STATE REGULATION OF INTRASTATE OIL AND GAS PIPE LINES IN TEXAS, OKLAHOMA AND LOUISIANA
| Jurisdiction | United States |
(Jan 1995)
STATE REGULATION OF INTRASTATE OIL AND GAS PIPE LINES IN TEXAS, OKLAHOMA AND LOUISIANA
Phelps Dunbar, L.L.P.
New Orleans, Louisiana
INTRODUCTION
I. As stated by Supreme Court of Texas in The Railroad Commission of Texas v. Lone Star Gas Company:1
A. Without state regulation, monopolistic tendencies of intrastate pipelines would be left unchecked.
1. Pipelines are natural monopolies with considerable market power.
a. As monopolies, they have reduced incentive to minimize costs:
i. They enjoy access to monopoly rent cushion.
ii. This assures them a reasonable rate of return regardless of cost. 2
B. State legislatures have traditionally granted their regulatory commissions power to promulgate orders and rules necessary to prevent discrimination.
1. Absent regulation, integrated companies owning both producing wells and connecting pipelines could:
a. Transport their own oil and gas production exclusively via their own pipelines.
b. Exclude other producers in the field from transportation via such pipelines.
c. Such discrimination required states to enact common purchaser and common carrier statutes. 3
[Page 7A-3]
C. Regulation needed to prevent anti-competitive practices among pipeline companies.4
II. Regulation also needed to prevent waste and protect correlative rights.
A. In early days of oil and gas industry, Rule of Capture was supreme.5
1. Operators produced as much as possible, as fast as possible.
2. No conservation efforts.
a. Result was vast waste of nonrenewable natural resources. 6
B. Oil and gas producing states began enacting legislation to prevent waste.
1. Aim of such statutes:
a. Prevent waste of valuable natural resources.
b. Protect correlative rights of landowners. 7
III. By 1938, natural gas industry subject to dual regulation.
[Page 7A-4]
A. Regulation of intrastate activities by individual gas producing states.
B. Regulation of interstate activities by national governmental authorities.
1. In 1938, Congress enacted Natural Gas Act (NGA).8
2. Congress enacted additional regulation in 1978 with Natural Gas Policy Act (NGPA).9
IV. Under NGA and NGPA:
A. Regulation of intrastate natural gas industry left to States.
1. States possess exclusive jurisdiction to regulate such intrastate industry.
V. In Public Utilities Comm'n of Ohio v. United Fuel Gas Co.,10 United States Supreme Court made it clear: local matters would be left to state regulatory bodies.
A. Federal Power Commission (FPC) [now Federal Energy Regulatory Commission (FERC)] exercises jurisdiction over matters in interstate and foreign commerce.
1. Congress fashioned harmonious, dual system of regulation of natural gas industry.
2. Federal regulation complementary in its operation to that of states.
[Page 7A-5]
3. Federal and state regulatory bodies operate side-by-side, each active in its own sphere.
VI. NGA applies to:
A. Transportation of gas in interstate commerce.
B. Sale in interstate commerce of natural gas.
C. Natural gas companies engaged in such transportation or sale.
D. NGA does not apply to:
1. Any other transportation or sale of natural gas;
2. The local distribution of natural gas;
3. The facilities used for such distribution;
4. The production or gathering of natural gas.11
E. NGA did not establish comprehensive regulatory scheme over:
1. Intrastate transportation or sale of natural gas; or
2. Production and gathering of natural gas.
F. Rather, NGA contemplated comprehensive dual natural gas regulatory scheme.
1. Federal government exercise jurisdiction over interstate and foreign transportation and sale of natural gas.
2. State regulatory bodies exercises jurisdiction over all intrastate matters.12
[Page 7A-6]
VII. Enactment of Hinshaw Amendment13 by Congress in 1954:
A. Congress reasserted its intent that states govern intrastate purchases, transportation and sales of gas (including intrastate pipelines taking delivery of gas from interstate pipelines).
1. Hinshaw Amendment overruled United States Supreme Court decision in Federal Power Comm'n v. East Ohio Gas Co.14 (holding that intrastate gas company's taking delivery of gas from interstate pipeline subjected intrastate pipeline to FPC jurisdiction under NGA).15
2. Thus, after enactment of Hinshaw Amendment, even though natural gas traveled interstate, that alone insufficient to subject intrastate pipeline receiving such gas to federal regulatory jurisdiction.
VIII. Following energy shortages of 1970's, Congress enacted NGPA "to assure adequate supplies of natural gas at fair prices."16
A. Congressional goal: establish integrated intrastate-interstate natural gas market.
B. Congressional scheme included federal control of intrastate natural gas pricing.17
[Page 7A-7]
C. However, United States Supreme Court held re federal wellhead price controls on intrastate gas:
1. They effect no special change in relationship between federal and state regulatory jurisdiction.18
D. Moreover, in enacting NGPA, "Congress explicitly envisioned that states would regulate intrastate markets in accordance with overall national policy."19
IX. Oil pipeline regulation begins in 1906 with Hepburn Act, amending Interstate Commerce Act.20
A. Interstate Commerce Act extended to "common carriers engaged in...[t]he transportation of oil by pipeline."
1. From 1906-1977, oil pipelines regulated by Interstate Commerce Commission.
2. Since 1977, oil pipelines regulated by FERC by Department of Energy Organization Act.21
B. Interstate Commerce Act "frozen in time," as of date Department of Energy Organization Act enacted, is governing statute.22
C. Interstate oil pipelines governed by Interstate Commerce Act provisions, except those specifically applicable only to other types of "common carriers."
1. All charges for services must be just and reasonable.23
[Page 7A-8]
2. Unjust and unreasonable charges prohibited.24
3. Special rates and rebates prohibited.25
4. Undue preferences and prejudice prohibited.26
X. Purpose of this paper:
A. Discuss how three of these states, Texas, Oklahoma and Louisiana, regulate intrastate transportation and local distribution of natural gas.
B. There will also be, as an ancillary matter, discussion of state regulation of oil pipeline transportation in these three states.
C. Additional discussion on "gathering" issues — federal and state.
TEXAS
TEXAS RAILROAD COMMISSION
I. The Texas Railroad Commission as regulator of intrastate crude oil and natural gas pipelines:27
A. Railroad Commission, conceived in 1890 when Texas Constitution amended, provides legislative means to regulate railroad industry.28
1. Texas Constitution amended in 1894 to provide that Commission shall consist of three commissioners.29
a. Each Commissioner elected to 6-year term on staggered basis. 30
[Page 7A-9]
2. In 1917, Texas Legislature declared pipelines to be common carriers.
a. Railroad Commission began supervising oil and gas affairs. 31
REGULATION OF PIPELINE TRANSPORTATION OF CRUDE OIL AND PRODUCTS IN TEXAS
II. Railroad Commission responsible for prevention of transportation of "unlawful oil."
A. "Unlawful oil" is that produced within state in violation of law or any Commission order.
1. Includes oil transported in violation of such law or order.32
2. To move oil by pipeline in Texas one must possess a "tender."
3. "Tender" is permit or certificate of clearance for transportation of oil or products issued by Commission.33
4. Unlawful oil declared nuisance; subject to forfeiture to state.34
III. All pipelines transporting oil are "common carriers" under Texas Natural Resources Code.35
A. Pipeline subject to Texas Natural Resources Code subject to jurisdiction of Railroad Commission.36
[Page 7A-10]
IV. Every person purchasing crude oil or petroleum that is common carrier or is affiliated with common carrier is "common purchaser."37
A. Common purchaser may not discriminate.
1. Common purchaser must purchase oil offered to it for purchase without discrimination in favor of one producer over another in same field.38
2. Common purchaser of crude oil not allowed to discriminate in favor of its own production.39
B. Domestic or foreign corporation, that is common purchaser, violating common purchaser provisions of Code, subject to forfeiture of its charter.
1. Such corporation can be enjoined and prohibited from doing business in Texas.40
C. A receiver may be judicially appointed to manage the property of any crude oil transporter violating any rule, order or judgment under the Code.41
V. Operation of gathering systems for crude petroleum by pipeline subject to regulation under Chapter 111.
A. Operator of gathering system for crude petroleum is common purchaser; subject to jurisdiction of Commission over common purchasers.42
REGULATION OF PIPELINE TRANSPORTATION OF NATURAL GAS IN TEXAS
VI. Gas utilities are monopolies in areas they serve.
A. With gas utilities, normal forces of competition which operate to regulate prices in free enterprise society do not operate.
[Page 7A-11]
1. Therefore, utility rates, operations and services regulated by public agency.
2. Objective: regulation operates as substitute for competition.43
VII. Railroad Commission derives its regulatory authority over gas utilities primarily from Cox Act.44
A. On June 12, 1920, Texas Legislature passed Cox Pipe Line Bill (Cox Act).45
B. Under Cox Act, Commission has original jurisdiction over gas utilities engaged in intrastate transportation and sale of natural gas.
1. Includes exclusive original jurisdiction over city gate rates.46
C. Commission has jurisdiction over gas rates and conditions of delivery in Texas municipalities as follows:
1. Commission has sole jurisdiction re: Texas municipalities with less than 2,000 persons.
2. Gas rates within...
To continue reading
Request your trial