IN THE SUPREME COURT OF TEXAS

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NO. 15-0687

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ETC MARKETING, LTD., PETITIONER,

v.

HARRIS COUNTY APPRAISAL DISTRICT, RESPONDENT

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ON PETITION FOR REVIEW FROM THE

COURT OF APPEALS FOR THE FIRST DISTRICT OF TEXAS

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CHIEF JUSTICE HECHT, dissenting.

I agree with the Court that the natural gas sold by ETC Marketing, Ltd. (ETC) outside Texas

begins its interstate journey at the Katy marketing hub, where it enters the pipeline operated by

ETC’s affiliate, Houston Pipe Line Co. (HPL). But I do not agree that temporary storage of the gas

in HPL’s Bammel reservoir in Harris County, incidental to the interstate shipment of the gas and

essential to the pipeline’s operation, subjects the gas to state taxation, prohibited by the dormant

Commerce Clause on property in interstate commerce. The Court correctly states that “stoppage

integral to the [interstate] journey itself is really no stoppage at all in the eyes of the Commerce

Clause.” According to the United States Supreme Court, “[u]nderground gas storage facilities are 1

a necessary and integral part of the operation of piping gas from the area of production to the area

Ante at ___.

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of consumption” —in this case, from Texas to out-of-state markets. If stoppage integral to interstate 2

transportation cannot be a basis for state taxation, and storage of gas is integral to transporting it

interstate, that should end the matter. Gas storage is integral to interstate transportation as a matter

of fact. To hold, as the Court does, that storage of gas to facilitate its interstate shipment is nothing

more than a shipper’s business choice directly contradicts not only the Supreme Court but, as I

explain below, the Federal EnergyRegulatoryCommission (FERC), and most importantly, the laws

of physics. I respectfully dissent.

I agree with the Court that in determining whether state taxation of interstate commerce

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, Inc. v. Brady as well as the older in-transit test. 3 4

Here, the question is whether the storage of ETC’s gas incidental to its interstate transit provides a

substantial nexus to Texas to allow state taxation of the gas.5

HPL’s pipeline system islocated entirelyin Texas but connects to several interstate pipelines.

Before 2009, HPLand its marketing arm, HPL Gas Marketing, serviced intrastate customers. HPL’s

affiliate, ETC (both are wholly owned by the same parent entity), sold gas exclusively in the

interstate market. HPLdecided to change its business to ship to interstate customers. To do so, FERC

Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 295 n.1 (1988) (quotation marks omitted).

2

430 U.S. 274, 279 (1977).

3

See Diamond Shamrock Ref. & Mktg. Co. v. Nueces Appraisal Dist., 876 S.W.2d 298, 302 (Tex. 1994).

4

The concurring JUSTICES echo Justice Scalia’s criticism of the Supreme Court’s dormant Commerce Clause

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jurisprudence. Ante at ___. While I, too, share the concerns he voiced, an epithet-laced rebuke of that Court by Justices

on this one is disrespectful.

2
required that HPLdivest itself of its marketing operations. HPLGas Marketing and ETC merged and

began selling gas exclusively to customers outside Texas. HPL transports gas for ETC as well as

other shippers.

ETC purchases gas at the Katy hub. The gas enters HPL’s pipeline there and begins its

interstate journey. Along the way it is commingled with gas from other shippers. Shippers still own

the gas they send through the pipeline—but they own the volume, and not the actual molecules, that

they delivered to the pipeline. A shipper is entitled to that volume of gas on delivery to customers

corresponding to amounts supplied to the pipeline. HPL controls the gas in the pipeline.

HPLowns and operates the Bammel reservoir, a gas storage facility in Harris County. Before

2009, HPL had used the facility to store gas for local customers. When HPL shifted to interstate gas

transmission, it used the Bammel reservoir for storage of gas moving through the pipeline. The

stored gas is owned by ETC and other shippers. The demand for gas at the delivery end of its

interstate journey is, of course, seasonal. In cold weather, more gas is used for heat; in warm weather,

more is used to generate electricity to power air conditioning. While production of gas to supply the

pipeline—from wells, gathering systems, and processing plants—can also fluctuate, the forces

affecting supply are not the same as those affecting demand.

The amount of gas in the pipeline affects its pressure. If input exceeds output, the pressure

increases; when output exceeds input, the pressure decreases. Gas transmission must operate

between a range of pressures. That range cannot be maintained by managing supply and demand.

When gas leaves the well, it must go somewhere. If it cannot be released for use or to a pipeline for

transmission, the well valve must be turned off. Demand is influenced by weather, which cannot

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reliablybe predicted, let alonemanaged. When sudden cold weather increases demand, pipeline flow

and pressure cannot be maintained by going through the oil patch and turning on more wells, any

more than pipeline pressure can be decreased by turning wells off when a predicted cold snap fizzles.

Gas storage allows a pipeline transmission system to operate safely and efficiently, and to

maintain a dependable supply for customers. HPLuses the Bammel facility, a depleted underground

formation, to store gas for interstate transmission. The gas has been moving in interstate commerce

as it is pumped into the reservoir, and it resumes that journey when it is pumped out. When demand

is high, nothing is stored, and the gas moves directly to customers. When demand is low, gas may

be stored for several months. Storage availability, used or not, is a necessary and integral part of gas

transmission in interstate commerce. Gas storage facilities are located all along the pipelines from

which ETC buys gas and the pipelines that carry the gas to the interstate customers to whom it sells.

Gas storage is, of course, to ETC’s benefit, and for that reason, the Court concludes that

storage is a business decision for ETC, a way for it to sell when demand and prices are higher and

wait when they’re lower. “If HPL did not store the gas,” the Court says, “it would necessarily flow

downstream only to find a complete lack of paying customers on the other end: a problematic (and

business backwards) result for ETC indeed.” The statement betrays a profound lack of 6

understanding of the laws of physics. If the gas pumped into HPL’s pipeline cannot be stored or

delivered, the line will explode. The only ways to adjust to the fluctuating demand is by

Ante at ___.

6

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correspondingly adjusting the supply, which cannot be done, or by using storage. Storage is integral

to transportation.

The Court states that HPL’s pipeline is not “overcrowded”, an inapt label by which I think 7

the Court means that line pressure is not too high. But the reason that the line pressure remains

acceptable is because storage is available. “Overcrowding” is precisely the problem when supply

exceeds demand. The supplycontinues, demand falls, and the pressure increases. That is the problem

that storage solves. The Court says: “ETC’s gas does not resume transportation as soon as space

becomes available; ETC orders transportation when the demand rises and it so decides the market

conditions are most advantageous.” But those periods coincide; space becomes available (still an 8

odd way of phrasing it) when market conditions are most advantageous. The increased demand

requires added flow and pressure in the pipeline provided by the gas released from storage.

The Court states: “ETC’s seasonal storage is not a prerequisite to safe, effective movement

of the stored gas but instead clears the way for the pipeline to transport other gas.” This is simply 9

wrong. The limitations on pipeline flow and pressure are not of ETC’s making; they are due to the

engineering and operation of the pipeline. ETC is not the only shipper whose gas must be stored.

ETC does not store its gas so that HPL can transport gas for another shipper. When demand falls,

all shippers are affected. “Succinctly,” the Court summarizes, “ETC does not store gas to facilitate

a continuous journey; ETC stores gas to avoid transportation for the time being—the antithesis of

Ante at ___.

7

Ante at ___.

8

Ante at ___.

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continuity.” Again, ETC is not the only shipper that stores gas; HPL must use storage for all 10

shippers because the gas has nowhere else to go.

This is all a matter of physics, not ETC’s or any other gas shipper’s marketing strategy. It is

why, as I noted at the outset, the United States Supreme Court has stated “[u]nderground gas storage

facilities are a necessary and integral part of the operation of piping gas from the area of production

to the area of consumption.” It is why FERC has echoed the Supreme Court: “underground storage

11

of natural gas is critical in assuring that overall demands and specific requirements of natural gas

customers aremet.” It is why, according to FERC regulations, “[t]ransportation includesstorage.” 12 13

The Court dismisses this statement as not being “a proclamation on the transitory nature of all gas

placed in storage.” But that is exactly what it is. It is an affirmation that gas storage is integral to 14

gas transportation, not separate from it, and that gas transportation cannot happen without storage.

In State of Minnesota v. Blasius, the Supreme Court set forth this rule: “If the interstate

movement has begun, it may be regarded as continuing, so as to maintain the immunity of the

property from state taxation, despite temporary interruptions due to the necessities of the journey or

for the purpose of safety and convenience in the course of the movement.” That rule fits the present 15

Ante at ___.

10

Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 295 n.1 (1988).

11

Rate Regulation of Certain Natural Gas Storage Facilities, Order No. 678, 71 Fed. Reg. 36612 (June 27,

12

2006).

18 C.F.R. § 284.1 (1992).

13

Ante at ___.

14

290 U.S. 1, 9–10 (1933).

15

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case perfectly. ETC’s gas began its interstate movement at the Katy hub. The movement is

sometimes interrupted at the Bammel storage facility due to the necessities of HPL’s pipeline system

operation, like those of any other similar system, and for safety and convenience. The interstate

movement of ETC’s gas through the Bammel reservoir must therefore be regarded as continuing.

The Supreme Court’s decision in Carson Petroleum Co. v. Vial, which the Court says

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“bears perhaps the closest resemblance to the current scenario”, is illustrative. In that case, oil 17

purchased in Texas, Oklahoma, and Kansas was transported by railcar to the Port of New Orleans

and stored there in tanks for transport in cargo ships to overseas customers. Sometimes ships were

18

in port waiting to be loaded with oil as it was delivered, and sometimes the oil was stored awaiting

arrival of a ship. The oil was not held in the tanks for any reason other than to accommodate its 19

transfer from railcars to ships, or for any longer than necessary. The Supreme Court held that the 20

tank storage did not interrupt the interstate and foreign transportation of the oil.21

The Court offers two reasons to distinguish Carson from the present case. Neither is valid.

One is that the oil transportation in Carson involved “disjointed, moving pieces”, while the gas 22

279 U.S. 95 (1929).

16

Ante at ___.

17

279 U.S. at 99.

18

Id. at 100.

19

Id. at 101.

20

Id. at 107–109.

21

Ante at ___.

22

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transportation here does not. ETC’s gas flows through HPL’s pipeline to interstate pipelines to the

ultimate consumers. In essence, storage of property is integral to its transportation if above-ground

but not if underground. One is tempted to think the Court is joking. What the transportation systems

in Carson and this case share, almost identically, is that neither could operate without storage. The

Court’s second distinction is that the shipper had already arranged for the sale of the oil abroad

before it arrived at the Port of New Orleans, while in this case, ETC’s gas is stored at Bammel

because it cannot be sold at that time for want of demand. But the demand for ETC’s gas—all of 23

it—exists; the issue is simply the timing of delivery. In Carson, sometimes a ship waited on oil to

arrive, sometimes oil waited on a ship to arrive. In this Court’s view, the oil should have been subject

to state taxation because the shipper did not wait to begin the rail transportation until the ship was

in port. ETC can be taxed, the Court says, because it did not somehow time its gas purchases to meet

its sales. But that cannot be a practice for ETC alone. To avoid state taxation of gas stored in

interstate transit, all shippers would be required to do the same. Interstate gas pipelines cannot

manage market fluctuations, maintain structural integrity and operational efficiency, and assure

dependable delivery by adjusting supplies from gas producers.

The issue we decide today has been here before. In Peoples Gas, Light, and Coke Co. v.

Harrison Central Appraisal District, the court of appeals held that gas in storage under conditions 24

almost identical to those in this case was not subject to state taxation. The appraisal district 25

Ante at __.

23

270 S.W.3d 208 (Tex. App.—Texarkana 2008, pet. denied).

24

Id. at 219.

25

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petitioned for review, and we ordered full briefing but eventually denied the petition. In my view, 26

Peoples was correctly decided.27

HPL made a business decision to shift from intrastate to interstate gas transportation, and

ETC decided to use HPL’s pipeline. The availability of the Bammel reservoir as an integral part of

the transportation system made those decisions possible. Its use was not optional for either HPL or

ETC. Under the Supreme Court’s rule in Blasius, the interstate journey of ETC’s gas, which began

at the Katy hub, did not end during storage necessary to continue the journey to ETC’s customer. If

Harris County can tax ETC’s gas while in storage, so can every other taxing authority with a storage

facility in its jurisdiction along the interstate journey of the gas. The resulting burden on interstate

commerce is exactly what the Commerce Clause prohibits.

I would reverse the judgment of the court of appeals and render judgment for ETC.

Nathan L. Hecht

Chief Justice

Opinion delivered: April 28, 2017

53 Tex. Sup. Ct. J. 389 (Mar. 12, 2010).

26

The Court notes, but does not discuss, two cases that have held in similar situations that stored gas is subject

27

to state taxation. See In re Assessment of Pers. Prop. Taxes Against Mo. Gas Energy (Missouri Gas), 234 P.3d 938, 959

(Okla. 2008); In re Appeals of Various Applicants From a Div. of Prop. Val. of Kan. (Kansas Gas), 313 P.3d 789, 799

(Kan. 2013). In my view, those cases were wrongly decided.

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