington. The “bank,” or shore, is the area between the bed and the line or mark of ordinary high tide. This area is also called “shorelands” in Washington and “submersible lands” in Oregon, and is sometimes called “tidelands” in Oregon, Washington, and California. In surveys, this line roughly coincides with the “meander line” established by the original surveys in the 18th and 19th centuries by the Government Land Office, predecessor to the Bureau of Land Management. In the absence of a tidelands or other grant in the upland owner’s chain of title, the meander line usually marks the boundary between public and private ownership.

Changes in the Shoreline. Given the dynamic movements of the tides, it is common for ocean water boundaries to fluctuate. The law generally classifies these fluctuations as either “accretive” (gradual) or “avulsive” (sudden). Generally, if the change is perceptible—if you can see it happening—it is avulsive. When a water boundary moves by accretion, the property boundary moves with it. When a water boundary moves by avulsion, the property boundary stays the same. For example, when the shoreline moves further landward through gradual erosion, the upland property owner may own progressively less real estate.

Questions of ownership for changing water boundaries are answered by state law. In some states— California, for example—the answer may differ depending on whether the shoreline movement is natural or caused by human action. In Oregon and Washington, the natural-artificial distinction does not matter, though the law is not absolutely clear on this point.

The Public Trust Doctrine
State-owned submerged lands and shorelands are generally imprinted with certain rights held by the state in trust for the public. For example, in 1969 the Oregon Supreme Court decided that the dry sand beaches in Oregon were subject to public rights, in the nature of an easement, even in places where the beaches are not state-owned. The scope of the public trust differs from state to state, but it is safe to say that the shore zone of any coastal waterway is probably encumbered by broad public-use rights. Although the law is not absolutely clear on this point in all coastal states, it is commonly thought (particularly by state resource agencies) that public trust rights cannot be conveyed out of state ownership, even when the state sells or leases the land subject to the trust. This can mean that any limitation on public rights of, for example, fishing or recreational access will need to be specifically discussed and negotiated during the leasing process. Normally, state agencies have enough flexibility to allow leases that exclude the public when safety issues are implicated.

The Scope of the Property Subject to Offshore or Onshore Lease

The portion of a landowner’s real property that will be subject to either an Offshore or Onshore Lease may be a very contentious issue during negotiations. There is a natural tension between a developer’s desire to include as much of the real property in the lease as possible and a landowner’s desire to limit the property subject to the lease to only those portions necessary for the construction, maintenance, and operation of the project facilities on the property.

Basic Issues. There are several reasons a developer may want to maximize the amount of property that will be subject to an Offshore or Onshore Lease:

• In today’s competitive environment, developers often begin acquiring rights in real property before they have enough data and information about the relative proximity of the offshore and onshore sites, access to suitable transmission lines, and environmental and energy-producing attributes to accurately determine the most productive and cost-effective layout and relationship for the marine or hydrokinetic facilities. By leasing most or all of the landowner’s property, the developer gains flexibility to respond to changes in the project layout and design that may become necessary as a result of, for example, a more convenient landfall for the cable or electrical connection to the offshore facility, landowner concerns about the impact on continued landowner or public use of the property, the requirements of governmental permitting authorities, security, and a desire to minimize the time and expense required to construct the project. • By maximizing the amount of property subject to the leases, the developer can maximize the size and location of the marine or hydrokinetic energy project and benefit from economies of scale in reducing development costs and increasing productivity.

The effective capture of energy from marine and hydrokinetic energy devices is largely dependent on the environmental conditions to which the property is subject. Any obstruction (e.g., an offshore object such as an oil platform) that interferes with the current or wave height over the property can have a dramatic, negative impact on the ability of the devices located on the property to generate energy. A developer will want control over the size and kind of structures that can be constructed near the property
by the landowner or third parties during the term of the leases. An effective way to gain this control is to encumber as much of the property as possible and have noninterference covenants in both the Offshore and Onshore Leases that limit the landowner’s right to interfere with the energy generation potential of the property.

The landowner’s primary motivations for limiting the amount of property that is subject to the leases are to limit the impact of the project on the landowner’s other activities on the property (especially when the landowner plans or others have the right to continue using the property in this manner while the project is operating on the property), to preserve the opportunity to lease excluded land for other purposes, and a basic reticence to give up a measure of control over too much of one’s property.
Potential Resolutions. There are several techniques to help resolve conflicts between landowners and developers over the amount of property to be included in Offshore and Onshore Leases:

Purpose of Agreement and Use of Property
Another contentious issue involves the purpose of the Offshore and Onshore Leases and uses the developer may make of the property to accomplish this purpose. Of course, the obvious purpose of these leases is the construction and operation of a marine or hydrokinetic energy project. The developer and landowner may disagree about the scope and extent of the rights in the property that the developer needs to accomplish this goal.

A developer will want the right to take any action on, and make any use of, the property that the developer believes is necessary to accomplish the goal of constructing and operating a project. For its part, the landowner may wish to see these rights limited to only those clearly delineated activities and facilities necessary to construct and operate the project on the landowner’s property.

What Facilities Go on Whose Land? For marine and hydrokinetic energy projects, a developer might control properties of neighboring landowners in order to aggregate the littoral accessibility or water surface that it takes to site the project. Putting aside the surface of the ocean, few landowners other than the government own enough littoral land (with access to transmission lines) to provide necessary littoral access on their property. Inevitably, once the developer conducts its oceanographic, transmission,
environmental, and construction studies on feasible properties and has located an area of ocean surface where energy recovery is likely, some littoral properties will stand out above others as better candidates for cable landings and substations, whereas others may be more suitable for transmission lines and roads that serve the onshore facility. Each landowner will want to be compensated for its property’s role in producing renewable energy. For example, the landowner may negotiate to receive special minimum payments if its property is used primarily for transmission lines and roads. Generally, the landowner desires such payments to be large enough to compensate for the fact that the landowner will not be receiving royalty payments on the sale of electricity on its property.

A landowner may also require that the developer pay additional compensation for the right to place certain special facilities on the subject property. For example, when the developer wants to place a substation that will serve the entire marine or hydrokinetic project on one landowner’s property, the landowner may feel that it is entitled to additional compensation for the added burden and loss of usable property caused by construction of such substation.

Landowner’s Continued Use of the Property
An important feature of marine and hydrokinetic energy projects is that, in most cases, even after the project is built and operating, the landowner may continue to use a great majority of the subject property in substantially the same manner as the landowner had been using it before entering into the Offshore or Onshore Lease. The onshore facilities necessary to collect and transmit the energy captured from a marine or hydrokinetic project are often minimal when compared to the area of open water necessary for the offshore facilities. For this reason, the landowner may be able to continue to conduct its activities on the property throughout the life of the project on the property, provided that such activities do not and will not interfere with the construction and operation of the energy project.

Payments
Payment is the final issue to consider when entering into Offshore Leases. When entering into leases with private parties, there are countless ways to structure rentals, royalties, and other lease payments. For example, in other types of renewable energy projects, such as wind energy, developers may pay the landowner either a lump-sum payment or annual payments for the rights granted in the agreement.

In the case of Offshore Leases, however, governments may require a percentage of annual gross income or the volume of commodities passing over the leased premises, or an amount based on the fair market value of adjacent uplands. There being few Offshore Leases for marine and hydrokinetic energy projects, there is little precedent to predict what rent developers will pay.

States will likely have discretion in determining payments, as the process is unlikely to be uniform until government agencies have more experience with marine and hydrokinetic energy projects. As a result, developers will have to negotiate with state agencies throughout the leasing process.

Although critical to a marine or hydrokinetic energy project, the matters discussed above are by no means the only issues a developer must consider. For example, issues related to indemnities, assignments, and financing will be key components of an Offshore or Onshore Lease. Crafting an Offshore or Onshore Lease that provides a developer with the necessary flexibility and security to develop the marine or hydrokinetic energy project requires experience, creativity, and skill.

The Oregon Insider
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Phone: 541.729.1546
Jeff B. Knebel / Managing Editor
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