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Railroad Commission of Texas Rules Against Westlake in Ethylene Pipeline Dispute

Regulators with the Railroad Commission of Texas (RRC) ruled that a unit of Westlake Chemical Corp. cannot charge a market-based rate on its ethylene pipeline, ending a three-year dispute with one of its customers.

But one of the two commissioners who voted against Westlake Ethylene Pipeline Corp. in the rate case with Eastman Chemical Co. said he did so "to provide the parties certainty rather than allow this case to sit in limbo indefinitely." Commissioner Ryan Sitton also lamented the issue as a "missed opportunity" and issued a dissenting opinion, arguing that Texas lawmakers granted the RRC the authority to set market-based rates.

In a final order issued Wednesday [No. 10358], RRC voted 2-1 to reject a tariff Westlake enacted in 2013 on its 195-mile ethylene pipeline, which runs from Mont Belvieu to Longview, TX. According to RRC records, Eastman filed a complaint in July 2013 after Westlake hiked its tariff rate from $1.90 per 100 lbs. to $3.50.

In its order, RRC said Westlake failed to meet its burden of proof that the $3.50 rate was just and reasonable. They added that Westlake had failed to prove that six other ethylene pipelines -- operated by Chevron Phillips Chemical Pipeline Co. LLC, Concha Chemical, Enterprise TE Products Pipeline Co. LLC, ExxonMobil Pipeline Co., Koch Pipeline Co. LP and SouthTex 66 Pipeline Co. Ltd. -- were substantially similar to its own, save for the lengths of the pipelines.

"A market-based rate setting approach is not appropriate in this case because the preponderance of the credible evidence shows [that] the market is not competitive...[and] distance is not the primary driver for a pipeline rate," RRC said, adding that the $3.50 rate is neither "competitive or market-based." An administrative law judge and technical examiner for RRC set a new rate of $2.45.

In his dissenting opinion, Sitton said the Texas Legislature gave RRC the authority to set market-based rates for common carrier pipelines in the state in 2007. He said RRC should have ruled in favor of Westlake. He concurred with Commissioner Christi Craddick that, under a cost-of-service methodology, the appropriate net invested capital input for the pipeline totaled approximately $25.8 million.

"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," Sitton wrote. "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. I am hopeful that we can get it right and set a market-based rate the next time we are presented with this issue."

Four years ago, in response to inexpensive ethane supplies from the Marcellus Shale, Westlake announced plans to convert its ethylene plant in Calvert City, KY, from propane to ethane feedstock and increase ethylene production from 450 million to 630 million pounds per year (see Daily GPIOct. 3, 2012). Eastman was among several other companies with plans for ethylene plant projects at the time.

Last January, Westlake said it was would add 70 million pounds of annual ethylene capacity at Calvert City by the first half of 2017 (see Daily GPIJan. 12).

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