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Franchise Fee Battle Continues in Tiny TX Town

December 14, 1998
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Franchise Fee Battle Continues in Tiny TX Town

PG&ampE Gas Transmission Texas (PG&ampE GT-T), a subsidiary of PG&ampE Corp., and Southern Union Gas Co. said last week they will continue to fight a judgement awarding franchise fees from marketer sales to the City of Edinburg, TX (Pop. 29,885). They said they will appeal a judgment handed down in the 92nd district court in Hidalgo County, TX, even though the judge reduced the award under an August 1998 jury verdict.

The case involves franchise fees in connection with LDC Southern Union's gas operations in Edinburg and the conduct of various defendants (see NGI July 6, 1998). The jury verdict found for the plaintiffs in City of Edinburg v. Rio Grande Valley Gas Co., et al, but, in entering the judgment, Judge Westergren reduced the total judgement from $13 million to about $8.72 million.

"This litigation and other similar suits have arisen due to changes that have occurred in the natural gas industry since the mid-1980s," said Luis de la Garza, vice president of corporate relations for PG&ampE GT-T. "Due to the deregulation in the gas industry, customers were no longer required to purchase all of their gas from the local distribution company. With cheaper gas available from other suppliers, these customers began purchasing gas from companies other than the local distribution company. While customers have been receiving less expensive gas, the cities have seen a reduction in payments under their franchise agreements," said de la Garza.

"We are confident that, on appeal, the courts will reverse the judge's decision because the evidence presented at the trial clearly shows that the defendants abided by the franchise agreement and conducted themselves in a legal and proper fashion."

The dispute rests on a provision of a franchise agreement between the city and Southern Union that was originally made with Rio Grande Valley Gas Co. in 1985. The provision says 4% of gross income from all gas sales is to be paid to the city of Edinburg. Southern Union, which bought Rio Grande in 1993, passes the 4% tax on to customers as a separate line item on their bills. The city maintains it is being deprived of revenue that would be realized if the large end-users were captive LDC customers. The city maintains the LDC never had permission to allow the end-users to buy their gas from third-party marketers.

That claim is disingenuous because the city functions as the LDC's regulator, and transportation-only tariffs were in fact approved by the city, Andre "Butch" Bouchard, an attorney for Southern Union Co., said in July. "Eventually they approved the actual transportation service and the charge that we can charge for the service. These were approved by city ordinance. Additionally, the City of Edinburg General Hospital has been a transportation customer for 11 years." The city claims that because it was a separate hospital authority at the time it entered into a transportation agreement it wasn't aware of it.

"While we are encouraged by the significant reduction in the damages by the trial judge, we continue to believe that the entire case is without merit and will ultimately be overturned on appeal," Bouchard said last week. "We are in the process of preparing our motion for a new trial to be filed with the district court."

de la Garza said the gas industry is mulling a legislative solution to the circumstances that brought the suit. "We would like to see a solution that restores to cities the kinds of revenues they're losing and in return see cities quit filing suits against pipelines. We believe only the legislature can do that prospectively." The proposed change would include franchise fees on gas that is transported by the LDC on behalf of marketing companies and producers. "The gas is treated the same whether it's a sale or transported by the local distribution company."

Bouchard has suggested the lawsuit is driven by the city's outside legal counsel, the Houston law firm of O'Quinn &Laminack, which became famous for its breast implant litigation against Dow Corning as well as seeking to tax pipelines for crossing city streets in a number of Texas municipalities. "The first time the city ever complained to Southern Union was by virtue of this lawsuit," Bouchard said. "No one contacted us but the attorney and only after the city had retained him to sue Southern Union. The city also is our regulator, and as a regulator they have the right at any time to audit our accounts, and they never availed themselves of that provision until they had already filed suit against us."

Joe Fisher, Houston

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