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Overrated

How the Texas Railroad Commission costs Texans millions on their natural gas bills.
by Published on

Updated

The Texas Railroad Commission, if it’s familiar to the public at all, is known mostly for its promotion of the Texas oil and gas industry. But the commission also plays a little-known but crucial role in regulating monopoly natural gas utilities, settling disputes between cities and the companies. About 4 million Texans in more than 1,000 cities are on privately owned gas distribution systems overseen by the commission.

Decisions by the Railroad Commission have a significant effect on consumers’ monthly gas bills. However, an in-depth study of 10 major rate cases to be released on Tuesday by the Atmos Cities Steering Committee, a coalition of North Texas municipalities, shows that the commission has sided with natural gas utilities over consumers and their own impartial hearing examiners in every single case since 1997.

The Observer reviewed the commission documents used in preparing the report and found a clear pattern: The Texas Railroad Commission has repeatedly, over the past decade, found ways to boost the bottom line of gas companies to the detriment of Texans’ pocketbooks. The study compares the recommendations of the commission’s hearing examiners, impartial arbiters who often spends weeks reviewing evidence and taking testimony, to the final decision by the three elected commissioners.

In two cases, the commissioners converted a recommended rate decrease—which would have saved consumers money on their monthly gas bill—to a rate increase that put more money into corporate coffers. Only once did the commissioners reduce a proposed rate hike. But even in that case, residential consumers still ended up paying more anyway, because the three commissioners forced consumers to pay a larger share of the increase than industry and commercial interests.

The result is that Texans have paid at least $150 million more on their gas bills than they would have if the commissioners had followed the examiners’ recommendations.

“I think it’s a pretty consistent pattern that the commission is more favorably disposed toward the interest of the utilities than consumers, and it’s borne out not just in the dollar impact but also in the shifts of dollars that occur between customer classes,” says Geoffrey Gay, general counsel for the Atmos Cities Steering Committee. “It’s the residential customer that takes the brunt of the commission decision-making.”

Take for example the 2007 rate case involving Dallas-based Atmos Energy. In 2006, Atmos proposed to raise rates on its 1.5 million Texas customers by about $63 million. Many cities balked, including Fort Worth, Sherman and Wichita Falls, arguing that Atmos actually needed to lower its rates. The company, they pointed out, had already been granted three rate increases since 1997.

Because the cities challenged the rate hike, the case went before hearing examiners, impartial arbiters employed by the Railroad Commission. After weeks of listening to testimony and reviewing evidence from both sides, the hearing examiners not only denied Atmos its request for an increase but recommended a $21.5 million cut to residential bills. It certainly didn’t help Atmos’ cause that the company tried to include extravagant expenses in their rate case: lavish hotel stays, airfare for executives and their spouses to attend the George W. Bush inauguration, cases of wine, $700 limousine rides and Dallas Cowboys tickets.

But the examiners’ decision wasn’t final. In contested gas-rate cases, the Railroad Commission has final say. The three elected commissioners, all Republicans, can approve, reject or modify the recommendations of the agency’s hearing examiners. In April 2007, the commissioners overturned the examiners and granted an overall $5 million annual rate increase, a reversal that an attorney for the cities called “deplorable.”

The commissioners did so largely by shifting the burden off big industrial customers and onto homeowners, renters and small businesses. Industry got a $5.9 million rate reduction while residential consumers were ordered to pay about $10 million more per year. Although the financial impact on people’s monthly bill was small–about 70 cents per month–the 2007 increase was one of five such increases the Railroad Commission has granted Atmos in the past 13 years.

Jay Doegey, an attorney with the city of Arlington, says Atmos and Arlington used to reach settlements on rates. That changed about eight years ago. “I think what’s going on is the company realized the commission was giving them pretty much everything they asked for or certainly most of it,” Doegey says. “They lost the incentive to settle.”

A spokesman for Atmos emailed a statement to the Observer saying it works with communities to “develop rates which are fair to consumers yet support the heavy capital investments needed to operate a safe and reliable natural gas delivery system.”

Ramona Nye, a Railroad Commission spokeswoman, defended the commission’s record in a long written statement. “In a state that has had tremendous growth (more than 12,000 miles of new transmission lines have been added since 2000), the Commission has provided adequate and prudent rate increases to meet that growth; protect the interest of consumers; and to provide safe and reliable service to Texas,” Nye wrote. She said that the commission decided to shift costs from industry to consumers in order to “end a decades long practice of having the industrial customers subsidize the cost of residential customers.”

Nonetheless, the commission’s decisions have primarily benefited three utilities: CenterPoint Energy, Texas Gas Service and Atmos (formerly Lone Star Gas and TXU Gas). In turn, these companies have plowed some of that cash back into the campaign coffers of the commissioners. Since 2000, the three gas utilities have collectively donated a little more than $150,000 to commissioner Michael Williams, outgoing chairman Victor Carrillo, commissioner Elizabeth Ames Jones and former commissioner Charles Matthews.

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That is a small percentage of the money flowing into the campaign accounts of commissioners. In 2008, for example, industry sources donated over $2.1 million to Railroad Commission incumbents, about 61 percent of the total contributions, according to a report on industry influence at the commission to be released tomorrow by the Texas office of Public Citizen. But Andy Wilson, campaign- finance researcher for Public Citizen, says even relatively small contributions can skew the agency’s decision.

“You have this sort of soft corruption where it’s all about access,” Wilson says. “Once you’ve paid your entry fee, you’re in. The public doesn’t have that same voice at the Railroad Commission. There isn’t someone there who can stand up for the public and match the industry and their campaign contributions and lobbying. It’s only $150,000 but that’s plainly enough.”

 

The current regulatory system dates to the 1920s, when popular outrage over indiscriminate profit-taking drove Texas lawmakers to grant cities the power to oversee natural gas utilities. At the same time, the Texas Legislature allowed utilities to appeal city decisions on rates to the Texas Railroad Commission. That bifurcated system is largely intact today. 

Gas outfits must first propose rate hikes to the municipalities that they serve. If the two sides can’t come to an agreement, the dispute is then aired in front of hearing examiners employed by the Railroad Commission. Ultimately, the examiners come up with something called a “revenue requirement”—basically how much revenue the utility needs to support its operations plus a reasonable profit. A recommendation is then forwarded to the commissioners for a final decision.

Typically, the examiners’ revenue requirement is somewhere between what the cities want and what the company wants. But the commissioners almost invariably find a way to get the companies more than the examiners recommend.

The balance of power between cities, gas companies, and state regulators has shifted variously over the decades. But today it tilts almost exclusively in the direction of corporate interests.

Here are a few examples:

  • In 1997, hearing examiners recommended an $89 million rate decrease for Lone Star Gas (now Atmos) customers. But the commissioners pared that amount down to just a $5 million decrease. Before the Lone Star Gas rate case, the Railroad Commission had seldom got involved in rate disputes. But for the next decade, it would repeatedly find a way to help pad the bottom line of big gas utilities. For customers of Lone Star Gas, it was the last rate relief they would get.

 

  • In 2004, TXU Gas (now Atmos) requested a $69.5 million rate hike to cover expenses incurred after it bought Lone Star Gas in 1997. But the examiners instead recommended a $20 million rate decrease. In other words, the examiners decided TXU had been overcharging its customers. Instead, the commissioners awarded TXU a $12 million annual increase. Ordinary consumers paid for most of the hike; residential rates went up 4 to 5 percent per month while industrial customers got a 27 percent break.

 

  • In 2010, it seemed like the commissioners had finally sided with ordinary ratepayers. Hearing examiners recommended a $5.7 million increase for CenterPoint Energy customers in the Houston area. Commissioners instead ordered a smaller hike—$5.1 million. However, in some accounting jujitsu, the Railroad Commission gave businesses a 33 to 40 percent rate reduction while laying the rest of the bill at the feet of residential customers. In the end, business got a $14.3 million price reduction while residential customers saw a $19.4 million increase.

Many Texans probably don’t realize how much their gas bills have climbed because of Railroad Commission decisions. That’s in part because low gas prices have masked most of the rate increases. Under Texas law, the market price of gas is passed directly onto the consumer. With a weak economy and a glut of gas in the market, consumers are paying historically low prices for heating their homes with gas. But the rate increases that the Railroad Commission aren’t going away. For example, the average Atmos customer in Dallas has seen the portion of their monthly gas bill controlled by the Railroad Commission from about $11 to almost $19 in the last decade—over twice the rate of inflation.

“The issue that’s difficult for folks to understand is that the rate they’re paying today in terms out-of-pocket dollars may not be any more than they were paying several years ago and that’s because the price of natural gas itself is declining,” says attorney Geoffrey Gay. “When you have gas prices like they were in early 2008, if we get back to that kind of level, people will be screaming. …  The price of gas could double. You’re going to pass that on immediately and the consumers are going to get walloped.”

Updated at 12:40pm, Tuesday: This post was updated to include comments from the Railroad Commission.

Forrest Wilder, a native of Wimberley, Texas, is associate editor of the Observer. Forrest specializes in environmental reporting and runs the “Forrest for the Trees” blog. Forrest has appeared on Democracy Now!, The Rachel Maddow Show and numerous NPR stations. His work has been mentioned by The New York Times, the Washington Post, the New Yorker, Time magazine and many other state and national publications. Other than filing voluminous open records requests, Forrest enjoys fishing, kayaking, gardening and beer-league softball. He holds a bachelor's degree in anthropology from the University of Texas at Austin.