Commissioner Ryan Sitton Opinion

Concurring in Part, Dissenting in Part - GUD No. 10358: Rate-setting proceeding regarding Westlake Pipeline severed from GUD No. 10296

AUSTIN—I concur with Commissioner Craddick’s view that the appropriate net invested capital input for the Mustang pipeline, if a cost-of-service methodology is utilized, is $25,764,021 as originally calculated and recommended by the examiner.[1]   I voted to approve the final order in this case to provide the parties certainty rather than allow this case to sit in limbo indefinitely.

However, I respectfully dissent from the approach the other two commissioners took to use a cost-of-service methodology to set the rate in this case. [2] In 2007, the Texas Legislature granted the Railroad Commission authority to set market-based rates for common carrier pipelines in Texas [3] – I believe that is what should have been done in this case.  

The cost-of-service approach used in this particular case would seem to require identical “twin” pipelines in every case to derive a market-based rate.   In other words, the commission could never adopt a market-based rate for common carrier pipelines because pipeline infrastructure is almost never constructed such that “twins” exist. Market-based rates for common carrier pipelines would incentivize necessary investment in our critical pipeline infrastructure and ensure that Texas remains a global energy leader.   We missed an opportunity in this case to begin the process of setting market-based rates for common carrier pipelines. Fortunately, the Final Order has language limiting the precedential value of the decision.[4] I am hopeful that we can get it right and set a market-based rate the next time we are presented with this issue.

The Final Order declares that the relevant market, for purposes of this case, is “the market between the pair of the receipt and delivery points between Mont Belvieu and Longview.”[5] The order makes this declaration in spite of the fact that both parties to the proceeding acknowledged that the “Gulf Coast Region” was the appropriate ethylene market comparison and that a market-based rate could be derived by appropriately examining other pipeline tariffs in that region.[6]

It is important to understand the limitations of the information that is going to be available to the commission when setting market-based common carrier rates. It would be extremely rare to see multiple pipelines running in parallel from point A to point B that carry the same products and volumes. Competitive alternatives also might not exist for transport from point A to point B in some situations. If we understand those facts, we can move on to an appropriate examination of what we should consider to set a market-based rate.

In this case, the commission is distracted by the fact that there is only one ethylene pipeline carrying product from Longview to Mont Belvieu. The commission therefore concludes that the market is not competitive so a market-based rate cannot be set. I view the case, and the information necessary to set a market-based rate, differently.

In order to determine a “proxy” market-based rate for a pipeline that doesn’t operate in a competitive market, the following criteria could be considered:

1. Whether the proxy rate was set by agreement between the parties
2. At the proxy origination point and termination point, there are a number of options to utilize or to transport the product or there is a reasonable basis to compare the different origination or termination points
3. There is at least one alternative method of transportation (rail, truck, etc.) to the proxy
4. The pipelines operate in similar markets

In the case before the commission today pipeline tariff rates were considered that met those criteria. In fact, the Concha Chemical Pipeline, originating in Napoleonville, LA, and terminating in Mont Belvieu, meets all of those criteria. It was established that:

1. The rates on the Concha pipeline were established in negotiation between the pipeline operator and its customers;
2. In the Napoleonville, LA area, there are a number of options to utilize to transport the product; and
3. There are other pipeline routes, albeit somewhat difficult to use, plus rail and truck, to use as alternatives to the Concha pipeline
4. The Concha and Mustang pipelines are in the same Gulf Coast market

Based on those criteria, it is clear that the Concha pipeline is charging a market-based rate. In other words, it must be worth it to the shipper to spend the money charged to move the product from the origination to termination points.

In addition to the Concha pipeline, at least five other ethylene pipeline tariffed rates were examined in this case.[7] Eastman argued that a sixth pipeline, the Evangeline Pipeline, should also have been considered.[8] It is clear though that the Concha pipeline is the best proxy for the Mustang Pipeline.

The termination point of the Concha and Mustang pipelines is the same - Mont Belvieu, TX.[9] However, their origination points are different; Napoleonville, LA and Longview, TX respectively. Therefore, in order to establish similarity between the pipelines for the sake of market comparison, a basis for comparing the origination points must first be established.

Napoleonville, LA is an open market, with substantial processing facilities in the area, plus pipeline transportation, trucking, and rail transport options. In the case of Longview, TX, there are other limited transportation options, but less processing capabilities. Therefore, it could be assumed that the ethylene product would be “more valuable” if located in Napoleonville than in Longview, and therefore, the value in transporting the product from Longview to Mont Beliveu would be at least the same as the value in moving the product from Napoleonville to Mont Belvieu.

There was discussion in the record regarding the cost impacts distance has as a pipeline moves a product. While a valid consideration in identifying a cost basis (and relevant to cost of service), these distances actually have very little to do with the market value of moving product and wouldn’t be considered in setting a market-based rate. I think the analysis described above is how we should develop future market-based common carrier rates.

Once we establish a competitive market-based “proxy” rate that is substantially similar as detailed above, which could have been effectively done based on the record in this case, I think the evidentiary review can end and a market-based rate should be set.

The crux of this case was fairly simple in my opinion. I previously voted to remand the case because I thought it was clear that setting a market-based rate was relatively simple and the right public policy direction. Unfortunately, the commission has continued down a path with predictable consequences that must be addressed.

First, once the commission’s final order in this case is effective, the VERY NEXT DAY, either party could file for another ratemaking proceeding based on new test year information or other cost input data changes. What will have taken us three years to decide, if not appealed to the Travis County District Court, could immediately be back before us.

Next, the fact that two WIDELY DISPARATE rates in the two proposed final orders presented to the commission were based on simply one cost input change makes clear how subjective, and inappropriate, the cost-of-service approach can be. In one of the proposed final orders we were asked to apply a rate of $2.45 per hundred pounds of ethylene transported. The alternative final order proposed a rate of $1.55 per hundred pounds of ethylene transported. Changing one cost input (in this instance Westlake’s net invested capital) in the cost-of-service model resulted in a 37 percent change in the rate. And there has been significant disagreement regarding the correct amount of that one cost input. This kind of variability would be avoided if the market-based approach were utilized.

Finally, it should be abundantly clear to everyone that Westlake wants to charge a higher rate and Eastman wants to pay the lowest possible rate. Both companies are in business to make money after all. It causes uncertainty for both companies when the commission takes an inordinately long amount of time to rule on these cases. I strongly believe that a market-based rate examination can and should be faster and more efficient to hear and decide than a cost-of-service ratemaking proceeding, if done properly. We will still have disagreements about the appropriate market and proxy rates, but there will be fewer arguments than there are in a cost-of-service situation where investment, depreciation, rate-of-return, allowances for operating capital, operating expenses, volumes, etc., are all vigorously debated. In the interest of regulatory efficiency, we should have a speedy process to hear evidence and set a market-based rate. If we move in that direction, my expectation will be that these cases will be decided much more quickly.

In conclusion, I appreciate the work our staff did on this case and I respect the other commissioners’ views. I think it was the wrong decision for the reasons articulated above and I am hopeful that we will quickly move to set market-based rates for common carrier pipelines as the Legislature envisioned.        

[1] GUD Docket No. 10358, Final Order dated August 24, 2016, Finding of Fact 78

[2] The decision was made by the commission at its June 21, 2016 conference to only consider a cost-of-service approach.

[3] TEX. NAT. RES. CODE ANN. § 81.061(b)

[4] GUD Docket No. 10358, Final Order dated August 24, 2016, Conclusion of Law 17

[5] GUD Docket No. 10358, Final Order dated August 24, 2016, Finding of Fact 48.

[6] See Eastman Chemical Company, Exceptions to the Remand Proposal for Decision, Railroad Commission p. 16 (May 13, 2016); Westlake Ethylene Pipeline Corporation, Exceptions to the Proposal for Decision, Railroad Commission p. 4 (May 13, 2016).

[7] See Remand Proposal for Decision p. 12.

[8] Westlake claimed Evangeline was not used by either side’s experts because that pipeline, “has suffered significant reliability issues and therefore is not appropriate for inclusion in setting a market-based rate,” Westlake Responses to Eastman’s Exceptions p. 6.

[9] See Appendix 3 to Remand Proposal for Decision, Labeled “Ethylene Tariffs in Effect July 2013”.

Elected to the Railroad Commission Nov. 4, 2014 to a six-year term, Commissioner Ryan Sitton won the general election with over 58 percent of the vote.Ryan Sitton is one of the world’s leading energy experts. He is the first engineer to serve on the Commission in 50 years. A native Texan who grew up in the Irving area, Sitton is a graduate of Texas A&M University where he earned a degree in Mechanical Engineering, and met his wife, Jennifer. In 2006, Ryan and Jennifer founded PinnacleART, an engineering and technology company focused on reliability and integrity programs for the oil, gas, and petrochemical, mining, pharmaceutical, and wastewater industries. As Railroad Commissioner, Ryan is working to make the Commission more efficient and effective so Texas can lead America to energy independence.