HOUSTON CHRONICLE: Eminent Domain Power Comes with Responsibilities

Feb. 21, 2016

Chris Tomlinson

"From the one who has been entrusted with much, much more will be asked."

In that biblical passage, Luke tells us that power comes with the responsibility to serve the greater good. That principle has special application to pipeline companies, something Magellan Midstream Partners would do well to remember.

The Tulsa, Okla.-based partnership operates some of the most important oil pipelines in Texas, and it has used the power of eminent domain to force reluctant landowners to grant them right of way. An efficient pipeline system is deemed a greater good that trumps personal property rights.

Under Texas law, private pipeline companies can only use eminent domain if they make their pipeline available to any company that wants to use it, and they must also charge all users the same rate, like a toll road for energy. Texas encourages so-called common carrier pipelines because we don't want every oil company to build its own. We want them to share.

Dozens of landowners have written me, though, complaining about how powerless they feel when fighting a pipeline company that uses eminent domain. They get some compensation, but they grieve for the scars left on their land, for the 200-year-old trees uprooted and for the security they lose in knowing that a leak could damage their farm or ranch.

Pipelines are necessary, though, and eminent domain is an important tool for making sure that a single landowner can't stand in the way of progress. Anyone who reads my columns knows I support pipelines where necessary.

Magellan is currently expanding its BridgeTex Pipeline to deliver oil from the Permian Basin to its extensive network in Houston serving the ship channel. The company invokes eminent domain where necessary.

Magellan, though, is refusing to live up to the other side of the bargain, according to two complaints filed with the Texas Railroad Commission and an antitrust lawsuit. Magellan's management has refused to allow Houston-based Fairway Energy Partners and Vopak Moda Houston to connect to Magellan's network at the Speed and Genoa Junctions so they can serve Houston-area customers.

"The state of Texas privileges Magellan to move oil through Texas, it gives them the right of eminent domain and those two things together are very powerful," said Dana Grams, chief commercial officer for Fairway. "But they also have an obligation back to the citizens of Texas to make sure they are promoting competition and an open market."

Fairway offers oil companies, speculators and refiners crude storage in salt caverns underneath the Houston area. The company has interconnections with two other common carriers, but those don't connect to the same oil producers and consumers that Magellan serves, Grams said.

"Magellan has an economic lock on Permian Basin barrels from the Midland area to the Houston Ship Channel," Grams said. "We're not asking for anything but an interconnect and access to their existing customer base that is under contract and is operated and controlled by their tariff. We're not trying to add any congestion to their system, we're actually playing by their rules."

The complaints and lawsuit are a rare legal test of Texas' ancient common carrier rules. Magellan says Fairway is asking for too much and urged the railroad commission to stay out of private negotiations.

"We are actively disputing Fairway's claims before the Texas Railroad Commission, and believe that beyond the strong legal arguments against the (commission) requiring the connections, a favorable ruling for Fairway would be an unprecedented action by the (commission) which would fundamentally change long-standing industry practices," Magellan said in a statement.

Fairway officials, though, allege that Magellan's director of crude oil transportation and storage, Scott Devers, told them that the connections were simply not in Magellen's financial interest.

What went unsaid is that Magellan is also adding competing storage facilities.

In their complaint, Vopak Moda said Magellan was trying to limit the available storage options.

"Not only does refusing the interconnection protect Magellan's existing and planned business, but it further insulates Magellan from its common carrier obligations," Vopak Moda's complaint alleges. The company also alleges Magellan said it would charge Vopak Moda a higher rate than existing customers.

Common carrier rules expressly forbid this kind of discrimination.

"If we're going to have open access and fair competition in the Houston Ship Channel market, are we going to allow new companies to start up and compete on a fair basis?" Grams asked. "Or are you going to allow the incumbents to pick and choose winners and decide who gets to connect?"

Magellan doesn't hesitate to drop the eminent domain hammer on a landowner who opposes a pipeline. Therefore the Railroad Commission shouldn't hesitate to demand that Magellan live up to its common carrier obligation.

After all, a deal is a deal.

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