   -




 Honorable Robert S. Calvert      ,, Opinion No. WW-1111
 Comptroller,of Public Accounts
 Capitol Station                    Re:   Whether, under the sub-
 Austin, Texas                            mltted facts Houston
                                          Pipe Line Company has
                                          been engaged in operating
                                          a "Gas Works". . ."for
                                          ;;E;$ sale and distrlbu-
                                                 so that lts.Pece$pts
                                          are t&cable under Art,
                                          7060, V.C.S., and related
 Dear Mr. Calvsrt:                        question.
       You have asked three q#!stlons concerning the application
  of the grobe &metptCr tax provided for under Article 7060,
  V,0,8,, (now Artiole 1X.03, Title 122A, Taxation-General) ,to
  ~&$a+lz$opens@ions of the Houston Pipe Line Company, in oonneo-
  tion w%%,han audLt of thid oofftpany
                                     ky your office. Specifically,
                asked and the statement5 of fact furnlahed relate
  ths i#.at?$tlGlld
 $0 cSz%4in opex%tions .of.HGu&ton..Plpe.Llne Company during the
  audited period ln the lncorpora%d ace88 of Texas City and
: Hou#ml.   WiM re'eferenceto the&i facts, you ask the following:
           ~"'Your opinion 15 requested a8 to
          whether or not under the facts'sub-
          mitted, Houston Pipe Line Company has
          been engaged In operating a 'gas works'
          . 0 .I'for local sale and distribution
                t at Texas City so that its re-
          ieipis are taxable under Article 7060,
          Texas Civil Statutes, now Article 11.03,
          Title 122A, Taxation-Qeneral.
            "Two questions arise concerning Houston
          Pipe Line Company's business In Houston.
            "First: In view of the definition of
          ‘gas works' as used Article 7060, R.C.S.,
          in the Eddlns-Walcher Butane Company
          v. Calvert, 298 S.W.2d 93, 96 (Texas
          Supreme Court,.1957), as I. . . a plant
          where gas Is manufactured or processed
              ,I or 1.   .the system of mains and
          iaierah by m;ans of which the commodity
Honorable Robert S. Calvert, Page 2      Opinion No. WW-1111


         Is usually delivered by a gas distributor
         to the premises of customers. . .: can
         the sales of gas by Houston Pipe Line
         Company through facilities owned, operated,
         managed and controlled by Houston Natural
         Gas Corporation be considered In determining
         whether Houston~Plpe Line Company Is subject
         tomthe tax?
           "Second: In the event the first question
         Is answered in the affirmative, are these
         'few instances' of gas delivered sufficient
         to subject Houston Pipe Line Company to
         the tax for the periods In question?"

      1. It appears that prior to November, 1956, Houston Pipe
 Line Company and Houston Natural Gas Corpqratlcn were unrelated
 corporations having different stockholders, officers and directors.
 Houston Pipe Line Company had been the prlncl.palsupplier for
 Houston Natural Gas Corporation, making city gate deliveries to
'Houston Natural Gas Corporation at several citl.esIn Texas. During
 this time (up until November, 1956) the relationship between Houston
 Pipe Line Company and Houston Natural Gas Corporation was purely
 contractual In nature.
     2. In November, 1956, Houston Natural Gas Corporation.pur-
chased Houston Pipe Line Company from Atlantic Refining Company.
:AlthoughlOO$ of the stock was purchased, Rouston Natural Qas
Corporation's acquisition took the essential.form of a purchase
of assets, by means of the formation of a new .?cm.pany,
                                                       first
chartered in 1956, with the former Houston Pipe Line Company
surrendering Its charter, dissolving and going out of business,
and the new company, subsequently changing lts name to the
abandoned name "Houston Pipe Line Company" then remaining with
the former business and assets of the previous Houston Pipe Line
Company.

     3. Houston Pipe Line Company, both as present3.yconstituted
and historically, Is a."gas transmlsslon lir~e. q,.s.ervin$varlous
gas distribution companies and Industrial cuetcmers. . . . Thus,
it appears that Houston Pipxlne   Company,plcks ';lpnatural gas
at the well head and from gas gathering systen;.s.and carries the
gas so gathered by long line, large diameter, high pressure pfpe-
lines to city gates for delivery to Houston Natural Gas Corpora-
tion and other gas distribution companies.
      4. In addition to Its city gate dellverles to gas distribu-
 tion companies, a substantial part of the br?slressof Houston
 Pipe Line Company conslats of selling gas in large quantities
 to industrial and chemical plants located alorg its lines in the
Honorable Robert S. Calvert, Page 3      Opinion No. WW-1111


Texas Gulf Coast area. In making these sales, Houston Pipe Line
Company employs laterals from Its high pressure main Ilnes,
rather than an extensive grid system of low pressure gas mains
and services. It does not odorize the gas in question nor does
It assume the duty of serving all customers on its lines desiring
service. Houston Pipe Line Company competes for this business
with other gas transmlsslon companies, and with alternative fuels
such as fuel oil, etc. Houston Pipe Line Company sells Its gas
by negotiated contract rather than by published rate schedules;
obtains no franchises from cities and towns touched or crossed by
Its transmission lines, and submits to no city or local regulation
of Its rates on these Industrial sales. Reports to the Railroad
Commission of Texas by Houston Pipe Line Company are made as
required of gas transmission companies, rather than those required
of gas distribution companies.

      5. Since 1947, the corporate limits of Houston and Texas
City have been extended so as to bring certain Industrial plants
served by Houston Pipe Line Company Into the city limits. By
contracts entered Into by and between Houston P!.pe Line Company
and Houston Natural Gas Corporation, (in 1450, prior to their
affiliation in 1956) a "transportation fee representing the
'salesprofit on a number of such,~ustomers was transferred
from Houston Plpe~Line Company &Houston    Natural Gas Corpora-
tion; together.,&th the duty to read meters, make service caLla,
change and.tiomputecharts, etc. Thereafter, Houston Natural
'Gas Corporation has paid the tax due under Art. 7060 on ,the
eiilesto these customers--limited, however> In some instances,
'to-the 'sales profit" or "transportation fee" received by it.
The agreements in questionhave been continued in force following
the events of November, 1956, related above.
     6.  The contracts between Houston Pipe Line Company and
Houston Natural Gas Corporation are questioned. The second
question of your request asks whether the sales to customers
transferred from Houston Pipe Line Company to Rouaton Hatural
Gas Corporation by the contracts in question can be considered
In determining whether Houston Pipe Line Company la subject to the
tax.
      Answering this question first, we are of the opinion that
 these contracts,..
                  being based upon what appears to be sufficient
 consideration and having been entered Into when the two companies
 were unaffiliated and at arms length, are not subject to question.
-However, in the view we take of the law, even an affirmative
 answer to this question would not make Houston Pipe Line Company
 subject to the tax on Its sales inside the City Limits of Texas
 City and Houston during the periods In question.
Honorable Robert S. Calvert, Page 4     Opinion No. WW+llll


     Your request for an opinion quite properly recognizes
that the recent Supreme Court opinion, Eddlns-Walcher .Butane
Company v. Calvert, ,156 Tex. 587, 298 S.W.2d 93 (1951) IS of
controlling Importance in this matter. This opinion Clearly
shows that it la not the number of customers In a city, but the
type or kind of buslneas conducted, which determines whether
the tax imposed by Art. 7060, V.C.S., applies. While this
opinion might well end with this observation, It may be helpful
to review the legislative history of Article 7060 and a number
of cases in which the dlstlnctlon Is recognized between the
operation of a local gas distribution plant, on the one hand,
and a gas transmission system incidentally making Industrial
sales of gas along Its line, on the other hand.
     Under the statute the question la whether.Houston Plpe~Line
Company has been engaged, In the cities of Houston and Texas
City, in-the occupation of "owning, operating, managing or
controlling any gas. . *works. . .located wlthln any Incorporated
town or city in this State, and used for local sale and dlstrlbu-
tlon In said town or city. . ." (Formerly Artlc1e.7060 Texas
civil Statutes; now Article 11.03, Title 122A, Taxatlon&neral,
Texas Civil Statutes).
     In Eddlns-Walcher Butane Company v. Calvert, 156 Tex. 587,
298 S.W.sd 93 (1957)  ,Art. 7060 V.C S   was held not to apply
to nmerous sales of'gas inslde'the ioriorate limits of a town"
unless such sales were accomplished by means of ". . .A plant
where gas Is manuEactured or processed. . <' or.,".
of mains and laterals by means of which the commodity la usua y
                                                   l   --k P

delivered by a gatsdistributor to the premises of customers. . ,'I.
In that case, the Supreme Court held that a butane distributor,
delivering butane to the premises of Its customers Inside the
city llmlts by means of trucks, did not owe the tax. Attorney
General's Opinion No. 0-3776 of August 1, 1941, mentioned as
authority In Mr. McKlnzle's letter dated September 23, 1960,
was overruled by the Court.
     fin Utilities Natural Gas Company v. State, 133 Tex. 313,
128 S.W.2d 1153 (1939) the Texas Supreme Court held that sales
by a long line, high pressure pipe line transmission company
to an electric power company inside Victoria, as well as to a
local distributing company, did not make the transmission company
a company which was Itself engaged In "local sale and distribution".
     It should be noted, additionally, that In Thompson v. United
Gas Corporation, 190 S.W.2d 504 (Tex.Clv.App., 1945 , err.ref.1,
in deterninIn# the app1lcabillty of Article 6060, V.C.S., commonly
known as the pipeline tax", the Court recognized olearly the
division of the gas Industry Into three distinct occupatlons--
severance and gathering, transportation or transmlsalon by plpe-
line, aad local distribution.
Honorable Robert S. Calvert, Page 5      Opinion No:WW-1111


     In Dallas Gas Co. v. State{ 261 S.W. 1063 (Te~.Cfv.App.,
1924) err.ref   the meaning of 'gas plant" under the statute In
force prior to'the passage of Art. 7060, V.C.S., was held to
contemplate the operation of a public utility regulated by the
municipality. In upholding tt%@onstitutionality of the tax
Imposed by that statute, the C&rt held (261 S.W. 1063, 1069):
          "But the occupation of operating a
        gas plant is one possessing characteristics
        peculiarly applicable to Itself, and in no
        sense similar In character to that of sellinn
        real estate. Such business is Usually
        recognized as a public utility bver which
        munlclpalitles, as in the instant cashY
        exercise powers of regulations. Its very
        nature. to enable its successful economic
        operation, demands a monopoly In its
        community."
     That.'!J.ocal
                 sale and distribution" has the meaning of public
utility setirlngall comers, Including Individual consumers
has been clearly recognized by the Attorney Generali In Opinion
~~-810, dated March 4, 1960. In discussing the Eddins-Walcher
case, this opinion states:    :

          "The definition of 'dlstrlbutlon',was
        added to by Eddlns-Walcher But
        v..Robert S. Calvert 156 T
        -2a                1x-i
                              an o,",:;
        Walker, the Texas SuljremeCourt held that
        the te*  ‘gas works'; as used In Art.  7060,
        V.A.CI;G.,meant (1) an establishment in
        which gas is manufactured,-produced or
        processed, or (2) a distribution system
        consisting of pipes through which gas
        flows and is delivered to the premises of
        consumers. In light of these two cases,
        It Is submitted that ldlstrlbution' means
        transfer or possession of gas to various
        consumer individuals or concerns in an
        Incorporated city or town. . ."
     In City of St. Louis v. Mississippi River Fuel Corporation,
97 F.2d '*r
        2b      .A.                                  ,orporatlon,
a high preesur; trans&slon   line having some 19 Industrial
customers in the City of St. L@@a under contract, was, never-
theless, held not to be engaged in "distributing and selling. s s
gas. . .for public use" within the meaning of a taxing ordinance
of the City of St. Louis. The 8th Circuit Court of Appeals
held, In affirming a judgment In favor of the gas company (97
F.2a 726, 730):
Honorable Robert S. Calvert, Page 6      Opinion No. WW-1111


          "We conclude that under Missouri
        law.the term 'for public use,' as used
        In the ordinance under consideration,
        means the sale of gas to the public
        generally ana indiscriminately, ma
        not to particular persons upon special
        contract. This construction of the
        phrase Is the one generally understood
        ana applied."
The Court of Appeals thus adopted the same reasoning as the
Texas Court In Dallas Gas Co. v. State, supra (261 S.W. 1063)--
that the operation of a gas plant requires a public utility
operation; not simply sales to particular persona upon special
contract.
      The same holding was made with respect to the Mlssisslppl
River Fuel Corporation even following an amendment of the taxing
ordinance so as to tax the "selling or distributing of. . .gaa
     .for heating, lighting ~power and refrigeration" and deleting
ihe words "for public use.' Mlsslsaippl River Fuel Corporation
v. City'of St.'Louls, 57 F.Supp. 549 (E D M      1944)   In this
second Misslsslppi River Fuel case, the*&ur~'~eld (5j F.Supp.
549, 563):
           "In the gas Industry the orcfinary,.
         ana usual clasf3lficatlonas to purposes
         for tilch gas is 00ia is domestic,
         commercial ana Lndustrial.
           II
                .   .   .   .



           "When a legislative act Is passed
         with reference to a particular trade
         orbusiness and words are used which
         those conversant with,the trade or
         business know and understand and have
         a particular and definite meaning, then
         the words are to be construed as having
         that particular and definite meaning,
         though such meaning may differ from the
         ordinary meaning of the words."
     Incidental deliveries of gas or electric power by companies
whose nrimars business Is not dlstrlbutlon. will 'not be held to
constitute distribution. State v. North Itasca Electric Co-op,
78 N.W.2d 54 (Mlnn.',1956). In that case the Court held an
Electrical Co-op operatiug a high-voltage transmission~llne
between two main points, but which also made deliveries to
two sub-stations along the way, was not engaged In "dlstrlbutlon"
of electrical power, but was a “~nsmisslon   company". The Court...
said:
Honorable Robert S. Calvert, Page 7      Opinion No, WW-1111


            "The distinction between the terms
         transmission lines and dlstrlbutlon lines
         as used in sections   273.42     d 273 41
         lies In the primary objectlg and purpose
         for which the ll     ia used. It i8 apparent
         that the prlmary?bj      tlve and purpose of
         the 22,000-volt lineek      question Is the
         transfer of large quantities of electrlcal
         energy in bulk to locations from which
         It may be distributed or allocated to
         consumers by means of other lines. Accord-
         ingly, we hold th t th line In question
         la a tranamlsslonallnee . ."
     In this connection, Attorney General's Opinion No. W-909,
dated August 29, 1960, has recognized that the         occupation
of the taxpayer la the crucial test for appllc         the statute.
Such opinion held that incidental distribution of gas In a "few
Instances" by the Air Force at a base located inside the city
limits of a town does not make such facility one engaged in local:
sale and distribution so as to occasion a tax under Art..7060,
V.C.S.
      In the light of the foregoing authorities, the question of
whether a transmission company's sales within the lnco orated
limits of any city or town oonst'ltuteause of a,"gas,woITks"
engaging  In 'local aale and distribution" cannot be answered
merely by counting the number of Its customers. .In none of the
authorities discussed above has the number of customers, by
Itself, been deemed significant except that under no clrcunstancea
can a sale and delivery to one customer make the seller liable for
the tax. Utilities Natural Gas Company v. State, 133 Tex. 313,
128 s.w.2a 1153 (1939).
     It appears affirmatively from the facts furnished to us wlth
your opinion request that the occupation of Houston Pipe Line
Company In the cities of Houston and Texas City Is that of a
transmission company and not that of a local di8trlbutlOn company
as those distinct categories are recognized In the authorities
cited above. For example, Houston Pipe Line Company (1) maintains
high pipeline pressures on gas crossing into city limits to point
of delivery; (2) has no "mains or services" or "system of mains
and laterals by means of which the commodity Is usually delivered
by a gas distributor to the premises of customers" or other net-
work for wide-spread dlstrlbutlon of gas; (3) does not odorize
its gas; (4) obtains    franchise from,the City of Houston or the
City of Texas City;     submits to no local regulation of Its
rates ana pollclea;     makes the sales In question competlvely
upon negotiated contracts rather than by published rate schedules,
and (7) In no manner holds Itself out as a public utility to.serve
HonorableRobert 9, OUvert, Page 8 pi, Opinion Ho. NU-1111


lnalvl&ualoonemers ee would be absolutelyneoessaryfor a
distributionoompanyand a oondltlonof Its franohiso.

                       SUMMARY

        HoustonPipe Idne Companyhae,notbeen
     engagedin opeatlng a "gas works. . .?or local
     sale and dlrtrlbutlon.. ." at Texas City ur4
     Houstonanil,therefore,Its reoelptsfrom its
     sales OS gar thereinare not taxableunder     .
     Artiole7060, V.&S.
                            Yours very truly,
                            WIIJJWIMON
                            AttorneyGeneralof Texas


                            B


JIiB:an.
APPROVRD:     _
OPINIONCOMHIT'I'RE:
Henry Bras%ell,Chairmen
Grady Chandler
Elmer McVey
John C. Stelnberger
Fred UerkentMn
         FORTRBATl!OBgXQ-
  : HoughtonBrownlee,Jr.
