-

HonorableRobert S. Calvert Comptroller,

of Public Accounts ,, OpinionNo. WW-1111 Capitol Station Re: Whether, under the subAustin, Texas mltted facts Houston Pipe Line Company has been engaged in operating a "Gas Works".

. ."for ;;E;$ sale and distrlbuso that lts.Pece$pts are t&cable under Art, 7060, V.C.S., and related Dear Mr. Calvsrt: question.

You have asked three q#!stlons concerning the application of the grobe &metptCr tax provided for under Article 7060, V,0,8,, (nowArtiole 1X.03, Title 122A, Taxation-General) ,to ~&$a+lz$

opens@ions of the Houston Pipe Line Company, in oonneotionw%%,han audLt of thid oofftpany ky your office. Specifically, ths i#.at?$tlGlld

asked and the statement5 of fact furnlahed relate $0 cSz%4in opex%tions .of. HGu&ton..Plpe

.LlneCompany during the auditedperiod ln the lncorpora%d ace88 of Texas City and :Hou#ml. WiM re'eference to the&i facts, you ask the following:

~"'Youropinion 15 requested a8 to whether or not under the facts'submitted, Houston Pipe Line Companyhas been engaged In operating a 'gasworks'

. 0 .I'forlocal sale and distribution tat Texas City so that its reieipis are taxable under Article 7060, Texas Civil Statutes, now Article 11.03, Title 122A, Taxation-Qeneral.

"Two questions arise concerningHouston Pipe Line Company's business In Houston. "First: In view of the definition of

‘gas works' as used Article 7060, R.C.S., in the Eddlns-Walcher Butane Company v. Calvert, 298 S.W.2d 93, 96 (Texas Supreme Court,.1957), as I.

. .a plant where gas Ismanufactured or processed ,Ior 1. .the system ofmains and iaierah by m;ans of which the commodityHonorableRobert S. Calvert, Page 2 OpinionNo. WW-1111

Is usually deliveredby a gas distributor to the premises of customers.

. .: can the sales of gas by Houston Pipe Line Company through facilities owned, operated, managed and controlledby Houston Natural Gas Corporationbe considered In determining whether Houston~Plpe Line Company Is subject tomthe tax?
"Second: In the event the first question Is answered in the affirmative,are these 'few instances'of gas delivered sufficient to subjectHouston Pipe Line Company to the tax for the periods In question?"
1. It appears that prior to November, 1956, Houston Pipe Line Company and Houston Natural Gas Corpqratlcnwere unrelated corporationshaving different stockholders,officers and directors. Houston Pipe Line Company had been the prlncl.palsupplier for HoustonNatural Gas Corporation,making city gate deliveries to 'HoustonNatural Gas Corporation at several citl.es In Texas. During this time (upuntil November, 1956) the relationshipbetween Houston Pipe Line Company and Houston Natural Gas Corporationwas purely contractualIn nature.
2. In November, 1956, Houston Natural Gas Corporation.purchasedHouston Pipe Line Company from Atlantic Refining Company. :AlthoughlOO$ of the stock was purchased, RoustonNatural Qas Corporation'sacquisition took the essential. form of a purchase of assets,by means of the formation of a new .?cm.pany, first charteredin 1956, with the former Houston Pipe Line Company surrenderingIts charter,dissolving and going out of business, and thenew company, subsequently changing lts name to the abandonedname "HoustonPipe Line Company" then remaining with the formerbusiness and assets of the previous Houston Pipe Line Company.
3. Houston Pipe Line Company, both as present3.yconstituted and historically, Is a."gas transmlsslon lir~e.q,.s.ervin$ varlous gas distributioncompanies and Industrial cuetcmers.

. . . Thus, it appears that Houston Pipxlne Company,plcks ';lp natural gas at thewellhead and from gas gathering systen;.s. and carries the gas so gatheredby long line, large diameter,high pressure pfpelines to city gates for delivery to Houston Natural Gas Corporation and other gas distribution companies.
4. In addition to Its city gate dellverles to gas distribution companies,a substantialpart of the br?slress of Houston Pipe Line Company conslats of selling gas in large quantities to industrialand chemicalplants located alorg its lines in theHonorable Robert S. Calvert, Page 3 Opinion No. WW-1111

Texas Gulf Coast area. In making these sales, Houston Pipe Line Company employs laterals from Its high pressuremain Ilnes, rather than an extensive grid system of low pressure gas mains and services. It does not odorize the gas in question nor does It assume the duty of serving all customers on its lines desiring service. Houston Pipe Line Company competes for this business with other gas transmlsslon companies, and with alternative fuels such as fuel oil, etc. Houston Pipe Line Company sells Its gas by negotiated contract rather than by published rate schedules; obtains no franchises from cities and towns touched or crossed by Its transmission lines, and submits to no city or local regulation of Its rates on these Industrial sales. Reports to the Railroad Commission of Texas by Houston Pipe Line Company are made as required of gas transmission companies, rather than those required of gas distribution companies.
5. Since 1947, the corporate limits of Houston and Texas City have been extended so as to bring certain Industrial plants served by Houston Pipe Line Company Into the city limits. By contracts entered Into by and between Houston P!.pe Line Company and HoustonNatural Gas Corporation, (in 1450, prior to their affiliation in 1956) a "transportationfee representing the 'salesprofit on a number of such,~ustomerswas transferred from Houston Plpe~ Line Company &Houston Natural Gas Corporation; together.,&th the duty to read meters, make service caLla, change and.tiompute charts, etc. Thereafter, Houston Natural 'GasCorporationhas paid the tax due under Art. 7060 on ,the eiilesto these customers--limited,however> In some instances, 'to-the'salesprofit" or "transportation fee" received by it. The agreements in questionhave been continued in force following the events of November, 1956, related above.
6. The contracts between Houston Pipe Line Company and Houston Natural Gas Corporation are questioned. The second question of your request asks whether the sales to customers transferred from Houston Pipe Line Company to Rouaton Hatural Gas Corporationby the contracts in question can be considered In determiningwhether Houston Pipe Line Company la subject to the tax.Answering this question first, we are of the opinion that these contracts,..

being based upon what appears to be sufficient considerationand having been entered Into when the two companies were unaffiliated and at arms length, are not subject to question. -However, in the view we take of the law, even an affirmative answer to this question would not make Houston Pipe Line Company subject to the tax on Its sales inside the City Limits of Texas City and Houston during the periods In question.HonorableRobert S. Calvert, Page 4 Opinion No. WW+llll

Your request for an opinion quite properly recognizes that the recent Supreme Court opinion, Eddlns-Walcher .Butane Company v. Calvert,,156 Tex. 587, 298 S.W.2d 93 (1951) IS of controlling Importance in thismatter. This opinion Clearly shows that it la not the number of customers In a city, but the type or kind of buslneas conducted,which determineswhether the tax imposedby Art. 7060, V.C.S., applies. While this opinionmight well end with this observation, It may be helpful to review the legislativehistory of Article 7060 and a number of cases in which the dlstlnctlon Is recognizedbetween the operation of a local gas distributionplant, on the one hand, and a gas transmission system incidentallymaking Industrial sales of gas along Its line, on the other hand.
Under the statute the question la whether.Houston Plpe~ Line Companyhas been engaged, In the cities of Houston and Texas City, in-the occupation of "owning, operating,managing or controllingany gas. . *works.

. .locatedwlthln any Incorporated town or city in this State, and used for local sale and dlstrlbutlon In said town or city.

. ." (FormerlyArtlc1e.7060 Texas civil Statutes;now Article 11.03, Title 122A, Taxatlon&neral, Texas Civil Statutes).

In Eddlns-WalcherButane Company v. Calvert, 156 Tex. 587, 298 S.W.sd 93 (1957) ,Art.7060 V.C S was held not to apply to nmerous sales of'gas inslde'the ioriorate limits of a town" unless such saleswere accomplishedby means of ".

. .Aplant where gas Is manuEactured or processed.

. <'or.,".

l --kP of mains and lateralsby means of which the commodity la usua y deliveredby a gatsdistributor to the premises of customers.

. ,'I. In that case, the Supreme Court held that a butane distributor, deliveringbutane to the premises of Its customers Inside the city llmltsby means of trucks, did not owe the tax. Attorney General'sOpinion No. 0-3776 of August 1, 1941,mentioned as authorityIn Mr. McKlnzle's letter dated September 23, 1960, was overruledby the Court.
finUtilitiesNatural Gas Company v. State, 133 Tex. 313, 128 S.W.2d 1153 (1939) the Texas Supreme Court held that sales by a long line, high pressure pipe line transmission company to an electricpower company insideVictoria, as well as to a localdistributingcompany, did not make the transmission company a companywhich was Itself engaged In "local sale and distribution".

It should be noted, additionally, that In Thompson v. United Gas Corporation,190 S.W.2d 504 (Tex.Clv.App.,1945, err.ref.1, in deterni

nIn# the app1lcabillty of Article 6060, V.C.S., commonly known as the pipeline tax", the Court recognized olearly the divisionof the gas Industry Into three distinct occupatlons-- severanceand gathering, transportationor transmlsalonby plpeline,aad local distribution.Honorable Robert S. Calvert, Page 5 Opinion No:WW-1111

In Dallas Gas Co. v. 1924) err.ref State{ 261 S.W. 1063 (Te~.Cfv.App.,

themeaning of 'gasplant" under the statute In forceprior to'thepassage of Art. 7060, V.C.S., was held to contemplate the operation of apublic utility regulated by the municipality. In upholding tt%@onstitutionality of the tax Imposed by that statute, the C&rt held (261 S.W. 1063, 1069):

"But the occupation of operating a gas plant is one possessing characteristics peculiarly applicable to Itself, and in no sense similar In character to that of sellinn real estate. Such business is Usually recognized as a public utility bver which munlclpalitles, as in the instant cashY exercise powers of regulations. Its very nature. to enable its successful economic operation, demands a monopoly In its community."
That.'!J.ocal

sale and distribution"has themeaning of public utility setirlng

all comers, Including Individual consumers has been clearly recognized by the Attorney Generali In Opinion ~~-810, dated March 4, 1960. In discussing the Eddins-Walcher case, this opinion states: :

"The definition of 'dlstrlbutlon', was added to by Eddlns-Walcher But v.. Robert S. Calvert 156 T -2a 1x-i an o,",:; Walker, the Texas SuljremeCourt held that the te* ‘gas works'; as used In Art. 7060, V.A.CI;G.,

meant (1) an establishment in which gas ismanufactured,-produced or processed, or (2) a distribution system consisting of pipes throughwhich gas flows and is delivered to the premises of consumers. In light of these two cases, It Is submitted that ldlstrlbution'means transfer or possession of gas to various consumer individuals or concerns in an Incorporated city or town.

. ."

In City of St. Louis v. Mississippi River Fuel Corporation, 97 F.2d '*r

2b .A. ,orporatlon, a high preesur; trans&slon line having some 19 Industrial customers in the City of St. L@@a under contract,was, nevertheless,held not to be engaged in "distributing and selling. s s gas. . .forpublic use" within themeaning of a taxing ordinance of the City of St. Louis. The 8th Circuit Court of Appeals held, In affirming a judgment In favor of the gas company (97 F.2a 726, 730):Honorable Robert S. Calvert, Page 6 Opinion No. WW-1111

"We conclude that under Missouri law.the term 'forpublic use,' as used In the ordinanceunder consideration, means the sale of gas to the public generally ana indiscriminately,ma not to particularpersons upon special contract. This constructionof the phrase Is the one generally understood ana applied."
The Court of Appeals thus adopted the same reasoning as the Texas Court In Dallas Gas Co. v. State, supra (261 S.W. 1063)-- that the operation of a gas plant requires a public utility operation;not simply sales to particularpersona upon special contract.
The same holdingwas made with respect to theMlssisslppl River Fuel Corporationeven following an amendment of the taxing ordinance so as to tax the "selling or distributing of.

. .gaa .forheating, lighting ~powerand refrigeration" and deleting ihewords "forpublic use.' Mlsslsaippl River Fuel Corporation v. City'of St.'Louls, 57 F.Supp. 549 (ED M 1944) In this secondMisslsslppiRiver Fuel case, 549, 563): the*&ur~'~eld (5jF.Supp.

"In the gas Industry the orcfinary,. ana usual clasf3lficatlon as to purposes for tilch gas is 00ia is domestic, commercial ana Lndustrial.

II

. . . . "When a legislativeact Is passed with reference to a particular trade orbusiness and words are used which those conversantwith,the trade or business know and understand and have a particular and definitemeaning, then the words are to be construed as having that particular and definitemeaning, though suchmeaning may differ from the ordinarymeaning of the words."
Incidentaldeliveries of gas or electric power by companies whose nrimarsbusiness Is not dlstrlbutlon.will 'notbe held to constitutedistribution. State v. North Itasca Electric Co-op, 78 N.W.2d 54 (Mlnn.', 1956). In that case the Court held an ElectricalCo-op operatiug a high-voltage transmission~llne between twomain points, but which also made deliveries to two sub-stationsalong the way, was not engaged In "dlstrlbutlon" of electricalpower, but was a “~nsmisslon company". The Court... said:HonorableRobert S. Calvert, Page 7 OpinionNo, WW-1111

"The distinctionbetween the terms transmission lines and dlstrlbutlon lines as used in sections 273.42 d 273 41 lies In the primary objectlg and purpose for which the ll ia used. It i8 apparent that the prlmary?bj tlve and purpose of the 22,000-volt lineek question Is the transfer of large quantities of electrlcal energy in bulk to locations from which It may be distributed or allocated to consumers by means of other lines. Accordingly,we hold th t th line In question la a tranamlsslonallnee

. ."

In this connection,Attorney General's OpinionNo. W-909, dated August 29, 1960, has recognized that the occupation of the taxpayer la the crucial test for appllc the statute. Such opinionheld that incidental distribution of gas In a "few Instances"by the Air Force at a base located inside the city limits of a town does not make such facility one engaged in local: sale and distribution so as to occasion a tax under Art..7060, V.C.S.

In the light of the foregoing authorities, the question of whether a transmission company's saleswithin the lnco orated limits of any city or town oonst'ltutea use of a,"gas,woks"

IT engaging In 'local aale and distribution" cannot be answered merely by counting the number of Its customers. .Innone of the authorities discussed above has the number of customers, by Itself,been deemed significant except that under no clrcunstancea can a sale and delivery to one customermake the seller liable for the tax. UtilitiesNatural Gas Company v. State, 133 Tex. 313, 128 s.w.2a 1153 (1939)

. It appears affirmatively from the facts furnished to us wlth your opinion request that the occupation of Houston Pipe Line Company In the cities of Houston and Texas City Is that of a transmission company and not that of a local di8trlbutlOn company as those distinct categories are recognized In the authorities cited above. For example, Houston Pipe Line Company (1)maintains high pipelinepressures on gas crossing into city limits to point of delivery; (2)has no "mains or services"or "system of mains and lateralsby means of which the commodity Is usually delivered by a gas distributor to the premises of customers" or other network for wide-spread dlstrlbutlon of gas; (3) does not odorize its gas; (4) obtains City of Texas City; franchise from,the City of Houston or the submits to no local regulation of Its rates ana pollclea; makes the sales In question competlvely upon negotiated contracts rather than by published rate schedules, and (7) In no manner holds Itself out as a public utility to.serve

### Honorable Robert9,OUvert, Page8 

### pi, Opinion Ho. NU-1111

lnalvl&ual

oonemerseewouldbeabsolutely neoessary

fora distribution

oompanyanda oondltlon of Itsfranohiso.

SUMMARY

Houston

Pipe IdneCompany

hae,notbeen engagedinopeatlnga "gasworks.

. .?orlocal sale**and** 

### dlrtrlbutlon.

. ."atTexasCityur4 Houstonanil,

therefore,

Itsreoelpts

fromits salesOSgartherein are**not** 

### taxable

under

. Artiole7060,V.&S.
Yoursverytruly,
WIIJJWIMON Attorney 

### GeneralofTexas

B

JIiB:an.
APPROVRD:

_ OPINION

COMHIT'I'RE: HenryBras%ell,

Chairmen GradyChandler ElmerMcVey JohnC.**Stelnberger** 

### FredUerkentMn

**FORTRBATl!OBgXQ-** 

### : Houghton

Brownlee,

Jr.