By Amy Baird, Tré Fischer, and Benjamin Rhem

Last week, in a 3-0 decision, the Railroad Commission of Texas ("Railroad Commission") overturned a Hearings Examiner's interim ruling that the Common Carrier Act does not apply to a pipeline transporting ethylene.  In a case of first impression, the Commission overturned the Hearings Examiner's interim ruling and clearly articulated its position that pipelines which transport refined petroleum products, not just crude petroleum pipelines, may be regulated as common carriers.  When regulated as common carriers, pipeline companies are subject to additional oversight by the Railroad Commission, including rate, tariff, and anti-discrimination requirements.  In return, common carriers receive eminent domain authority. The Commission's interim order allows those pipelines that transport petroleum products to enjoy the benefits of common carrier status, as long as they expressly agree to comply with the duties and obligations of common carriers.

In its complaint, Eastman Chemical Company (Eastman) alleged Westlake Ethylene Pipeline Corporation (Westlake) failed to comply with requirements of the Common Carrier Act by setting rates that were not just and reasonable and discriminating against Eastman by limiting service to Westlake affiliates, essentially converting a common carrier pipeline to a private line.  However, before addressing those issues, the Hearings Examiner had to determine whether the Railroad Commission even had the authority to regulate pipelines that transport products other than those specifically listed in Section 111.002 of the Natural Resources Code as common carriers.

In his interim ruling, the Hearings Examiner held that the Railroad Commission only has jurisdiction over common carrier pipelines as defined in Section 111.002 of the Natural Resources Code.  The Hearings Examiner's interim ruling can be found HERE. As described in Section 111.002, there are multiple ways in which a pipeline operator may qualify as a common carrier. However, the definition of a "common carrier" is limited to pipeline operators transporting crude petroleum, coal slurry, hydrogen, or feedstock for carbon gasification.¹ While "crude petroleum" is not specifically defined, the Commission's regulations and other legal authority make clear that ethylene is not "crude petroleum" because it is not in the liquid phase in the reservoir, removed from the reservoir in such liquid phase, and obtained at the surface as such, but instead must be processed in some manner to be liquefied and separated from the natural gas stream. As a result, ethylene is considered, variously because the statutes and regulations are not consistent in their precise nomenclature, a "product," an "oil product," or a "petroleum product."² The Hearings Examiner determined that because ethylene is not "crude petroleum" the Westlake pipeline does not meet the definition of a common carrier under Section 111.002.

Eastman, however, argued that Natural Resources Code Section 111.020(d) expands the applicability of the Common Carrier Act beyond those pipelines defined as common carriers in Section 111.002. Section 111.020(d) states:

A person may acquire the right conferred in this section by filing with the commission a written acceptance of the provisions of this chapter expressly agreeing that, in consideration of the rights acquired, it becomes a common carrier subject to the duties and obligations conferred or imposed by this chapter.

The Commission ultimately agreed with Eastman that the Railroad Commission's common carrier regulations can extend to pipelines that transport petroleum products, with both Chairman Smitherman and Commissioner Porter specifically referencing Section 111.020(d) as part of the basis for their decision.³ Commissioner Craddick indicated that she also agreed with the Chairman's position. A copy of the Interim Order can be found HERE.

Because this is an interim order, it is not appealable at this time. Westlake can appeal this ruling, after the Commission issues a final order on this hearing and Westlake has exhausted its administrative remedies at the Commission.

If you have any questions about the e-alert or about Jackson Walker's Energy Practice, please contact Amy Baird (713.752.4525 or abaird@jw.com), Tré Fischer (713.752.4530 or tfischer@jw.com) or Benjamin Rhem (512.236.2012 or brhem@jw.com).

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¹TEX. NAT. RES. CODE § 111.002(a).

²For more information on recent court decisions addressing these matters, namely, Crosstex NGL Pipeline, L.P. v. Reins Road Farms-1, Ltd., No. 09-12-00563-CV, 2013 Tex. App. LEXIS 6316, 2013 WL (Tex. App.—Beaumont 2013, no pet.) and In re Texas Rice Land Partners, Ltd., James E. Holland, and David C. Holland, 402 S.W.3d 334 (Tex.App.—Beaumont 2013, no pet.), CLICK HERE.

³ The Texas Supreme Court has previously addressed whether submission to the Commission's regulations is sufficient to demonstrate common carrier status in Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC, 363 S.W.3d 192 (Tex. 2012). In that context, the Supreme Court rejected the argument that common carrier status for a CO2 pipeline could be based solely on submitting to regulation by the Railroad Commission and instead required that a pipeline company demonstrate a "reasonable probability" that the pipeline company will serve the public.  For more information on the Denbury decision CLICK HERE.