## IN THE SUPREME COURT O F TEX AS

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O N P E T I T I O N F O R R E V I E W F R O M T H E C O U R T O F A P P E A L S F O R T H E F I R S T D I S T R I C T O F T E X A S

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C H I E F J U S T I C E H E C H T , dissenting.
I ag ree with the Court that the natura l g as sold by ETC Marke ting, L td. (ETC) outside Texas beg ins its interstate journey at the Katy marke ting hub, wher e it ente rs t h e p i p eline opera ted by ETC’s aff iliate, Houston Pipe L ine Co. (HPL ). But I do not ag ree that temporar y storag e of the g as in HPL ’s Ba m m el re s er v o ir in Har ris County , incidental to the interstate shipment of the g as and essential to the pipeline’s opera tion, sub j ec t s the g as to state taxation, prohibited by the dormant Commerce Clause on proper ty in interstate commerc e. The Court corr ectly states t h at “stoppag e integ ral to th e [ i n t er s t at e] journey itself is rea lly no stoppag e at all in the ey es of the Commerce Clause.” Acc ording to the United States Supreme Court, “[u] nderg round g as storag e fac iliti es are

1

a nec essar

y and int eg ral part of t he oper ation of piping g as fr om the are a of pr oduction to the are a

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_ _ _ . 1of consumption” —in this case , from Texas to out-of-state marke ts. I f stoppag e integ ral to interstate 2 t ra n s p o rt ation cannot be a basis for state taxation, and storag e of g as is integ ral to transportin g i t interstate, that should end the matter. Gas storag e is integ ral to interstate transporta tion as a matter of fact

. To hold, as the Court does, that storag e of g as to fac ilitate its interstate shipment is nothing
more than a shipper’s business choice direc tly contra dicts not only t h e Supreme Court but, as I explain below, the Fe dera l Energ y Reg ulatory Commi ssion (F ERC), and most importantly , the laws of phy sics. I respe ctfully

dissent. I ag ree with the Court that in deter mining whether state taxation of interstate co m m er ce violates the dormant Commerce Clause, we must do our best to follow the United States Supreme Court’s four- part test in Complete Auto Transit , In c. v. Brady as well as t he older in-transit test. 3 4 Her e, the question is whether the storag e of ETC’s g as incidental to its interstate transit provides a substantial nexus to Texas to allow state tax ation of the g as. 5 HPL ’s pipel in e s y s te m is lo cate d entirely in Texas but connec ts to sever al interstate pipelines. Be fore 2009, HPL and its marke ting arm, HPL Gas Marke ting, service d intrastate customers. HPL ’s aff iliate, ETC (both are wholly owned by the same pare nt entity ), s o l d gas exclusively in the interstate marke t. HPL decide d to chang e its business to ship to interstate customers. To do so, FERC

S c h n e i d e w i n d v . A N

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. 4 T h e c o n c u r r i n g J U S T IC E S e c h o J u s t i c e S c a l i a ’ s c r i t i c i s m o f t h e S u p r e m e C o u r t ’ s d o r m a n t C o m m e r c e C l a u s e 5 j u r i s p r u d e n c e . A n t e a t _ _ _ . W h i l e I , t o o , s h a r e t h e c o n c e r n s h e v o i c e d , a n e p i t h e t
- l a c e d r e b u k e o f t h a t C o u r t b y J u s t i c e s o n t h i s o n e i s d i s r e s p e c t f u l

. 2require d that HPL divest itself of its marke ting opera tions. HPL Gas Marke ting and ETC merg ed and

beg an selling g as exclusively to customers outside Texas. HPL transports g as for ETC as well as other shipper s. ETC purch as es gas at the Katy hub. The g as enter s HPL ’s pipeline there and beg ins its interstate journey

. Along the way it is commingle d with g as from other shippers. Shippers still own the g as they send throug h the pipeline—but they own the volume, and not the actua l molecules, that they delivere d to the pi peline. A shipper is entitled to that volume of g as on deliver y to customers
corr esponding to amounts supplied to the pipeline. HPL controls the g as in the pipeline. HPL owns and opera tes the Ba mmel rese rvoir, a g as storag e fac ility in Har ris County
. Be fore 2009, HPL had used the fac ility to store g as for local customers. When HPL shifted to interstate g as transmi s s i o n , i t used the Ba mmel rese rvoir for storag e of g as moving throug h the pipeline. The stored g as is owned by ETC and other shippers. The d em an d for g as at the delivery end of its interstate journey is, of course , seasona l. I n cold wea ther, more g as is used for heat; in war m wea ther,
more is used to g ener ate elec tricity to power air conditioning. Whil e production of g as to supply the pipeline—from wells, g at h er i n g sy stems, and proce ssing plants—can also fluctuate , the forc es aff ecting supply

are not the same a s those aff ecting demand. The amount of g as in the pipeline af fec ts its pressure. I f input exceeds output, the pre ssure incre ases; when output exceeds input, the pressure decr ea s es . Gas transmission must opera te betwee n a rang e of pressure s. That rang e cannot be maintained by manag ing supply and demand. When g as leave s the well, it must g o somewher e. I f it cannot be rele ased for use or to a pipeline for transmission, the we l l v alve must be turned off. Demand is influence d by wea ther, which cannot 3reliably be predic ted, let a lo n e ma nag ed. When sudden cold wea ther incre ases demand, pipeline flow and pressure cannot be mai n t ai n ed b y going throug h the oi l patch and turning on more wells, any
more than pipeline pressure can be decr ease d by turning wells off when a predic ted cold snap fizz les. Gas storag e allows a pipelin e t ra n s mission sy stem to opera te s afe ly and efficiently , and to maintain a dependa

ble supply for customers. HPL uses the Ba mmel fac ility , a depleted underg round formation, to store g as for interstate transmission. The g as has been moving in interstate commerc e
as it is pumped into the rese rvoir, and it resumes that journey when it is pumped out. When demand is hig h, nothing is stored, a nd the g as moves dire ctly to customers. When demand is low, g as may be stored for sever al months. Storag e availability , used or not, is a nece ssary and integ ral part of g as transmission in interstate commerc e. Gas storag e fac iliti es are located a ll along the pipelines from which ETC buy s g as and the pipelines that car ry the g as to the interstate customers to whom it sells. Gas storag e is, of course , to ETC’s benef it, and for t h at re as o n, the Court conclude s that storag e is a business decision for E TC, a way for it to sell when de mand and pr ices a re hig her and wait when they ’re lower. “I f HPL did not store the g as,” the Court say s, “it would nece ssarily flow downstream only to find a complete lack of pay ing customers on the other end: a problematic (and business backw ards) result for ETC i n d ee d

. ” The statement betra y s a profound lack of 6 understanding of the laws of phy sics. I f the g as pu m p ed i n t o HP L ’s pipeline cannot be stored or d el i v er ed, the line will explode. The only way s to adjust to the fluctuating demand is by

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_ _ _ . 6 4corr esponding ly adjusting the supply , which cannot be done, or by using storag e. Storag e is integ ral

to transportation. The Court states that HPL ’s pipeline is not “over crow ded”, an inapt label by which I think 7 the Court means that line pressure is not too high. But the rea son that t h e l i n e p re s s ure rema ins
acc eptable is beca

use storag e is available

. “Ove rcr owding ” is precisel y t h e p robl em when supply exceeds demand. The supply continues, demand falls, and the pressure incre ases. That is the problem that storag e solves. The Court say s: “ETC’s g as does not resume tr an s p o rtation as soon as space become s available ; E TC orders tra nsportation when the de mand rises a nd it so decides the marke t conditions are most advantag eous.” But those periods coincide; spa ce be comes a vailable ( still an 8 odd way of phrasing it) when m ar k et conditions are most advanta g eous. The incre ased demand require s added f

low and pre ssure in the pipeline pr ovided by the g as re lease d from storag e. The Court states: “ETC’s seasona l storag e is not a prer equisite to safe , eff ective movement of the stored g as but instead cle ars the w ay for the pipe line to transport other g as.” This is simply 9 wrong . The limit ations on pipeline flow and pressure are not of ETC’s making ; the y are due to the engin ee ri ng and opera tion of the pipeline. ETC is not the only shipper whose g as must be stored. ETC does not store it s g as so that HPL can transport gas for another shipper. W hen demand falls, all shippers are aff

ecte d. “Succinc tly ,” the Court summarizes, “ETC does not store g as to fac ilitate a continuous journey ; ETC stores g as to avoid t ranspor tation for the time being

—the antit hesis of

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_ _ _ . 9 5continuity .” Ag ain, ETC is not the only shipper that stores g as; HPL must u s e storag e for all 1 0 shippers bec ause the g as has nowhe re e lse to g o. This is all a matter of phy sics, not ETC’s or any other g as shipper’s marke ting strateg y . I t is why , as I noted at the outset, the United States Supreme Court has stated “[u] nderg round g as storag e fac iliti es are a nece ssary and integ ral part of the opera tion of piping g as from the are a of production to the are a of consumption.” I t is why FERC has echoe d the Supreme Court: “under g round storag e 1 1 of natura l g as is critica l in assuring that overa ll demands and specific require ments of natura l g as customers are met.” I t is why , acc ording to FERC reg ulations, “[t] ranspor

tation inc lu d e s s to rag e.” 1 2 1 3 The Court dismisses this statement as not being “a pr oclamation on the transitory nature of all g as place d in storag e.” But that is exactly what it is. I t is an aff

irmation that g as storag e is integ ral to 1 4 g as transporta tion, not separ ate from it, and that g as transporta tion c annot happen without stora g e. I n St ate of Minnesota v. Blasius , the Supreme Court set forth this rule: “I f the interstate movement has beg un, it may be reg arde d as continuing, so as to maintain the immunit y of the proper ty from state taxation, despite temporar y interruptions due to the nece ssities of the journey or for the purpose of safe ty and convenie nce in the course of the movement.” That rule fits the prese nt 1 5

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. 15 6case perf

ect l y . ETC’s g as beg an its interstate movement at the Katy hub. The movement is sometimes interrupted at the Ba mmel storag e fac ility due to the nece ssities of HPL ’s pipeline sy stem opera tion, like those of any o t h er s i m i l ar sy stem, and for safe ty and convenie nce. The interstate movement of ETC’s g as throug h the B ammel re servoir must there fore be re g arde d as continuing

. The Supreme Court’s decision in Carson Petroleum Co. v. Vial , which the Court say s 1 6 “bea rs perha ps the closest rese mblance to the curr ent scena rio”, is illust rative. I n that case , oil 1 7 purcha sed in Texas, Oklahoma, a nd Kansa s was tra

nsported by

railca r to the P ort of Ne w Orle ans and stored there in tanks for transport in car g o ships to overse as customers. Sometimes ships wer e 1 8 in port waiting to be loaded with oil as it was delivere d, and sometimes the oil was stored awa iting

arr ival of a ship. The oil was not held in the tanks for any rea son other than to acc ommodate its 1 9 transfe r from railca

rs to ships, or for any longe r than nece ssary . The Supreme Court he ld tha t the 2 0 tank storag e did not interrupt the inter state and f oreig n transporta tion of the oil. 2 1 The Court of

fer s two rea sons to disting uish Carson from the prese nt c ase. Neither is va lid. One is that the oil transporta tion in Carson involved “dis j o i n t ed , moving piece s”, while the g as 2 2

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_ _ _ . 22 7transporta tion here does not. ETC’s g as flows throug h HPL ’s pipeline to inter state pipelines to the

ultimate consumers. I n essenc e, storag e of proper ty is integ ral to its transporta tion if above- g round but not if underg round. One is tempted to think the Court is joking. What the transporta tion sy stems in Carson and this case share , almost identically , is that neither could opera te without storag e. The C o u rt ’s second distinction is that the shipper had alre ady arr ang ed for the sale of the o i l ab ro ad befor e it arr ived at t h e P o rt of New Orlea ns, while in this case , ETC’s g as is stored at Ba mmel beca use it c annot be sold at that time f or want of demand. But the demand for ETC’s g as—all of 2 3 it—ex ists; the issue is simply the timing of de livery . I n Carson , sometimes a ship waited on oil to
arr ive, sometimes oil waited on a ship to arr ive. I n this Court’s view, the oil should have been subject to state taxation because the shipper did not wait to beg in the rail transporta tion until the ship w as in port. ETC can be taxed, the Court say s, beca use it did not somehow time its g as purcha ses to meet its sales. But that cannot be a prac tice for ETC alone. To avoid state taxation of g as stored in interstate transit , all shippers would be require d to do the same. I nterstate g as pipelines cannot manag e marke t fluctuations, maintain structura l integ ri t y an d o pera tional eff iciency , and assure dependa ble deliver

y by adjusting supplies fr om ga s produce rs. The issue we decide today has been here befor e. I n Peoples Gas , L i g h t , a n d Coke Co. v. Harrison Central Appraisal District , the court of appea ls held that g as in storag e under conditions 2 4 almost identical to t h o s e i n this case was not subject to state taxation. The appra isal district 2 5

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. 25 8petitioned for revie w, and we order ed full briefing but eventua lly denied the petition. I n my view, 2 6 Peoples was c orre ctly

decide d. 2 7 HPL made a business decision t o shift from intrastate to interstate ga s transporta tion, and ETC decide d to use HPL ’s pipeline. The availability of the Ba mmel rese rvoir as an integ ral part of the transporta tion sy stem made those decisions possible. I ts use was not optional for either HPL or ETC. Under the Supreme Court’s rule in Blasius , the interstate journey of ETC’s g as, which beg an at the Katy hub, did not end during storag e nece ssary to continue the journey to ETC’s customer. I f Har ris County can tax ETC’s g as while in storag e, so can ever y other taxi ng authority with a storag e fac ility in its jurisdiction along the interstate journe y of the g as. The r esulting bur den on interstate
commerc e is exactly

what the Commerc e Clause pr ohibits. I would reve rse the judg ment of the c ourt of appe als and re nder judg ment for ETC.

Nathan L . Hec ht Chief J ustice Opinion delivere d: April 28, 2017

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