Government leaders faced a considerable challenge in this volatile session, one that opened with a budget shortfall of $10 billion. Realizing well ahead of the session that a shortfall was looming, TXOGA marshaled its considerable forces. Working with industry experts and partners, as well as key members of the legislature, the Association was determined to block legislation that would have further penalized the already heavily burdened oil and gas industry and to protect longstanding programs and enact new improvements and efficiencies. By all accounts TXOGA met its goals.

Challenging New Taxes

Knowing a considerable shortfall was inevitable, and that the oil and gas industry is always on the list of revenue sources, TXOGA early in the year organized a study to assess the impact of taxation and the oil and gas industry on the Texas economy. Not surprisingly to those in the industry, the study substantiated the unparalleled tax burden placed on the industry by state and local governments. Led by Anadarko's Adrian Acevedo, chair of the TXOGA Committee to Fight Franchise Expansion, the Association was successful in its efforts to educate the leadership that, in the race to find additional funds to support state government, the oil and gas industry should not be the target of further taxation. Most notable in this effort was the defeat of the franchise tax.

Defeating the Franchise Tax
For nearly 100 years, the state's corporations have been paying the franchise tax, a levy that brought in nearly $2 billion last year. In an effort to eliminate what has been known as the "Delaware Sub loophole," short for Delaware-Sub-S-Chapter Corporations, and recapture taxes for Texas, an amendment to HB 2425 was added in the eleventh hour of the session by the Senate Finance Committee. Delaware has made itself attractive to partnerships by capping its franchise tax at $150,000, while franchise taxes for corporations in Texas remain uncapped and can run into the millions of dollars.

But, neither the House, in several attempts, nor the Senate Finance Committee, was able to draft a bill that did not have far reaching consequences to businesses of all sizes and shapes, many of which are not engaged in Delaware Sub structures. TXOGA believed that the attempt to close this loophole in fact had the effect of creating a new tax, one that would be detrimental to the oil and gas industry. And, imposing this tax, based on the type of business entity structure, would adversely affect not only the oil and gas industry, but other capital-intensive businesses such as real estate, by making it more difficult to attract investment dollars into the state. Language in the amendment would have also required onerous reporting requirements for all partnerships, trusts and other businesses, as well as sparking a tax increase because of wording that denied deductions for management fees, interest, and royalties. Moreover, the provisions were added to HB 2425 without any public testimony or the opportunity for a thorough analysis.

To prevent these types of unintended consequences, TXOGA and the Texas Taxpayers and Research Association organized a coalition of 23 other prominent business associations, including the Texas Association of Business, the Texas Retailers Association, the Texas Hotel Motel Association, the Texas Automobile Dealers Association, the Texas Medical Association and the Texas Bankers Association, among many others, to remove this amendment from HB 2425. These efforts were successful when Senate Finance Chairman, Senator Teel Bivens, (R-Amarillo), eliminated the amendment from the bill. Concludes Adrian Acevedo, "We in the industry believe in paying our fair share. But, there was a lot of difficulty in separating out legitimate partnerships with this effort. And, rather than trying to take this approach to solve this problem, the business community felt we needed a broader perspective and better approach to how we tax businesses in Texas." The only caveat is that a special session on School Finance is expected in the fall or spring when all tax issues will be back on the table.

Protecting Long-Standing Provisions

Long-standing ways of conducting oil and gas business were once again threatened this session, but TXOGA led determined efforts that defeated challenges to surface use and tax credit and incentive programs.

Defeating Restrictions to Surface Use
Again this session, the oil and gas industry came under fire by the landowners group known as the Texas Land and Mineral Owners Association (TLMA), which pressed hard for new restrictions on surface use by oil and gas operators. The two bills, HB 1803 and SB 1376, would have had the effect, says Ben Sebree, TXOGA's vice president for governmental affairs, of "throwing out on its metaphoric ear the longstanding principles of property rights in oil and gas law." For more than 100 years, the mineral estate has been dominant over the surface estate, and the "accommodation doctrine" states that the mineral estate is entitled to use as much of the surface estate as is "reasonably necessary" to develop the minerals. If the mineral estate uses more of the surface estate than is reasonably necessary, then the mineral owner, under current law, must compensate the surface owner.

The new bills, as advocated by the TLMA, made the presumption that every use of the surface estate is unreasonable, and so surface owners are due compensation even before a drilling or mining effort commences, due to "injury to their persons or property caused by oil and gas development." The mineral developer would also have been required to pay the surface owner damages for loss of agricultural production and income, lost land value and lost use of and access to the surface owner's land.

Well-organized, industry-wide opposition to the two measures, led by TXOGA, helped to defeat both bills. In fact, neither bill even received a hearing.

Protecting Tax Credits and Exemptions
With such pressing budget needs, it was inevitable that all tax credits and exemptions be scrutinized for curtailment or elimination, placing the industry's very valuable and effective incentive programs in jeopardy, including the High-Cost Gas Tax Credit and the Enhanced Oil Tax Incentive Recovery Program. But not only did we protect these incentives, TXOGA led efforts which repealed the expiration dates from the incentive programs.

The high-cost gas incentive program was set to expire on September 1, 2010 and the enhanced oil recovery program was set to expire September 1. 2008. Since the late 1980's, TXOGA has always worked to extend these expiration dates but because of the temporary nature of the expiration dates, the programs have always been in jeopardy. In a major victory, TXOGA, with the quiet support of key state leaders, pushed through legislation in HB2424 to repeal the expiration dates on both programs. Says TXOGA's Ben Sebree, "This is a huge win. These very valuable, but temporary severance tax breaks are now permanent. The industry can count on the tax reductions in their long-term planning for capital allocation."

Additionally, HB 2425 protects and improves the High Cost Gas Tax Credit. Language in the bill was agreed to that retains a four-year limitation period for applying for a refund under the tax credit. However, the refund for taxes on gas produced prior to filing a high cost gas application with the Railroad Commission was limited to the taxes paid on gas produced in the 24 calendar months preceding the month the application is filed, effective September 1, 2004. In the effort to generate additional revenue, a legislative proposal was also put forward to limit the number of deductions the industry is allowed for the transportation and marketing of natural gas, which TXOGA steadfastly opposed. Led by Tom Sellers, of ConocoPhillips, changes were made to allow taking the full set of current deductions from the Comptroller's rules and replicating them in the Tax Code. Sellers says, "The effect of all this is that the discretion for changing the deductions no longer rests solely with the Comptroller, but now with the Legislature, and there should be no net difference in this program as the Comptroller's office administrates it." The expiration date of September 1, 2010 for the high cost gas tax incentive program was also eliminated, making it now a permanent program.

Supporting New Legislation

Key new pieces of legislation supported by TXOGA were passed, including measures to improve pipeline safety, protect access to railroad rights-of-way, lower bonding rates for non-wellbore operators, improve the motor fuels tax and protect the clean air fund.

Significant Victories for Pipelines
Several important pieces of pipeline legislation were passed, including HB 1931, HB 942; HB 2006 and HB 2654, all designed to keep our pipeline infrastructure running in the safest and most productive manner.

HB 1931, introduced by Representative Jaime Capello, (R-Corpus Christi), and Senator Tommy Williams, (R-The Woodlands), defines the role of pipeline companies when communicating with emergency responders and schools, including documenting clear expectations for providing important pipeline safety information in person and to the right people. Pipeline companies are required to provide emergency responders and schools with information on the location and contents of pipelines and instructions on how to recognize, report and respond to a pipeline release.

Also included in HB 1931 was the "more than three-county legislation" (SB 310). The "more than three-county rule" was an amendment added to the Railroad Commission's Sunset legislation that required new pipeline projects to give public notice if crossing more than three counties. But, federal and state pipeline safety rules already contain detailed requirements for pipeline construction, so it (SB 310) served only as a delay to important infrastructure projects.  HB 1931 repeals the 3-county pre-construction notice requirements.  "This legislation provides the right information to the right people at the right time, protecting the public's interest," says Martin L. Allday, Government and Public Relations Management, Inc.

When it became apparent that we could not pass significant improvements to Texas' one-call system, we pursued a different strategy of just focusing on protecting pipelines which proved successful. Provisions in HB 1931, championed by Rep. Buddy West, (R - Odessa) protect pipeline facilities and the public by prohibiting any building, repair, replacement, or other construction over a pipeline facility without the pipeline's written approval and consent. The bill also requires the constructor to pay for any measures that are necessary, according to the pipeline operator, to mitigate risk or to protect the pipeline.

At the start of the session, it was clear that the industry was on the brink of facing regulations requiring testing and assessment of rural gathering lines. If adopted, these regulations would have been extremely expensive to gathering line operators across Texas. Accordingly, TXOGA conceived of a bill, (HB 2654), to thwart these efforts. Successfully passed, it simply exempts rural gathering lines from Railroad Commission of Texas requirements regarding assessments and testing.

Improving Bonding for Well-Bore Operators
Under current law, the bonding requirement for all activities under the jurisdiction of the Railroad Commission, other than operation of oil and gas wells, was set to increase to $250,000.00 dollars per organization report on September 1, 2004. TXOGA, led by the Association's pipeline membership, pushed through HB 942 by Rep. Warren Chisum, (R-Pampa) and Sen. Juan Hinojosa, (D-McAllen). This bill provides that the bonding requirement for most activities will stay at $25,000.00. It also completely exempts the following from bonding: gas marketers, crude oil nominators, first purchasers, gas nominators, gas purchasers, well servicing companies, survey companies, salt water haulers, local distribution companies, and well pluggers.

Protecting Access to Railroad Rights-of-Way
In a turn of events, TXOGA members were facing difficulties with railroad rights-of-way, impacting both new and existing facilities, including a disregard for existing agreements; unreasonable demands made for substantial fee increases; the threatened use of termination clauses to force acceptance of those demands; unreasonable indemnification and insurance requirements; and exorbitant application origination and process costs. Many of these problems stemmed from the railroads' outsourcing management responsibility to third-party property management companies. HB 2006, introduced by Representative Elizabeth Jones, R-San Antonio, encourages good-faith negotiations between railroad companies and those that must cross railroad right-of-ways.

Though many TXOGA members have the power of eminent domain and thus can condemn railroads, this bill provides a limited grant of eminent domain powers to "energy transporters," including utility companies, cable companies and the like, that provide essential goods and materials around the state. These providers are thus protected from unreasonable demands made by the railroads or their third-party management companies.

Improving the Motor Fuels Tax
In an effort to increase transportation resources, HB 2458 moves the point of collection of the Motor Fuels Tax from the fuel pump back to the loading rack, which reduces the number of taxpayers involved in a transaction. For the purpose of federal excise tax, this makes the position holder responsible for collecting the motor fuels tax. To do so, new license categories were created, namely the "supplier" and the "permissive supplier." The supplier license is for in-state companies and the permissive license is for out-of-state companies importing into Texas.

Again, unintended consequences of the bill as originally written had to be addressed. As a consequence of moving the collection, distributors would face some financial hardships, because under the current system, they were able to keep part of their collections to compensate for expenses in reporting and fuel loss. Additionally, they enjoyed a "float" when paying the tax to the state, which would be lost under this legislation. Working with the Texas Petroleum Marketers and Convenience Store Association (TPCA), TXOGA negotiated to share the collection allowance that would now belong to the "suppliers." From these negotiations the petroleum marketers would retain 1.75 percent and the suppliers would retain 0.25 percent of the 2 percent available for collecting the taxes.

In a related issue, exports were another area of potential revenue loss for out-of-state customers who purchased gasoline in Texas for export to one of the neighboring states. They too would lose the collection allowance and float in their home states. TXOGA negotiated with TxDOT and the legislature to allow for "licensed" exporters to purchase tax-free until such time as the Comptroller's Office could enter into agreements with neighboring states to allow for collection of their taxes. In this case, not only was a financial burden placed on the industry, but also the legality of collecting tax in other states was called into question. Currently, only Oklahoma law allows a Texas supplier to collect their motor fuel taxes when the sale occurs in Texas. For all other states, the supplier may sell tax-free to "licensed exporters" who are removing the product to an out-of-state destination, but must collect Texas tax if they are not licensed.

TXOGA plans to work closely with the Comptroller's office to develop new administrative rules and design application forms before the new law takes effect on January 1, 2004. Says F. Wayne McDonald, excise tax advisory manager for ExxonMobil, "We've been involved in a number of other challenges in other states and we've learned through trial and error that you can't amend the current law. You have to repeal it and enter a whole new code, because when you amend one piece of the law, you always affect the other sections of the law."

Sara K. Tays, ExxonMobil's Texas Field Public Affairs Manager, adds: "We at TXOGA are very proud of the way this extraordinarily complex issue was worked with TCPA, the Legislature, the Comptroller, the Governor's office and the Texas Department of Transportation. Through many hours of work, a bill opposed by industry was crafted into a fair and equitable bill supported by industry."

Funding for Clean Air
The Texas Emissions Reduction Plan, HB 1365, introduced by Representative Dennis Bonnen, (R-Angleton), is a crucial piece of legislation created to generate $150 million to pay for the Texas Emissions Reduction Plan (TERP), which was created by the 77th legislature. The TERP program is needed to protect millions of dollars in federal highway funding and to ensure that the Texas State Implementation Plan (SIP) is approved by the EPA. But, the TERP funding plan was deemed unconstitutional and so SIP approval was held up. House and Senate bills were created to address TERP funding: under the original House bill, funding would come from a three-cent-per-gallon fee on diesel fuel, while under the original Senate bill, funding would come from a title transfer fee on vehicles. Of particular concern in both of the original bills was a two percent surcharge on the lease or sale of new or used equipment, which included drilling equipment, a major blow for oil and gas operators. Another sticking point was the 55 mph speed limit on area highways. A lengthy stalemate ensued, but eventually cool heads prevailed on this important piece of legislation. The resulting HB 1365 provides for:

• A surcharge of two percent on storage, use or other consumption of new or used equipment (including mining equipment, but not on drilling equipment)
• A surcharge on every retail sale, lease or use of every on-road diesel vehicle over 14,000 pounds of 2.5 percent for a vehicle earlier than model year 1996 and 1 percent for 1997 or later
• A fee on certificates of title of $33 if the applicant resides in a non-attainment county or $28 of the applicant resides in an attainment county. On or after September 1, 2008, the fee is $15, regardless of the status of the county.

"Though we had high hopes for HB 2, which died on a point of order, and would have restructured and streamlined our permitting process, we had other successes. So, though environmentally we did not get the icing on the cake, we did not get any mud pies either," says Cindy Morphew, TXOGA's vice president for environmental affairs.

Supporting Tort Reform

Tort reform was one of the most hotly contested issues in this legislative session. Dubbed the "medical malpractice bill," HB 4 promised an all-encompassing rewrite of the state's civil lawsuit code. Over the course of the session, some 300 amendments to the bill were added, increasing its complexity and heating up the debate. Ultimately, the House and Senate reached a compromise that allowed the bill to pass.

Though not as widely publicized, language in the new bill will change many parts of the state's laws on torts, or damages, that will benefit state industry, oil and gas included, says George Scott Christian, general counsel to the Texas Civil Justice League. Among the changes:

• Defendants can now present evidence to a jury of the liability of a third party. For example, if a premises owner was being sued by the employees of a contractor or subcontractor, the owner can now present evidence of that employers' negligence to the jury.
• Currently, a defendant found responsible for more than 15 percent of a claimant's damages is held liable for the entire damage awarded. Under the new bill, that 15 percent threshold has been raised to 51 percent, thus requiring firmer proof that those that actually cause an injury are those that pay.
• The interest rate attached to damage awards will be changed from 10 percent to the current market rate, which in a large judgment can result in significant savings.
• Both sides in a suit are now being encouraged to settle. A party that turns down a settlement might have to pay the other's legal costs if the decision turns out not to be significantly better than what was offered before trial.

Defeat of Anti-Indemnity Legislation

TXOGA led another broad-based coalition to defeat intense efforts to pass legislation outlawing indemnification agreements in construction contracts. Contractors and plaintiffs' lawyers pushed several pieces of legislation that would have rendered null and void any indemnification agreement in construction contracts. These agreements are widely used in contracts to manage potential liability arising from contractors and third parties on industrial premises during construction and maintenance activities. According to Steve Perry of Chevron Texaco who was a leader in the anti-indemnity fight, "If the anti-indemnity legislation had passed, it would have lead to a dramatic increase in personal injury lawsuits against the company and an equally dramatic increase in litigation expenses, insurance costs, and settlement payments."

A Successful Session

"Even though we began this session under the threat of increased taxation and additional regulation, the industry ended up in a very good position," says Rob Looney, president of TXOGA. "Through the efforts of a great many folks on the TXOGA team, we were able to meet the considerable challenges that faced the industry this year. The 78th session of the Texas Legislature clearly demonstrates the benefit of speaking with one unified voice."

By keeping abreast of the concerns and issues facing its membership, by recognizing threats to business operations both large and small, and by proactively mobilizing forces in and outside the industry, statewide and nationally, TXOGA is continually working to respond to the ever-growing demands placed on the industry.

For additional details on these and other significant issues this legislative session, please see the accompanying "Summary of Legislation".

Contributing Writers: Ben Sebree, TXOGA vice president for Governmental Affairs; Bill Ennis, TXOGA vice president for Member & Media Relations; Cindy Morphew, TXOGA vice president for Environmental Affairs; Vicki Gervickas, TXOGA writer.