Improve State Agencies Use of Gas Transportation Service

State agencies and institutions of higher education should be provided less expensive gas transportation.

The Texas Legislature has directed state agencies to meet their gas needs though the use of state-owned gas sold by the General Land Office (GLO) in order to lower utility costs and save taxpayer funds while adding to the Permanent School Fund. 1 State agencies spend approximately $30 to $38 million annually on gas supply and services. 2 During fiscal 1992, GLO sold 70 state agencies approximately 8.3 million British thermal units (MMBtu) of gas. 3

Sta te agencies have been having problems obtaining gas transportation service from a few local distribution gas utility companies (LDCs) at a reasonable rate. When an LDC is the only option and a lack of competition exists, the state may pay more than it reas onably should for utility services.

Electric and telephone utilities in Texas have certified areas in which others may not directly compete unless permitted by the state regulatory authority. For LDCs, however, there are no certified areas approved by the state regulatory authority.

In certain areas, state agencies have realistic alternatives to transportation by the LDC, such as other gas utilities or pipelines. In other areas, LDC is the only option. The average cost for gas transportation by all gas utilities in Texas is approximat ely $0.14 per thousand cubic feet (Mcf). 4 The majority is for the transportation of the gas, not for distribution through the LDC s distribution system. However, in areas where the LDC can monopolize gas transportation, agen cies pay much higher prices. One Texas Department of Criminal Justice (TDCJ) facility, with annual throughput of 190,000 Mcf has been paying a gas transportation rate of $2.37 per Mcf. 5

Many LDCs residential and commercial rates are fixed by the regulatory authority based on only a portion of an entire statewide distribution system. While many do group a large number of cities into just a few service areas, other LDCs have virtually each city as a separate service area. Some LDCs do have industrial sales rates applicable throughout their entire statewide distribution system.

Many large state facilities, such as those operated by TDCJ, the Texas Department of Mental Health and Mental Retardation and several universities are energy intensive. In fiscal 1991, TDCJ s throughput of natural gas was approximately 2.2 million Mcf for 33 existing correctional facilities. By 1996, the number of TDCJ facilities will double. 6 Energy costs can determine whether it is cost-effective to build in a given geographic area. A new or expanded state facility, especially in less populated areas of the state, can have significant impact on the local economy. Excessive transportation rates by an LDC not only waste taxpayer money, but also adversely impact a local economy.

Under the Gas Utility Regulatory Act (GURA) and the Cox Act, the Railroad Commission and municipalities share jurisdiction over some gas utility matters. 7 The Railroad Commission has sole original jurisdiction over other gas utility matters, and appellate jurisdiction over matters within the municipalities original jurisdiction. Pursuant to Section 5.02(b) of GURA, rates are approved by the regulatory authority if one of three specified conditions exist, except if the purchaser files a complaint with the Railroad Commission. 8 Before an existing contract rate can be modified in a complaint proceeding, the Railroad Commission must find that modification is in the public interest. 9 Section 5.02(b) does not expressly address the situation where the LDC does not make an offer to a particular purchaser to provide transportation service. Although no state agency has filed a formal complaint with the Railroad Commission, at least two state agencies recently have written to request assistance with gas transportation problems.

The Railroad Commission reviews some gas transportation rates to determine whether the rates are in excess of a cost-based rate. 10 Upon request by a gas utility, the Railroad Commission reviews the operating expenses and investment of a gas utility to determine if the transportation rate the gas utility seeks is not in excess of a cost-based rate. The Federal Energy Regulatory Commission (FERC) allows an intrastate gas utility to use the not in excess of a cost-based rate finding by the Railroad Commiss ion in lieu of a proceeding at FERC, and that rate becomes the ceiling pursuant to Section 311 of the Natural Gas Producers Association (NGPA). The utility may contract for a rate lower than the ceiling rate. To maintain FERC approval, the utility must see k a Railroad Commission redetermination every three years.

Within the existing regulatory scheme, with time and funds currently in short supply, a state agency may be able to further reduce its expenditures for gas. TDCJ has estimated that it could save $400,000 annually by constructing backup propane tanks and estimates that construction costs would be approximately $300,000.

A. The Legislature should amend Gas Utility Regulation Act (GURA) and the Cox Act to provide for less expensive gas transportation for state agencies and institutions of higher education. These changes should provide that no Local Distribution Gas Utility Company (LDC) could refuse to provide gas transportation service to a state agency. The Legislature should direct the Comptroller s office to reduce the budgets of the affected agencies by the identified savings.

Rates by an LDC to a state agency should be presumed by the Railroad Commission to be just and reasonable regardless of whether the three specified conditions in GURA, Section 5.02(b) exist. Where the LDC and agency cannot agree on the rate, the Railroad Commission should fix the just and reasonable rate, not to exceed a cost-based transportation rate,within 120 days of request, unless the Railroad Commis sion determines the LDC has insufficient pipeline capacity. The determination of the cost-based transportation rate should be based on the LDC s statewide local distribution system as a whole, not on a particular locality. Once the rate is determined, the Railroad Commission can rely on that determination to resolve any dispute unless the LDC requests a new determination. During the three years after such determination, the LDC and agency may negotiate and execute a rate that does not exceed the cost-based rate determined by the Railroad Commission.

B. The Legislature also should amend the definition of gas utility in GURA and the Cox Act to provide that an entity that is not otherwise a gas utility shall not become a gas utility based on the transportation of gas on behalf of a state agency.

This could increase the pipeline options available to state agencies. The Legislature should provide encouragement for state agencies to expend the time and funds necessary to pursue creative alternatives that reduce expenditures for gas, such as the option mentioned by TDCJ. The Legislature can do this by allowing a state agency to retain some or all of the savings for a few fiscal years after implementation. Without such encouragement, there may not be suffic ient incentive for a state agency to expend the scarce time and funds necessary to pursue long-term savings on those projects.

This recommendation clarifies oversight in situations where a monopoly exists. Its primary advantage is saving ta xpayers substantial amounts of money with a minimal impact on or disruption of the existing regulatory scheme. The recommended changes affect the one customer that the Legislature has determined should purchase state-owned gas, and improves that customer s access to the gas.

The primary disadvantage will affect only LDCs; state agencies will no longer pay higher transportation rates. Utilities may not favor this Railroad Commission jurisdiction; however, conferring on the state regulatory authority when st ate agencies are involved is an exception the Legislature has previously recognized. Certain statutes provide that upon the filing of a petition by a state agency, the Public Utility Commission of Texas has jurisdiction to determine issues of a municipally owned electric utility s rates, pricing policies, access restrictions, and other matters regarding state agency cogeneration facilities. 11 Purchasing state-owned gas is a mechanism to use state resources to save taxpayer money in the procurement of utility service. Municipally owned utilities should not be allowed to unreasonably impede these efforts.

Fiscal Impact
The fiscal implications will vary. For agencies with the largest annual consumption and distribution rates over the average, the costs would be reduced by $489,000. 12 TDCJ usage accounts for 63 percent of this savings, while Southwest Texas State University, the University of Texas M.D. Anderson Cancer Center and the General Services Commission account for the remainder.

The Railroad Commissio n could incur some additional costs through requested proceedings in which the Railroad Commission must determine a cost-based transportation rate. Those costs, however, are minute in comparison to the large potential savings to the state. Moreover, procee dings at the Railroad Commission are not likely to occur often because of the Railroad Commission s ability to rely on a previous determination for three years.

Fiscal Savings to the General Change
Year Revenue Fund 001 in FTEs

1994 $489,000 0
1995 489,000 0
1996 489,000 0
1997 489,000 0
1998 489,000 0

1 Tex. Nat. Res. Code Ann., sec. 31.401 (Vernon Supp. 1992).
2 Texas Comptroller of Public Accounts, Expenditures for Electric, Gas, Telephone (Monthly and Long Distance) and Water, Austin, Texas, November 13, 1992 (printout).
3 Memorandum from Walt Rosenbusch, Deputy Commissioner for Energy Resources, General Land Office, to Richard Muscat, Attorney General s Office, December 14, 1992.
4 Railroad Commission of Texas, Table 6B-489, Revenue From Gas Transportation Of Gas Of Others in Texas, Calendar Year 1990 (Austin, Texas, 1991).
5 Letter from the Texas Department of Criminal Justice to the Railroad Commission, April 29, 1992.
6 Ibid.
7 Tex. Rev. Civ. Stat. Ann., arts. 6050 - 6066f (Vernon Supp. 1992).
8 GURA, Tex. Rev. Civ. Stat. Ann., art. 1446e (Vernon Supp. 1992).
9 High Plains Natural Gas Company v. Railroad Commission, 467 S.W.2d 532, 536 (Tex. Civ. App., Austin, Texas 1971, writ referenced n.r.e.). (Although the freed om of contract clauses in the federal and state constitutions prevent the impairment of contracts, the Railroad Commission, in exercise of the state s police power, may modify or abrogate a contract rate when it is in the public interest to do so.)
10 A cost-based rate is a rate that allows the utility to recover reasonable and necessary operating expenses plus a reasonable return on investment.
11 Tex. Rev. Civ. Stat. Ann., art. 4413(55), sec. 6 (Vernon Supp. 1992).
12 General Land Office, Customers above average annual consumption of 106,087 MMBtu with Distribution Rate Greater Than Program Average of $.5916 (Austin, Texas, December 23, 1992), p. 1 (printout).