Supreme Court of Texas Reverses Course, To Hear Gas Compression Cost Case

Supreme Court of Texas Reverses Course, To Hear Gas Compression Cost Case

Last week, the Texas Supreme Court agreed to review the appellate ruling in Kachina Pipeline Co. Inc. v. Lillis, No. 13-0596-CV (Tex. 2015). The central issue for the Court is whether Kachina Pipeline Company Inc., a natural gas transportation company, is entitled to summary judgment on the claim that it improperly charged Michael D. Lillis, a natural gas producer, more than $450,000 for natural gas compression costs associated with compressors located downstream from Kachina's receipt of Lillis's gas and upstream from a third-party processing facility. The appellate court found that contractual language allowing Kachina to charge for compression installed to "effect delivery of [Lillis]'s gas" did not allow Kachina to charge Lillis for compression costs incurred after it received the gas in order to sell the gas to the third-party processing facility.

The Court's decision to hear this case is a reversal of its October 3, 2014 order denying appellate review. Kachina requested a rehearing in October after the Court's initial refusal to hear the case, arguing that the appellate court resolved the issue by mistakenly assuming that the downstream location of Kachina's compressor "necessarily means it does not aid in the transfer of Lillis's gas into Kachina's pipeline." This assumption is wrong because a compressor both pulls gas into a line and pushes it out the other end, meaning a compressor located downstream of a delivery point can still aid upstream deliveries. Kachina argues that this flawed assumption will disrupt the natural gas industry in Texas because all industry participants will need to reexamine their current contracts that were negotiated under the assumption that compression was correctly understood.

Lillis, on the other hand, while noting that the appellate court may have "muddled" the compression costs provisions, says he did not agree to be charged for compression costs associated with pushing his gas to a downstream third-party processing facility. He further argues that Kachina has not made any showing that his gas was under the contractually required pressure at Kachina's receipt points, and that Kachina compressed his gas only to deliver it to the processing plant.

The Texas Pipeline Association and Gas Processors Association also expressed their concern about the appellate court's decision in an amicus curiae letter. The trade associations said that the language "to effect delivery of [producer's gas]" is common in the natural gas industry, and that these provisions are negotiated with the understanding that a pipeline will install compressors to serve multiple producers in a gathering system who will share those centralized compression costs proportionally based on their share of total production.

After withdrawing its order denying petition for review without an opinion, the Court has set oral arguments for March 24.

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