Railroad Com'n of Texas v. Lone Star Gas Co., a Div. of Enserch Corp.

• Decision Date: 31 December 1992
• Docket Number: No. D-0650,D-0650
• Citation: 844 S.W.2d 679
• Parties: Util. L. Rep. P 26,251 The RAILROAD COMMISSION OF TEXAS and Dan Morales, Attorney General, Petitioners, v. LONE STAR GAS COMPANY, A DIVISION OF ENSERCH CORPORATION, and Enserch Gas Company, Respondents.
• Court: Texas Supreme Court

Page 679

844 S.W.2d 679

Util. L. Rep. P 26,251

The RAILROAD COMMISSION OF TEXAS and Dan Morales, Attorney General, Petitioners, v. LONE STAR GAS COMPANY, A DIVISION OF ENSERCH CORPORATION and Enserch Gas Company, Respondents.

No. D-0650.

Supreme Court of Texas.

Dec. 31, 1992.

Dan Morales, Sarah F. Miller, Ed Salazar, Don Walker, Austin, for petitioners.

David C. Duggins, Barry Bishop, James E. Mann, Austin, for respondents.

OPINION ON MOTION FOR REHEARING

HIGHTOWER, Justice.

Petitioners and Respondents' motions for rehearing are overruled. The opinion of September 23, 1992 is withdrawn and the following is substituted.

Lone Star Gas Company, a division of Enserch Corporation (Lone Star), and Enserch Gas Company (Enserch), a wholly owned subsidiary of Enserch Corporation, challenge Texas Railroad Commission (Commission) Rules 30(a)(1) and (5), and 34(h)(2-4) (hereinafter Rules) governing the natural gas industry. Lone Star and Enserch sued the Commission and the Attorney General of Texas seeking a declaration of the invalidity and applicability of the Rules. After a hearing, the trial court rendered judgment that the Rules were valid but dismissed Lone Star and Enserch's request for declaratory relief on other grounds. The court of appeals reversed the trial court's judgment and rendered judgment that the Rules are invalid because the Rules are preempted by federal law. 798 S.W.2d 888. For the reasons explained herein, we reverse the judgment of the court of appeals and render judgment that the Rules are valid.

The issues before this court are (1) whether the Commission had the statutory authority to promulgate the Rules, (2) whether the Rules are consistent with the statutory authority relied upon by the Commission, (3) whether the statutory authority to promulgate the Rules contains sufficient guidelines or standards for the exercise of such authority, (4) whether the Rules disregard the separate corporate existence of Lone Star and Enserch without notice, hearing or evidence and (5) whether the Rules are preempted by federal law.

Lone Star and Enserch challenge Rules 30(a)(1) and (5), and 34(h)(2-4). See Tex.R.R. Comm'n, 12 Tex.Reg. 536 (1987) (codified at 16 Tex.Admin.Code § 3.30(a)(1) and (5) and 3.34(h)(2-4) (since amended)). ¹ The Commission's purpose in promulgating the Rules was, among other things, to prevent discriminatory production and taking of natural gas, prevent waste, promote conservation, protect correlative rights, ² and protect the priority system concerning nominations, purchases and production of gas. See Tex.R.R. Comm'n, 12 TEX.REG. 536, 536-37 (1987).

The Commission promulgated these Rules in response to the creation of affiliated companies (generally known as special marketing programs or SMPs) by pipeline companies. SMPs coordinate their activities with their affiliated pipeline company to buy or broker gas and often transport gas on their affiliate's pipeline. SMPs evolved in the gas marketing industry as a result of a natural gas surplus which resulted in low natural gas prices. Gas companies such as Lone Star bound by long-term contracts to buy higher priced gas began losing their market share because customers were unwilling to pay the higher cost of gas. These customers began purchasing the cheaper gas from the spot market. ³ As a result, SMPs were formed for the purpose of buying and selling cheaper gas in the spot market. Because of its price of gas, Lone Star is able to sell only twenty-five percent of its available gas. Enserch Corporation formed Enserch for the purpose of selling the cheaper spot market gas to Lone Star customers who purchased less gas from Lone Star due to Lone Star's higher price. Enserch purchased gas from producers who had been released from long-term purchase contracts with Lone Star and also from producers unrelated to Lone Star. The Commission in part promulgated the Rules because it believed that pipeline companies, often the only available means of transporting gas from the producer to the market, could exercise too much market leverage in negotiating with producers for the release of gas for sale in the spot market. The Rules treat pipeline companies and their SMPs as one entity for purposes of preventing discriminatory production and taking of natural gas if the SMP transports gas on its affiliate's pipeline system unless the SMP otherwise qualifies as a first purchaser under Rule 34(h) or applies for a hardship exemption under Rule 34(k). 16 Tex.Admin.Code §§ 3.30(a)(1) and (5), 3.34(h) and (k). ⁴ The Rules define the conditions under which pipeline companies may qualify their marketing affiliates as SMPs subject to separate Commission regulation. The Rules require the SMPs' marketing activities to be non-discriminatory and define specific conduct constituting impermissible discrimination. 16 Tex.Admin.Code § 3.34(h)(2) and (3).

The Rules also constitute a portion of a priority system concerning nominations, purchases and production of gas. See 16 Tex.Admin.Code §§ 3.30(g), 3.34(a). The purpose of the priority system is to guarantee the continued production of casinghead gas, ⁵ oil and special allowable wells and "to prevent waste, to promote conservation, and to encourage production of natural gas supplies." Tex.R.R. Comm'n, 12 TEX.REG. 536, 536 (1987) (preamble). The "priority system" generally provides that higher priority gas (usually casinghead gas and special allowable wells) should be fully produced before lower priority gas is produced. The Commission in part promulgated the Rules based upon the belief that a pipeline company which was unable to take lower priority gas due to low market demand could circumvent the priority system by creating a SMP to buy and sell the lower priority surplus gas. In effect, a pipeline company could be curtailing casinghead gas (and the attendant oil production) on its system while its SMP was purchasing one hundred percent of the lower priority gas on the same pipeline system. The Rules treat pipeline companies and their SMPs as one entity for purposes of nominating and taking gas unless the SMP otherwise qualifies as a first purchaser under Rule 34(h) or applies for a hardship exemption under Rule 34(k).

I.

The Commission argues that it had the statutory authority to promulgate the Rules. We agree.

"[A]n agency can adopt only such rules as are authorized by and consistent with its statutory authority." State Board of Insurance v. Deffebach, 631 S.W.2d 794, 798 (Tex.App.--Austin 1982, writ ref'd n.r.e.). An agency's authority to promulgate rules and regulations "may be expressly conferred on it by statute or implied from other powers and duties given or imposed by statute." Dallas County Bail Bond Bd. v. Stein, 771 S.W.2d 577, 580 (Tex.App.--Dallas 1989, writ denied); Railroad Comm'n v. Atchison, Topeka, 609 S.W.2d 641, 643 (Tex.Civ.App.--Austin 1980, writ ref'd n.r.e.). See State v. Jackson, 376 S.W.2d 341, 344 (Tex.1964); Stauffer v. City of San Antonio, 162 Tex. 13, 344 S.W.2d 158, 160 (1961). "The only requirement is that an agency's rules must be consistent with the laws of this state." Dallas County Bail Bd. v. Stein, 771 S.W.2d at 580; Gerst v. Oak Cliff Savings & Loan Ass'n, 432 S.W.2d 702, 706 (Tex.1968). "The determining factor ... whether ... a particular administrative agency has exceeded its rule-making powers is that the rule's provisions must be in harmony with the general objectives of the Act involved." Gerst v. Oak Cliff Savings & Loan Ass'n, 432 S.W.2d at 706; State Board of Insurance v. Deffebach, 631 S.W.2d at 798.

In the preamble to the Rules, the Commission stated that it was adopting the Rules under Texas Natural Resources Code §§ 81.052 (general rulemaking authority), 85.202 (concerning the conservation of oil and gas and the prevention of waste), 86.041-86.042 (concerning the conservation of gas and the prevention of waste), 111.083, 111.090 and 111.133 (authority under the Common Purchaser Act). Tex.R.R. Comm'n, 12 TEX.REG. 536, 537 (1987). The preamble further stated:

The system embodied in this section is based on the state's statutory authority recognized by the Supreme Court, to conserve its natural resources by preventing waste, protecting correlative rights, and preventing discrimination. This authority is embodied in a comprehensive body of conservation laws (Chapter 86, Texas Natural Resources Code) designed to ensure production of natural gas in accordance with market demand and to prevent its waste.

Id. at 536.

Section 85.201 of the Texas Natural Resources Code states that "[t]he commission shall make and enforce rules and orders for the conservation of oil and gas and prevention of waste of oil and gas." Section 85.202(b) of the Texas Natural Resources Code states that "[t]he commission shall do all things necessary for the conservation of oil and gas and prevention of waste of oil and gas and may adopt other rules and orders as may be necessary for those purposes." Section 86.001 of the Texas Natural Resources Code, entitled "Declaration of Policy," states:

In recognition of past, present, and imminent evils occurring in the production and use of gas as a result of waste in this production and use of gas in the absence of correlative opportunities of owners of gas in a common reservoir to produce and use the gas, the provisions of this chapter are enacted for the protection of public and private interests against these evils by prohibiting waste and compelling ratable production.

Tex.Nat.Res.Code § 86.001. Section 86.011 prohibits waste in the "production, transportation, or use of gas...." Tex.Nat.Res.Code § 86.011. Section 86.041 of the Texas Natural Resources Code states The commission has broad discretion in administering the provisions of this chapter and may adopt any rule or order in the manner provided by law that it finds necessary to effectuate the provisions and purposes of this chapter.

Tex.Nat.Res.Code § 86.041. Section 86.042...