Kansas AG’s natural gas well presents possible conflict of interest as he investigates industry

Derek Schmidt’s gubernatorial campaign dismisses accusation

By: - December 14, 2021 9:00 am
Kansas Attorney General Derek Schmidt joined a dozen other attorneys general in support of a lawsuit challenging a federal law limiting direct and indirect use of COVID-19 stimulus funding to reduce state taxes. (Noah Taborda/Kansas Reflector)

Kansas Attorney General Derek Schmidt owns a natural gas well in southeast Kansas, prompting accusations of a potential conflict of interest as his office investigates whether high prices earlier this year violated Kansas law. (Feb. 23, 2021, photo by Noah Taborda/Kansas Reflector)

Kansas Attorney General Derek Schmidt has a financial interest in the sale of natural gas, prompting calls for him to disclose more information about his earnings as he investigates gas companies for potential price gouging during February’s severe freeze.

Schmidt, the state’s top law enforcement official, is investigating whether companies raised natural gas prices, which increased by as much as 200 times almost overnight in February, in violation of Kansas consumer protection law and will consider whether to pursue litigation.

At the same time, Schmidt, a Republican who is running to unseat Democratic Gov. Laura Kelly, could be receiving thousands of dollars a year in income from his own natural gas well in southeast Kansas.

“I think the attorney general has a responsibility to affirmatively report and disclose the income that he receives from the natural gas industry in light of him leading an investigation into the natural gas industry,” said Tyson Slocum, director of the energy program at Public Citizen, a progressive consumer advocacy nonprofit.

In February, when temperatures plummeted below freezing for days on end, Kelly declared a state of emergency, which, among other provisions, activates Kansas’ anti-profiteering law prohibiting businesses from raising prices on necessary goods by more than 25%.

Attorneys general in nearby states also hit by the severe cold were quick to identify rising natural gas prices — which are likely to cost ratepayers in Kansas more than $1 billion over the next few years —  as potential price gouging and launch investigations. Schmidt told the Kansas City Star he was already investigating the matter after Kelly sent him a letter in March. 

In a news release in September, seven months after the storm and as utilities were negotiating plans to pass higher rates onto customers, Schmidt said the high prices “appear to violate Kansas law.” 

Schmidt announced in the same release he was seeking an outside law firm to assist with the rest of the investigation and advise on possible litigation. John Milburn, a spokesman for his office, said in an email that no firms responded to the state’s request for proposals, so the deadline was extended. He said the attorney general’s office hopes to retain a firm by Christmas.

Emma O’Brien, a spokeswoman for the Kansas Democratic Party, called on Schmidt to disclose his “potential financial conflicts of interest and recuse himself from this investigation.”

“For nearly a year, Schmidt has left Kansas families out in the cold, slow-walking the investigation into the illegal natural gas price gouging that will impact Kansans and businesses for years to come — and now we know why,” O’Brien said.

Patrick Miller and Don Heider-Markel, political science professors at the University of Kansas, said Schmidt’s ownership in the well appeared to create a potential conflict of interest.

Miller said it was appropriate to note Schmidt’s ownership in the well and that, to be as transparent as possible, he could disclose his earnings on the well. But he said Schmidt wouldn’t be the first elected official to fall short of that level of transparency. 

Milburn said the attorney general doesn’t normally announce investigations but commented on this one because “the governor politicized the issue” with her letter. 

“The thorough and complicated investigation into natural gas marketing and pricing practices last February continues in Kansas as it does in other affected states,” Milburn said. “It is not correct to suggest the Kansas investigation is proceeding more slowly than those in other states.”

Milburn directed other questions about whether Schmidt spoke to an ethics officer or planned to disclose more information about the well to his gubernatorial campaign manager, CJ Grover, who said Schmidt is “one of perhaps thousands of Kansas landowners with oil and gas production on their property.” 

“Those landowners play no role in the marketing or price setting of gas and are not under investigation,” Grover said. “For the Kansas Democratic Party and a left-wing group founded by Ralph Nader to imply that Kansas landowners are somehow responsible for the February price spike shows they have no idea what happened, who or what is being investigated, or how the energy industry works.”

Public Citizen’s employees have given to numerous Democratic political candidates, and the organization supports progressive causes, including the Green New Deal. It does not endorse candidates for public office.

None of Schmidt’s critics accused him of violating Kansas law. Neither the Kansas Supreme Court, which handles discipline against attorneys, nor the Kansas Governmental Ethics Commission, which governs state employees, disclose ethics complaints until they are investigated.

Schmidt’s well

Schmidt’s statement of substantial interests, a disclosure filing required of public officials in Kansas, says he owns 240 acres of land and a natural gas lease in Labette County. Those forms require officials to list any salaries, financial assets worth more than $5,000 and ownership in any business above 5%, but not their precise worth, leaving it unclear exactly how much income Schmidt may receive from sales of natural gas extracted from his property.

Grover said the Democratic party’s “lame attack” was possible because Schmidt met his legal obligation to disclose it on that statement.

In Kansas, landowners are entitled to royalties on gas or oil extracted from their property — typically 12.5% of what it sells for in the case of natural gas, said Kenny Carter, chairman of the Eastern Kansas Royalty Owners Association. Some landowners negotiate contracts as high as 25%. 

According to public records from the Kansas Geological Survey, Schmidt’s well produced 515,000 cubic feet of natural gas in February 2021.

Based on average monthly prices reported by the Energy Information Administration at the Henry Hub, Schmidt could be earning, on average, between about $330 and $660 per month minus charges for transporting the gas off of his property, depending on the terms of his contract. Carter said the amount landowners receive can vary heavily depending on what company they work with to extract the gas. 

While the prices that natural gas producers and, by extension, landowners received increased substantially in February, the Henry Hub price didn’t rise as severely as the prices charged down the line for processed natural gas coming off of pipelines to serve local utilities.

Neither Milburn nor Grover would disclose Schmidt’s earnings on the well. 

At the least, Slocum said, Schmidt needed to disclose his income from natural gas so Kansas residents aren’t left to guess. But to be safe, he said, Schmidt should recuse himself from the investigation entirely.

Craig Holman, Public Citizen’s lobbyist on ethics, lobbying and campaign finance rules, said the estimate was enough to “warrant that he should not be involved in official actions that would affect his pocketbook.”

“It’s a problem because his official actions will directly affect his pocketbook,” Holman said. “It’s reasonable to believe that he could take official actions that would have in mind his own financial interest rather than the merit of the investigation.”

He added: “The investigation has got to be independent of the attorney general, and he should know that.”

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Allison Kite
Allison Kite

Allison Kite is a data reporter for The Missouri Independent and Kansas Reflector, with a focus on the environment and agriculture. A graduate of the University of Kansas, she’s covered state government in both Topeka and Jefferson City, and most recently was City Hall reporter for The Kansas City Star.

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