<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:58499.wais]
KANSAS AD VALOREM TAX REFUND LEGISLATION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
H.R. 1117
__________
JULY 29, 1999
__________
Serial No. 106-74
__________
Printed for the use of the Committee on Commerce
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COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
BILL LUTHER, Minnesota
LOIS CAPPS, California
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Power
JOE BARTON, Texas, Chairman
MICHAEL BILIRAKIS, Florida RALPH M. HALL, Texas
CLIFF STEARNS, Florida KAREN McCARTHY, Missouri
Vice Chairman THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma BART GORDON, Tennessee
JAMES E. ROGAN, California BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING, RON KLINK, Pennsylvania
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Albright, James D., Associate General Counsel, New Century
Services, Inc.............................................. 15
Moran, Hon. Jerry, a Representative in Congress from the
State of Kansas............................................ 3
Stovall, Hon. Carla J., Attorney General, State of Kansas.... 9
Material submitted for the record by:
Shooh, Hardy & Bacon L.L.P, letter dated August 13, 1999, to
Hon. karen McCarthy, on behalf of Carla J. Stovall......... 41
Smith, Douglas W., General Counsel, Federal Energy Regulatory
Commission, letter dated June 30, 1999, to Hon. John
Shimkus, enclosing material for the record................. 41
Yeager, J. Michael, President, Mobil Exploration & Producing
U.S. Inc., letter dated August 17, 1999, to Hon. Joe Barton 40
(iii)
KANSAS AD VALOREM TAX REFUND LEGISLATION
----------
THURSDAY, JULY 29, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:15 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Shimkus,
Pickering, Bryant, Hall, and McCarthy.
Staff present: Cathy Van Way, majority counsel; and Rick
Kessler, minority professional staff member.
Mr. Barton. The subcommittee will please come to order.
I would like to welcome everyone to today's hearing on H.R.
1117 introduced by my colleague from Kansas, Congressman Jerry
Moran. H.R. 1117 would waive unfair interest payments related
to the refund of the Kansas ad valorem tax ordered by the
Federal Government.
Earlier this year, we held an oversight hearing on this
topic. Today's hearing is the last step before we schedule or
at least consider scheduling legislation for markup. I would
encourage our witnesses and the members to tell us specifically
what should be included in a markup of H.R. 1117.
At our hearing in June, we heard about the impacts the
Kansas ad valorem tax refund would have on natural gas
producers and royalty owners located in Kansas and elsewhere.
They made a compelling case, at least in my opinion. This
issue, which originates from the days of Federal price controls
on natural gas, is an unfortunate example of the Federal court
system and the bureaucracy at its worst.
Years after the Federal Energy Regulatory Commission
determined that Kansas natural gas producers could pass through
the cost of the Kansas tax, they changed their mind. Now
producers and royalty owners have been sent a bill for not only
the tax but the interest as well. In fact, the interest is now
two-thirds of the amount producers and royalty owners are being
asked to pay. As a result, many producers and royalty owners
are facing a huge liability they were unaware of until
recently.
H.R. 1117 seeks to at least partially remedy this unfair
situation by waiving the interest payments. In my opinion, this
is a very fair solution. I am interested in learning whether
today's witnesses agree that Congressman Moran has the right
approach to resolving the issue or if we need to modify this
bill at any point.
Again I welcome everyone, especially our witnesses, to
today's hearing.
With that, I would be happy to welcome my ranking member
for an opening statement.
Mr. Hall. Mr. Chairman, I thank you; and thank you for
calling this hearing to see what, if anything, can be done to
help bring a just resolution to what I think is a pretty
unfortunate situation. It is an unfortunate case of some kind
of a litigation fumble.
What really makes this litigation fumble so outrageous is
the fact that the parties themselves seem to have acted with
due diligence, but it was a government agency, FERC, who
dropped the ball and mysteriously ignored this case for 5 or 6
years, from 1983 to 1988. No one, Mr. Chairman, benefited from
this injustice, and the parties still need to resolve the case
so they can move forward.
The reasonableness of refunding various amounts of money to
people who in a 15-year period have relocated, they are dead,
many of them, or otherwise it has become impractical to locate
these folks, raises a real, valid question about the
enforceability of such a judgment. Furthermore, the inequity
seems rather glaring in a finding that producers pay interest
for a 5-year time period in which FERC seems to have lost the
case from its radar screen. It doesn't make sense to me. It
seems that the parties would resolve this question. I am
surprised the Congress is called upon to do so.
Mr. Chairman, it is with some hesitance that many of us
would approach a bill that would, in the view of some, impose a
political settlement on the parties, however well-intended and
however helpful it is. That gives me some problem, because I
don't--I think it is a wonderful step in the right direction,
but the problem is that the parties have been given good reason
to lose faith in the ability of FERC to deliver and enforce a
fair judgment in this case.
I come here, again, to listen and to try to decipher both
the best course for resolving this case and the best way to
ensure that similar situations don't arise in the future.
I thank you, and I thank Mr. Moran for his good work and
his efforts, and I am willing to listen. And I yield back the
balance of my time.
Mr. Barton. Well, I thank the gentleman for that statement.
I would say that I agree with the intent of it and the content
of it. It would be best if this could be settled by the parties
or out of court or at the FERC, but it doesn't appear that that
has been much progress made on that front. So there is a
legislative solution, and we want to take a look at the
legislative solution also.
The gentleman from Tennessee, Mr. Bryant, is recognized for
an opening statement.
Mr. Bryant. Thank you, Mr. Chairman. I am going to
associate myself with both of your remarks. I agree strongly
with both of you.
I yield back my time.
Mr. Barton. That is not the normal situation in the great
State of Tennessee. You all usually have a position and stick
to it.
Mr. Bryant. If the gentleman would yield, I was looking at
the chart, we have about $3,000 in this, so we are willing to
listen very closely to what Mr. Moran has to say.
Mr. Barton. Well, $3,000 is $3,000.
Mr. Barton. Mr. Moran, you are welcome to the subcommittee,
again, and you are recognized for such time as you may consume.
But this is a legislative hearing, so we would hope your
opening statement is not too lengthy. But you are recognized.
STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF KANSAS
Mr. Moran. Thank you for recognizing me, Mr. Chairman.
Thank you for, you and Mr. Hall, your opening statements.
$3,000 in an agricultural district is still a lot of money,
Mr. Bryant; and I appreciate being back again for this second
hearing. I will be brief, as you requested.
As you recall, this issue before you is the treatment of
the Federal Energy Regulatory Commission's treatment of natural
gas taxes back in the early 1980's. Throughout this time,
Kansas producers treated Kansas taxes in accordance with the
Natural Gas Policy Act and the regulations as ordered by FERC.
The taxes were questioned and FERC ruled on three separate
occasions, 1983, 1986 and 1987, the taxes were correctly
applied.
Then, in 1993, FERC changed its ruling and retroactively
ordered refunds, plus interest, over a 15-year period of time.
That brings us to where we are today, when producers and
royalty owners unexpectedly received bills for taxes and
interest from wells that may not even--they may no longer even
own, and on wells that may no longer be in production.
From the last hearing I believe there were four points that
were established, and these four points set forth the basis for
the congressional action that you are considering today.
No. 1, the court-ordered refunds are not going back to the
people who were supposedly treated unfairly. This refund is
basically a penalty for following the laws as interpreted by a
Federal agency. It was stated by Mr. Albright from the Public
Service Company of Colorado that there has been no attempt to
find original customers, it is too expensive to find original
customers, and they are not, except by happenstance, going to
receive any of the refunds.
No. 2, FERC's 5-year inaction, as mentioned by Mr. Hall,
unnecessarily added to the cost of the penalty. FERC was unable
to explain in any way at last hearing why they failed to act
for over 5 years.
No. 3, all producers followed the law and regulations the
entire time. As the independent oil and gas producers testified
at the last hearing, producers and land owners were following
FERC's orders in effect at the time.
No. 4, the windfall for the new pipeline customers is
minimal. While the cost to the producer--the natural gas
producer and the royalty owners are tremendous, the amount of
money that an actual customer might receive is very minimal. I
think many individuals thought they were winning the Powerball
lottery or the Publisher's Clearinghouse. As is often the case,
the details suggest that is not the case. It appears that it is
about $1.25 a month for 1 year that customers will receive,
enough for a grilled cheese sandwich each month back home in
Kansas. Yet the burden upon the producers and royalty owners is
tremendous.
There is still a great amount of misinformation out there
around this issue. I recently learned that there is some solace
in the fact that Kansas is no longer alone. Originally,
Colorado thought that they were winners in this game, but it
now appears that Coloradans also owe more money in penalties
than they will receive in refunds.
I was appalled by this situation when I first learned about
it; and, unfortunately, the more I have heard and read and the
more I have learned, the worse it becomes. A penalty from--
taking it from unsuspecting, law-abiding people, and even last
month we learned universities, given to unsuspecting third
parties? It just doesn't make sense.
As I stated in my testimony from the first hearing, Kansas
is the largest recipient State in this case. I appreciate and
understand the voice of both sides of this issue. That is why I
proposed the legislative solution before you today. While I
believe no refund should be ordered, H.R. 1117 attempts to
strike an appropriate balance and relieve producers simply of
the interest, while at the same time allowing the base amount
of the tax in question to be refunded.
On a final point, I would like to reiterate the importance
of this legislation, a legislative remedy in this case is
awfully important to Kansans, and also restate my willingness
to work with you and members to see that the right kind of
solution is achieved.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Jerry Moran follows:]
Prepared Statement of Hon. Jerry Moran, a Representative in Congress
from the State of Kansas
Mr. Chairman, members of the committee, I again thank you for
holding this second hearing. Your concern is appreciated. Since the
previous hearing was just last month, I will keep my remarks brief
You will recall, the issue before you is the treatment by the
Federal Energy Regulatory Commission of natural gas taxes back in the
mid-1980's. Throughout this time, Kansas producers applied the taxes in
accordance with the Natural Gas Policy Act and the regulations as
ordered by FERC. The taxes were questioned and FERC ruled three
separate times, in 1983, 1986, and in 1987, that the taxes were
correctly applied.
Then in 1993, FERC changed its ruling and retroactively ordered
refunds plus interest for over a fifteen year period. And that brings
us to where we are today, when producers and royalty owners
unsuspectingly receive a bill for taxes and interest from wells they
may not even own anymore and on wells that may be no longer in
production.
From the last hearing, I believe there were four important points
established, and that these four points set the basis for the
Congressional action you are considering today.
1.) The court-ordered refunds are not going back to the people who
were supposedly taxed unfairly. This refund is basically a penalty for
following the law as interpreted by FERC. It was clearly stated by Mr.
Albright from the Public Service Company of Colorado that there has
been no attempt to find the original consumers, it is too expensive to
find the original consumers, and that they are not, except by
happenstance, going to receive any of the refunds.
2.) The Federal Energy Regulatory Commission's five years of
inaction unnecessarily added to the cost of the penalty. FERC was
unable to explain at the last hearing why they failed to act on this
case for five years.
3.) All producers followed the law and regulations the entire time.
As the independent oil and gas producers testified last time, producers
and land owners were following FERC's orders.
4.) And, finally, the windfall for the new pipeline customers is
minimal--while the cost to the producer is tremendous. I think many
individuals thought they were winning the powerball lottery or
Publisher's Clearinghouse. But, as is often the case, the details are
in the fine print, and in this case the winnings for the new customers
are about a $1.25 per month for one year, enough for a grilled-cheese
sandwich back in my hometown in Kansas.
There is still a great deal of misinformation floating around on
this issue. I have recently learned that at least Kansas is not alone.
Originally, Colorado thought that they were also ``winners'' in this
game, but it now appears that Coloradans owe as much in penalties as
they will receive.
I was appalled by this situation when I first heard about it and,
unfortunately, the more I learn, the worse it becomes. A penalty taken
from unsuspecting--law abiding--people and even universities, given to
unsuspecting third parties? It just doesn't make sense.
As I stated in my testimony from the first hearing, Kansas is the
largest recipient state in this case. I appreciate and understand the
voices on both sides of this issue. That is why I proposed the
legislative solution you have before you today. While I believe no
refunds should be ordered, H.R. 1117 attempts to strike a balance and
relieve producers of interest, while at the same time allowing the base
amount of tax in question to be refunded.
On a final point, I would just like to reiterate the importance of
a legislative remedy in this case and my willingness to work with all
parties to achieve this goal.
Mr. Barton. The Chair recognizes himself for 5 minutes for
questions.
Congressman, why don't you start by explaining what your
bill actually does?
Mr. Moran. Mr. Chairman, as indicated just briefly in my
testimony, the overall picture is that FERC has required the
payment of past-due taxes, plus what we call penalty and
interest. Basically I think it is interest, going back a long
period of time. All that H.R. 1117 does is say the interest
will not be collected and not be refunded.
Mr. Barton. So if your bill were to become law, the
principal would still have to be repaid?
Mr. Moran. Yes, Mr. Chairman.
Mr. Barton. Does your bill stipulate the allocation formula
for repayment of the principal?
Mr. Moran. It does not, Mr. Chairman.
Mr. Barton. That would be up to the pending FERC order or
any negotiations that have been agreed to between the States
and the interested parties?
Mr. Moran. That would be my impression.
Mr. Barton. So you are simply trying to eliminate the
interest. Is the primary reason you are trying to eliminate the
interest penalty because it has been so long since--I mean,
FERC dillydallied on this for a number of years. Is that the
primary reason?
Mr. Moran. I think that is a reason. Certainly FERC--this
issue was out there for a long time. We have individuals who
were abiding by the law at the time, as reiterated on three
occasions, actually five over a longer period of time, that
they were doing the proper treatment. So part of it is simply
the unfairness of the Federal agency changing its mind.
The second aspect is what you mentioned, that it took them
so long to make that change. And so it seems to me in this
circumstance, in my testimony last month, it is like you follow
the laws in paying your income taxes, but the IRS changes its
rules and regulations and said, oh, we made a mistake in the
way we interpreted the Internal Revenue Code, and you now owe
us more money, and you owe us not only the amount of the tax
that you didn't pay, but you owe us interest going back 15
years. That would be patently unfair to us and our taxpayers,
and we would react strongly against that. This is the same kind
of concept that has happened to a smaller segment of the
population.
Mr. Barton. Your bill is silent on the principal, how it is
to be refunded, but what would you feel if we amended your bill
so that the principal that was refunded at a minimum had to be
refunded to the consumer who paid initially, No. 1, a good-
faith effort? Because some records do exist and some existing
customers are still using natural gas in affected areas.
So if we amended it to say an effort had to be made to pay
back the principal to the people who paid it, No. 1; and, No.
2, that in no event could any of the moneys be accepted by the
pipelines, that it either went to the consumers or went to some
public use fund in the affected States, how would you react to
that kind of an amendment?
Mr. Moran. I would react very favorably to that concept.
Until last month's hearing, I was unaware that the money
was not going back to the consumers, to the customers that were
the original customers at the time the mistreatment occurred. I
was surprised to learn that the testimony was what it was.
I thought the money was going to those way back in those
dates through records. They are certainly using the records to
try to find people they think should pay the money. It seems to
me they ought to be--it would be fair to use the records to
find the people they owe the money to.
Mr. Barton. Have you had any discussions with the
commissioners or senior staff at FERC about that last issue,
using the existing records to try to find out who should get
the refunds?
Mr. Moran. Mr. Chairman, we have had a very difficult time
having conversations with FERC about this issue, because it is
considered a pending case.
Mr. Barton. Oh, I see. Okay.
What kind of a timetable, if we could get a bipartisan
consensus, would you like to see in terms of a markup on this
bill?
Mr. Moran. Mr. Chairman, there is a lot of consternation in
Kansas. People who have received bills are struggling to know
what to do. They don't have the money to pay them. They are
worried about the legal consequences of ignoring them. They are
seeking legal advice, which is costly.
As you would know, the oil and gas economy, certainly for
small domestic producers, it is a struggle in today's economic
environment. Any solution that is sooner rather than later
would be awfully beneficial for peace of mind and for economic
reasons.
Mr. Barton. My last question, at our oversight hearing it
was brought out that a number of very small royalty owners or
producers had petitioned to the FERC for relief because of some
sort of a hardship situation or de minimis impact. The
representative from the State of Missouri seemed somewhat
surprised that that State had been objecting to those hardship
petitions on what seemed to me pretty technical grounds and
certainly inhumane grounds. What if anything has been done on
some of those pending hardship petitions, to your knowledge?
Mr. Moran. I do not know whether anything has changed since
the 3 or 4 weeks ago at which time we had the hearing. It is my
understanding the State of Missouri has objected to every
application for a hardship waiver.
Mr. Barton. If we were to put into your bill, again to
amend an already good bill, to make it somewhat better, and put
in some de minimis standards and some hardship standards into
the statute, if that were to be shown there was no need for an
appeal, if you could certify these conditions were met, that
those interest and penalties and perhaps even principal amounts
would be waived, how would you react to that?
Mr. Moran. I would react very favorably. People are
spending money and time trying to obtain a hardship waiver. If
they are deserving of a hardship waiver, they don't have
certainly the money to pursue that remedy in the first place.
Mr. Barton. Well, I don't know that we have shown this to
the other members yet, but we are going to show it to the
members of the minority and majority. But if there is no
objection we are going to put into the record some information
that appears to me to be from a credible source. And it shows
that of the 750 claims, if you take the 10 percent of the
smallest, the average claim is less than $25,000, including
interest. So there are obviously some very large claims, but
there are also several hundred very small claims that could be
wiped off the books and there wouldn't be any material harm to
anybody.
I yield to the gentleman from Texas, Mr. Hall, for
questions.
Mr. Hall. Thank you, Mr. Chairman. I think I asked most of
the questions of the Congressman when he was here before.
It seems to me that the person that paid the tax ought to
be eligible for the refund. The bill appears to assume that, in
all instances, that consumers of the gas paid the tax, and
therefore only consumers of the tax ought to be eligible to
receive refunds. I don't think you disagree with that. Yet this
is not true, though. In some instances, at least, the tax was
paid by the purchaser of the gas and not passed on to the
consumer. Why shouldn't the person that paid the tax be
eligible for the refund?
Mr. Moran. I think that is accurate. I would consider a
consumer, the customer, the person who paid the tax.
Mr. Hall. It ought to be a fact question as to who that
person is.
Mr. Moran. I don't know how to differentiate between
whether or not the customer was an individual homeowner or an
individual pipeline that paid the tax. They both would have the
same entitlement.
Mr. Hall. Some people question the constitutionality of
your bill. What do you have to say about that?
Mr. Moran. Well----
Mr. Hall. What constitutional problems do you see in it?
Mr. Moran. I really foresee little or no constitutional
problems. I would be willing to defer to the attorneys that
will testify.
Mr. Hall. I think she is going to testify in a little bit.
I think she already answered that, also. I think it
discriminates some between those that are eligible to receive
the refund and those that aren't. But those are things that,
once again, that--I have not been briefed--that I just want to
ask about.
I think you have covered everything that I wanted to hear,
Mr. Chairman. I thank you for your questions. I yield back my
time.
Mr. Barton. Then we recognize the gentleman from Tennessee
for questions for 5 minutes.
Mr. Bryant. Thank you.
Jerry, I think I am in the same boat as our ranking member.
We have asked questions at the earlier hearing. I would simply
ask, in closing, do you have any comments you would like to
make? And after you make your comments, I yield back my time.
Mr. Moran. Mr. Bryant, thank you very much. I have tried to
express my concern with this issue on two occasions, and I
would not want to take the committee's time beyond that.
What I am appreciative of is the fact that you and other
members, as well as the ranking member and Mr. Barton, have
been so willing to address an issue that impacts clearly a
minor set of people who generally happen to be Kansans. It is
pleasing to me to know that Congress and people who may not
have a lot at stake in this issue directly are willing to try
to fashion a legislative solution.
I also think that we could take this issue a step beyond
who wins and who loses in this particular setting, and none of
us at whatever Federal agency would expect our own constituents
to accept the treatment that has been forced upon mine in what
I think is a very unjust and unfair way.
So it is a broad issue, I think, of how Federal agencies
treat the people that they regulate and their power. But I also
am appreciative of the fact that a small group of people are
affected by this legislation. It is very kind of you to take an
interest in it.
Mr. Barton. Well, this committee likes to seek truth and
justice for all Americans, Congressman.
Mr. Moran. Thank you, Mr. Chairman.
Mr. Barton. We figure you are on the side of truth and
justice, so we are on your side. At least the subcommittee
chairman is on your side. I can't speak for everybody.
We would like to call the second panel. We have the
distinguished Attorney General for the State of Kansas, the
Honorable Carla Stovall; and we have the distinguished
gentleman representing the New Century Services, Incorporated,
Mr. James D. Albright. If you would come forward, sir.
Good to see you back.
Ms. Stovall. Thank you.
Mr. Barton. We have heard from you, Madam Attorney General.
We are going to give you about 5 minutes one more time and then
give Mr. Albright 5 minutes, and then we will ask some
questions for each of you.
So, both of you, welcome to the subcommittee.
Madam Attorney General, you are recognized for 5 minutes.
STATEMENTS OF HON. CARLA J. STOVALL, ATTORNEY GENERAL, STATE OF
KANSAS; AND JAMES D. ALBRIGHT, ASSOCIATE GENERAL COUNSEL, NEW
CENTURY SERVICES, INC.
Ms. Stovall. Thank you very much, Mr. Chairman, and
members. I appreciate the opportunity to be here and present
the position of the State of Kansas on House bill 1117. We are
very grateful to Congressman Moran and our entire delegation
for support.
I was here to testify on June 8, and I would ask that my
prior testimony be incorporated by reference into the record.
Mr. Barton. Without objection.
Ms. Stovall. When I was asked last time, I was asked to
talk about the legislative history in this whole area. I won't
do that this time, with the exception of encapsuling the
history enough to say that, for 19 years, the FERC ruled
natural gas producers could pass through the pipelines an ad
valorem tax, and after 19 years of saying that, they changed
their minds and applied it retroactively. So now the situation
that Congressman Moran has described to you is what we are
facing.
I will tell you this is not the first time I have disagreed
with an agency decision, nor the first time I have disagreed
with a court decision, but it is the first time I have come to
Congress and asked for relief from those, because in the past I
have at least been able to understand what either the
statutory, constitutional or common law basis for the decisions
were, and, folks, I can't do that when we have this situation.
FERC affirmed six times the pass-through of this tax over
13 years and then changed their mind and made retroactive
application apply.
Well, my preference would be, as Congressman Moran's, and
that is that this whole issue would go away and no refunds
would be owed. I understand that that is probably not feasible.
So, because of that, I do strongly support the Congressman's
bill.
No. 1, it waives the interest, and I think equity demands
that, because it recognizes that nobody was acting in bad faith
here. The producers and the royalty owners the entire time were
operating pursuant to the law.
Five years of the interest accrued during the time, as has
been indicated, that FERC held the case and had no action on
it. In addition, the DC Circuit is the one who said it should
go back to 1983. FERC itself said it should only be retroactive
to 1988, and the circuit went back 5 years beyond that.
Then because now 160 percent of the total obligation is
interest and it is still accruing for those people who can't
afford to pay 100 percent of what the pipelines say is owed, it
still continues to grow.
Second, his part of the bill that says that ultimately
consumers must benefit before the refunds are to be paid is
important, because I don't think either FERC nor the DC Circuit
intended this to be a pipeline enrichment ruling. If we put the
second part of Congressman Moran's bill on to the legislation,
then we are assured that that will not happen for those of us
that maybe are a little skeptical of the motivation of folks
fighting against what Kansas is trying to do here.
There clearly has been detrimental reliance, contrary to
the DC Circuit opinion. When my legislature enacted a severance
tax, it was with specific testimony that the ad valorem tax
would be passed through, as would the severance tax. Had we
known at any time that this ruling would be changed, the Kansas
legislature could and I believe would have changed the law so
that the producers did not face a tax that they had to pay and
that could not be passed through. The legislature could have
repealed the ad valorem tax. They could have amended it to make
it like Colorado or Wyoming's, which is passed through. They
could have done other tax relief if they wanted.
In addition to the State having detrimental reliance on
decisions of the Federal Government, certainly the producers
did, too. They could have made decisions had they known what
was going to happen to not drill wells, cap existing wells,
alter production or deposit the ad valorem tax payments they
were receiving in accounts so when they were finally ordered to
pay them, they would have had the money to pay them.
But nobody had the benefit of a crystal ball in those days.
Nobody had an inkling that those decisions would be changed.
Not only did the DC Circuit change FERC's mind and the FERC
went along with it, I believe FERC and the DC Circuit has
overruled Congress. That is what I would bring to your
attention. What the decisions have done is to throw out the
window any price certainty, any guarantee that the producers
had relied on for 19 years.
Second, you said that there should be no stays of FERC
decisions by courts. Essentially, that is exactly what the DC
Circuit has done, is stayed the situation so that the decisions
of FERC are not final, binding or controlling.
Then, last, in section 110 of the NGPA you specifically
authorized that the taxes should be passed through. So I would
ask that your intentions be reasserted, your authority be
reasserted and upheld by passing and supporting Congressman
Moran's bill.
Mr. Barton. Don't let the bell scare you. You have come a
long way.
Ms. Stovall. Thank you. I thought this was the Chair that
ejects if that happens.
Let me just add then the concern I have as the Attorney
General of the State of Kansas. Clearly, the producers and
royalty owners have great amounts of concern here. But my State
will experience a shortage, we believe, of any new drilling. 85
percent of the new drilling in Kansas comes from Kansas folks,
Kansas companies. If our folks, though, have to pay these
amounts back, that is our entire drilling budget for 3
consecutive years. So for 3 years there will not be money to do
drilling when 85 percent of the drilling is from our companies
anyway.
Second, we have the Hugoton gas field in Kansas, the
largest gas field in the United States of America. The large
producers probably are not going to be hurt a lot, although
this ruling is as unfair to them as it is to the small folks.
They may be able to survive financially if they have to pay
these refunds and interest. A lot of our small producers simply
will go bankrupt. What we will be left with is that the largest
natural resource in the State of Kansas will not be able to be
utilized by Kansas small businesses because they will have been
bankrupted by the obligation to pay this $365 million back, and
so the majors, the non-residents, will be the ones to benefit
from our natural resource.
So because of those issues, it is my hope that you are able
to support Congressman Moran's bill. If not for the effect it
has on Kansas, then for the effect of what could happen to
individuals or groups within your States that have relied on
decisions of the Federal Government and then had those flip-
flop. Think of all the regulations or decisions that you
support, either that FERC or EPA or OSHA, HUD, HHS, any Federal
agency has made, and then imagine those being changed on your
constituent groups and have no recourse, because that is
exactly what has happened here.
So for your own sakes, I hope that you are able to support
this bill and send a message to the DC Circuit as well as to
the Federal agency that we don't play like this in America. We
play by the rules, and we give folks fair chances and shots at
due process.
Thanks very much for the opportunity to be here.
[The prepared statement of Hon. Carla J. Stovall follows:]
Prepared Statement of Carla J. Stovall, Attorney General, State of
Kansas
introduction
Chairman Barton, Vice-Chairman Stearns, members of the Committee. I
am Carla J. Stovall, Attorney General for the State of Kansas. Thank
you for the opportunity to appear before your subcommittee in support
of H.R. 1117 introduced by Rep. Moran of Kansas and supported by
Congressmen Tiahart, Ryun, and Moore. Before detailing Kansas' support
of this bill, I have been asked to give a brief overview of the laws
and legal decisions which have brought us to the current situation. I
would also like to incorporate by reference the testimony I previously
presented to the Committee on June 8, 1999.
historic review
In 1954, the United States Supreme Court held that the Natural Gas
Act (allowed the Federal Government, under the Commerce Clause, to
control the price paid for natural gas at the wellhead if such gas was
sold to an interstate pipeline. Phillips Petroleum Co. v. Wisconsin,
347 U.S. 672 (1954). From that time to 1993, the Federal Government,
through the Federal Power Commission (FPC) and its successor agency,
the Federal Energy Regulatory Commission (FERC), established
substantially all of the rates that could be recovered by natural gas
producers across the nation.
In 1974, in Opinion No. 699, the FPC authorized producers to
recover ``production, severance, or other similar taxes.'' Later in
1974, the Kansas Corporation Commission filed a request with FPC
seeking clarification of Opinion No. 699, concerning the right of
producers to recover the Kansas ad valorem tax over and above the
maximum lawful price (MLP). The FPC responded by issuing Opinion No.
699-D which affirmed that Opinion No. 699 allowed producers to recover
the Kansas ad valorem tax in excess of the MLP.
Four years later in the Natural Gas Policy Act of 1978, Congress
codified (in Section 110) the FPC's earlier decisions allowing
reimbursement of State ``production-related'' taxes. While Section 110
did not mention any specific state tax, the legislative history made it
clear that the Kansas ad valorem tax was intended to be included as a
tax allowed to be passed through. The NGPA Conference Report noted that
this included ``an ad valorem tax or a gross receipts tax.''
In reliance upon FPC Opinion Nos. 699 and 699-D, and the Natural
Gas Policy Act affirming those opinions, the Kansas Secretary of
Revenue testified in 1981 before the Kansas Senate Tax Committee that
the FPC had ruled that Kansas' current ad valorem tax, as well as a
severance tax if enacted, could be passed through to allow producers to
recover both taxes. In reliance on the FPC ruling and previous
Congressional action, the Kansas Legislature in 1983 passed a severance
tax, justifiably believing that Kansas producers could recover their
payments of both the severance tax and the ad valorem tax.
In that same year, however, Northern Natural Gas Company filed an
application with the FERC to ``reopen, reconsider and rescind'' Opinion
No. 699-D. Three years later, in 1986--a full twelve years after FERC
issued Opinion No. 699-D authorizing ``pass through'' of the Kansas ad
valorem tax--FERC rejected Northern's request stating that it was
``clear beyond question, that the Kansas ad valorem tax is based, in
large part, on gas production'' (emphasis added), and reaffirmed its
prior opinion which allowed the tax to be passed through. FERC denied
Northern's request for rehearing, once again confirming Opinion No.
699-D and assuring Kansas and Kansas producers that ad valorem taxes
could lawfully be passed through.
Shortly thereafter, the Northern decision was appealed to the D.C.
Circuit which, on June 28, 1988, held that FERC had not adequately
explained its order. Colorado Interstate Gas Co. v. FERC, 850 F.2d 769,
773 (D.C. Cir. 1988). The case was remanded to FERC where it sat idle
on FERC's docket for a period of five years, from 1988 to 1993. (This
delay is significant because a subsequent FERC decision would cause
interest claims amounting to millions of dollars to accrue during this
period, through no fault of the producers, royalty owners, or the State
of Kansas.)
Finally, in 1993, FERC issued an Order on Remand reversing Opinion
No. 699-D and ordering refunds retroactive to June 28, 1988, the date
the Court of Appeals had first remanded the case to FERC. This ruling
was also appealed to the D.C. Circuit and in 1996, the Court affirmed
FERC's decision that Kansas' ad valorem tax did not qualify under
Section 110, but held that refunds would be retroactive to October of
1983 when the notice of Northern's petition had been published in the
Federal Register--expanding by five years the period for which refunds
were due. Public Service Company of Colorado v. FERC, 91 F.3d 1478
(D.C. Cir. 1996).
By this decision, the D.C. Circuit essentially held that all
producers should have known that Northern's 1983 petition would be
granted thirteen years later, notwithstanding that the notice of the
petition mentioned nothing about potential refunds. The Court went so
far as to say the producers were ``foolhardy'' to think that they could
have relied on a final, non-appealable order of FERC, notwithstanding
the administrative finality provisions of the NGPA. FERC not only has
refused to grant hearings, but has refused to waive interest on these
retroactive refunds, interpreting the Court's decision to require the
imposition of interest on ad valorem tax refunds, even though the
court's decision was silent on this issue.
justification for legislative relief
Against this background, Congress has a range of alternative
legislative remedies available. My preference would be that Congress
waive the refunds in their entirety. The refunds at issue here are
contrary to due process and the legislative history of the NGPA--not to
mention my concepts of fairness and justice and the integrity of the
Federal Government.
The decision of the Court of Appeals effected a retroactive change
in the law. That change was a complete reversal of the state of the law
at the time the ad valorem taxes were being paid to the sovereign State
of Kansas. Had there been any warning of the impending change in
federal policy, the Kansas legislature could have amended the Kansas ad
valorem tax statute to assure that the tax would qualify for continued
treatment under the NGPA in the same manner as the tax had been treated
under the Natural Gas Act and as similar taxes in other producing
states are treated, notably that of Colorado. The only reason the
Kansas legislature did not do so was that it relied on the FPC's and
the FERC's several decisions that the Kansas ad valorem tax was a
permissible add-on to the maximum lawful price both under the NGA and
under the NGPA.
The point is that it is not just the producers who relied on FERC's
assurances. The government of the State of Kansas relied on FERC's
rulings. Our producers, royalty owners and domestic economy are now
disadvantaged by reason of a retroactively effective Court ruling.
Under the unique circumstances presented by the history of the FERC
rulings at issue and the legislative history of the NGPA that
contemplated building on the framework of NGA regulation, I believe
that the only just and equitable remedy for the State of Kansas and
Kansas producers and royalty owners is for Congress to waive refunds in
their entirety.
It should be noted that this is not an area where consumers have
been harmed in any sense. Indeed, consumers were the primary
beneficiaries of the abundant gas supplies and lower gas prices which
resulted from the NGPA. After Congress enacted section 110 of the NGPA,
consumers had no reasonable expectation that the production-related
taxes of producing states would not be passed on to consumers.
Additionally, consumers have also received the benefit under the NGPA
of regulated prices often below the MLP and in many instances well
below the market price. The opponents of legislative relief are hanging
onto a windfall bestowed on them by a scheme. Had there been fair
warning of the infirmity of the Kansas statute, I assure you the
legislature would have acted swiftly to obviate the problem we face
today. But the FERC's dilatory actions and the revisionist ruling of
the Court of Appeals conspired to impose a harsh burden on the State of
Kansas, Kansas producers, and royalty owners.
I would note that neither the producers nor the royalty owners are
the J.R. Ewings we remember from the television show, living in
mansions and driving expensive automobiles. The royalty owners are
retired farmers who have come to rely on the little ``gas check'' each
quarter to supplement their Social Security. The royalty owners are
school teachers whose grandparents may have bequeathed them a \1/8\
share of the gas well on the family farm. The royalty owners may be
constituents of yours, not Kansas residents, who inherited or purchased
an interest in a gas well in Kansas. The ``bills'' the royalty owners
are receiving are beyond the means of most of them and will ruin them
financially. The interest the pipelines claim is due is now more than
160% of the principal calculated at prime compounded quarterly!
And why are they being made to pay these exorbitant ``bills''? Not
because they were cheating on their taxes. Not because they hid their
interest in a gas well from government officials. Not because they
thought of a scheme to overcharge the pipelines and ultimately
consumers, but because they were following the law as it had been
interpreted consistently for nineteen years by a federal agency!
the ngpa itself supports legislative relief
The Natural Gas Policy Act achieved its objective admirably.
Congressman Dingell is to be commended for his role in that
legislation. As you know, the NGPA did not accomplish its goal merely
through price increases (though people generally think incorrectly that
that is how it achieved its goals). Although the NGPA did create price
incentives, what really made the NGPA effective was the elimination of
regulatory uncertainty.
Consider the fact that, in real dollar terms, the average wellhead
prices of gas today, more than 20 years after the shortages of the
1970s to which the NGPA was a response, are well below the regulated
prices existing prior to enactment of the NGPA. Thus, it is apparent
that the regulatory uncertainty eliminated by the NGPA contributed
greatly to the supply-demand balance we enjoy today.
The Court's decision retroactively changing the status of the
Kansas ad valorem tax flies in the face of the statutory provisions of
the NGPA designed to foster regulatory certainty. Section 506(b) of the
NGPA specifically provides for judicial review of FERC rules pursuant
to the Administrative Procedure Act. However, Section 506(b) also
states that the ``second sentence'' of Section 705 of the APA ``shall
not apply.''
What is the second sentence of Section 705? That sentence
authorizes a reviewing court to issue a ``stay'' of an agency rule
pending judicial review. The significance of omitting the power to
issue a stay with regard to orders under the NGPA is that, in the
absence of a stay, Commission orders are final, binding, and
controlling, and producers are entitled to rely on them.
I understand that Congressman Dingell was responsible for inclusion
of this and other provisions of the NGPA that were intended to provide
regulatory certainty as a means to foster greater gas supplies.
The retroactivity of the Court's order here has the practical
effect of granting a stay in contravention of the prohibition in
Section 506(b) of the NGPA. Therefore, the Court's retroactive order is
unlawful and contrary to the NGPA itself.
h.r. 1117
I do not appear on behalf of the State of Kansas to allege that
FERC should be precluded from changing its position regarding the
definition of the ``pass through'' of ad valorem taxes or to challenge
that authority. Clearly, such authority lies within the sound exercise
of FERC's jurisdiction when applied on a prospective basis.
I appear here to object to the inequity which arises from that part
of FERC's ruling which held that interest must be paid on the
retroactive refund obligations resulting from a reversal of 19 years of
agency policy. If this change were applied on a prospective basis only,
I would not be here objecting. However, the D.C. Circuit's decision
contended that the producers' allegation of detrimental reliance on
FERC's nineteen-year practice allowing the pass-through of the ad
valorem tax was ``purely notional; if it were real it would not have
been reasonable.'' Incredibly, how could the Court say it was not
reasonable to rely on a nineteen-year history of consistent rulings by
a federal regulatory agency? I agree something is not reasonable--but
it is not the actions of natural gas producers!
After Northern initially challenged the applicability of the ruling
to the Kansas' ad valorem tax, in 1986 FERC stated that the pass-
through was ``clear beyond question.'' How could the producers'
reliance on FERC's rulings be unreasonable when FERC itself continued
to reaffirm those rulings? Perhaps you could help me explain this to my
constituents because I am absolutely at a loss as to how to do so. As
my state's chief lawyer, I am unable to understand for myself--much
less explain to anyone else--how our system of government and
jurisprudence allows a nineteen-year ruling to be reversed overnight
and applied retroactively causing citizens to owe hundreds of millions
of dollars in principal and interest.
The ``bills'' being sent by the pipelines to small natural gas
producers have caused those producers to teeter on the brink of
bankruptcy. Such adverse financial consequences, in a period of
historic low prices, has spelled doom for the natural gas industry in
my state--home of the Hugoton gas field, the largest in the continental
U.S. Not only do the owners, employees, and suppliers of the production
companies suffer financially--the State of Kansas suffers as revenue
from income, property, severance, ad valorem, conservation and anti-
pollution taxes declines, including the income tax effects to the state
of the refunds being ordered of major out of state producers.
The procedures outlined by the FERC to accomplish the refund
procedure called for the pipelines to submit ``bills'' to the producers
and required the producers to pay 100% of the ``bill'' into escrow or
to post a bond in the amount of the ``bill.'' Subsequent to payment of
the ``bills,'' FERC would then determine the liability of the producers
if they requested a hearing or sought adjustment relief. To date FERC
has not granted any hearings, although 20 requests for hearing on the
accuracy of the claims have been filed. In my view, requiring payment
before any determination of whether the refund is actually owed is
backwards and reflects the procedural irregularity in the refund
process.
Congress should waive the interest on the refunds as proposed in
H.R. 1117. There is ample reason for this. The extended delay involved
in resolving the Kansas ad valorem tax refund issue is not the fault of
producers or royalty owners on whom the burden of refunds falls. In
fact, it is the fault of FERC. FERC delayed its decision on remand of
the Court's decision for a period of five years, adding insult to
injury. During this period of unconscionable delay, interest was
accruing. Indeed, fully two-thirds of the entire Kansas ad valorem tax
refund claims is made up of interest on the principal amounts. Had
there not been significant delay by FERC, the interest would have
constituted a much lower portion of the refund claims. The equities
demand a waiver of the interest.
Although H.R. 1117 would not grant relief from the requirement for
retroactive refunds that I wish would be legislatively overturned, H.R.
1117 would at least provide a much needed remedy--albeit on a limited
basis--to natural gas producers and royalty owners by barring
assessment of any interest or penalties on those refunds.
Under FERC's regulations, no government agency is required to pay
interest or penalties on refunds. See 18 C.F.R. Part 154. Thus, the
State of Kansas will owe a refund of the ad valorem tax that the
Department of Parks and Wildlife passed through, although it will not
owe interest. Yet the elderly, widowed royalty owner will owe a refund
of the taxes AND interest on the refund. What justifies this disparate
treatment? H.R. 1117 would eliminate this irrational disparity.
Another concern addressed by H.R. 1117 is the risk that a large
portion of the refunds and claimed interest will not flow through to
the consumer. H.R. 1117 would provide protection to the consumer by
requiring that all amounts refunded be passed through to the ultimate
consumer.
Large utilities opposing H.R. 1117 claim that, if passed, H.R. 1117
would adversely impact the property rights of ultimate gas purchasers
in violation of the Takings Clause of the Fifth Amendment. That is
simply not the case. Opponents of H.R. 1117 rely on Phillips v.
Washington Legal Foundation for the proposition that interest is
``property'' for the purpose of a Fifth Amendment takings claim. 524
U.S. 156 (1998). In Phillips, interest accrued on money being held in a
special fund for clients. The Court held that interest thus generated
belonged to the client. (The Court specifically did not address whether
those funds were ``taken.'')
Unlike the clients in Phillips, the large utilities seeking refunds
here do not have a cognizable property interest in receiving interest
on the retroactive refunds. Property interests are not created by the
Constitution. Rather, they are created by ``existing rules or
understandings that stem from an independent source, such as state
law.'' Board of Regents of State Colleges v. Roth, 408 U.S. 564, 577
(1972) (cited in Phillips, 524 U.S. at 156).
The NGPA and the FERC's regulations thereunder did not create
constitutionally vested ``property rights'' accruing to the benefit of
gas purchasers. No private rights of action were created for purchasers
under the NGPA. See, e.g., In re Texaco, 89 Bankr. Rep. 382, 84 Bankr.
Rep. 911 (Bankr. S.D.N.Y. 1988). Neither the FERC nor the federal
courts have treated past regulatory policies of the FERC as creating
``property rights'' for gas purchasers. No party has disputed that the
FERC also has the equitable power to deny refunds or interest on
refunds in the exercise of its statutory jurisdiction.
Opponents further argue that passage of H.R. 1117 would amount to
retroactive legislation and would infringe on the due process rights of
the customers by ``depriv[ing] citizens of legitimate expectations and
upset[ting] settled transactions.'' This argument is unsustainable. In
reality, it is the producers that are being deprived of their
legitimate expectations and the producers' transactions that are being
unsettled. Producers entered into gas purchase contracts, passing
through the cost of the Kansas ad valorem tax in accordance with the
law from 1974 until 1993. To now obligate those same producers to
refund those dollars seriously undermines the established contractual
obligations between the parties and upsets transactions that were well-
settled for nineteen years. Although H.R. 1117 is not a complete
remedy, it nevertheless provides an equitable measure of relief for
producers, royalty owners and the State of Kansas.
conclusion
I urge you to support this bill. It redresses an unjust ruling
having detrimental effects on a significant sector of the Kansas
economy. I also urge you to support this bill to correct the effects of
an unjust and unreasonable decision by a federal administrative agency
against a sovereign state--if not because of the merits, then to stop
FERC or some other federal agency or court from imposing similar,
albeit unrelated, but equally devastating consequences on individuals
or businesses in your states. Finally, Congress must consider the
interests of the royalty interest owners and small producers and devise
some means to grant these people and the State of Kansas relief.
Mr. Barton. Thank you, Madam Attorney General.
Mr. Albright, I was impolite when I said that the Attorney
General had been here before. You have also been here before.
Mr. Albright. That is correct, Mr. Chairman.
Mr. Barton. You have my apologies for not making that
announcement simultaneously with the lady to your right. You
are recognized. We are going to set the clock for 5 minutes,
but you, too, will be given some discretion if you need a
little extra time.
STATEMENT OF JAMES D. ALBRIGHT
Mr. Albright. Thank you, Mr. Chairman. As with Ms. Stovall,
I would request that my testimony from the June 8 oversight
hearings be incorporated by reference into this record.
Mr. Barton. Without objection.
Mr. Albright. Just to familiarize yourselves with whom I
represent, I am an attorney for Public Service Company of
Colorado and Cheyenne Light, Fuel and Power. I am not here
representing their interests as much as the interests of the
over 1 million customers that we serve. We are entitled to
approximately $20 million based on estimates of information
filed with the FERC, and just to place a hold who is actually
going to receive these refunds, I would like to address
Congressman Moran's comments as to that issue after I go
through my opening statement, as part of my opening statement.
In my prior testimony, I reviewed the history of the
litigation surrounding the Kansas ad valorem tax issue as well,
and I don't need to review it at this time, but I provided the
viewpoint of the customers that were in line to receive these
refunds and whether the legislation such as that proposed by
Congressman Moran was warranted.
The record developed at the oversight hearing revealed the
following which paints a somewhat different picture than that
presented so far today.
The consumers were unjustly overcharged during the 1980's
as a result of the producers' unlawful collection of these
taxes under the Natural Gas Policy Act. In fact, the producers
did appropriate windfall profits during this time at consumers'
expense.
The interest portion of these refunds is merely to
compensate the consumers for the money that was deprived them
during the up to 16 years of time that it took to litigate this
case, and this compensation is not insubstantial because of the
amount of time that has transpired.
It is important to note that there has been no retroactive
application of the law. FERC was found to have misapplied
Congress' law, the Natural Gas Policy Act, as to whether or not
the Kansas ad valorem tax should have been recovered through
the maximum lawful prices set forth in the act.
FERC misinterpreted the law and the court so found.
The litigation concerning this was transpired over 15
years. The tax was in dispute during that time. These
producers, especially if you look at the sheets that show who
is entitled or who has the liability for these refunds, are
major producers who are not unsuspecting but, rather, were
involved in the litigation and were well aware of the
consequences of collecting this tax. In fact, FERC had a
regulation on the books under the Natural Gas Policy Act which
required that all collections under the Natural Gas Policy Act
would be collected subject to refund and that those refunds
would require the payment of interest. So this isn't something
new, something unsuspecting that was out there. In fact, the
only thing that the producers may have miscalculated was that
they could lose this litigation.
In fact, the courts have completely rebuffed any claim of
unfairness of detrimentally relying on FERC's orders as to the
Kansas ad valorem taxes. In fact, the court noted that such
claim was ``purely notional, and that if it was real, it was
unreasonable and foolhardy.''
FERC has adequate authority to deal with the claims of
undue hardship in the majority of the cases under section 502.
502 gives FERC the authority to prevent special hardship,
inequity or unfair distribution of burdens.
The record also reflected from the oversight hearing that
86 percent of the total liability for these refunds falls on
the top 24 producers on the list, and that list would be
Exhibit E to Ms. Lumpe's testimony in that oversight hearing.
These 24 producers are mostly large, multibillion dollar
companies.
As to Mr. Moran's statement that the customers that
actually paid the tax--and, in fact, it wasn't the tax they
paid, they were charged for natural gas service by local
distribution companies--those customers are still the same
general body of customers that will receive the refunds.
It is somewhat different to say that the 700 or so parties
that unfairly collected these taxes, that these producers that
are within the pipelines' records that must pay this tax can be
compared to the millions and millions of consumers that
actually were overcharged in their rates. Practically speaking,
refunds at a local distribution company level just cannot be
made on a person-by-person basis. It is the general body of
consumers within the service territory that contributed to
these, that paid these taxes, that must now be refunded. That
is what would happen in the majority of the cases under the
State laws.
At the same time, however, there is no denying that
hardship exists in some cases and FERC has been somewhat
dilatory in processing the over 100 hardship cases before it.
Even this process is not practical for some parties. Some
royalty owners and producers have such a small liability that
even processing their hardship case would cost them so much in
attorneys' fees that it just doesn't pay to fight it.
We do have certain problems with House bill 1117. As I
indicated, it is overbroad, because it forgives interest for
everyone, not just those who may credibly claim a hardship. Why
should the Amocos and Mobils and Oxys and Union Pacific
Resources of the world be entitled to relief when they were
fully aware of this litigation from the beginning, and
certainly it doesn't cause any hardship on them?
There are also some technical difficulties, if the bill is
going to require that the individual consumers within the State
regulated local distribution companies' service territories
must be located and found. That will eliminate the refunds,
because it will cost too much for local distribution companies
to go back and resurrect records, whether it is through
telephone listings or what have you, to find the exact
customers.
As I indicated in my testimony on June 8, Public Service
Company experiences 20,000 name changes and address changes
each month, and over a course of years, that is over 1 million
changes on 1 million customers. It is just too impractical to
process.
In fact, it is the States who regulate the distribution. In
our State, in Colorado, there is a statute which allows the
Public Utilities Commission of the State of Colorado to fund an
energy assistance fund to provide assistance to low-income
customers. So the customers that would most need it would also
get a portion of these refunds, at least in the State of
Colorado.
Mr. Barton. Could you summarize? I don't want to cut you
off. Again, you have come a long way, too.
Mr. Albright. There are other technical issues that we have
with the bill. Constitutionality is one.
Mr. Barton. Elaborate on the constitutionality, because
Congressman Hall asked about that.
Mr. Albright. There are vested rights as a result of the
Supreme Court's denial of certiorari in the case where the DC
Circuit found the refunds are due and, in fact, mandated FERC
to order those refunds. Those vested rights relate, obviously,
to the principal. The question is, is it a vested right to be
compensated for the loss value, for the time value of money
that was deprived these consumers? Is that also a vested right?
I think that would be an issue that would likely get litigated
under this bill.
Also, there is an issue of the 97 or so million dollars
that have already been refunded to customers because of these
refunds. How is this bill going to deal with that? Is it going
to retract that? Are the pipelines and the local distribution
companies now going to have to turn around and go find the
refunds that were actually made and try to get those dollars?
That is just as inequitable as what Mr. Moran is talking about.
A little residential customer receives a check for $12 or what
have you. Now all of a sudden it is told they have to pay it
back a year or 2 later.
But there is room for compromise. I suggest in my written
statement, which has been submitted, that, similar to Mr.
Chairman's suggestions at the beginning of these hearings, that
there could be a cutoff, a de minimis cutoff, that all
liabilities for royalty owners or small producers that are
under $500 may be forgiven through legislation, and that
perhaps even at the $25,000 limit a reduced evidentiary
standard where only sworn affidavits can be submitted, and if
it establishes the necessary criteria, that will resolve the
hardship standards in that case.
Thank you, Mr. Chairman.
[The prepared statement of James D. Albright follows:]
Prepared Statement of James D. Albright, Associate General Counsel, New
Century Services, Inc.
introduction
Mr. Chairman and members of the committee, my name is James D.
Albright. I am Associate General Counsel, New Century Services, Inc., a
wholly owned subsidiary of New Century Energies, Inc. My
responsibilities include all regulatory and legal matters regarding
natural gas for Public Service Company of Colorado (Public Service) and
Cheyenne Light, Fuel and Power Company (Cheyenne), both wholly-owned
subsidiaries of New Century Energies, Inc. Public Service and Cheyenne
are both combination electric and gas utilities. As relevant to these
hearings, Public Service and Cheyenne are local distribution companies
that provide natural gas service to customers at retail, and are
extensively regulated by state utility commissions in Colorado and
Wyoming, respectively.
Both Public Service and Cheyenne purchased natural gas during the
1980's from interstate pipelines which, in turn, purchased natural gas
produced in various states, including the State of Kansas. Public
Service and Cheyenne, which together serve over one million natural gas
customers in Colorado and Wyoming, were the lead petitioners in the
1996 federal court case which resulted in the orders mandating the
refunds with interest of amounts collected by producers during 1983-
1988 attributable to the reimbursement of Kansas ad valorem taxes to
the extent that their collection caused the producer to collect prices
in excess of the otherwise applicable maximum lawful price. For the
record, neither Public Service nor Cheyenne stand to retain any of
these refunds; that will be flowed through to them by interstate
pipelines. Public Service and Cheyenne have pursued these refunds, with
interest, for the benefit of their customers in Colorado and Wyoming.
While the benefit to any particular customer may be relatively small,
approximately $15 for the average residential customer and $90 for the
average commercial customer, the size of the refund on a customer-by-
customer basis has never been the test for excusing refunds. These
customers have been wronged through the unlawful collection of
reimbursements for these ad valorem taxes, the impact of which on
consumers as a whole is in the hundreds of millions of dollars and in
Colorado, over $23 million. Public Service and Cheyenne have a strong
commitment to protecting the interests of our customers and, in this
case, as a direct result of that commitment, we have found ourselves in
the position of championing the right to refunds of natural gas
consumers in 23 states.
H.R. 1117, introduced by Congressman Moran of Kansas, would
forgive, at a minimum, over $200,000,000 of the estimated $335,000,000
in refunds that the Federal Energy Regulatory Commission (FERC) has
ordered to be paid by those who sold natural gas from 1983 to 1988 at
prices which exceeded the maximum lawful prices prescribed under the
Natural Gas Policy Act of 1978 (NGPA). These over-collections, as I
explained in my June 8, 1999 testimony before this subcommittee, derive
from producers charging their customers ``add-on'' amounts that would
reimburse them for ad valorem taxes paid to the State of Kansas in
addition to the otherwise lawful maximum price under the NGPA. The
collection of these add-ons over and above the maximum lawful NGPA
price was found by FERC, and affirmed by the United States Court of
Appeals for the District of Columbia Circuit in Public Service Co. of
Colorado, et al. v. FERC, 91 F.3d 1478 (D.C. Cir. 1996), cert. denied
520 U.S. 1224 (1997), to have been impermissible under the NGPA.
H.R. 1117 can also be read to excuse all refunds (not just the
interest component of the refunds) if the particular consumer who
actually paid the overcharge back in the 1983-1988 period cannot be
located for purposes of distributing the refunds. What makes this
aspect of H.R. 1117 inequitable as well as unworkable is the fact that
the refunds must be distributed first at the federal level and then at
the state level. FERC has jurisdiction over the first allocation of
refunds from the interstate pipelines to their former wholesale
customers, many of which are local distribution companies. The states
have jurisdiction over the second level of refund distribution--the
pass-through of refunds from local distribution companies to the
ultimate consumer. H.R. 1117 ignores these jurisdictional allocations
and would require the interstate pipelines to identify not only its own
customer but also the name of the ultimate consumer from whom the
excessive charges were collected. The rationale behind this is that the
customers who actually paid the overcollections should receive the
refund. In the world of retail rate regulation, the customers who
actually pay an overcharge are not always the same customers who
receive the refunds. But that has never been, and can never be, the
basis for excusing a regulated company from its refund obligation. At
the state retail level, tracing customers for refund purposes is
neither practical nor cost-effective even within the utility's own
service territory; it is virtually impossible to track customers which
leave the utility's service territory altogether. Local distribution
companies have thousands and, in many cases, millions of customers who
are constantly moving from one location to another. In Public Service's
territory alone, nearly 20,000 customers change locations each month.
That is why rate cases of local distribution companies like Public
Service and Cheyenne allocate charges to ``classes'' of customers and,
when refunds are ordered, allocate the return of excessive charges,
with interest, to the same customer classes.
The return of excessive gas charges by first sellers under the NGPA
is no different. To the extent that pipeline customers are regulated by
state commissioners, the states determine the distribution of refunds
to the customers in the relevant customer classes of those companies.
FERC does not get involved in locating the individual consumer who
actually paid the charge, or does the state regulatory agency. Whether
at the federal or the state level, it has never been suggested until
now that regulated entities which overcharge their customers can be
excused from paying refunds if their customers cannot prove that the
very same ultimate consumer who paid his proportionate share of the
overcharge will actually receive his proportionate share of the refund.
The refunds addressed by H.R. 1117 were collected subject to a
general obligation to refund, with interest, overcollections of amounts
which are ultimately determined to have exceeded the NGPA maximum
lawful price. And, while it may have taken many years for the liability
to be determined--during which substantial changes have occurred in the
customer bases of both interstate pipelines and local distribution
companies--that is no reason for excusing the payment of refunds to the
overcharged customers.
The exact way in which ultimate consumers receive compensation, in
a highly regulated industry, should be left to the appropriate state
agencies that have authority to regulate retail rates to consumers.
Those entities may rationally elect to rebate to the existing consumer
base, rather than trying to find individual customers from the past.
Some states, as does my own, may elect to take unclaimed refunds and
place them in a fund to assist low income consumers in paying their
utility bills. State regulatory commissions, applying existing state
laws, are quite competent to distribute the refunds in a manner
consistent with the public interest.
interest should be paid
First and foremost, the committee should recognize that there is no
inequity in requiring the return of unlawfully collected overcharges
with interest. Interest is not a penalty. It is merely compensation for
the time value of money wrongly held by one party and owed to another
party. Arguments have been made that interest payments should be
excused because the first sellers and the royalty owners here had every
reason to believe that the sums which they collected for the Kansas ad
valorem taxes were lawfully collected from consumers. They argue that
FERC had determined in a final order that the Kansas ad valorem tax
could be collected as an add-on to the otherwise applicable maximum
lawful and then, nineteen years later, suddenly changed its mind and
ordered the tax collections refunded with interest. Were that the case,
the D.C. Circuit's decision requiring full refunds would have been
different. The fact of the matter is that it was the Federal Power
Commission (FPC), the predecessor of FERC, in rulings regarding the
national ceiling price for gas under the Natural Gas Act that issued a
final determination on the prices to be collected under the NGA and the
national ceiling rate proceedings allowing the Kansas ad valorem tax to
be added to the national ceiling price. After the NGPA was enacted, the
continued viability of the FPC's prior NGA rulings on the
collectibility of the Texas ad valorem tax was raised by producers.
They urged FERC to reverse the FPC's prior disallowance of collection
of the tax. The same issue in reverse was raised by pipelines as to the
Kansas tax. These proceedings started in 1983, leaving no doubt in
anyone's mind (except perhaps the overconfident) that the
permissibility of the collection of the Kansas ad valorem tax under the
NGPA was in question and that an adverse ruling would lead to a refund
order under the FERC's regulations. Regardless of the actual knowledge
of each gas producer or royalty owner regarding its refund obligation,
the reality is that (1) the NGPA made it illegal to collect amounts in
excess of the maximum lawful price, (2) the permissibility of the
collection of the Kansas ad valorem tax under the NGPA was being
litigated and (3) FERC's regulations explicitly stated that collections
in excess of the NGPA maximum lawful price were to be refunded with
interest. There were no surprises except perhaps that the first sellers
did not factor in that they could lose.
Given these facts, it is hard to see the inequity in requiring
refunds of unlawfully collected revenues with interest. Everyone was on
notice that the permissibility of the Kansas ad valorem tax as an NGPA
add-on was in question. And, everyone was on notice that if not
permitted by statute, those dollars would have be refunded, with
interest. Yet, H.R. 1117 would automatically excuse every first seller,
including companies like Amoco Production Company, from the obligation
to pay interest on the unlawful collections--monies which companies
like Amoco have had the use of for up to 16 years. Interest on the
refunds merely puts consumers in the position they would have been in
had the unlawful charges not been collected. Fairness and equity is on
the side of the consumers, not on the side of companies like Amoco. For
Congress to forgive the interest overcharged consumers would be to
grant the producers a windfall of over $200 million.
Not only would there be unfairness and inequity in failing to make
consumers whole for these illegal overcharges, a legislative
forgiveness of interest would unduly discriminate in favor of natural
gas produced in Kansas and the state treasury of Kansas over natural
gas produced in other states and their state treasuries. Other gas
producing states, including particularly Texas, also had ad valorem or
other property-type taxes in effect during this period which were never
eligible for reimbursement as an add-on to the maximum lawful price
under the NGPA. Texas' ad valorem tax, which in all material respects
was identical to Kansas' ad valorem tax, was expressly found by the
FERC in 1986 not to qualify as a recoverable ``add-on'' to the maximum
lawful price under section 110 of the NGPA. Thus, gas producers from
Texas have never been allowed to collect reimbursement for these types
of state taxes in the prices charged for natural gas. To forgive
interest on these refunds would enact a preference for producers of
Kansas gas over producers of gas from other states.
It should also be clear that there is no inequity or injustice in
requiring the bulk of the first sellers to demonstrate the kind of
individualized showing of hardship required by NGPA Section 502(c) if
FERC is to excuse payment. That is the standard established by Congress
and the standard that has been used to grant special relief from NGPA
obligations for more than 20 years.
problems with h.r. 1117
The problems with H.R. 1117 are clear. First, the legislation is
overly broad. Supporters of this legislation claim that relief is
needed to avoid burdening very small natural gas producers or royalty
owners. In reality, 86% of the refunds are owed by major oil and gas
producers. As such, the legislation is far too broad in that it would
eliminate the interest payments on the refunds for all producers, not
just those who may credibly claim hardship. Second, the legislation
does nothing to simplify or expedite the statutory hardship relief
process at FERC for legitimate hardship cases. And, third, the
legislation would require refunds ``only to the extent that the
purchaser demonstrates to FERC that the refund will be passed on to
ultimate consumers of the natural gas.'' As I explained earlier, this
language is susceptible to an interpretation that would virtually
eliminate refund liability. Such legislation would run counter to every
federal and state regulatory scheme which has been enacted to protect
consumers from excessive rates. The Moran bill does the opposite--it
grants natural gas companies--here the producers, a monetary windfall
of at least $200 million at the expense of the consumers.
The Moran bill should not be passed. To the extent that its purpose
was to address the problems being faced by small producers and royalty
owners in hardship situations, alternatives are available which do not
grant windfalls to producers.
a possible solution
While H.R. 1117 goes too far, Public Service and Cheyenne believe
that there is room to address the true hardship cases and the cases
where the refund obligation is so low as to cause the government and
these individuals to incur more cost in resolving questions of
liability than the dollar value of the refund liability itself. Under
the NGPA, FERC is responsible for the administration of disputes
concerning liability for refunds. However, it appears that FERC is
caught in a quagmire at the present time and may not be able to find a
way to promptly resolve the numerous refund liability issues that have
been placed before it. To assist in this process, Congress could
consider requiring FERC to expedite its processes, for example, by
declaring that any first seller or royalty owner whose refund liability
is less than $500 be excused from paying the refund. In addition,
Congress could require FERC to establish a procedure whereby those with
refund liabilities less than $25,000 could establish their entitlement
to a hardship exemption by affidavit. For those with refund liability
exceeding $25,000, Congress could require that expedited procedures be
established to resolve any factual disputes regarding liability and a
FERC decision issued within a set period of time. Public Service and
Cheyenne urge the committee, if there is a need to legislate relief
provisions for the true hardship cases, to consider such alternative
approaches.
This concludes my written statement.
Mr. Barton. The chairman recognizes himself for the first
series of questions.
I wanted to be sure we have a complete record on this, Mr.
Albright. NCE, I am told, is a holding company that owns the
Public Service Company of Colorado, the Southwestern Public
Service Company of Colorado, Cheyenne Light and Power Company
and other subsidiaries, including one in England.
I am also told there is a pending merger with Northern
States Power. As of the last published reports, that the
operating revenues of the various affiliates that encompass NCE
total about $3.1 billion a year. Is that generally correct?
Mr. Albright. That sounds correct, Mr. Chairman.
Mr. Barton. So it would be safe to say that the entity that
you represent is not a small potato in this field.
Mr. Albright. That is correct, we are not, which is why we
were involved in the litigation and prosecuted the case.
Mr. Barton. How much refund and interest money, if any, are
the various groups that you represent at NCE claiming?
Mr. Albright. The only groups that I represent within NCE
are its customers. I am representing Public Service of Colorado
and Cheyenne Light and Power. Under the public utility's
regulations in Colorado, we are obligated to represent our
customers' interests.
Mr. Barton. I didn't ask you if you are obligated. I asked
you how much interest and penalty the entities that you
represent are claiming. You have every legal right to claim it.
I am just trying to see what vested interest the parties you
represent have in this case. That is all.
Mr. Albright. Well, we are really not claiming anything.
But, based on the estimates, we are entitled to receive
approximately $20 to $23 million of principal plus interest.
Mr. Barton. Okay. Now, if these funds that you just said
are in your own companies' customer base, if those funds were
to be obtained, would they all go back to your customers?
Mr. Albright. As I indicated in my opening statement, there
is a statute which allows the Public Utilities Commission to
divert some of the refunds that would otherwise be
undistributed, and in fact probably all of these would be
undistributed if we were to try to go back and find the
original customers. But under the processes normally followed,
the PUC would designate a portion, somewhere greater than half,
less than 100 percent, that would be credited to our existing
current natural gas sales customers. The remaining portion then
would go into the Colorado energy assistance funds used
exclusively for low-income customers that have trouble paying
their heating bills.
Mr. Barton. Let me rephrase the question. If it is not
possible or it is not required under the State laws that your
subsidiary companies operate in that you have to try to find
the customer that used the gas and paid the tax and paid
everything in the beginning, do all the funds go back to these
public benefit funds that you just alluded to, or is any of the
money going to end up in the corporate coffers?
Mr. Albright. None will end up in the corporate coffers. We
have indicated to the PUC we would like to be reimbursed for
some of our costs for this, but we have not received any, and
that has not been ruled upon. All of the money will be paid out
from Public Service Company and Cheyenne Light and Power. None
will be retained based on the rulings today.
Mr. Barton. Except for your costs and being an efficient
company like you represent, there will be minimal costs. I am
sure there will not be large costs that need to be reimbursed.
Maybe a couple postage stamps or something for the filing with
the various State entities. But it is all going to go back to
this public benefit fund then?
Mr. Albright. No, that is not what I said. I said a portion
of it, less than 50 percent, would likely be directed by the
Public Utilities Commission to be placed into the public
benefits fund.
Mr. Barton. What happens to the other 50 percent?
Mr. Albright. That would go directly to our current
existing sales customers.
Mr. Barton. Who paid it in the beginning, which seems
equitable. That is fair.
Mr. Albright. It is the general body of customers, not the
particular customers. We don't make an individual isolation of
customers to determine whether they were our customer during
the 1983 to 1989 period.
Mr. Barton. My time has expired for the first round. I will
come back. Mr. Hall.
Mr. Hall. General Stovall, in his testimony Mr. Albright
outlined some alternatives to H.R. 1117, including requiring
FERC to allow these with less than $25,000 in refund
liabilities to establish their hardship exemption by affidavit
and completely exempting anyone with under $500 of liability
from having to pay at all.
Is this an acceptable--is this a way of settling this in
lieu of H.R. 1117?
Ms. Stovall. I don't think so, Congressman.
Mr. Hall. What are the problems with that?
Ms. Stovall. I don't think it goes far enough. Clearly, any
relief we can get for folks is important, and I wouldn't say no
to it, but if I have the ability to say what I prefer, it is
very much that we would take care of this, more than just for
those folks at the very, very bottom in terms of owing.
When Chairman Barton mentioned earlier that the lowest 10
percent that owe money, the total of that group, the total of
those folks is $25,000. So each of those folks don't owe a
tremendous amount of money, but to them it may be substantial.
But when you get into the range of some that owe a few
thousand to tens of thousands to hundreds of thousands, it can
be as devastating as $500 might have been to my grandmother. So
to say simply based on a dollar amount that we are going to
forget that doesn't get to the hardship of how difficult it is
for somebody to pay.
My hope is that we can have much greater relief. Because
whether or not you have the ability to pay, it is wrong that
FERC is trying to make anybody pay when they played by the
rules for so many years. That is why just exempting--and even
making the majors pay doesn't work. While it is hard to get
really sympathetic and have hard feelings or sympathy for the
majors, they still played by the very same rules that the small
Kansas producers do. That is why I can't distinguish between
the two. They all played by the rules that FERC had. They all
did lawful transactions, made business decisions based on the
law at the time, and now they are faced with this change. So I
would hate to see us do anything less than 1117 and would hope,
frankly, that we could do more.
Mr. Hall. Mr. Albright, do you want to defend your
alternative?
Mr. Albright. Well, the alternative is based upon the
record in the last case in which there was testimony about how
some of the smaller producers suddenly got a bill in the mail
that was just going to bankrupt them, and they weren't even
involved in the natural gas industry during the time that these
taxes were unlawfully collected.
There are cases, legitimate cases of hardship that should
be processed on an expeditious manner by FERC. But it doesn't
seem like FERC has the wherewithal or perhaps even the
resources to deal with these on an expedited basis. The purpose
of the $25,000 cap is just to set forth a minimum criteria that
if an affidavit is provided that meets that criteria then
whatever anyone else has to say about it will not matter. It
still has to be truthful, obviously, but it can't really be
rebutted if those criteria are met. FERC definitely has the
ability to establish those criteria.
The $500 limitation, that is really to deal with the
problem of those that have received bills that simply can't
afford to come to FERC and plead their case. It is just to
relieve any of the hardship that may apply to those particular
producers or royalty owners that simply don't have the
practical resources to come fight the case.
Mr. Hall. Do you think the FERC hardship process is
working?
Mr. Albright. It is working, but only to those producers
that have a vested stake and those customers of those producers
or the customers that are complaining that they shouldn't be
relieved of hardship to work out the differences as to how much
the refunds are and whether there is a compromise solution. The
process would allow for a settlement between the conflicting
parties and the FERC. But, like I said, there are people that
are just too small to actually play the game.
Mr. Hall. Ms. Stovall?
Ms. Stovall. Last time when we testified there were nine
hardship cases that FERC had ruled on, and I think four had
been granted. The Missouri commission appealed all of those. It
is my understanding, from information yesterday, in the last
month they have done an additional one, so they are up to 10
they have worked. To do one in a month when we are talking
about hardship cases that even gets the sympathy of Mr.
Albright, it is just unconscionable. It is another example, I
am afraid, of a Federal agency not living up to its
responsibilities.
Mr. Hall. Actually, they did 11 and acted on nine, I think,
hadn't they? They acted on six of them. When they adjust that
figure to account for the two cases where no money was owed, it
looks like FERC has granted waivers in two out of every three
cases it has reviewed. So that makes it sound like the process
is working in favor of its small producer.
Mr. Barton. Missouri is appealing. I don't think those
appeals have been heard yet. There are over 100 pending cases?
Ms. Stovall. Over 130, I believe.
Mr. Barton. It is working, I think, Mr. Hall. If you were a
banker trying to get paid on the note, you would be pressing
for more expeditious----
Mr. Hall. The point she is entitled to make is the time
element there. I heard that Arkansas had a lottery now where
instead of getting $3 million----
Mr. Barton. Be careful.
Mr. Hall. They get $1 a year for 3 million years. Maybe
that is the way their situation is working.
Mr. Barton. I was wondering where you were going with that.
Mr. Hall. I yield back my time.
Mr. Chairman, can all statements by subcommittee members be
made part of the record? I may have a statement I want to put
in the record, and others surely do have.
Mr. Barton. Without objection, so ordered.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Richard Burr, a Representative in Congress
from the State of North Carolina
Mr. Chairman, I wanted to thank you for holding this hearing today.
I welcome our colleague and another Longworth neighbor, Mr. Moran, as
well as our other panelists to discuss Mr. Moran's legislation, H.R.
1117.
Mr. Chairman, in June our Committee held an oversight hearing on
Mr. Moran's legislation. We came away from that hearing with a greater
understanding of the remedy Mr. Moran is seeking in passage of H.R.
1117. We learned that:
<bullet> The court ordered refunds are not going to the consumers who
were taxed inappropriately. According to the pipelines it is
too costly and there is no way to identify individual consumers
from 1983-1988. Interestingly enough, those same records exist
in determining who to bill now, based on the same 1983-1988
time frame.
<bullet> The five year delay by FERC accounts for one-third of the time
and well over one third of the cost of the penalty. For five
years, FERC's inaction on the issue simply added cost to this
retroactive liability.
<bullet> The damage to the producers who would be required to pay
refunds to the customers could be devastating. For farmers,
royalty owners, and gas producers, the bill might reach
$10,000, whereas the actual refund to the individual household
will only be approximately $15.00, or roughly $1.25 a month.
Mr. Chairman, at a time when some on our Subcommittee are
advocating expanding FERC's power in the soon-to-be restructured
electricity market, this example of its inaction over a FIVE YEAR
PERIOD, illustrates the need for us to seriously reconsider the rush to
add to their regulatory powers when they have trouble taking action
expeditiously within their current framework.
I will be interested to hear the testimony of the two panelists
that follow Mr. Moran as well. Most specifically, I would like to hear
of whether such a waiver on the payments for the producers constitutes
a ``taking'' of private property. I also would like to see the argument
that gas pipelines won't pass all of the money through to the local
distribution companies and their customers if the refunds are granted.
I appreciate you holding this hearing, Mr. Chairman, and I yield
back.
______
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Mr. Chairman, thank you for holding this hearing on H.R. 1117,
introduced by Representative Moran.
On June 8, this Subcommittee conducted an oversight hearing that
explored the complex issues raised by the Kansas Ad Valorem tax refund
order. At that hearing we heard how government intervention into the
marketplace can have unintended consequences years after such
intervention has ended.
I am sympathetic to the extreme hardship paying this refund, with
interest, will cause for many of the producers and royalty owners
located in Kansas and elsewhere. At the same time, I recognize that the
consumers have already paid a tax the courts determined they didn't
owe. This is a complex issue and it is still unclear to me on whose
side the equities lie. Therefore, I look forward to hearing the
testimony of the witnesses and hope we can come to an acceptable
resolution for both sides.
Thank you.
______
Prepared Statement of Hon. Ralph M. Hall, a Representative in Congress
from the State of Texas
Mr. Chairman, thank you for calling this second hearing to see
what, if anything can be done to help bring a just resolution to this
unfortunate case of some kind of ``litigation fumble.'' What makes this
litigation fumble so outrageous is the fact that the parties themselves
seem to have acted with due diligence, but it was the government
agency, FERC, who dropped the ball, and mysteriously ignored this case
for five years, from 1983 until 1988. No one has benefitted from this
injustice, and the parties still need to resolve the case so they can
move forward.
The reasonableness of refunding various amounts of money to people
who in a fifteen year time period have re-located, died, or otherwise
become impractical to locate raises valid questions about the
enforceability of such a judgement. Furthermore, the inequity seems
rather glaring in a finding that producers pay interest for a five year
time period in which FERC appears to have lost the case from its radar
screen. It seems most appropriate of course that the parties themselves
would resolve these questions.
So it is with some hesitance that many of us would approach a bill
that would in the view of some, impose a political settlement on the
parties. The problem is that the parties have been given good reason to
lose faith in the ability of FERC to deliver and enforce a fair
judgement in this case. I come here again to listen and try and decifer
both the best course for resolving this case, and the best way to
ensure that similar situations do not arise in the future.
Thank you, Mr. Chairman, and I yield back the balance of my time.
______
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Mr. Chairman, today's hearing explores issues relating to the
treatment of the Kansas ad valorem tax on natural gas and its
disposition under federal law: specifically the Natural Gas Act and the
Natural Gas Policy Act.
There is a long and complex history behind this issue, which I am
sure we will have recounted today by our esteemed witnesses. I will
only point out that Federal Energy Regulatory Commission (FERC) has
ordered that the costs of the Kansas tax be refunded to gas consumers
and that in 1997, the D.C. Circuit held that since refund claims had
been pending from 1983 forward, that FERC should order refunds with
interest from 1983 forward.
The final disposition of refunds of the Kansas ad valorem tax is an
issue that is still pending before the courts. In fact, oral arguments
in this case are set for September 7, only about a month from now. Why
should Congress legislate at this time and interfere in the judicial
process? The producers are spending lots of their hard earned money to
appeal the 1997 court ruling and I think it would be wrong for this
Committee to deny them their day in court--especially when the outcome
could affect small producers like Mobil and poor royalty owners like
Cornell University.
As to substance, the legislation before us would exempt producers
from having to pay interest on the refunds of the Kansas ad valorem
tax. This is a very nice deal if you can get it, and it's certainly one
that I hope this Committee would give you or me if we failed to pay our
taxes for five years or more. The legislation would also require that
refunds be made only if the purchaser demonstrates to FERC that the
refunds will be passed on to the ultimate consumers of the natural gas.
This second provision raises some interesting Constitutional questions
regarding final judgements and takings, while at the same time it takes
away the traditional authority of state utility commissioners to decide
how much money goes to companies or ratepayers.
Frankly, I find it difficult to understand why we are talking about
moving this bill today. It is the end of July. The August recess and
the end of the fiscal year are just around the corner. We have not
enacted a Patient's Bill of Rights. We have not ensured the solvency of
Medicare. We have not marked up Ms. Eshoo's bill--cosponsored by more
than 260 Members--to provide Medicaid coverage to women with breast and
cervical cancer. We haven't even had a hearing on Ms. Capps' bill--with
almost 200 cosponsors--that would extend Medicare disability coverage
to people who are dying of Lou Gehrig's disease.
Yet, today we are starting the process of moving special interest
legislation cosponsored by three Members. On Tuesday we spent 4 hours
discussing toilets I do not believe that this is how the American
people want us to spend the last few legislative days before the end of
the fiscal year.
Mr. Chairman, this is a bad bill that should not be moved. It seeks
to resolve a matter between private parties that continues to consume
the energy and time of both the Executive Branch and the Judicial
Branch. I think having two out of three branches working on this matter
is more than enough. I suggest that this branch and this Committee have
more important matters to attend to in the next two months and hope
that we will choose to use our time more wisely in the future.
Mr. Barton. The gentleman from Mississippi is recognized.
We have a pending vote and about 9 minutes in the vote. We are
going to recognize you for 5 minutes, but try to be a quick 5
minutes.
Mr. Pickering. Let me just go to understand what you are
proposing, Mr. Albright. $500 waiver for anyone with a $500
liability, is that correct?
Mr. Albright. I am just proposing that as alternative
legislation to really deal with the hardship cases that are out
there.
Mr. Pickering. How much of the liability that is, in your
view, outstanding would that in aggregate total?
Mr. Albright. I have not made the calculations. It doesn't
appear anyone has made a listing of the royalty owners'
liabilities. However, there is an exhibit that was entered into
the record during the oversight hearing, and of the 17 pages of
producers that are listed, let me see, I am sorry, it is 7
pages of the producers that are listed, that would eliminate at
least the last page and some of the 6th page. So it looks like
there is probably 70 or 80 producers involved. But the royalty
owners only receive a small portion of each. There would be a
lot of royalty owners covered.
Mr. Pickering. Now, the total liability, if I remember from
our last hearing, is what, $310 million?
Ms. Stovall. $365 million.
Mr. Pickering. Has Mobil settled for $50 million? Does that
take it off that liability?
Mr. Albright. I believe Mobil paid their share of the
refunds with interest. Those have been distributed.
Mr. Pickering. Does that mean the 365 is reduced by 50
million?
Mr. Albright. There is another schedule attached to Ms.
Lumpe's testimony from the oversight hearing which indicates,
if I can get to the right page, it is exhibit F to her
testimony, it shows that approximately $97 million is paid. So
that would leave about $260 or $270 million unpaid.
Mr. Pickering. $270 million outstanding liability.
Mr. Albright. I think the majority of that has been paid
into escrow accounts by the producers.
Mr. Pickering. Now, would that be both the overcharge and
the interest, or is that simply the interest?
Mr. Albright. That is the overcharge plus the interest.
Mr. Pickering. What is the interest component of $270
million?
Mr. Albright. That I do not have.
Ms. Stovall. It is 160 percent.
Mr. Pickering. Sixty percent of the 270. So if you took Mr.
Barton's proposal of $25,000, do you know how much that would
reduce that liability?
Mr. Albright. No.
Mr. Barton. It wouldn't be much, because there are not that
many. There are 75 claims that total less than $25,000.
Mr. Pickering. I am just trying to understand, one, the
scope of the problem, and the possible solutions. I still
believe that this is a gross case of maladministration and
maljustice, and that I don't see an equitable solution any way
it goes right now. I know we have a vote on, but it is
something that I wanted, Mr. Chairman, to continue to work with
you to see if----
Mr. Barton. I am going to come back. If you want to come
back, you are certainly more than welcome to come back.
Congressman Hall said he is going to come back also.
Mr. Pickering. With that, I would yield back my time, or
give you back the Chair.
Mr. Barton. We do have a pending vote, but this is going to
be the last legislative hearing before we decide what to do in
terms of a markup. I think it is very important to get a number
of these issues to establish a record. So I am going to ask
both of these witnesses to remain. We should be back and
reconvene around 11:30. That is an approximate time. That is
going to be pretty close. I am just going to go vote and come
back immediately.
So we are in recess until approximately 11:30.
[Brief recess.]
Mr. Barton. If the subcommittee could come back to order.
The administration officials in Washington ignore us, so
why shouldn't the administration officials from Kansas ignore
us?
Ms. Stovall. Because I have great respect for the Congress.
Mr. Barton. We know the gentlelady from Missouri has
blessed us with her presence. If the gentlelady is ready, we
recognize you.
Ms. McCarthy. As you well know from our work----
Mr. Barton. The microphone is on now.
Ms. McCarthy. I thank you, Mr. Chairman.
Mr. Barton. You are now recognized, the working
Congresswoman from Missouri, who is doing two or three
subcommittees at one time.
Ms. McCarthy. It is a special day.
Mr. Barton. We are glad to have you at our subcommittee.
Ms. McCarthy. It is an important issue, and I welcome our
Attorney General from Kansas, Carla Stovall, back. And, Mr.
Albright, thank you very much for your participation in this
very issue.
I will not try to revisit any of the questions or concerns
that I raised at the first hearing, and I appreciate you
looking into those and getting back to me on some of those.
I am still troubled a little bit by the fact that, since
the FERC decision is before the DC District Court, why you
really think it is wise to legislate on matters that are
currently in the courts? It has been my experience in Missouri
with our Attorney General there that traditionally Attorneys
General shy from that sort of policy. By calling on the
Congress to intervene in the judicial process, I would like to
know why that is so imperative at this time. If you would
reflect, Attorney General Stovall; and, Mr. Albright, if you
would like to weigh in, it would be most welcome.
Ms. Stovall. Our feeling that Congress is our last place to
go really is because, while we are going to make our arguments
with all of the vim and vigor that we have on September 7, we
are not very hopeful that the DC Circuit is going to rule in
our favor, considering that they are the ones who made the
decision that they did to remand the case back to FERC,
indicating they were not satisfied with FERC's rationale for
excluding the Kansas tax, and they are the ones that, contrary
to FERC's order to say that any refunds should go back to 1988,
took it back to 1983. So we just don't have any hopes that that
court is going to give us the relief we need. We are asking
Congress really to reassert your authority to tell the DC
Circuit that they have acted in contravention of what the
original intent of Congress was with regard to the Natural Gas
Policy Act and the goals that you tried to have from that.
Congress has previously, even in this area, made decisions
that legislatively overruled U.S. Supreme Court decisions. So,
clearly, you have the authority. We just think it is the only
way to have any resolution of this with some finality.
Otherwise, the DC Circuit remands back to FERC, and we are
dealing with the two agencies that put us in this untenable
situation to start with.
Mr. Albright. The way I understand, it is the DC Circuit
Court of Appeals that has jurisdiction over the case now. The
basic issue before the court is whether the FERC erred in
denying the major producers petitions for relief of hardship to
pay the interest. They were seeking a generic waiver of
interest. So the very issue as to whether FERC could or could
not by law waive interest is probably going to be addressed by
the court. So once that court decision comes out and it becomes
final, then you have more vested rights involved, which points
back to the constitutionality of H.R. 1117, which was raised
earlier.
Ms. McCarthy. The reason I raised this question now is that
it looks like the case is set for September 7 for the oral
arguments. So that is only a month from now. I was wondering
why Congress should legislate at this time and interfere with
that judicial process.
Mr. Albright. I agree with that. I would prefer, and I
think it would be out of line for Congress to jump in the
middle of a heated litigation that has been ongoing for years
and years.
Ms. McCarthy. I appreciate that perspective.
I would like to follow up with H.R. 1117 with regard to its
requirement that refunds be made only if the purchaser
demonstrates to FERC that the refunds would be passed on to the
ultimate consumers of the taxed natural gas.
It sounds like a well-intentioned provision to ensure that
ratepayers in other States benefit from the refunds, but I
wonder if it is not more of a cynical attempt to help keep
money in the hands of the Kansas tax producers.
Most interestingly, too, while it might be a well-
intentioned provision, isn't it subject to the judgment of
Washington bureaucrats instead of the State public utility
commissioners who are normally tasked to do this job? We had
some rather, I thought, eloquent testimony in the last hearing
from the actual public utility commissioners on their role and
responsibilities, and this shift to Washington, while well-
intentioned perhaps, undermines that whole process that has
worked so well for so long in the States.
Mr. Albright. I believe that is a correct assessment.
The Public Utilities Commission in Colorado has the duty
and is charged under its statutes to apply what is best in the
public interest and in the interests of our customers, so they
have all the information. They would be prepared to see how the
refunds or how the Kansas ad valorem taxes had been overcharged
to the customers and what the most equitable and fair way of
resolving how those refunds should be distributed, and that is
correct, by saying the pipelines now have to step up and say
that the ultimate consumer that is going to receive the refund
must be the same as the ones that actually paid the overcharges
in the first place, which would just totally wipe out that
process.
Ms. McCarthy. I know I have gone beyond my time, Mr.
Chairman----
Mr. Barton. We are so glad to have you here, we will give
you a little extra time, even though your questions are
burdening my soul with insinuations of Washington bureaucrats.
You are looking at the bureaucrat right back there. That young
lady in the purple is the bureaucrat that has been staffing
this with this young lady to my right.
Ms. McCarthy. I appreciate all of their efforts. I know
they do good work for you and for all of us.
I appreciate the extension of time, because I wanted Ms.
Stovall to be able to respond and also to reflect on the
consumers of Kansas, because they are the first--you are the
first State in terms of liability obligation, as my own State
of Missouri being second in those numbers, however large, $81
million and $61 million respectively. These are large
producers, not from the State of Kansas for the most part, who
owe these obligations to the taxpayers, ratepayers in Kansas
and Missouri, and they are national and international entities
from outside of Kansas owing them.
As you reflect on my initial question which Mr. Albright
responded to, could you reflect on why in this case these
obligations should be waived to your own constituents and mine?
Ms. Stovall. I appreciate the opportunity to respond to
that, because while I certainly like to think of myself as a
very active and good consumer protection Attorney General, I
would be able to go back and with a straight face and very
sincere and open heart tell any consumer group in Kansas why I
oppose the possibility of payment to them based on these
refunds.
Even Mr. Albright's testimony is that the average
residential consumer will only get $15, period, and yet what
the producers are going to experience are tens of thousands of
dollars. So the benefit to the consumer is so minimal when
compared to and weighed against what the harm is to the
producers and/or the royalty interests.
In addition, one-third of all the folks that owe money,
one-third of the producers that are subject to this order, are
Kansas producers. So one-third of it is a big number to us.
Even though the majors and the international conglomerates are
involved in this and it is hard to work up any sympathy for
them, as I said in my opening statement, nonetheless the
Constitution still applies to them, and in my view there was
nothing that was legitimate about the way that 19 years of the
laws and rules of FERC being flipped on them retroactively is
appropriate.
So I just find it inconceivable, frankly, that we are
trying to do this. Even when this legislation would benefit the
big bad oil companies, they are entitled to the relief, too,
because they paid in good faith based on rulings that were
valid and had been upheld for 13 years by FERC.
When it comes to the ultimate consumer, I don't think
Congressman Moran was cynical in placing within the bill the
provision about making sure that the ultimate consumer got the
benefit. What Mr. Albright's comments and everybody who has
talked in opposition to Mr. Moran's bill talks about are trying
to benefit the consumers. If we are really interested in trying
to benefit the consumers, then it shouldn't be consumers who
didn't ever pay that ad valorem pass-through to start with.
If the consumers are the ones we care about, it ought to be
the ones that paid it. I don't find it disingenuous that, if we
are going to collect the money, it ought to go to those
consumers. Frankly, that provision was placed in there not to
hurt new consumers of natural gas but to be sure the pipelines,
who originally made claims to keep $47 million, wouldn't keep
it.
Mr. Moran's provision wasn't necessarily to distinguish
between current and past consumers. It was to be very clear
that we don't want the pipelines, who have been fighting and
financing this litigation. Maybe I am a skeptic, but I don't
think it is because they are benevolent. That was the great
concern. While they may have backed off of trying to keep that
$47 million, that very much was in the original records. So
that was the concern.
Ms. McCarthy. Well, I don't think we on the committee are
trying to take sides among the various interests, the royalty
holders, the pipeline companies and others involved in this.
That is what is before the courts, and that is kind of why I
raised the overall question of us interfering at this moment in
time when the courts are pursuing this in a way that hopefully
will not be caught up in any of the politics of the issue but
really take an overarching view on the long-term implications
of laws and justice.
There are many heart-rending stories of ratepayers and
also, of course, the royalty companies, but there are--I don't
know that that is for the Congress to decide. I think that is
why to let the courts proceed is an appropriate path to take at
this time for this contentious issue that is very difficult.
Otherwise the precedent will be set that we in the Congress
will jump in again at another point in time for another State
in a situation akin to this or as a precedence to this.
I am just having real problems with that role for this
Congress, Mr. Chairman. That is why I appreciate you having
this hearing and extending my time.
Mr. Barton. Thank you. I am sure you really do appreciate
having this hearing.
But I don't think there is any question, but just to make
the record explicit, I have taken a side. And I am on the
producers' side and the small royalty owners' side, which
Congressmen can take sides--they don't have to, and most of us
avoid it like the plague, but sometimes we do. And I have good
friends on the pipeline side and have good friends in all the
sectors involved, but I do think the ex post facto laws do
apply even to small producers and royalty owners.
Ms. McCarthy. Mr. Chairman, with that in mind, would you
concede that the royalty owners, such as Cornell University and
other financially well-off entities, should pay?
Mr. Barton. I think if it can be determined that there was
some Machiavellian plot to somehow divert tax resources into
private pockets, we ought to really go after them, sure. But,
in this case, FERC ruled one way for years and years and years
and then changed their mind, and they are now all in a knot and
don't know what they want to do, and I think it is appropriate
that the Congress from time to time as an equal branch of the
three branches step in and, if nothing else, try to shed some
public light on what is normally a hidden proceeding or at
least a very closed proceeding in the administration of the
justice system.
Ms. McCarthy. I respect that very much. I just don't want
us in the Congress to try to take the risk out of business.
Mr. Barton. I am with you on that.
Ms. McCarthy. Thank you, sir.
Mr. Barton. I am also with you that we shouldn't take the
risk out of elections. I am certainly adding to my election
risk by holding this hearing, in many ways.
The Chair is going to recognize himself for 5 minutes. The
Chair does sincerely appreciate the gentlelady from Missouri,
because she has studied the issue. There is another side to
this obviously. That is why, if it were an easy issue to solve,
it wouldn't be in the courts or at the FERC or even here in the
Congress. So we are delighted that the gentlelady from Missouri
is here.
I have done a little calculation in the interim of my last
question round, going back to the statement that the
distinguished gentleman, Mr. Albright, made about maybe there
might be a resolution of this, and I am basing my calculations
on the principal involved, not the interest. But a total of 750
claims encompassing $127 million worth of principal in terms of
taxes is what is at stake, and until my first round I talked
about the 10 percent of the smallest claims, which averaged
about $128. The actual 10 percent of the largest claims, the
principal involved is $116 million.
So if you could settle 90 percent of this, 91 percent of
the claims are in the 10 percent of the largest claims. So if
we base this strictly on the principal amounts and not the
interest involved, there is an alternative solution that would
solve the small royalty owner and the small producer problem in
Kansas.
The material that I have has not been verified, and I need
to verify it and then let the minority staff look at it. If we
can get that done, we will put that material into the record.
I want to ask you, Attorney General, in my question round
this time, what efforts, if any, have been made to determine if
the request that the pipelines have made to the FERC in terms
of refunds are actually--I won't say legitimate; I am going to
stipulate they are all legitimate claims--but if they actually
correlate with what was paid? Has anything been done on that?
Ms. Stovall. To my knowledge, there has been one gas case,
the Colorado Interstate Gas case, that in the filings that CIG
made to FERC itself, the thousands of documents that they
filed, counsel were able to go through those and determine that
there, in effect, were great inaccuracies in those, and in fact
they were claiming that they paid the maximum lawful price and
the ad valorem tax on top of that in cases where the wells had
already been deregulated, for example, so there would have been
no maximum lawful price. So indeed, Mr. Chairman, there have
been those discrepancies.
I think the handout that Mr. Albright referenced that Ms.
Lumpe had used in her earlier testimony, was because on those
initial filings, which have since decreased now because of
inaccuracies that have been counted, erred.
Mr. Barton. Do you all both agree, Attorney General Stovall
and Mr. Albright, that we need at least to agree on what really
is owed, and that has not been established yet?
Mr. Albright. I agree with that, Mr. Chairman. FERC does
have a process to resolve the discrepancies between what the
pipelines' records reflect and what was provided to the
producers in the way of a notice of refunds due versus the
producers' own records. That process is ongoing.
Ms. Stovall. Mr. Chairman, if I might, could I offer that
part of the problem is that the way FERC has set this up is the
producers are having to pay 10 percent of the amount that the
pipelines say is owed in order to toll the interest running,
without any initial determination of what is really owed. It is
the pipelines saying to producers, you owe this. The pipelines
are having to pay 100 percent of it. So it is a horrible due-
process failure to start with.
Second, the pipelines are saying that the--I am not going
to remember the name of the documents, but the gas price
records, FERC said many years ago were, supposed to be
maintained at FERC, and those would be the actual records of
customers, royalty owners, et cetera; and the pipelines are now
saying that, you know, those records aren't really that
accurate and they don't want to use those records for trying to
prove these claims. Yet the producers themselves don't have
those accurate amounts. So it is a double problem now, because
even the records of the pipelines, they are trying to back away
from.
Mr. Barton. Let me read some numbers here. These are big
numbers. These are not the small numbers.
But according to the pipeline refund claims that have been
filed, and these are tax reimbursement claims of principal,
this does not have interest. But Mr. Albright, you mentioned
Mobil has settled. According to the document that I have before
me, the pipeline collected for reimbursement of tax from Mobil
$17,225,556, but the amount that the pipelines demanded for
refund of principal was $15,107,867, which is a difference of
$2,117,689, or 14 percent.
Oxy, the numbers are smaller, $5,898,796 collected,
$3,625,155 demanded for refund. The difference, $2,273,641. But
the percentage is 62.7 or 63 percent.
So it would appear--and you may not have this, so we will
share this with you and all the others--but it really does
appear there is a real fact problem between what the pipelines
collected from the producers for reimbursement of tax and what
the pipelines are demanding in terms of refund of principal,
and that would seem to be a very relevant question that the
FERC ought to be trying to get to the bottom of, using the best
records that are available.
Ms. Stovall. Mr. Chairman, 20 applications have been filed
to get at that very issue, and none of them have been granted
yet by FERC, although they have been on file for almost 2
years. It will be 2 years in November. If I can clarify one
point that I think came as a result of questioning by
Congressman Pickering, Mobil hasn't settled. They have paid
that $50 million into escrow so that their interest obligation
is tolled. But they are not giving up their right to fight and
say we don't owe that principal and/or that interest.
I just want the record to be clear we are not conceding any
of Mobil's rights here.
Mr. Barton. Let's assume that we take the gentlelady from
Missouri's suggestion that these Washington legislative
bureaucrats, which there are two of them, begin to hold this
thing in abeyance. What if we did that but we passed just a
noncontroversial bill perhaps on the suspension calendar by
unanimous consent that said all penalty charges are stopped? In
other words, the clock is stopped ticking and then put a
timeframe, a reasonable timeframe, for this thing to be
resolved. What would Kansas' response be to that?
Ms. Stovall. By penalties, Congressman, do you mean
interest or actual penalties assessed by FERC? Because they
have not assessed any penalties yet.
Mr. Barton. That would be interest. I am not an attorney,
so I use terms in a common way, which is very dangerous in a
legal setting.
Ms. Stovall. The jargon with natural gas is a whole new
language for me. I want to be sure I am clear as well.
Mr. Barton. What I want to do is be sure we can do
something that puts a little incentive into solving the problem
but to take Congresswoman McCarthy's suggestion that we not
dictate the outcome.
Ms. Stovall. Certainly anything that relieves the accruing
of the interest is important, because some of those producers
haven't been able to toll the running of that interest because
they don't have the money to put in escrow, which is required
by FERC, to stop it.
Mr. Barton. You think your Governor would support something
like that?
Ms. Stovall. There wouldn't be any reason, I think, for us
to oppose it.
Mr. Barton. What about you, Mr. Albright, the parties you
represent, how would they react to that?
Mr. Albright. Well, I think the parties that I represent,
you know, they are customers, and they would be happy to get
any of these refunds at this point. They are just like you and
me, and they pay gas bills on a day-to-day basis.
Mr. Barton. Are these the customers that the average over
the year is $12 or they get a grilled cheese sandwich, as Mr.
Moran indicated, or are these the larger customers you can't
find yet that would might actually get some money if you tried
to determine who they are? Which customers are you referring
to?
Mr. Albright. I am talking about the small customers. I
would add, what is more unfair, to take $320 from one customer
or $15 from 20 million customers? The same unfairness exists.
Mr. Barton. I take it you don't want us to do what I just
suggested, which is back away from this but yet stop the
interest clock running and give us a time period to resolve
this, either individually or through the States or at the court
or through the FERC system?
Mr. Albright. What you are suggesting is just toll interest
as of a date certain going forward. In effect, most of the
producers, and I would concede that not all of the producers,
have tolled the interest that they have to pay on the refunds
by placing the refunds that the pipelines indicated they owe
into escrow.
Mr. Barton. You are going to have to tell me what tolled
means.
Mr. Albright. Toll means to stop the interest from running,
to keep it from accruing on their refunds liability.
Mr. Barton. How have they done that?
Mr. Albright. They have done it by placing the total
refunds, including interest, into an escrow account, an
interest-bearing escrow account. So the interest that is now in
that account accruing is interest that the bank or whatever
financial institution is accruing to that account, and the
producer is not paying any additional interest.
I would just clarify it as to Mobil. Mobil did not do that,
as Ms. Stovall indicated. She just was mistaken. Mobil actually
paid their refunds back to the pipelines, and those pipelines
then refunded their customers.
Ms. Stovall. Subject to refund though, they are still
objecting.
Mr. Barton. All I am trying to do is build on some things
that people have said at the hearing today. I am ready to move
the Moran bill as is if I can find the votes to do it, but if
we are going to not do that, we ought to try to find another
way to help resolve the issue. And several people, both at the
witness table and up here, have offered some I think positive
suggestions on maybe how to do that. I am just trying to see if
there is any consensus on that.
Ms. Stovall. It would really help the small producers,
because, contrary to what Mr. Albright suggested, the majority
of producers have not paid the money into escrow. I am not sure
what the percentage is, but it is not the majority of the
amounts owed. Their interest continues to accrue on a
continuing basis. I am like you. I would rather the Moran bill
get moved, but at least it would be something.
Mr. Barton. The gentleman from Mississippi is recognized
for 5 minutes.
Mr. Pickering. Mr. Chairman, I just want to join with you
in looking at this case. I do not think it is a case, unlike
the gentlewoman from Missouri, where we should simply wash our
hands and leave it to the courts. This is a unique case, where
we have had, how many years now----
Ms. Stovall. Nineteen years.
Mr. Pickering. [continuing] 19 years have gone by where you
have had inconsistent regulatory decisions made by FERC. I
happen to believe we have a legislative responsibility under
the Constitution to check and give oversight to regulatory
agencies when they are either performing poorly or
inappropriately or corruptly. In this case, it just seems to me
a maladministration.
Now you have the court system coming back in and saying,
because the regulatory agency made a mistake, that doesn't
resolve or solve the liability going back to all of these
people who played by the rules during those 19 years, and as a
result of those mistakes, made not by the producers and the
royalty owners but because of the mistake of the FERC, the
interest, or the penalty in this case, FERC doesn't have to pay
for that. They are not held accountable.
There is no justice there. The people who were overcharged
are not getting this benefit back, or the overcharge paid back
to them. There is not a direct correlation between those who
were harmed and those who are now supposed to benefit from the
settlement or for the payment.
So I would side with Chairman Barton and Mr. Moran in
saying that we should not have the liability accrue to those
who are innocent at the time.
So, Mr. Chairman, I want to work with you as we go forward.
If there are some proposals or solutions out there that would
mitigate or minimize the harm that could be done if we go
forward, I am open to any of those types of proposals. But at
this time, I do think we should move forward, Mr. Chairman.
Mr. Barton. Thank you. I have just a few more questions,
and then we will conclude the hearing.
Madam Attorney General, is it true that the producers and
royalty owners in question are only called upon to pay refunds
if the total price collected, including the Kansas tax,
exceeded the maximum lawful ceiling price?
Ms. Stovall. That is what the FERC order says.
Mr. Barton. Mr. Albright, you agree with that?
Mr. Albright. That is, in fact, what the NGPA says.
Mr. Barton. So we have agreement on that.
Mr. Albright. Yes.
Mr. Barton. I know what NGPA means. That means Natural Gas
Policy Act. So I have got that.
Since the NGPA states that, I am going to ask this to you,
Mr. Albright: Has the FERC, which stands for Federal Energy
Regulatory Commission, determined whether any producer in fact
has violated the maximum lawful price at any time in the period
between 1983 and 1988?
Mr. Albright. Well, that specific question as to each
producer is a matter of fact.
Mr. Barton. Well, to the best of your knowledge of the
facts, is the answer to that question or no?
Mr. Albright. FERC has not made a determination except for
the collection by those producers of the Kansas ad valorem tax.
Mr. Barton. So your answer is no, the FERC has determined
that no producer has violated the maximum lawful price at any
time between 1983 and 1988?
Mr. Albright. Well, I would not say that FERC has not made
that determination. They made a generic determination that that
was the case and that is why the refunds were ordered. As far
as individual circumstances that may be exceptions to that
generic order, those individual cases have not all been
processed.
Mr. Barton. Can you cite one case that has been processed
where they have found that a producer violated the maximum
lawful ceiling price between 1983 and 1988?
Mr. Albright. I am not sure FERC has issued an order. As a
matter of fact, I would tend to think they have not issued an
order, but I know in the Colorado Interstate Gas Company case
referred to by Ms. Stovall, there are those claims that have
been made, and to the extent the pipeline----
Mr. Barton. I am not talking about claims.
Mr. Albright. Well, the claims have been made, and the
pipelines and producers get together and resolve those
discrepancies.
Mr. Barton. But today, and you certainly are knowledgeable,
nobody is all encompassing, but you are certainly a
knowledgeable witness, you cannot cite one instance of where
the FERC to date has actually found that a producer violated
the maximum lawful price between 1983 and 1988, can you?
Mr. Albright. Not with respect to these Kansas ad valorem
taxes, no.
Mr. Barton. And if I were to put into the record a draft
order that is dated July 27, 1999, which is fairly recent, and
I want to quote, ``We did not then and are not now determining
whether there has in fact been a maximum lawful price
violation. We are simply asking the parties to determine in the
first instance whether such a violation has occurred and, if
so, to provide refunds. If the parties cannot agree, then they
may bring their dispute to the Commission for resolution.''
If I were to get permission from the minority, who
unfortunately is not in attendance, to put this draft order
into the record, that would seem to indicate that in fact no
maximum lawful price violations have been found? Would you
agree with that?
Mr. Albright. I would not agree with that.
Mr. Barton. Would you not agree with that?
Mr. Albright. I would not agree with that.
Mr. Barton. Why would you not agree with that?
Mr. Albright. The fact that the court mandated that the
Kansas ad valorem taxes that had been refunded or overcollected
by these Kansas producers should not have been collected as
part of the Natural Gas Policy Act maximum lawful price was a
determination that such collection----
Mr. Barton. You have just agreed earlier that you can't
cite an individual case yet that has in fact been found by the
FERC that a maximum lawful price violation has occurred, at
least in the period between 1983 and 1988. Admittedly this is a
draft order. This is not, in fact, an order, but the draft
order does, this week, we did not then and are not now
determining whether there has in fact been a maximum lawful
price violation.
How can you, as decent and honest and patriotic as you
certainly seem to be, sit before this subcommittee and say with
a straight face what you just said?
Mr. Albright. Well, there are two issues involved.
Mr. Barton. And you are not under oath.
Mr. Albright. I could be.
Mr. Barton. I know. I am sure you would be willing to be,
but this is not an oversight subcommittee.
Mr. Albright. The question that you are asking and the
discussion by FERC in the draft order relates to a----
Mr. Barton. Have you seen the draft order?
Mr. Albright. Yes, I have.
Mr. Barton. See, I am not enough of a FERC attorney--I am
not a FERC attorney at all, in fact, so I don't know if these
draft orders are circulated. But a draft order is put out for
people to look at, apparently?
Mr. Albright. It is publicly available, but it is not
binding and continues be relied on. We can discuss it.
Mr. Barton. This was not the first time you heard these
words?
Mr. Albright. That is correct.
Mr. Barton. You are honest. That is good.
Mr. Albright. The reference in that draft order is to a
determination as to the specific producer that is at issue in
that case, whether that producer has in fact violated the
Natural Gas Policy Act by collecting the Kansas ad valorem tax.
Mr. Barton. You are saying this draft order applies to one
specific case, not to a generic number of cases?
Mr. Albright. Yes. It applies to that producer. FERC has
not made producer-by-producer determinations yet, and may well
have to, to resolve a lot of these disputes as to whether that
producer violated the NGPA by collecting the Kansas ad valorem
taxes. But FERC has made, pursuant to the DC Circuit Court's
mandate, the determination that collection of the Kansas ad
valorem tax in excess of the NGPA stated maximum lawful price
is a violation of the NGPA and must be refunded. So the generic
determination has been made.
Mr. Barton. Do you agree with what he just said on the
generic determination, Madam Attorney General?
Ms. Stovall. I agree that the court said if and when the
maximum lawful price was exceeded, that tax needs to be
refunded.
Mr. Barton. But there has been no determination as to the
if and when?
Ms. Stovall. True.
Mr. Barton. Now, have any producers, to either of your
knowledge, demanded hearings before the FERC to, in fact,
adjudicate whether any violated the maximum lawful price?
Mr. Albright. Can you repeat the question, Mr. Chairman? I
am not sure I followed ``to adjudicate.''
Mr. Barton. I think you all understand where I am going
with this, but I will repeat the question.
We are trying to determine whether in fact there have been
any maximum lawful price violations. I think you both agreed
that no specific case has yet been determined that there has
been a maximum lawful price violation. So my question this time
around is, have any of the producers demanded a hearing before
the FERC to adjudicate--sometimes I don't pronounce things very
correctly--to adjudicate whether any of their sales violated
the maximum lawful price?
Mr. Albright. The answer to that is, yes, some of the
produce users have.
Mr. Barton. Do you agree with that?
Ms. Stovall. It is my understanding 20 applications have
been filed.
Mr. Barton. Twenty applications have been filed. Do either
of you knowledgeable witnesses know when those hearings are
going to be held?
Ms. Stovall. They were filed in November 1997.
Mr. Barton. They have been out there for about 2 years now.
Ms. Stovall. That is exactly right. None of them have been
granted yet.
Mr. Barton. What is your response to that?
Mr. Albright. The reference to November 1997, a lot of the
large producers raised the issue as being an issue but didn't
make the claim that in fact they had----
Mr. Barton. We just agreed, the distinguished lady from
Kansas just said that 20 of these claims have been filed. Is
that right? Have been filed. Not raised the issue, have been
filed. Now, Mr. Albright, do you dispute that?
Mr. Albright. Yes, I would dispute that claims have been
made to the FERC, that the producers themselves in specific
instances have not exceeded--they were generic claims that were
made, and in fact the specific claims----
Mr. Barton. What is the difference between a claim and a
generic claim?
Mr. Albright. Well, she is making the argument that FERC
has not made such a determination, therefore cannot order
refunds. That was the claim that was made in November 1997.
Mr. Barton. Madam Attorney General, what is your response
to that somewhat legalistic answer that he just gave me?
Ms. Stovall. Mr. Albright may have more details on
specifics than what I do. What I know is----
Mr. Barton. You are just a servant of the people from
Kansas trying to find the facts.
Ms. Stovall. Very hard working, trying to serve justice.
You are exactly right, Mr. Chairman.
What I do know is, in many, many occasions, the producers
received much, much less than the maximum lawful price of gas
in that 1983 to 1988 period, because the market price was so
low and the pipelines were requiring those market-out
contracts. So we know from a practical matter that maximum
lawful price was not exceeded in all of the situations. Again,
that CIG case proves that that I referred to earlier.
Mr. Barton. What is your answer to his response? I mean,
you seem pretty specific that a true claim has been filed. I
don't know enough to know what a claim is and what a claim is
not. He seems to be fairly confident that what you are saying
has in fact been filed as a specific claim is a more
amorphous--you know, we are just kind of interested in getting
a little general information.
Ms. Stovall. My gallery back here says that it was the----
Mr. Barton. This side of the room is not on your side.
Ms. Stovall. Some of them are, in the very back.
Mr. Barton. Mr. Albright's gang is over here, and your gang
is over here. It causes me to look cross-eyed when I see the
audience reaction.
Ms. Stovall. The 20 applications filed in November 1997
were figures for hearing. They weren't necessarily claims. But,
nonetheless, we are trying to bring this issue to FERC's
attention.
Mr. Barton. So what was filed was we want to bring the
facts before the FERC and the FERC has not yet even said we
want to hear the facts.
Ms. Stovall. That is correct.
Mr. Barton. Do you agree with that?
Mr. Albright. I wouldn't agree with that.
Let's go a step further. What happened pursuant to the
September 10, 1997, order, which is the first order in which
FERC on remand directed that the pipelines seek these refunds
and that producers were obligated to pay the refunds, many
pleadings were filed in response to that, and that is what was
filed by the producers in the late part of 1997, and in fact it
was a petition for a hearing----
Mr. Barton. It was a petition for a hearing.
Mr. Albright. But to----
Mr. Barton. You admit that.
Mr. Albright. It was a petition for a hearing.
Mr. Barton. God bless you, Mr. Albright.
Mr. Albright. The process that has occurred is that each of
the pipelines have sent notices and filed refund reports or
reports of notice of refunds to FERC, and that process has
instituted a docket, a proceeding for each pipeline in which
the producers and the pipeline compare records, resolve the
disputes as to whether or not an NGPA violation occurred.
Because nobody is claiming that the producers owe any amount
that wasn't in excess of the NGPA maximum.
Mr. Barton. People are claiming the producers need to pay
the principal and the interest, and the interest appears to
continue to be accumulating, and it would appear to me that is
unfair.
Mr. Albright. Those producers who have those claims, many
of them have elected to deposit the amount of the refund
claimed by the pipeline.
Mr. Barton. Why wouldn't it be fair for your side to get
with the Attorney General of Kansas and the producer's side and
ask the FERC to go ahead and accept the facts that have been
filed and do that and expedite things?
Mr. Albright. We would love for FERC to get moving on this
case, Mr. Chairman.
Mr. Barton. You would encourage your people to send a
letter to the FERC to say, 1997 is 2 years ago, and the
millennium is upon us. Why don't we go ahead and bring these
current pending 20 petitions to a hearing? You are for that?
Mr. Albright. Yes.
Mr. Barton. Okay. Good. A straight answer, yes. Okay.
Well, I guess I could go on and on, but I am going to
conclude. We are going to work with the minority and interested
parties, including Congressman Moran. We are going to see if a
compromise bill can be crafted that all parties agree to. That
may not be possible, obviously, because there is a significant
amount of money in play here. But we won't be in session after
next weekend, but the staff will be working on this, and we
will see what, if anything, can be done legislatively sometime
in September.
And I would encourage all witnesses and interested parties
to take a serious look at the Moran bill, because I think the
Congressman has put a lot of effort into it, and I do believe
that it would help if we could move something that, at a
minimum, expedites FERC consideration of some of these issues.
So, with that, I want to thank both of you two witnesses
for being here again and appreciate you waiting so we could
come back and ask some other questions. But this hearing is
adjourned.
[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Mobil Exploration & Producing U.S. Inc.
August 17, 1999
The Honorable Joe Barton
Chairman, Energy and Power Subcommittee
Commerce Committee
2125 RHOB
Washington D.C. 20515
Re: H.R. 1117 Hearing on July 29,1999
Dear Mr. Chairman: Mobil appreciates the opportunity to supplement
the record of the hearing held by your Subcommittee on July 29, 1999.
We understand that there may have been some uncertainty concerning
Mobil's payment of refunds of the reimbursement of Kansas ad valorem
taxes.
In September 1997, the FERC ordered producers to make full refunds,
including interest, by March 10, 1998. As of the end of 1997, Mobil's
estimated refund liability was approximately $60,392,600. This total
included $22,664,500 in principal and approximately $37,728,100 of
interest that had accrued from 1983 through December 31, 1997. The FERC
had not authorized any arrangement for escrow or bonding instead of
payment to the pipelines. Interest was compounding at a rate of over
$13,000 per day and about $400,000 per month. Therefore, Mobil made
refunds of approximately $47,175,500 at the end of 1997. This payment
reduced the accrual of additional interest by about eighty percent.
Later, in late January, 1998, the FERC finally allowed producers to
escrow or post a bond for refunds and interest. Mobil set up an
interest-bearing account, and paid approximately $13,395,700 into
escrow on February 27, 1998. This amount included the portion not
refunded in December 1997 plus additional interest on that amount
through the end of February 1998.
I hope that this information is helpful and sufficient. As always,
Sara Glenn in our Washington office is available if you have further
questions on this or other matters before the Subcommittee. Again,
Mobil appreciates the interest of you and the members of the
Subcommittee in this problem.
Sincerely,
J. Michael Yeager
President
______
Shook, Hardy & Bacon L.L.P.
August 13, 1999
The Honorable Karen McCarthy
United States House of Representatives
Washington, D.C. 20515
Re: Kansas Ad Valorem Tax Refund Hearings on H.R. 1117
Dear Representative McCarthy: On behalf of Carla J. Stovall,
Attorney General for the State of Kansas, we are responding to your
recent inquiry regarding certain data referenced in the testimony
presented by Attorney General Stovall at the hearing held on June 8,
1999 concerning H.R. 1117.
We believe that the figures in which you expressed an interest--
i.e., the number of refund claims at various dollar levels--are
contained in the materials submitted to Chairman Barton on August 4,
1999 by the Kansas Independent Oil and Gas Association (``KIOGA'').
Accordingly, we would refer your attention to the KIOGA submission.
If you have any questions or we can be of further assistance,
please let us know.
Sincerely,
William F. Demarest, Jr., Elisabeth R. Myers-Kerbal
Counsel for the State of Kansas
cc: Cathy Van Way, Esq.
______
Federal Energy Regulatory Commission
Washington, D.C. 20426
June 30, 1999
The Honorable John Shimkus
U.S. House of Representatives
Washington, D.C. 20515
Dear Congressman Shimkus: During the June 8, 1999, hearing held by
the Subcommittee on Energy and Power of the House Commerce Committee on
the subject of the Kansas ad valorem tax refund issue, you requested
from me a written explanation of the Federal Energy Regulatory
Commission's refund procedures.
The enclosure describes the Commission's process for resolving any
disputes over the amount of refund obligations and the procedures for
the flowthrough of refunds by pipelines to their customers.
If you would like any further information, please do not hesitate
to contact me.
Sincerely,
Douglas W. Smith
General Counsel
Enclosure
cc: The Honorable Joe Barton
Chairman
Subcommittee on Energy and Power
Kansas Ad Valorem Refund Procedures
1. Statement of Refunds Due, Number and Procedures for Refunds by First
Sellers
In a Commission order issued on November 9, 1997, pipelines were
required to serve first sellers with a ``Statement of Refunds Due'' for
the period October 3, 1983 through June 28, 1988. The Statement was to
include the amount, including interest, that the pipeline believed the
first seller owed. These statements were to be sent by the pipelines
directly to first sellers four months before the refunds were due to
provide the parties with ample opportunity to resolve differences over
the refund amounts before the refunds were due.
In the November 9th order the Commission also required pipelines to
file refund reports with the Commission. These reports must list first
sellers that made refunds (with principal and interest shown
separately) and also list any first seller that the pipeline believed
still had a refund obligation.
Once the refund report was filed with the Commission, the
Commission staff sent letters to first sellers listed in the pipeline
refund reports with an outstanding refund obligation. The letter
indicated the pipeline believed that there was a refund obligation and
advised the first seller that it could request an adjustment to prevent
special hardship.
A first seller can ask the Commission for: (a) permission to
amortize the refunds over an extended period not to exceed five years;
(b) an adjustment to prevent special hardship; or (c) resolution of
disputes over its refund obligation.
Under any of these options, the Commission has a variety of
procedural options open to it. These range from, but are not limited
to, alternative dispute resolution, appointment of a settlement judge,
resolution of the matter on a paper record, or setting the matter for a
formal administrative hearing before an administrative law judge.
Generally, however, when a first seller requests the commission to
resolve disputes over refund obligations, the Commission's staff first
seeks data from both parties in an attempt to resolve the differences.
After the Commission's staff reviews the data, the Commission could
issue an order resolving the dispute, or could set the matter for a
formal hearing before an administrative law judge, or could choose
another procedural option, as set forth above.
In cases where a first seller requests: (a) permission to amortize
the refunds or (b) an adjustment to prevent special hardship, the
Commission staff reviews financial data supplied by the applicant. In
these cases, the Commission again has the full range of procedural
options available to it. Mindful of the substantial expense of
participating in a formal hearing, to date the Commission has acted on
requests for adjustments based on the record consisting of written
submissions and any further data provided to staff.
2. Procedures for the Flowthrough of Refunds by Pipelines
Interstate pipelines were required to pass through any ad valorem
tax refunds they received by making lump-sum cash payments to the
customers who were actually overcharged within 30 days after receipt of
refunds from the producers. If a pipeline does not make refunds within
this 30-day period, the interest provisions in section 154.67(c) will
be triggered and interest must be paid from the date the pipeline
receives the refunds from the producers until the date the pipeline
pays refunds to its customers.
The Commission required pipelines to file refund reports showing:
(a) the amounts received from producers (with principal and interest
shown separately); (b) first sellers that still owe refunds; and (c)
the basis it used to apportion the refunds among its customers.
The initial report was required to be filed by May 19, 1998, and
annually thereafter for the next five years. The pipelines must serve a
copy of its report on all of its customers; in addition, the Commission
notices the reports to allow any party to dispute the distribution of
refunds.