<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:57438.wais]
THE KANSAS AD VALOREM TAX REFUND
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JUNE 8, 1999
__________
Serial No. 106-38
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
57-438 CC WASHINGTON : 1999
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.............................................. 64
Khrehbiel, Robert E., Executive Vice President, Kansas
Independent Oil and Gas Association........................ 51
Lumpe, Hon. Sheila, Commissioner, Missouri Public Service
Commission................................................. 30
Majereni, John, Real Estate Department, Cornell University... 57
Moran, Hon. Jerry, a Representative in Congress from the
State of Kansas............................................ 6
Smith, Douglas W., General Counsel, Federal Energy Regulatory
Commission................................................. 19
Stovall, Hon. Carla J., Attorney General, State of Kansas.... 25
Material submitted for the record by:
Lumpe, Hon. Sheila, Commissioner, Missouri Public Service
Commission, letter dated July 1, 1999, enclosing response
for the record............................................. 135
(iii)
THE KANSAS AD VALOREM TAX REFUND
----------
TUESDAY, JUNE 8, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Largent, Rogan,
Shimkus, Wilson, Shadegg, Pickering, Fossella, Bryant, Hall,
and McCarthy.
Staff present: Cathy Van Way, majority counsel; Jeff
Krilla, professional staff member; and Sue Sheridan, minority
counsel.
Mr. Largent [presiding]. We will call the meeting to order.
The chairman, Mr. Barton, is on his way over, but we wanted
to get started in deference to everybody's schedule.
Today's hearing is on the Kansas ad valorem tax refund
issue, and we are going to allow our panelists to speak on
this. And I would like to defer to the ranking member, Mr.
Hall, for his opening statement.
Mr. Hall. Thank you, Mr. Chairman and members of the
committee.
The issues that are before us today only prove once again
the old adage, justice delayed is justice denied, is very true.
There aren't any good answers to this dilemma, and I think all
parties probably realize that.
I thank you for having this hearing. I have some
familiarity with the situation that exists here today.
The Hawkins oil field in east Texas is entirely within my
district. In the 1980's the royalty owners were asked to refund
hundreds of millions of dollars as a result of a determination
by the Federal Government that the operator had charged too
much for production in the Hawkins field during the time oil
was under price controls.
The result was an absolute financial catastrophe for a
number of royalty owners, people who had no knowledge of what
price was being charged and had no way to protect themselves
even if they did. The producer really had no choice but to
pursue collection of amounts they had paid to the royalty
owners because failure to do so would have left the company
vulnerable to stockholders' suits. It was just a sorry
situation all the way around.
The circumstances before us today are really very familiar.
My sense is that the real villain is here is FERC, who appears
to be the biggest contributor to the delay and has exacerbated
this situation, in my opinion. But there is enough blame to go
around.
So after we hear the testimony, I think this committee is
going to have some real decisions to make. What I hope
ultimately will result is some forbearance on the parts of all
parties. Yes, under the law these gas customers are entitled to
recover the amount that they were overcharged, plus interest;
however, those provisions were enacted to recover reasonable
interest amounts over reasonable periods of time, in a matter
of months, not 15 years or so.
The inequities to royalty and working interest owners that
results from letting the interest toll and for the delay in
informing these owners of the extent of their liability are
really enormous. So all parties, including the Congress, are
faced with trying to determine what is the best course of
action to take. Unfortunately, we can only select from a lousy
set of options.
I will listen very carefully to the testimony here today to
see what remedies may be available and what might be done to
prevent situations like this from arising to the future.
Mr. Chairman, I thank you. I yield back the balance of my
time.
Mr. Largent. Thank you, Mr. Hall.
At this time, the Chair recognizes the gentleman from
Tennessee for an opening statement.
Mr. Bryant. Thank you, Mr. Chairman. I do want to welcome
my colleague from the First District in Kansas and certainly
acknowledge his interest in this legislation and his what I
believe incredible amount of work on this. I look forward to
hearing not only his testimony, but the other panels that are
here today and yield back my time.
Mr. Largent. And the Chair recognizes the gentleman from
Illinois for an opening statement.
Mr. Shimkus. Thank you, Mr. Chairman.
I, too, want to welcome my colleague from Kansas who is a
strong advocate on this issue and has been working us over on
it early and often. So I am looking forward to learning about
it and following the procedures. Welcome, Jerry.
And I yield back my time.
Mr. Barton. Has the gentleman from Texas given his opening
statement?
Mr. Hall. I would like unanimous consent to insert the
Honorable John Dingell's statement into the record.
Mr. Barton. Without objection.
[The prepared statement of Hon. John D. Dingell follows:]
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.
Now, on March 18th of this year, Senator Roberts of Kansas
succeeded in attaching language to the Supplemental Appropriations bill
to 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 the IRS would never give you or me if we failed
to pay our taxes for five years or more. However, Senator Roberts
convinced his colleagues that this was a good idea and it passed the
Senate along with the rest of the Supplemental bill. Noting that the
House-passed bill contained no such provision, Chairman Bliley and I
both conveyed our opposition to the Roberts language to the
Appropriations Committee on the grounds that the provision was amending
the Natural Gas Policy Act, a statute primarily within the jurisdiction
of this Committee. Fortunately, the House position carried the day and
the Roberts language was dropped in conference.
But jurisdiction was not the only reason I objected to the Roberts
amendment. I also opposed this language because it clearly represented
a transfer of wealth from my state to gas producers in the State of
Kansas. I know my esteemed colleague from Kansas is concerned about
whether the refunded money would ultimately find its way into the
pockets of ratepayers, and let me assure him I share his concern. I
also share his concern for the small producers of natural gas, who may
indeed require some assistance.
Nonetheless, both issues are irrelevant to this debate. It is for
state public utility commissions to decide how much money goes to
companies and how much to ratepayers. And with regard to assisting
natural gas producers, I would point out that there are other ways to
help Kansas producers than by taking it directly from the pockets of my
constituents or those residing in Missouri, Illinois, Iowa, Ohio,
California or any of the other states owed refunds.
I would also posit that my good friend from Kansas may be pursuing
an avenue that may ultimately prove unconstitutional since his
legislation appears to have the effect of altering a final judgement by
the courts and, if enacted, could be considered a taking.
Frankly, I find it difficult to understand why we are having this
hearing today. The final disposition of refunds of the Kansas ad
valorem tax is an issue that is still pending before the courts. Why
should Congress legislate at this time? 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.
Furthermore, if the issue is small, hardship cases, then I fail to
understand these attempts to circumvent the FERC hardship process,
because so far the Commission has granted exemptions in 6 out of the 11
cases it has reviewed to date. It certainly makes me wonder whether
this process is truly driven by small producers, rather than large
producers who already know they have the ability to pay the refunds
with interest.
It's also unclear to me what action, if any, this Committee intends
to take on the Kansas ad valorem issue. I note that this is being
billed as an oversight hearing, yet the invitation letter to at least
one of our witnesses asks them to comment on Mr. Moran's bill.
What is also unclear to me is the position and the procedures of
the Federal Energy Regulatory Commission. I have a memorandum from
FERC, with Mr. Smith's name on it, that went to our friends on the
Appropriations Committee stating that Chairman Hoecker would not oppose
the language that was included in the Supplemental Appropriations bill.
Now the Roberts language amended the Natural Gas Policy Act which is
within our jurisdiction, yet no one from FERC saw fit to consult with
Chairman Bliley or me about our views on legislation affecting a law
within this Committee's jurisdiction. I am curious how this position
was arrived at and how FERC came to the decision to involve itself in
this matter. Was an open public meeting held to consider this issue?
Did the Commission vote on this matter, or was this memorandum only the
position of one commissioner? If it was only Chairman Hoecker's
position, what were the positions of the other Commissioners and are
they aware that he intervened in this matter both here and at the White
House? I would also like to understand why FERC took a position on an
issue that is still pending in the courts and why Mr. Smith's testimony
states that FERC has no position, when it's clear that the Chairman has
taken a position in favor of one side's view in this matter. These
questions must be answered because they raise serious concerns for me
at a time when we are being asked to grant them more power in the area
of electricity transmission.
Mr. Chairman, while I am certainly interested in hearing from our
witnesses, it seems clear to me that this is a topic that, at the very
least, is not yet ripe for legislative action. What may be ripe,
however, is an oversight hearing on FERC and its procedures and I hope
the Chairman will consider holding such a hearing before we take any
action that would have the effect of increasing FERC's power.
Mr. Barton. Does the gentleman wish to give an opening
statement?
Mr. Hall. I have given my statement, Mr. Chairman. It was
very unusual, I beat you here. First time in about five
meetings.
Mr. Barton. Not the first time and, hopefully, it won't be
the last.
Well, the Chair would recognize himself for an opening
statement.
We want to thank everyone for being here today, especially
Congressman Moran. We understand that he has worked on this
issue quite a bit.
Today's hearing is on the Kansas ad valorem tax refund
issue. It is an important issue, and it is also an issue that
is complex and has gone back and forth at the Federal Energy
Regulatory Commission. It is an issue that I am personally
deeply concerned about, and I have sent several letters to the
various committees and to the Senate on this issue.
This is an issue that comes from the days when natural gas
prices were regulated at the wellhead. It is an unfortunate
issue that arises at a time when independent oil and gas
producers in many parts of the country, including Kansas, are
struggling for survival.
I am not going to recite the long history of the issue. I
am sure the witnesses that we have before us today will do that
much better than I could. I am going to say, though, that I am
concerned that there are many small producers and royalty
owners located in Kansas and also around the country today that
they are facing a huge tax and penalty liability as a result of
years of legal wrangling and of which in some cases they are
just now becoming aware.
I believe that this is an issue of equity. I believe it is
an issue of fairness.
Should producers and royalty owners be required to pay 13
years' worth of interest on a tax that they didn't know that
they owed at the time that it was incurred?
Should they have known that it might be owed at some point
in the future?
Should pipelines and local distribution companies be
required to prove their claims for refunds before producers are
ordered to pay those claims?
Are natural gas consumers harmed if the interest payments
on the tax refund are waived?
I hope today's witnesses can shed light on all of these
questions and other questions that other members of the
subcommittee may have as the hearing progresses. If this
hearing reveals that congressional action on the issue is
warranted, I would be very interested to learn if the interests
believe that Congressman Moran's bill that is pending before
the Congress is the right approach to resolve the issue at this
point in time.
Again, I want to welcome everyone to today's hearing. I am
sure that it will be very informative.
Are there other members present that have not been given a
chance to give an opening statement?
Mr. Shimkus, do you wish to give an opening statement?
Mr. Shimkus. I have already given it.
Mr. Barton. Seeing no other members present, all members
shall have the requisite number of days to put their statement
in the record at the appropriate point in time.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Mr. Chairman, thank you for holding this hearing on the Kansas ad
valorem tax refund issue. I know natural gas producers and royalty
owners are anxious to see this issue resolved quickly. However, I
believe on complicated issues such as this one, holding a hearing and
developing a record for action is important.
Importantly, this issue arises from the days of natural gas price
controls and serves as a reminder as we work on electric utility
restructuring that free markets are preferable to government
intervention. It is unfortunate that many years after wellhead prices
of natural gas have been decontrolled, natural gas pipelines, producers
and customers are still embroiled in battles over these regulations. I
hope today's hearing can help us better understand this issue and
discover ways to avoid such controversies in the future.
I look forward to hearing the testimony of the witnesses. Thank
you.
______
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress
from the State of Missouri
Thank you Mr. Chairman. I would like to thank the Chairman for
holding this hearing on this issue which is so vitally important to
Missouri and I would like to commend the Chairman for extending an
invitation to my good friend and former colleague, Ms. Sheila Lumpe,
Chair of the Missouri Public Service Commission. I would also like to
recognize my friend and neighbor, Ms. Carla Stovall, Attorney General
for the State of Kansas.
We are here today to discuss the Kansas ad valorem tax and the
legislation that has been introduced on this bill by our colleague Rep.
Jerry Moran, H.R. 1117. Our task here today is to ensure that equitable
and just results are reached for all parties involved.
For over 15 years, the issue of whether and how much of a refund to
be paid natural gas consumers has been litigated before the D.C.
Circuit and before FERC. After years of litigation, the D.C. Circuit
Court of Appeals finally determined that natural gas producers in the
State of Kansas owed refunds on the amounts charged in excess of the
maximum lawful price dating back to 1983, when the challenge to the
Kansas ad valorem tax was first made and sellers were first put on
notice of the potential refund obligation.
In response to these determinations, legislation was introduced to
mandate that only the amount charged, and not the interest on these
amounts be paid by the producers. H.R. 1117 and advocates of this
legislation argue that the measure presents an equitable solution to
the decision reached by FERC and the D.C. Court of Appeals, which they
say will unreasonably burden small businesses and hurt the economy.
Arguably, the final determination which has been reached as a
result of this litigation is equitable and just. Interest on the
amounts paid is the only way to ensure that those so charged receive
the full time value of their money. Since 1989, the Missouri Public
Service Commission has been actively seeking recovery of the Kansas ad
valorem refunds which are due to consumers in over 20 states, including
Missouri. It is estimated that Missouri consumers are owed upwards of
$60 million. Even with the notice as early as 1983 that they might be
responsible for refunding monies, consumers in states, such as
Missouri, have been paying rates above the maximum lawful amount.
It would be unwise for this body to reverse the lengthy due process
delivered within the judicial and administrative branches of our
government and essentially legislate the taking of property, that is
the taking of the refund and interest owed consumers in this country,
including those in the State of Missouri.
I look forward to hearing the testimony today on H.R. 1117 and the
Kansas ad valorem tax, and yield back the balance of my time.
Mr. Barton. The Chair would call the first witness to
today's hearing, the Honorable Jerry Moran from the great State
of Kansas.
Mr. Moran, welcome to the committee. Senator Roberts sends
his greetings. He called me earlier this morning to say that he
couldn't be here, but he knew that you would do an outstanding
job on the issue and that we would fairly inform the committee
of the pros and cons of the issue. We will put your entire
statement in the record, and we would recognize you for such
time as you may consume. Hopefully, that will be less than 7 or
8 minutes.
STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF KANSAS
Mr. Moran. Mr. Chairman, thank you for your admonition on
time.
I appreciate Mr. Robert's kind remarks. I wish he would say
them more often in Kansas as well.
It is a delight to be here on this issue. I wish the issue
didn't exist, and I was somewhat disconcerted to hear Mr. Hall
say all solutions are not very good, but I come with the
suggestion of at least one.
Imagine receiving a notice from the IRS saying that, while
you had paid your taxes in full 15 years ago, the IRS has
changed its mind on how you figured your taxes and could you
please pay an additional $5,000 and, oh, by the way, $10,000 in
penalty and interest. We would not tolerate this type of
retroactive taxpayer abuse by the Internal Revenue Service.
However, this is essentially what another government agency has
done to Kansas natural gas producers and royalty owners.
I do appreciate the opportunity to be here and discuss an
injustice that is being perpetrated on many of my constituents.
At issue is whether Kansas natural gas producers could pass
through to their customers the Kansas ad valorem tax. In the
regulated energy marketplace in the 1980's these decisions and
the resulting price charged for natural gas were made by the
Federal Power Commission, the predecessor to the Federal Energy
Regulatory Commission.
FPC and later FERC consistently ruled that Kansas ad
valorem taxes could be included in the price of gas paid to
these companies, to the producers, by their pipeline customers.
It was not until 1993 that FERC reversed its previous rulings.
FERC's reversal and subsequent court case provided the charges
for ad valorem taxes should not have been passed through from
1983 to 1988 and must now be refunded. In addition, interest
penalties were assessed that now more than double the amount of
tax in question.
Let me make several points as we review this issue.
First, my constituents and all royalty owners and producers
followed all applicable laws, rules and regulations. The
Federal agency responsible for regulating these matters
explicitly gave its blessing to the pass through of these
taxes. Many gas contracts were written with specific reference
to FERC's ruling on the matter. It was not a gray area, it was
not subject to interpretation, and none of these individuals
could, should or would have been expected to have handled it
any differently.
There are those who would claim that producers and royalty
owners somehow should have known that FERC would change its
ruling. This is simply not the case. FERC ruled on this issue
three separate times in 1983, 1986 and 1987. Each time, FERC
ruled that the taxes were correctly applied.
I don't know how many times we need to hear from a Federal
agency to believe it, but I suspect that after three rulings
since the issue was questioned and two rulings prior to 1983
that producers rightfully believed they were following the law.
After five separate successful rulings on my own tax return
from 15 years ago, I might even be willing to throw the tax
return away and sleep well at night.
Second, a 15 year reach-back is outrageous. We have all
heard of cases of unfair, arbitrary, irrational, convoluted
decisions by Federal Government agencies, but this one takes
the cake. To reverse a decision and then even go back over 15
years and force the payment of refunds with interest isn't only
unfair, it is unconscionable. Why is there no statute of
limitations? What about ex post facto? This country was born
out of protest against this type of improper governmental
conduct, and we should not stand for it in this case.
Third, the decision is devastating to producers and offers
little for consumers. For royalty owners and small businesses
this decision could not have come at a worse time. We read of
the consolidation of the major oil and gas companies due to
difficult times, but we do not as easily see the hundreds of
small businesses that have closed their doors, laid off
employees, gone bankrupt. In Kansas alone, the oil and gas
industry has laid off 5,000 employees in the last year.
The burden on small businesses as a result of this
situation is enormous. For example, Mid Continent Energy, a
small Kansas company with two employees, owes $244,000. Several
of my elderly constituents have written and described bills
they have received well over the value of their annual payments
they receive from Social Security.
A typical example is Mrs. Betty Shingler of Wichita,
Kansas. She along with her husband were the owners of a company
called Aurora, Inc. Early in the 1980's, Mr. and Mrs. Shingler,
with outside investors, owned six gas wells. Today, Mrs.
Shingler, who lost her husband 3 years ago, now faces a $19,000
bill.
FERC's decision not only affects the companies that explore
for and produce natural gas, their far-reaching decision has a
terrible impact on royalty owners. Royalty owners are those who
own the land under which the natural gas is located, often the
farmers and ranchers of southwest Kansas.
Today you will hear examples from property owners who have
been unknowingly attacked by this situation. You will also hear
about consumers and how they are owed this refund. This issue
deserves your review.
Of the eight pipeline companies involved in obtaining the
refund and interest, two have already filed with FERC to keep
the refund and not pass it on to consumers. My counterparts in
the Senate, Senator Roberts and Senator Brownback, have called
for a GAO investigation on the distribution of refunds; and I
fully support that request. One would like to think that each
dollar collected would be returned to the original customer.
However, after 15 years, many people have moved, retired or
passed away. What happens to the money when customers can't be
located? Could this be why pipelines fight this issue so
aggressively?
Although the damage is huge, the benefits are small. For
the average household consumer, this refund is minimal and will
likely be prorated. For example, in Kansas a typical house
receiving gas from the Greeley Gas Company using 100 mcf per
year will receive an estimated $6 refund. Among the estimates I
have seen, a typical household across the country would receive
around $15 or just about a little over a dollar a month for 12
months.
Keep in mind that Kansans, as well as producing the gas,
are also the largest recipients of the refunds. Representing
the largest positions on both side of this issue, I introduced
what I consider compromise legislation that has been referred
to this subcommittee, H.R. 1117. This legislation attempts to
strike at the basic requirement of fairness. Under the bill,
the amount of disputed tax would be collected, but an interest
penalty would not be assessed and the refunds required would be
required only to the extent that they will be received by the
ultimate consumer.
While I contend that the pass through of a tax, after being
approved by FERC five times, should be allowed to stand and no
refunds ordered, I introduced this bill as a compromise to try
and protect the hundreds of individuals who had always acted in
accordance with the law.
Again, I thank this committee for their time and attention.
I would be a happy to answer any questions.
And I also welcome my Kansas colleagues, including the
Attorney General of the State of Kansas, Carla Stovall.
Mr. Barton. Does that conclude your statement?
Mr. Moran. It does, 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
Imagine receiving a notice from the IRS saying that, while you had
paid your taxes in full fifteen years ago, the IRS has changed its mind
about how you figured your taxes and could you please pay an additional
$5000 and another $10,000 in penalty and interest. We would not
tolerate this type of retroactive taxpayer abuse by the IRS. However,
this is essentially what another government agency has done to Kansas
natural gas producers and royalty owners.
I appreciate having the opportunity to be here to discuss an
injustice that is being perpetrated on many of my constituents. At
issue here is whether Kansas natural gas producers could pass through
to their customers the Kansas ad valorem tax. In the regulated energy
marketplace in the 1980's these decisions and the resulting prices
charged for natural gas, were made by the Federal Power Commission
(FPC), the predecessor to the Federal Energy Regulatory Commission
(FERC).
In several rulings on this issue, FPC and later FERC, consistently
ruled that the Kansas ad valorem tax could be included in the price of
gas paid to these companies by their pipeline customers. It wasn't
until 1993 that FERC reversed its previous rulings. FERC's reversal and
subsequent court case provide that charges for ad valorem taxes should
not have been passed through from 1983 to 1988 and must now be
refunded. In addition, interest penalties were assessed and now more
that double the actual amount of tax in question.
I would like to make several points as we review the issue today:
First, my constituents, and all royalty owners and producers,
followed all applicable laws, rules and regulations. The federal agency
responsible for regulating these matters explicitly gave its blessing
to the passthrough of taxes. Many gas contracts were written with
specific reference to FERC's rulings on the matter. This was not a gray
area, was not subject to interpretation and none of these individuals
could, should or would have been expected to have handled it any
differently.
There are those who would claim that producers and royalty owners
somehow should have known that FERC would change its ruling. That is
simply not the case. FERC ruled on the issue three separate times in
1983, 1986, and 1987. Each time, FERC ruled that the taxes where
correctly applied. I don't know how many times we need to hear from a
Federal agency to believe it, but I suspect that after three rulings
since the issue was questioned and the two rulings prior to 1983 that
producers rightly believed they were following the law. After five
separate successful rulings on my taxes from 15 years ago, I might even
throw away my returns and sleep well at night.
Second, a fifteen year reach-back is outrageous. We have all heard
of cases of unfair, arbitrary, abusive, irrational or convoluted
actions by federal government agencies, but this one takes the cake. To
reverse a decision and then go back over 15 years and force the payment
of refunds, with interest, isn't just unfair, it's unconscionable. Why
is there no statute of limitations? What about ex post facto? This
country was born out of protest against this type of improper
governmental conduct. We should not stand for it in this case.
Third, the tax is devastating for producers and offers little for
customers. For royalty owners and small businesses this tax could not
have come at a more difficult time. We read of the consolidation of the
major oil and gas companies due to the difficult times, but we do not
so easily see the hundreds of small businesses that have gone bankrupt,
gone through layoffs, or otherwise been forced to close their doors. In
Kansas alone, the oil and gas industry lost some 5,000 jobs in the last
year.
The burden on small businesses as a result of this situation is
enormous. For example, Mid Continent Energy, a small Kansas company
with two employees owes $244,000. Several elderly constituents describe
bills well over the value of their annual payments they now receive
from Social Security. A typical example is Mrs. Betty Shingler, of
Wichita, Kansas. She, along with her husband, were the owners of a
company called Aurora, Inc. In the early 1980's, Mr. and Mrs. Shingler,
with outside investors, had 6 gas wells. Today, Mrs. Shingler who lost
her husband three years ago, now faces a $19,000 bill.
FERC's decision not only effects the companies that explore for and
produce natural gas, their far reaching decision has a terrible impact
on royalty owners. Royalty owners are those who own the land under
which the natural gas is located--often the farmers and ranchers of
Southwest Kansas. Today you will hear examples from property owners who
have been unknowingly attacked by this situation.
You will also hear about consumers and how they are owed this
refund. This issue deserves your review. Of the eight pipeline
companies involved in obtaining the refund and interest, two have
already filed to keep the refund and not pass it on to consumers. My
counterparts in the Senate, Senators Roberts and Brownback, have called
for a General Accounting Office investigation on the distribution of
the refunds and I fully support that request. One would like to think
that each dollar collected would be refunded to the original customer;
however, after fifteen years, many people have moved, retired or passed
away. What happens to the money when the customer can't be located?
Could this be why the pipelines are fighting so aggressively?
Although the damage is huge, the benefits are small. For the
average household consumer, this refund is minimal and will likely be
prorated. For example, in Kansas a typical house receiving gas from the
Greeley Gas Company using 100 mcf per year will get an estimated $6
refund. Among the estimates I have seen, a typical household will
receive around $15, or just over a dollar a month for one year.
Keep in mind, that Kansans, as well as producing the gas, are also
the largest recipients of the refunds. Representing the largest
positions on both sides in this issue, I introduced the compromise
legislation that has been referred to this subcommittee, H.R. 1117.
This legislation attempts to strike at the basic requirement of
fairness. Under the bill, the amount of disputed tax would be
collected, but an interest penalty would not be assessed and the
refunds required only to the extent they will be received by the
ultimate consumer.
While I contend that the pass through of the tax, after being
approved by FERC five times, should be allowed to stand and no refund
ordered, I introduced this bill as a compromise to try and protect the
hundreds of individuals who had always acted in accordance with the
law.
Again, I thank the committee for their time and attention and would
be happy to answer any questions.
Attached is just one example for the committee's review. In this
situation, the accused company was not even involved in the gas
business during the time in question.
______
Argent Energy, Inc.
May 11, 1999
Congressman Jerry Moran
1519 Longworth
Washington, D.C. 20515
Re: Refunds of Kansas ad valorem tax reimbursements (Federal Energy
Regulatory Commission Docket Nos. RP97-369-000, et al.)
Dear Congressman Moran, Argent Energy, Inc. is a small independent
Kansas oil and gas producer/operator. I formed Argent Energy November
1, 1989, three years after the 1986 oil price collapse. At its
inception, the company had no producing properties, only some cash the
stockholders had contributed to get it started. Argent has survived and
grown both by successful exploratory drilling and by acquiring
producing properties. Additionally, it operates producing properties
owned by others, and receives compensation for these services. It has
three employees.
Early in 1993, Argent purchased working interests in 27 wells from
Kiwanda Energy, Inc. for $195,000. Ten of these wells were oil wells,
two were saltwater disposal wells, and fifteen were gas wells. Prior to
purchase, Argent had no connection whatsoever with any of those wells.
The sales were an arms length, contractual transaction wherein Kiwanda
agreed to indemnify and hold Argent harmless from all claim,
liabilities, penalties, and losses arising out of any obligations
incurred by Kiwanda concerning these properties (except as specifically
assumed by Argent). Further, Kiwanda warranted that these properties
were unencumbered and were free and clear of adverse claims.
A few weeks after the purchase of these properties, Argent
terminated the gas sales contract Kiwanda had in place with Northern
Natural (now Enron). Under that termination agreement Northern
discharged Argent (and its officer, directors, agents, and employees)
from ``any and all liabilities, claims and causes of action, whether
known and asserted or hereafter discovered, arising out of or relating
to said contracts . . .'' Argent then entered into its own sales
contract with Northern.
By letters dated October 5, 1998, and October 12, 1999, FERC
directed Kiwanda and its predecessor, Exploration and Production, Inc.
to make payments for stated amounts due for reimbursement of Kansas ad
valorem taxes paid them during the period 1983 to 1988. Since both
Kiwanda and its predecessor were now out of business, the letters were
sent to those two entities at Argent's mailing address. By letter dated
November 2, 1998, Argent informed the Commission that it was not
affiliated with and was not a mail drop for either Kiwanda or its
predecessor. Further, Argent did not at that time own an interest in
these properties, and indeed was not even in existence during the time
of the alleged reimbursements, thus could not have received any such
reimbursements.
In spite of this reply, Argent received a letter from the FERC
dated March 26, 1999, in which the Commission appears to have
determined that Argent is indeed liable for these reimbursements as a
successor to Kiwanda and its predecessor. The total of these alleged
reimbursements plus interest is $855,147.60. I'm not sure but that we
would have been better off had we thrown the first letters in the trash
unopened. Argent has been forced to retain legal counsel to defend
itself from being held responsible for an amount more than six times
what it paid for these properties in 1993.
I still don't understand how a 1974 FPC ruling which allowed pass-
through of Kansas ad valorem taxes (which was consistently upheld),
could be reversed retroactively for fourteen years, have fourteen years
of interest applied, then be assessed on natural gas producers who had
complied with the law in effect at the time of these reimbursements. I
just cannot comprehend such an action occurring in this country--and I
cannot believe that a regulatory body constituted in this country could
hold Argent Energy, Inc. liable for repayment of reimbursements which
it did not receive, on properties it did not own, during a time period
before it existed, and having no possibility of recoupment from the now
non-existent seller.
Congressman Moran, I join many Kansas gas producers in expressing
my appreciation to you for your understanding and help. Your authoring
of proposed legislation to remove the interest imposed on the repayment
demanded on these reimbursements is indeed meaningful, both to Kansas
royalty owners and to the produces. In the case of Argent Energy,
however, the entire liability is inequitable. We have filed, through
our attorneys, a reply to the FERC letter of March 26, 1999. I would
hope that you will be able to monitor Argent's efforts to remove this
liability. The filing is under Docket No. SA99-5-000. If there are
further steps I should be taking, please let me know, and if I can
furnish you with further documentation, I'll be happy to. Thank you for
your consideration.
Sincerely,
James C. Remsberg
President
Mr. Barton. The Chair would recognize himself for the first
5 minutes of questions.
Is there any estimate on the number of original consumers
that are still in the area that can be found in order to give
the direct refunds to?
Mr. Moran. I have not seen any kind of specific numbers. I
think there is a general agreement that there is a very
difficult circumstance that--locating potential consumers out
there; and the ones that were ultimately entitled perhaps to
the refund, as I said in my testimony, may not be living and
addresses cannot be found.
Mr. Barton. Well, assuming that you can locate some of the
original payers of the tax, consumers that consumed the gas,
but let's just for estimation purposes say that only about 50
percent of the original consumers can be located and
identified, so that there is 50 percent of the remainder that
cannot be and that 50 percent of the funds and 50 percent of
the interest and 50 percent of the penalty is just sitting out
there in a pot, is there a consensus on what is done with that
money?
Mr. Moran. I would guess there is great disagreement as to
what should be done with that money. That is an issue between
the royalty owners, the natural gas producers, the working
interest, and the pipelines; and that is an issue that I think
is awfully important.
Mr. Barton. There is no defined protocol. There is not an
automatic lump sum payment to the State of Kansas or lump sum
payment to some charity in Kansas City or----
Mr. Moran. Mr. Chairman, there is not.
Mr. Barton. [continuing] or congressional campaign
committee account.
Mr. Moran. Certainly that is one I would be aware of, and I
am not.
Mr. Barton. Okay. In Kansas and in the general public, is
this an issue that is talked about? Is this a front page story
or is this pretty much an inside Washington and royalty owner
producer pipeline story?
Mr. Moran. No, I wish it was much more of a story than it
has been. It is a significant issue in Kansas. It has been an
issue of the Kansas legislature. Our Governor, Governor Graves,
has come to Washington to meet with FERC, has written the
President. This has a major impact upon Kansas.
The Governor, one of his concerns is the resulting demise
of the oil and gas industry as a result of the refunds, the
penalty and interest at a time when there is no way that they
can absorb those costs, results in less exploration, less
drilling, and businesses going out of business.
The State of Kansas is concerned about their financial
security as far as a State. The revenue estimates in Kansas are
impacted as a result of this issue being forced upon our
working interest and royalty owners.
Mr. Barton. What is the status right now? I know Senator
Roberts had an amendment in one of the supplemental
appropriation bills that came over from the Senate. What is the
current status of this in terms of a resolution of the issue in
the Congress?
Mr. Moran. I know of nothing close to a resolution of this
issue in Congress.
There was an effort made to prohibit the collection of the
penalty interest in the appropriation process in the emergency
supplemental which was not included in the conference report.
And to my knowledge, you, Mr. Chairman, and Mr. Hall, your
subcommittee is the first to take a serious look at a serious
issue.
Mr. Barton. So have you gotten any input or feedback from
either the Republican or Democrat leadership in the House on
your bill that they support it, oppose it, neutral, haven't had
a chance to look at it?
Mr. Moran. I certainly would not admit nor would it be true
that I haven't had the chance to talk about it. I have talked
to the leadership, members of this committee, members of the
full committee as well as Republican leadership of the House
stressing the importance of this issue to many producers and to
many royalty owners.
I think it is a very difficult issue for anyone to
understand. If you are not knowledgeable in what a royalty
interest is and what FERC does in the regulated nature of the
gas industry in the 1980's or many struggle to know what an ad
valorem tax is. It is a very difficult issue for me as a Member
of Congress to describe to my colleagues and get sympathy.
I think the broad picture of how can any Federal agency do
this to any taxpayers, to any business, through changing its
mind 15 years after the fact, I think that is a bigger issue
and easier one for me to talk about.
Mr. Barton. My time is about to expire. But if I were to
say this is an example of a tax that was assessed, when it was
incurred it was passed through, it was paid, legally, and then
a Federal agency changed its mind after the fact, how far off
would I be from the truth?
Mr. Moran. I think you accurately describe the truth.
Mr. Barton. So that is not that complex an issue.
Mr. Moran. If I could talk about it in a broad sense of how
this could happen in any business, any Member of Congress, it
is an easier issue to talk about.
Mr. Barton. Okay. My time has expired.
The Chair recognizes the gentleman from Texas, Mr. Hall,
for 5 minutes.
Mr. Hall. I didn't mean to be discouraging to you in my
opening statement. But I sat where you sat back in the early
1980's when Hawkins Field and Exxon had their collision and I
saw the situation there where a lot of little royalty owners
were absolutely wiped out. And I don't know if that is going to
be the situation in Kansas or not, but it appears if they
follow the cases that were tried in the Hawkins Field case then
you are going to have a lot of bankruptcy lawyers get rich in
Kansas. Because they absolutely came back on them years later
when they couldn't tell them anything they had done wrong and
they couldn't tell them how they could have corrected it if
they had known what they had done wrong.
And yet Exxon has shareholders. They were subject to
shareholder suits and litigated. They didn't litigate it in the
Hawkins Texas County courts, you know. They went to the Federal
courts. And Federal courts, somehow some--impressed by the way
the local people felt, and the royalty owners wound up, many of
them, with bills of $100,000, $150,000 years and years and
years later to pay, not understanding why they had to pay and
where they were going to get it.
And there was--over a period of about 2 or 3 years there I
think that the companies did their best to settle as many of
them as they could. But it was a disaster and still, in my
district, suffering; and, of course, there is nothing good has
happened to the oil and gas people in the last 10 years.
It is a terrible time for you to be sitting where you are,
doing what you are doing. And I admire you for doing it, but I
must warn you that if you haven't read that series of cases--
and I am sure you have and followed the Hawkins Field--I
suggest you do so. Because we were sitting there, we didn't
hate Exxon for what they did, because they probably had to do
what they did to stave off their own shareholders.
I thought FERC was the enemy there and their delay and
dilatory tactics. It just seemed that they were no help,
really, to the royalty owners in the final analysis.
So what does your bill do? I haven't had a chance to read
it.
Mr. Moran. Mr. Hall, I appreciate having you on this
committee with your knowledge of what happened in Texas and
your understanding of the oil and gas industry.
Mr. Hall. Well, my knowledge and experience is bad, though,
from where you sit.
Mr. Moran. Appreciate your sympathy. And the Hugoton field,
from which this gas is produced, is a Kansas, Oklahoma and
Texas field. The reason this is a Kansas issue is because of
the way they were treating Kansas ad valorems.
This bill does two things, Mr. Hall. It eliminates the
interest that goes back to 1983, leaving the principal amount
of the refund in place; and it also says that no amount should
be collected that can't ultimately be received by the original
consumer.
Mr. Hall. And would you say that knocks out the interest
provision?
Mr. Moran. That knocks out the interest provision.
Mr. Hall. Does your bill toll the interest or how does your
bill handle it?
Mr. Moran. The bill, Mr. Hall, is very straightforward.
Basically says that no interest should be collected on this
amount, the principal amount of the tax.
Mr. Hall. Think that will navigate the big court?
Mr. Moran. One step at a time, Mr. Hall----
Mr. Hall. You have nothing to lose.
Mr. Moran. [continuing] from my perspective.
Kansas has also attempted to address this issue in passing
a statute of limitations to try to toll the collection for
royalty owners.
Mr. Hall. Well, ours wound up in just absolute disaster for
a lot of royalty owners; and a lot of people, like your folks,
had no knowledge of what price was being charged and had no way
to protect themselves even if they did and still--yet they
didn't prevail at the courthouse. It was a pretty sad
situation.
I yield back my time. I may think of something that will
help you before we leave. But I will listen to the rest of the
testimony.
Mr. Moran. Thank you, Mr. Hall.
Mr. Barton. I see Mr. Largent is not here.
The gentleman from Mr. Tennessee, Mr. Bryant, is recognized
for 5 minutes.
Mr. Bryant. Thank you, Mr. Chairman.
I agree with my colleague from Kansas that it is a very
interesting issue and certainly one that you have a personal
stake in in terms of your constituency. Do I understand that
your bill would weigh the interest as well as the penalty in
any such payments?
Mr. Moran. That is correct. And, generally, the penalty and
interest have been words that have been interchangeable as the
parties have talked about this issue. It is basically interest
that dates back to 1983. There is no additional penalty.
Mr. Bryant. And interest would be calculated as straight
percentage times whatever is owed per year?
Mr. Moran. I am unable to determine exactly what interest
rate is being charged, and I have been told anyplace from 6.5
to 12.5 percent. That would be an opportunity to find out some
facts today perhaps from the testimony from FERC.
Mr. Bryant. Now, in reading some of the other comments in
advance, I understand that the other side of this position says
that, well, these folks were on notice, it was being
challenged, and therefore they should have taken that into
consideration. And you said today that you had a number of
successful rulings and, therefore, they should have felt
comfortable knowing that they were acting correctly.
I share your concern, particularly with the smaller
companies. To some extent, I guess, I really don't know enough
about this issue to come down finally on one side on the other.
But I understand something like 15 percent of the money
involved here would have to come from small businesses and
small producers.
Mr. Moran. That is correct, Mr. Bryant.
Mr. Bryant. Eighty-five percent would be from larger
sources. How are smaller companies, the producers and the
royalty owners, finding out about this liability?
Mr. Moran. Well, that is a real problem, particularly for
royalty owners. Many of them just received letters from the gas
producers saying you owe X number of dollars and you have 10
days to pay that amount of money. The royalty owners are not
parties to the litigation, are not in front of FERC. And we
will have testimony today from the Southwest Kansas Royalty
Owners Association in which you might--I know their testimony
will describe this further.
But it is really like a shot in the dark. People who have
no idea, had nothing to do with whether or not the tax was
passed through by the gas company that is producing gas on
their land, received a letter from the gas company saying we
got to pay, you got to pay, we need money, and we need it
quickly.
Mr. Bryant. There is provision for some sort of waiver of
this already for a hardship type situation. Does that require
an application? How much of a cost from a legal standpoint
would a small producer or a small royalty owner have to incur
to successfully--or to apply for an application for hardship?
Mr. Moran. FERC did provide for a hardship waiver, and
there have been a number of applications for that waiver of
which only a few have received favorable attention. And there
are examples that will be given today of ones that most of us
would think clearly a hardship exists. They have been opposed
by other--the parties to the other side. I think every hardship
waiver has been opposed.
And so it is a time-consuming, expensive process and one,
again, that, particularly when it comes to royalty owners but
also the small business natural gas companies, the producers,
the working interest, they are not involved in the FERC
proceedings and therefore don't know why they are the ones who
have to come forward to present a case for a hardship in a very
time-consuming and expensive way. This has been an ongoing,
expensive legal battle for those that can afford lawyers.
Mr. Bryant. I thank you, and I will yield back my time.
Mr. Hall. Mr. Chairman, can I correct one thing I said? I
think I referred to FERC instead of the Department of Energy in
the Hawkins case. You are dealing with FERC. FERC was the one
that piddled around and didn't do anything about it for so
long. But they are both north of the line, so it didn't make
any difference.
Mr. Moran. I am not sure where Kansas is, Mr. Hall.
Mr. Barton. We will have to double check the meaning of
``piddle'' but it doesn't sound like it is positive.
Does the gentlelady from Missouri wish to ask questions of
the first witness?
Ms. McCarthy. I will forego that as I have an opportunity
twice each week as we commute back and forth together to pop
those questions, and I will.
Mr. Barton. The gentleman from Illinois, Mr. Shimkus, is
recognized for 5 minutes.
Mr. Shimkus. Thank you, Mr. Chairman.
I am very interested in how our Federal agencies approach
our citizens who should be clients. And we have all heard the
IRS, and we have all heard the EPA, and now it looks like some
of the concerns of how FERC is dealing with small business
individuals.
But I do have a question, Jerry, on--in the committee memo
it says, the FERC initially found that the tax was indeed a
severance tax after appeal. This is in 1983. The FERC initially
found that the tax was a severance tax. But, after appeal, the
D.C. Circuit Court remanded the decision to the FERC which then
determined that the tax was a property tax. And the D.C.
Circuit Court's opinion was in 1988. Would that then have sent
signal flags up that maybe there was a problem with the tax?
Mr. Moran. The issue of whether or not the tax is a
property tax or a severance tax is the key legal question
before FERC in determining whether or not the tax can be passed
through. If it is a production tax, it can be passed through
according to FERC rulings and regulations in place at the time.
If it was a property tax, it is to be borne by the producer. So
that has been the legal issue for which FERC ruled twice before
1988.
Then this issue was raised by the pipelines. FERC again
ruled that it was a severance tax based upon production. The
appeal went to the court that remanded it back.
And so two times before 1988 and three times subsequent
this issue was determined by FERC. Ultimately, the reversal
occurred in 1993. But even any kind of suggestion of notice we
go back to 1983 in collecting the refund as well as the
interest.
Mr. Shimkus. Right. Okay.
I yield back. That is the only question I had, Mr.
Chairman.
Mr. Barton. Thank you.
We have a pending journal vote. I would like to finish with
Congressman Moran, if possible, before we recess to go vote.
We have Mr. Shadegg, Mrs. Wilson, and Mr. Rogan. In order
of appearance, Mr. Shadegg would be recognized. If you could
make your questions very brief so we can give Mrs. Wilson and
Mr. Rogan a chance, too.
Mr. Shadegg. I would happy to make my comments or my
questions brief.
Congressman Moran, I wanted to give you an opportunity to
respond to what I understand to be FERC's position regarding
H.R. 1117 and let you have a chance to put on the record kind
of your responses to the arguments that they make.
They argue, for example, that because the relief in H.R.
1117 is across the board relief, some who are not adversely
affected could benefit from the relief granted in the
legislation. I would like to give you a chance to respond to
that.
Mr. Moran. I am not certain who FERC would describe as
those not adversely affected by this decision. There are those
that have more financial ability to stand--withstand this
assault. But all of them, large and small, wealthy and poor,
have faced the circumstances of relying upon FERC decisions, a
line of decisions over a long period of time. So I think that
the argument that there are those that are not adversely
affected, that premise makes it very difficult to respond to
their suggestions.
Mr. Shadegg. Second question I have, and it will be the
last one, what about refunds that have already been made?
Mr. Moran. There are--my understanding--and this is
probably, Mr. Shadegg, a better question for other witnesses,
but it is my understanding there has been some money paid into
escrow, that some gas companies have paid. But this is still
continuing to be a battle in front of the agency.
Mr. Shadegg. Thank you. I yield back.
Mr. Barton. Thank you. Thank you for being expeditious.
The gentlelady from New Mexico is recognized for, let's
say, 2 minutes.
Mrs. Wilson. Mr. Chairman, I will yield my time. I have had
at least one conversation with Mr. Moran, and I will clear up
my questions I have privately.
Mr. Barton. We thank the gentlelady.
And the gentleman from California is recognized for about 2
minutes.
Mr. Rogan. Thank you.
I want to thank our colleague for joining us today. I am
glad to have you here sharing this with us instead of just
pestering me on the floor of the House as you have been doing
on a regular basis.
Mr. Chairman, I have become intimately familiar with both
the gentleman from Kansas' position and, more importantly, his
constituents' position, because he has not allowed me a moment
of peace since this issue erupted. I want to thank you for your
leadership on this, Congressman Moran.
Mr. Chairman, I yield back.
Mr. Barton. We have been piddling around, and now you have
been pestering, and now we are trying to find peace. So maybe
we can find some progress on this issue.
We are going to recess very briefly to go vote on the
journal. I would encourage all our members to come back because
we have six witnesses on the next panel, and both sides of the
issue will be presented. We have a very balanced panel.
We want to thank you, Congressman Moran; and we will give
you a chance to have the last word before we recess.
Mr. Moran. Mr. Chairman, I would like to add for the record
additional testimony and comments by constituents, including
some letters I received.
I also appreciate your seriousness in addressing this
issue. It is clear to me this is not just a hand-holding
hearing, and I look forward to----
Mr. Barton. We are serious about moving your bill or a
version of your bill, based on what the next panel says; and
Chairman Bliley is fully cognizant and very willing to address
the issue seriously also.
We are going to recess until approximately 11 a.m. So I
would encourage all members to come back very quickly.
[Brief recess.]
Mr. Barton. The subcommittee will come to order.
Congressman Hall beat me into the room again, but he didn't
beat me up to the podium.
We would like to welcome our second panel:
Mr. Doug Smith, who is the General Counsel for the Federal
Energy Regulatory Commission.
Is Mr. Smith here in the room? Okay.
The Honorable Carla Stovall, the Attorney General for the
great State of Kansas.
Is she in the room?
The Honorable Sheila Lumpe----
Ms. Lumpe. Lumpe.
Mr. Barton. [continuing] from the Missouri Public Service
Commission.
Is she in the room? Okay. If you will come forward please,
ma'am.
Mr. Robert Krehbiel, the Executive Vice President for the
Kansas Independent Oil and Gas Association.
Mr. John Majereni, the Real Estate Department of Cornell
University.
Is he here? Okay.
How close was I on your name?
Mr. Majeroni. Just like macaroni with a J.
Mr. Barton. Majereni, okay.
Mr. James Albright, the Associate General Counsel for New
Century Energy Incorporated.
Okay. We want to welcome you.
We are going to yield to the gentlelady from Missouri to
give special recognition to two of the witnesses.
Ms. McCarthy. Thank you, Mr. Chairman, and thank you for
holding this important hearing.
I want to welcome a neighbor, Attorney General Stovall; and
I am so glad that you are here.
I also want to welcome Sheila Lumpe who I served with, Mr.
Chairman, in the Missouri legislature for more years than we
care to admit. I thought she had a pretty tough job there. She
was Chair of the Appropriations Committee, and I served on the
Appropriations Committee for most of my 18 years there while
chairing the Ways and Means Committee. I made her serve on
that.
But I think she has the toughest job of all right now as
the Public Service Commissioner, and she is doing an
outstanding job. Mr. Chairman, she is leading the way on de-
reg. She has formed task forces with the Commission and got in
all the experts and is moving Missouri forward on that issue.
And we look forward very much to your remarks today on the
issue, very much on the ad valorem situation out there in
Missouri, and I thank all the panelists for being there.
Thank you, Mr. Chairman.
Mr. Barton. Mrs. Lumpe, if you need a negotiator to buy
some rugs, Congressman McCarthy is the lady. I watched her in
action in Morocco, and she bought a rug for about 10 cents on
the dollar. I was very impressed that.
Ms. McCarthy. I learned that in Ways and Means.
Ms. Lumpe. Good experience on Ways and Means.
Mr. Barton. We are going to recognize Mr. Smith, but the
Chair wants to recognize a visitor in the audience who is a
personal friend from Houston, Texas, who used to work at
Atlantic Richfield Oil and Gas Company when I was a struggling
young associate there. Mr. Earl Simms with Vastar is in the
room, a good friend and gentleman and very bright person. So we
are glad to have you.
Mr. Smith, we are going to recognize you for 5 minutes. We
are going to go right down the line. Each of your statements is
in the record in its entirety. And I am sure by the time we get
to Mr. Albright the rest of the Congressmen will be back so we
will have a spirited question and answer period. So Mr. Smith,
you are recognized for 5 minutes.
Mr. Hall. Would the gentleman yield? Where did your friend
go to school?
Mr. Barton. I don't know where he went to school. He
probably went to the University of Texas but I am just
guessing.
Mr. Simms. I went to the University of Tulsa and got a
graduate degree from the University of Texas in Dallas.
Mr. Hall. You just look like the kind of guy that was
ruining the curve for guys like me.
Mr. Barton. He was head of the policy shop at Arco Oil and
Gas.
Mr. Smith is recognized for 5 minutes.
STATEMENTS OF DOUGLAS W. SMITH, GENERAL COUNSEL, FEDERAL ENERGY
REGULATORY COMMISSION; HON. CARLA J. STOVALL, ATTORNEY GENERAL,
STATE OF KANSAS; HON. SHEILA LUMPE, COMMISSIONER, MISSOURI
PUBLIC SERVICE COMMISSION; ROBERT E. KHREHBIEL, EXECUTIVE VICE
PRESIDENT, KANSAS INDEPENDENT OIL AND GAS ASSOCIATION; JOHN
MAJERENI, REAL ESTATE DEPARTMENT, CORNELL UNIVERSITY; AND JAMES
D. ALBRIGHT, ASSOCIATE GENERAL COUNSEL, NEW CENTURY SERVICES,
INC.
Mr. Smith. Mr. Chairman and members of the subcommittee,
good morning. My name is Douglas Smith, and I am the general
counsel at the Federal Energy Regulatory Commission. I am here
today as a Commission staff witness and do not speak for the
Commission as a whole or for individual members of the
Commission. I appreciate the opportunity to appear before you
today to discuss the complex issues surrounding the treatment
of Kansas ad valorem tax payments for purposes of price
regulation under the Natural Gas Policy Act.
The Natural Gas Policy Act, enacted in 1978, set ceiling
prices for sales of natural gas by producers. Section 110 of
the act allowed producers to charge their customers amounts in
excess of the applicable ceiling prices to the extent necessary
to recover State severance taxes attributable to the production
of natural gas.
The application of section 110 to Kansas ad valorem taxes
has a long litigation history which I will describe briefly. In
1983 a pipeline company purchasing gas from Kansas producers
asked the Commission to find that the Kansas ad valorem tax was
a property tax rather than a tax on the production of gas, and
thus was not eligible for collection over and above the ceiling
prices. In response, the Commission found that the Kansas tax
could be recovered under section 110. In June 1988, the U.S.
Court of Appeals for the D.C. Circuit found that the Commission
had not adequately explained its decision to treat the Kansas
tax as a tax on production and remanded the matter to the
Commission for development of a cogent theory for
distinguishing property and severance taxes for NGPA purposes.
In its order on remand, the Commission concluded that the
Kansas ad valorem tax was a tax on property, not on production,
and therefore producers could not recover it as an add-on under
section 110. The Commission required Kansas producers to make
refunds back to June 1988, the date of the court's Colorado
Interstate decision. In 1996, the D.C. Circuit sustained the
Commission's conclusion that the tax payments were not
recoverable but held that refunds were due starting in 1983,
not 1988 as had been ordered by the Commission.
In 1997, a number of producers asked the Commission to
grant an across-the-board waiver of the obligation to pay
interest on the required refunds for the period of 1983 through
1988. The Commission denied the request because such a waiver
would be inconsistent with the court's decision requiring full
refunds. The D.C. Circuit had already rejected the producers'
argument that imposing refund obligations on them was unfair
because they had relied on the Commission's prior rulings. The
court had stated that any such reliance by producers would have
been unreasonable.
A petition for review of the Commission's denial of a
generic interest waiver is now pending before the D.C. Circuit
and will be argued in September. Although the Commission denied
the request for across-the-board relief from interest
obligations, the Commission did provide for consideration of
requests for special hardship waivers on a case-by-case basis.
Allow me now to describe briefly the current status of
refunds related to the ad valorem tax. Refunds for 1988 through
the end of price controls in 1993 amounting to $125 million in
principal and interest were paid by producers in 1994 and 1995.
With respect to the earlier period beginning in 1983, producers
owe refunds of approximately $339 million, consisting of
approximately $129 million in principal and $210 million in
interest.
As of May 1999, producers had paid about $95 million of
these refunds for the 1983 to 1988 period. An additional $100
million has been placed in escrow pending resolution of
requests for refund adjustments now before the Commission.
The Commission's orders require with limited exceptions
that interstate pipelines receiving refunds must flow those
refunds through to their customers. The refunds will be flowed
through to local distribution companies serving consumers in at
least 13 States.
Let me now comment briefly on the bill introduced by
Representative Moran. H.R. 1117 would make two changes to the
NGPA. It would preclude assessment of interest or penalties in
any refunds of pre-1989 State ad valorem taxes, and it would
bar such refunds unless the refunds would be passed through to
the ultimate consumers.
Neither the Commission as a whole nor Chairman Hoecker has
taken a position on this legislative proposal. I do, however,
have several observations concerning the proposed legislation.
First, the Commission recognized that the required refunds
may cause some producers, and in particular some small
producers, financial hardship. The Commission's September 1997
order stated that the Commission would consider waiver of an
individual producer's obligation to refund both principal and
interest in cases of special hardship. The Commission
consideres such petitions for waiver on a case-by-case basis.
An across-the-board waiver of interest as proposed in H.R. 1117
would give all Kansas producers, without regard to hardship,
relief from the interest component of the refund obligation. If
interest is not provided in refund amounts, consumers would not
receive full compensation for the earlier overcharges because
the refunds would not reflect the time value of money. The
Commission's regulations concerning refunds provide for
appropriate interest to be paid in connection with all refunds.
Second, although H.R. 1117 would preclude penalties,
penalties are not an issue in these cases. The Commission has
not imposed any penalties on the producers. The assessment of
interest in refund calculations is not intended to penalize the
producer but rather to fully compensate the consumer for
overcharges paid years earlier.
Third, H.R. 1117 would preclude refunds unless the
purchaser demonstrates that the refunds will be passed on to
ultimate consumers. The Commission's orders require interstate
pipelines to flow through all refunds to their consumers with
an exception for three pipelines that have settlements with
their customers permitting the pipelines to retain the refunds.
Mr. Barton. The gentleman's time has expired about 2
minutes ago. Can you summarize your summary rather quickly,
please.
Mr. Smith. I will do so.
Finally, there are some questions about the intended effect
of the legislation on refunds that have already been paid with
respect to the period prior to 1989. As I mentioned, some
refunds were made in 1994 and 1995 with respect to the 1988 tax
year and $95 million in refunds have been made with respect to
the earlier time period. In order to minimize costly litigation
in this protracted dispute, any legislation in the area should
be as clear as possible as to the intended effect with respect
to refunds already made.
The Commission is in the unenviable position of trying to
bring to closure this dispute that lingers from an earlier era
of pervasive Federal regulation of natural gas prices. The
Commission will continue to apply the applicable law and
consider the equities on all sides--producers, consumers,
pipelines, and States--in working this matter through to
completion in a timely manner.
Thank you for the opportunity to testify.
[The prepared statement of Douglas W. Smith follows:]
Prepared Statement of Douglas W. Smith, General Counsel, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Subcommittee: Good morning. My name
is Douglas Smith, and I am the General Counsel at the Federal Energy
Regulatory Commission. I am here today as a Commission staff witness,
and do not speak for the Commission itself or for individual members of
the Commission. Thank you for the opportunity to appear before you
today to discuss the issues surrounding the treatment, for purposes of
price regulation under the Natural Gas Policy Act, of payments of ad
valorem taxes to the State of Kansas by natural gas producers.
The central issues--Do Kansas producers owe refunds of amounts
collected in excess of the statutory ceiling prices? For what time
period are refunds due? Should refunds include interest on
overcharges?--have been extensively litigated before the Commission and
the courts beginning in 1983. H.R. 1117, which would preclude the
inclusion of interest in any refunds ordered, would have the effect of
modifying the outcome of Commission orders implementing a 1996 decision
of the United States Court of Appeals for the District of Columbia
Circuit requiring producers to refund all Kansas ad valorem tax
reimbursements they received from their customers from October 1983
through the removal of federal price ceilings on January 1, 1993.
I will describe the background and history of the dispute
concerning Kansas ad valorem taxes, discuss the current status of
refunds and requests for waivers, and comment on issues raised by H.R.
1117.
Statutory Framework
Before 1978, the Commission regulated sales by natural gas
producers under the Natural Gas Act (NGA), establishing just and
reasonable rates to be charged by producers.
The Natural Gas Policy Act of 1978 (NGPA) replaced the Commission's
NGA regulation of producer sales with a system of cogressionally
specified ceiling prices that producers could charge for their sales of
natural gas. NGPA section 110 allowed producers to charge their
customers amounts in excess of the applicable ceiling prices ``to the
extent necessary to recover . . . State severance taxes attributable to
the production'' of natural gas. Section 110 defined severance tax as
``any severance, production, or similar tax, fee, or other levy imposed
on the production of natural gas'' by a state. The Wellhead Decontrol
Act of 1989 ended NGPA regulation of all sales by natural gas producers
effective January 1, 1993.
History of the Case
The State of Kansas has charged natural gas producers an ad valorem
tax with respect to natural gas in Kansas since before the enactment of
the NGPA. In 1974, the Commission's predecessor, the Federal Power
Commission (FPC), held that Kansas producers could recover the cost of
the Kansas ad valorem tax as an add-on to the national just and
reasonable rates the FPC was then establishing for sales of natural gas
by producers. Opinion No. 699-D, 52 FPC 915 (1974). The FPC held that
the Kansas ad valorem tax could be considered as similar to a severance
tax because it was based largely upon production factors.
Following the enactment of the NGPA, the Commission similarly
treated the Kansas ad valorem tax as a severance tax that producers
could recover as an add-on to the ceiling prices under NGPA section
110. However, in 1983, Northern Natural Gas Company, a pipeline company
purchasing gas from Kansas producers, asked the Commission to reverse
that ruling. It argued that the Kansas ad valorem tax was a property
tax on the value of the gas in the ground, rather than a severance tax
on the production of gas, and thus producers should not be permitted to
recover the Kansas ad valorem tax as an add-on to the ceiling prices.
Northern Natural argued that the Commission had made a similar finding
with respect to Texas' ad valorem tax. In 1986, the Commission upheld
its earlier rulings that the Kansas ad valorem tax could be recovered
as an add-on to the ceiling price, while the Texas ad valorem tax could
not. Sun Exploration & Prod. Co., 36 FERC para. 61,093 (1986), reh'g
denied sub nom. Northern Natural Gas Co. 38 FERC para. 61,062 (1987).
In June 1988, the U.S. Court of Appeals for the D.C. Circuit
critically reviewed the Commission's analysis of the Kansas tax, and
found that the Commission had not adequately explained its decision to
treat the Kansas tax as a tax on production and had not adequately
distinguished the Kansas and Texas ad valorem taxes. Colorado
Interstate Gas Co. v. FERC, 850 F.2d 769 (D.C. Cir. 1988) (Colorado
Interstate). The court therefore remanded the matter to the Commission
for a more ``cogent theory'' of what distinguishes a production or
severance tax which a producer can recover as an add-on under section
110 from a non-recoverable property tax. Id. at 773.
In a 1993 order on remand, the Commission set out the standards for
determining whether NGPA section 110 permitted producers to recover a
particular tax as an add-on to NGPA ceiling prices. Among other things,
the Commission held that a recoverable severance tax is a tax on the
value of the volumes of gas removed from the ground. A non-recoverable
property tax, by contrast, is a tax on the value of the gas remaining
in the ground, as well as on the value of wells and other production
assets on the lease. Applying those standards, the Commission concluded
that the Kansas ad valorem tax, like the Texas ad valorem tax, was a
``tax on property, not on production,'' and, therefore, producers could
not recover it as an add-on to the ceiling price under NGPA section
110. Colorado Interstate Gas Co., 65 FERC para. 61,292 at 62,371
(1993), order on reh'g, 67 FERC para. 61,209 (1994).
However, the Commission required Kansas producers to make refunds
only back to the June 1988 date of the court's decision in Colorado
Interstate. The Commission held that, until the court's decision,
producers could reasonably have relied upon the Commission's previously
settled rule that the Kansas ad valorem tax could be recovered as an
add-on to the ceiling price.
Producers appealed the Commission's decision, arguing that the
Commission should have reaffirmed its prior determination that the
Kansas ad valorem tax could be recovered as an add-on to the ceiling
price, and, in any event, should have ordered refunds only
prospectively from the date of its decision in 1993. The Public Service
Company of Colorado, supported by the Missouri Public Service
Commission, also appealed the Commission's order, arguing that the
Commission should have required refunds back to 1983, when the
qualification of the Kansas ad valorem tax as an add-on to the ceiling
prices was first challenged.
In 1996, the U.S. Court of Appeals for the D.C. Circuit affirmed
the Commission's holding that the Kansas ad valorem tax was a property
tax that could not be recovered as an add-on to NGPA ceiling prices.
Public Service Company of Colorado v. FERC, 91 F.3d 1478 (D.C. Cir.
1996) (Public Service). However, the court rejected the Commission's
finding that, before June 1988, producers had reasonably relied on the
Commission's prior rule that the Kansas ad valorem tax could be
recovered as an add-on to the ceiling price and thus that refunds
should not be required before that date. The court explained its
decision as follows:
[T]he status of the Kansas tax was expressly drawn into
question in 1983 when Northern Natural first petitioned the
Commission for a ruling that producers could not lawfully
recover the tax under section 110. Once the recoverability of
the tax was in dispute, we do not see how the Commission could
possibly find that the producers reasonably relied upon
continuing to recover it . . . Absent detrimental and
reasonable reliance, anything short of full retroactivity
(i.e., to 1978) allows the producers to keep some unlawful
overcharges without any justification at all. The court
strongly resists the Commission's implication that the Congress
intended to grant the agency the discretion to allow so
capricious a thing. Still, we do not require refunds of taxes
recovered with respect to production before October 1983
because there is before us no controversy over those monies.
Id. at 1490. Accordingly, the court concluded that the producers'
liability for refunds should extend back to October 1983, the date when
parties were given notice that the recoverability of the tax was at
issue. The court remanded the matter to the Commission to implement the
refunds. The Supreme Court declined to review the Court of Appeals'
Public Service decision. Public Service Company of Colorado v. FERC,
520 U.S. 1224 (1997).
In late 1994, while the appeal of the Commission's 1993 order
requiring refunds for the period 1988-1993 was pending, the producers
paid the refunds for the 1988-1993 period. The producers paid
approximately $125 million, which included interest.
In May 1997, after the Supreme Court declined to review the Public
Service decision, a number of producers asked the Commission, in
considering the Court of Appeals' remand, to grant all producers an
across-the-board waiver of any requirement that they pay interest on
their refunds of the reimbursement of ad valorem taxes collected during
the period 1983 through 1988. The threshold question for the Commission
was whether a waiver of interest would violate the court's decision.
The court held that ``[p]roducers are liable to refund all Kansas ad
valorem taxes collected with respect to production since October
1983.'' 91 F.3d at 1492. The Commission concluded that refunds without
interest would not satisfy the court's requirement of full refunds. The
Commission explained that both the Commission and the courts have
consistently treated interest as a necessary element of full refunds
because interest is necessary to reflect the time value of money. The
Commission pointed out that its regulations require interest to be paid
on refunds both to provide just compensation for the losses, or costs,
imposed on those who have paid excessive rates and to reflect the
benefits which were available to companies which collected excessive
rates. Public Service Company of Colorado, 80 FERC para. 61,264 (1997),
reh'g denied, 82 FERC para. 61,058 (1997).
The Commission found that the court's decision required rejection
of the producers' equitable argument in favor of waiving interest. The
producers argued that imposing interest charges on them was unfair
because they had relied on the Commission's prior rulings that the
Kansas ad valorem tax did qualify as an add-on to the ceiling prices.
The Commission, however, stated that the court had already found any
such reliance by producers was both ``foolhardy'' and unreasonable. 91
F.3d at 1490. The Commission thus concluded that the Public Service
decision left it with little choice but to deny an across-the-board
waiver of the requirement to pay interest on the refunds required by
the court.
The Commission was mindful, however, that the refund obligation
with interest could present serious financial problems to specific
producers. Accordingly, the Commission stated that it would consider
individual producers' requests for relief from the refund requirement
based on their particular circumstances.
A petition for review of the Commission's decision is currently
pending before the U.S. Court of Appeals for the D.C. Circuit, which
has scheduled oral argument for September 7, 1999.
Status of Refunds
Based on the Commission's 1993 order, producers paid, in 1994 and
1995, $125 million in refunds for the 1988-1993 period, which included
interest. Because of the timing of the ad valorem tax bills, these
refunds included the tax payments for all of 1988.
Since the Commission's September 1997 order implementing the
court's decision, nine pipelines have reported to the Commission that
producers owe refunds for the reimbursement of Kansas ad valorem taxes
of approximately $339 million for the 1983-1988 period. Of that amount,
the Commission estimates that approximately $129 million is principal.
The remaining $210 million is interest. Under the Commission's
regulations, as set forth in 18 CFR Sec. 154.501(d), interest is
calculated from the date of collection from the customer based on the
average prime rate for each calendar quarter as published by the
Federal Reserve. As of May 1999, the producers have paid about $95
million of refunds, which includes both principal and interest. Thus,
producers still owe about $244 million in refunds.
Approximately 130 requests have been filed with the Commission for
waiver of all or part of a producer's refund obligation. The Commission
has acted on eleven of those requests, granting six, denying three, and
dismissing two as unnecessary. In general, the Commission grants such
requests where the applicant can show that payment of the refund will
cause it a special hardship. Where a producer's application for relief
contains insufficient information for the Commission to make a
determination, the Commission's staff contacts the producer and
indicates the type of information which it should file in order to
support its application for a waiver.
The Commission's orders require that interstate pipelines receiving
refunds must flow those refunds through to their customers, with the
exception of three pipelines (Natural Gas Pipeline Company, ANR
Pipeline Company, and El Paso Natural Gas Company) which have
Commission-approved settlements with their customers that permit the
pipelines to retain all refunds they receive in exchange for certain
benefits they granted to their customers. The initial refund reports
filed by the pipelines in May 1998 indicate that the amount those three
pipelines may retain is $4.9 million, or about 1.5% of the total $339
million in ad valorem tax refunds. The remaining 98.5% of the refunds
will be flowed through to at least 225 local distribution companies
serving consumers in at least 13 states: Colorado, Illinois, Indiana,
Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, Ohio, Texas,
Wisconsin, and Wyoming.
Proposed Legislation
H.R. 1117 would add the following new section to the NGPA:
Section 603. REFUNDS.
In the event any refunds of any rates and charges made, demanded,
or received for reimbursement of State ad valorem taxes in
connection with the sale of natural gas prior to 1989 are
ordered to be made by the Commission, the refunds shall be
ordered to be made without interest or penalty of any kind, and
the refunds shall be required only to the extent that the
purchaser demonstrates to the Federal Energy Regulatory
Commission that the refund will be passed on to ultimate
consumers of the natural gas.
Chairman Barton's letter of invitation asked for comments on this
proposal to waive the inclusion of interest in refund amounts.
Neither the Commission as a whole nor Chairman Hoecker has taken a
position on this legislative proposal. However, I do have several
observations to make concerning the proposed legislation.
First, the required refunds may cause some producers, particularly
some small producers, financial hardship. As described above, the
Commission's September 1997 order stated that the Commission may waive
an individual producer's obligation to refund both principal and
interest in cases of special hardship. The Commission considers such
petitions for waiver on a case-by-case basis. An across-the-board
waiver of interest, as proposed in H.R. 1117, would give all Kansas
producers, without regard to hardship, partial (i.e., interest but not
principal) relief without having to file with the Commission individual
applications for relief from the refund requirement and supporting
those requests.
If interest is not provided in refunds, consumers would not receive
full reparation for the overcharges, because the refunds would not
reflect the time value of money. This would be contrary to the
Commission's regulations concerning refunds, which provide for
appropriate interest to be paid in connection with all refunds. 18 CFR
Sec. 154.501 (1998). That requirement is consistent with a policy of
requiring regulated entities that have overcharged consumers to provide
full compensation for the overcharges.
Second, although H.R. 1117 would preclude penalties, penalties are
not at issue in these cases. The Commission's orders described above
provide that producers must pay interest on their refunds of Kansas ad
valorem tax amounts, but the Commission has not imposed any penalties
on the producers. The assessment of interest in refund calculations is
not intended to penalize the producer, but rather to fully compensate
the consumer for overcharges paid years earlier.
Third, H.R. 1117 would preclude refunds unless the purchaser
demonstrates that refunds will be passed on to ultimate consumers. The
Commission's orders require interstate pipelines to flow through all
refunds to their customers, except for three pipelines that have
settlements with their customers permitting the pipelines to retain the
refunds. In those cases, in return for certain benefits the pipeline
had granted to their customers, the customers had agreed to allow the
pipeline to retain all refunds the pipeline received from the
producers. Natural, 85 FERC para. 61,001 (1998); El Paso, 85 FERC para.
61,003 (1998); ANR, 85 FERC para. 61,005 (1998). The flow through of
refunds by local distribution companies is a matter subject to state
regulation.
Finally, the intended effect of the legislation on refunds already
made is not clear. First, there is ambiguity with respect to refunds
made after the Commission's 1993 order. By its terms, H.R. 1117 applies
to the period before 1989. As discussed above, the 1993 Commission
order provided that producers refund Kansas ad valorem taxes collected
after June 1988. The 1993 order covered essentially all ad valorem
taxes producers collected with respect to their 1988 sales, because
Kansas generally calculated its ad valorem tax bills due as of January
first as late as November of the same year, and sometimes even later,
and the producers then billed their customers for reimbursement for
their 1988 ad valorem tax payments. The Commission required producers
to refund all such amounts as overcharge occurring after the June 1988
cut-off date, and the producers refunded those amounts in 1994 and
1995. As now worded, the proposed legislation could be interpreted as
invalidating the requirement in the 1993 order that the producers' 1988
refunds include interest, and producers might request the Commission to
provide a means for them to recover that interest.
In addition, it is not clear whether the proposed legislation would
apply to the interest component of the approximately $95 million in
refunds producers have already paid pursuant to the Commission's 1997
order. Thus, if the proposed legislation is enacted in its current
form, producers might ask the Commission to provide a means for them to
recover from pipelines interest already paid pursuant to the 1997
Commission order implementing the D.C. Circuit's Public Service
decision. The pipelines could be expected to seek recovery of those
amounts from their customers. In order to minimize further litigation
of this protracted dispute, any legislation in this area should be
clear as to its intended effect.
Conclusion
The Commission is in the unenviable position of trying to bring to
closure this dispute which lingers from an earlier era of pervasive
Federal regulation of natural gas prices. Even a decade ago, the court
in Colorado Interstate noted the ``special context'' of this case--a
dispute about the application of the arcane law of price regulation at
a time when natural gas markets were moving to competitively determined
prices--and observed that ``FERC's task on remand may be about as
inviting as having to make costly repairs on a building slated for
demolition.'' 850 F.2d at 775. Nevertheless, the Commission will
continue to apply the law and consider the equities on all sides--
producers, consumers, pipelines, and states--in working this matter
through to completion in a timely manner.
Thank you for the opportunity to testify this morning. I would be
pleased to answer any questions you may have.
Mr. Barton. Thank you. Attorney General Stovall, you are
recognized for 5 minutes.
Ms. Stovall. Thank you very much. I appreciate the
opportunity----
Mr. Barton. And put the microphone over there, please,
ma'am.
STATEMENT OF HON. CARLA J. STOVALL
Ms. Stovall. I appreciate the opportunity to be here and
represent Kansas' concerns. We are very supportive of the
legislation that Congressman Moran has introduced. We are
grateful for the support of our entire congressional
delegation. Congressmen Tiahrt, Ryun and Moore, also Senators
Roberts and Brownback. It is an issue that has great
implications for Kansas. And while general counsel Mr. Smith
has said FERC is in the unenviable position of trying to
resolve these issues, FERC's position is not as unenviable as
those of the small producers in Kansas and our royalty owners.
That is where the problem is.
Congressman Moran told you about the long history of the
small producers in Kansas relying on decisions of FERC. In 1986
he mentioned that northern decision. Not only did FERC say it
is okay for our producers to pass on that ad valorem tax, they
did so with language that said it is clear beyond question that
they can do that.
When the issue finally was reversed on behalf of FERC and
they said we changed our mind now, it is not really a tax you
can pass on, you need to rebate it. When the D.C. Circuit
approved that decision, they actually said that producers in
Kansas were foolhardy to rely on FERC decisions and that our
reliance was not reasonable.
I would suggest to you that what is not reasonable is
changing those rules in the middle of the game and even
changing what it is that Congress has said was appropriate. In
1978, when the Natural Gas Policy Act passed, in section 110
you specifically said an ad valorem tax like Kansas had can be
passed on. So FERC not only has changed the rules on producers
in Kansas and our legislature but they changed the rules on you
as well. That is what we have a great problem with.
With regard to Congressman Moran's bill, it addresses two
of the concerns. I wish that we could go back in some way, what
the chairman suggested, and have a perfect resolution of the
situation, which would be to suggest that no rebates be due at
all, but Jerry's bill doesn't ask for that. It says merely two
things. One is that claims of interest that now are argued to
be due back to 1983 would be waived. We strongly believe that
equity requires that. FERC had the case when the D.C. Circuit
remanded the Colorado case back to FERC for further
explanation, not to reverse it but to say explain to us again
how it is that this qualifies. FERC had that case for 5 years
without doing anything on it. For 5 years.
Once the D.C. Circuit said we are going to change the rules
and you are going to owe this tax after all, those 5 years that
FERC had the case and did nothing on it now counts against our
Kansas producers. During those 5 years they wouldn't have had
reason to think that the rules of the game were going to be
changed in light of all those prior rulings. So the FERC delay
has caused great problems.
Equity second requires, in my opinion, that the bill be
passed because the producers were very responsible in relying
on those decisions. I can't fathom how the D.C. Court would say
they were foolhardy or unreasonable to rely on that
administrative agency. I can't explain it.
Three, had the producers known this would be the ultimate
result, they could 19 years ago have changed their practice.
They could have not drilled wells, they could have capped
wells, they could have altered production had they known this.
But they didn't know this.
And fourthly, the Kansas legislature, had they known this,
rules would change, could have taken action. They could have
repealed the ad valorem tax. They could have increased the
percent of severance tax perhaps to compensate knowing the
severance tax is a pass-through. They could have changed the ad
valorem tax to comply with the new regulations like Colorado
and Wyoming to be sure that it passed through. But the
legislature didn't know that they needed to do anything to
protect Kansas consumers either.
What is important is that FERC has ordered the Kansas
producers to pay 100 percent of the bills that the pipelines
have sent to them by March of this year. They had to pay 100
percent of it. Although there has been no due process hearing
to determine what amount of liability a producer might owe, the
pipeline simply calculated what they believed it was, sent the
bill to the producers, and they have been ordered to pay 100
percent of it. There is no due process in that at all. That is
one of the things that we find additionally unconscionable.
The producers have made those bills dependent on the fact
they have assumed that the maximum lawful price was charged and
on top of that was this ad valorem tax. Records that we have
looked at shows that that is not true. FERC has ordered the
rebate only when the maximum lawful price was exceeded by that
tax. Sometimes the maximum lawful price was not charged. So the
tax on top of that still fell below the maximum lawful price as
authorized by statute. In that case no refund is owed. But
without a due process hearing for our producers to determine
those pipeline bills are accurate or inaccurate, the producers
are absolutely in the untenable position of having to cough up
tens of thousands of dollars, sometimes hundreds of thousands,
without being able to have redress.
And because of the other provision of Congressman Moran's
bill which says that if the money is not to be paid to the
ultimate consumers, it is not collected, that tries to balance
the interest of the consumers with those of the producers.
I thank the committee very much for the time to be here.
[The prepared statement of Hon. Carla J. Stovall follows:]
Prepared Statement of Carla J. Stovall, Kansas Attorney General
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 House Bill 1117, which has been introduced by Representative Moran
of Kansas and is 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.
historic review
In 1954, the United States Supreme Court held that the Natural Gas
Act allowed the Federal Government, under the Interstate 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 later 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, the FPC in Opinion
No. 699 authorized pipelines to increase the ceiling rates under the
Natural Gas Act by allowing producers to recover ``production,
severance, or other similar taxes.'' This was interpreted to mean that
Kansas natural gas producers could charge pipelines the ``Maximum
Lawful Price'' and, in addition, collect reimbursement for the Kansas
ad valorem tax (Kansas did not have a severance tax until 1983).
In an effort to be absolutely certain of its interpretation, the
Kansas Corporation Commission filed a request with FPC in August of
1974 seeking clarification of Opinion No. 699, concerning the right of
producers to recover the Kansas ad valorem tax. The FPC responded on
October 9, 1974 by issuing Opinion No. 699-D which reaffirmed that a
proper interpretation of Opinion No. 699 allowed producers to increase
the ceiling rates to recover their costs of the Kansas ad valorem tax
imposed on natural gas production.
Four years later in the Natural Gas Policy Act of 1978, Congress
codified (in Section 110) the FPC's earlier decisions, contained in
Opinions No. 699 and 699-D, which allowed reimbursement of State
``production'' 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 Joint Explanatory Statement to the Conference Committee
Report, accompanying the NGPA, noted that this cost included ``any tax
imposed upon mineral or natural resource production including an ad
valorem tax or a gross receipts tax.'' (Emphasis added.)
In reliance upon FPC Opinions No. 699 and 699-D and Congress'
passage of the Natural Gas Policy Act affirming those opinions, the
Kansas Secretary of Revenue testified in 1981 before the Kansas Senate
Tax Committee that was considering legislation which would have imposed
a severance tax on natural gas production. In his testimony he
accurately stated that the FPC had ruled that Kansas' current ad
valorem property tax, as well as a severance tax if enacted, could be
passed through to allow producers to recover the tax. In reliance on
the FPC ruling and the Congressional action, the Kansas Legislature in
1983 passed a severance tax, justifiably believing that Kansas
producers could recover the cost of both the severance tax and the ad
valorem property tax. Consequently, during the period from 1983 until
1988, producers and royalty owners were collecting reimbursement of the
Kansas tax from the pipelines under final, non-appealable FPC Orders.
In 1983, the year that the severance tax was passed by the Kansas
Legislature Northern Natural Gas Co. (Northern) 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 re-affirmed 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, Colorado Interstate Gas Company (Colorado
Interstate) appealed the Northern decision to the Federal D.C. Circuit
which, on June 28, 1988, held that FERC had not adequately explained
its order. The case was remanded to FERC for clarification of how the
Kansas ad valorem tax was similar to a production or severance tax
under NGPA, Section 110. Colorado Interstate Gas Co. v. FERC, 850 F.2d
769,773 (D.C. Cir. 1988). The case 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.
Finally, in 1993, FERC issued an Order on Court Remand reversing
Opinion 699-D and ordering refund of those taxes that had been included
in the rates paid to Kansas producers after June 28, 1988, the date the
Court of Appeals had first remanded the case to FERC. This ruling was
appealed to the D.C. Circuit and in 1996, the Court found that Kansas'
ad valorem tax did not qualify under NGPA, Section 110 and held that
refunds would be due for taxes recovered commencing in October of
1983--expanding by five years the time period for which FERC had
ordered refunds and exponentially increasing the claims of interest
against Kansas producers and royalty owners! (October 1983 was when the
notice of Northern's petition had been published in the Federal
Register.) Public Service Company of Colorado v. FERC, 91 F.3d 1478
(D.C. Cir. 1996). By this decision, the D.C. Circuit essentially held
all producers should have known that the challenge by Colorado
Interstate in the Northern case would prevail. 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 NGPA. FERC refused to waive
interest, interpreting the Court's decision to require the imposition
of interest on the principal obligation of the ad valorem tax refund.
During the next two years, various producers along with the State
of Kansas, filed petitions and motions with FERC requesting relief
from, and reconsideration of, its decision and additional relief in the
form of waiver of interest on the principal obligation. In 1998, the
Kansas Legislature passed Kansas Senate Concurrent Resolution No. 1616
stating that the
. . . retroactive reversal of a practice that had been legal
for 19 years places an unjust and punitive financial burden,
possibly exceeding $500 million, on the Kansas natural gas
industry, and that the ordered refunds threaten serious
financial harm not only to Kansas natural gas industry but to
the state and local economies and governmental budgets that
rely on the industry's economic base . . .
and asked the U.S. Congress to provide relief from penalties and
interest. Indeed, FERC has refused to grant any form of relief to
Kansas and Kansas producers through either reconsideration of FERC's
position regarding the retroactivity of its change of rule and policy
or the waiver of claims of interest on those refunds. Nevertheless,
FERC has required that 100% of the pipeline's claims be paid without
hearing.
position of kansas
I do not appear on behalf of the 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 the refund obligation resulting from
this policy reversal was retroactive! FERC's ruling, coupled with the
controlling decision of the D.C. Circuit, has resulted in an overnight
change of a policy which had been in effect for nineteen years! If this
change were applied on a prospective basis only, I would not be here
objecting. The D.C. Circuit Court contends that the producer's
allegation of detrimental reliance on the nineteen years 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 19-year history of
consistent rulings by a federal regulatory agency? I agree something is
not reasonable--but it was not the actions of natural gas producers!
When Northern initially challenged the applicability of the ruling to
Kansas' ad valorem tax, FERC said, in 1986, the pass through was
``clear beyond question.'' How could the producers' action of relying
on FERC's rulings be unreasonable when FERC itself continued to
reaffirm them? Perhaps you could help me understand how to 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
and then explain to anyone else how our system of government and
jurisprudence allows a 19-year ruling to be reversed overnight and be
applied retroactively causing citizens to owe tens of millions of
dollars in principal and interest.
What if the IRS were to reverse its prior decisions, although based
on Congressional legislation, and rule that home mortgage interest
payments are no longer deductible from income taxes--and not only are
they not deductible on a prospective basis but taxpayers must now pay
the amount of taxes they would have owed plus interest on that amount.
Can you imagine the calls and letters your offices would receive over
such an action? You have not heard the same level of outrage on this
issue simply because it does not affect as many people. But I believe
the situation with natural gas producers and royalty owners is equally
as repugnant as my IRS scenario and producers and royalty owners are as
deserving of protection and remedy from this Congress as would be
homeowners.
The bills being sent to small natural gas producers have caused
them 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. 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
decline, including the income tax effects to the state of the refunds
being ordered of major out of state producers.
The royalty owners are not 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 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 as a tax
write-off. 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 160% of the principal!
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 19 years by the agency!
Although it is the retroactive provision of the ruling itself that
results in the present injustice and that I wish would be legislatively
overturned, the Moran bill would at least provide a much needed
remedy--albeit on a limited basis--to natural gas producers and royalty
owners by making unlawful any interest or penalties assessed on those
refunds. This bill will provide relief from the series of
administrative and judicial decisions by FERC and the D.C. Circuit,
respectively, which are manifestly unjust: decisions which penalize
Kansas producers for complying with the law for 19 years; decisions
which changed the rule and declared to be unlawful two decades of
lawful actions of the producers; decisions which had called the
legality of these very actions as ``clear beyond question.''
Under rules of FERC, no government agency is ever required to pay
interest or penalties. Without remedy by Congress, 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. The
elderly, widowed royalty owner will owe a refund of the taxes AND
interest on the refund. What justifies this disparate treatment?
Under FERC's order, my great concern is that it is very likely that
a large portion of the refunds and claimed interest will not flow
through to the consumer. The second provision of House Bill 1117, which
is just as important as the prohibition of claims of interest
provision, would provide a protection to the consumer by requiring that
all amounts refunded be passed through to the ultimate consumer.
I urge each of you to support this bill not just because it
redresses such an unjust and detrimental effect on a significant sector
of the Kansas economy: I urge you to support this bill in an effort to
correct the effects of an unjust and unreasonable decision by an
federal administrative agency against a sovereign state.
Mr. Barton. Thank you, General. We would now like to hear
from the gentlelady from Missouri, and I am sure she is going
to exactly echo what the gentlelady from Kansas said.
Ms. Lumpe, you are recognized for 5 minutes.
STATEMENT OF SHEILA LUMPE
Ms. Lumpe. Thank you, Chairman Barton and members of the
committee. As Chair of the Missouri Public Service Commission,
I am speaking on behalf of them today.
And we thank you for the opportunity to present our
testimony. I will not discuss the history in detail. I think it
has been adequately presented. I would only like to reiterate
that the issue did start in 1978 with the passage of the
Natural Gas Policy Act.
This act outlined procedures and processes leading to the
deregulation of the gas industry and in it Congress set ceiling
prices. The refunds with interest from the unlawful collection
of the ad valorem tax from 1988 to 1993 have been paid.
However, no refunds have been given for the unlawful collection
over the maximum legal price which consumers paid from 1978 to
1983.
The time of issue here are the years 1983 to 1988, and it
was the U.S. Court of Appeals that required the refund go back
to 1983. They did not go back further because that issue had
not been raised.
The basic thought that we would like to leave with you is
that consumers have been paying more than the maximum lawful
price since the unlawful add on and passed through to them of
the ad valorem tax. Our mission as commissioners under Missouri
statutes is to provide adequate service at just and reasonable
rates. The consumers have paid more than the just and
reasonable price over that period of time. Our purpose is to
see that they are refunded the money with interest to
compensate them for the lost use of their money. The producers
have had the use of these moneys, and we believe the consumers
should have had the use of their moneys.
It is also important to note that the consumers have paid
billions of dollars in transition costs over this period
between 1978 and 1993 through take or pay contracts and gas
supply realignment costs, approximately $12 billion.
The second point is that the producers were on notice about
this issue. As a matter of fact, it was a producer that first
raised it by asking in 1983 that Texas receive the same
treatment as Kansas. The fact that the case has dragged on so
long also is not the fault of the consumer. The parties demand
due process. It is their right. And that takes time, and it is
not unheard of for a party who may be benefiting from the
status quo to wish to drag out a case as long as possible.
The producers, when they first filed their petition I am
sure were sophisticated enough to know that they could lose,
and a prudent business practice would have been to plan for
such a contingency.
Third, we are not unsympathetic to the true hardship case
of the small producers. However, we believe that each case has
a unique set of facts and should be treated individually. We
would not challenge hardship rulings where the information and
the documentation are provided. Only if there appear to be
significant discrepancies might we wish to take another look.
Chairman Barton, Congress passed the Natural Gas Policy Act
in 1978. As I said, it is a carefully crafted piece of
legislation. It balanced the rights of the different parties.
It established procedures and processes that have worked well
over a 20-year period. We oppose H.R. 1117 because it would
violate those procedures and invite unpredictability and hosts
of appeals on regulatory matters to Congress to solve.
We again thank you for the opportunity to appear before
you. The Missouri Commission and its staff have worked long and
hard to compile facts and information and we stand ready to
assist you further in your deliberations.
Thank you.
Mr. Barton. Thank you. Before we recognize Mr. Krehbiel, I
want the gentlelady to know I got elected to Congress in 1984
on a platform of repealing the Natural Gas Policy Act of 1978.
So I want you to know where I am coming from on this.
[The prepared statement of Shiela Lumpe follows:]
Prepared Statement of Sheila Lumpe, Chair, Missouri Public Service
Commission
i. introduction
Chairman Barton and Members of the House Subcommittee on Energy and
Power, I am here today to testify on behalf of the Missouri Public
Service Commission (``Missouri PSC''). The Missouri PSC is a
governmental agency with jurisdiction to regulate the distribution and
sale of natural gas to retail consumers in the state of Missouri. The
Missouri PSC actively participates in Federal Energy Regulatory
(``FERC'') proceedings which affect the price of natural gas sold to
local gas distribution companies located in Missouri.
Since 1989, the Missouri PSC has been on the front line with
several other consumer advocates seeking recovery of the Kansas ad
valorem refunds which are due to consumers in over 20 states. The
Missouri PSC opposes H.R. 1117, because this bill seeks to relieve
natural gas producers of their obligation to pay to natural gas
consumers the accrued interest portion of ad valorem tax refunds
related to the period 1983-1988.
As your invitation requested, I will address three areas: (1) the
background of the ad valorem tax refunds, (2) the current status of the
refund and interest payments, and (3) the pros and cons of the proposed
legislation. I also wish to address several misconceptions that may
exist on this matter.
ii. background--kansas ad valorem tax refunds
By enacting the Natural Gas Policy Act of 1978 (``the NGPA'' or the
``Act'') Congress established maximum lawful prices, or price ceilings,
for first sales of natural gas. Section 110 of the NGPA provided for
add-ons to the ceiling prices for state ``severance or similar taxes''
and for certain production costs. Section 504 of the Act made it
unlawful for any person ``to sell natural gas at a first sale price in
excess of any maximum lawful price under this Act.'' The FERC, by
regulation (18 C.F.R. Sec. 273.301, attached as Exhibit A), imposed a
refund obligation on any person, his successors, heirs and assigns who
accepted a first sale price in excess of the maximum lawful price. FERC
regulations also provide that refunds are to be paid with interest so
that the recipient is made whole for the time value of money. NGPA
Section--502(c) also permitted the FERC to make adjustments,
``consistent with the purposes of the Act, as may be necessary to
prevent special hardship, inequity or an unfair distribution of
burdens.''
In 1983, a Texas producer petitioned the FERC to reverse a decision
of the former Federal Power Commission (``FPC''), and to treat Texas ad
valorem property taxes as a severance or similar tax under Section 110.
Later that same year a pipeline asked the FERC to disallow Kansas ad
valorem property taxes as a severance tax add-on under Section 110. By
October 31, 1983, 21 Kansas producers and the Kansas Corporation
Commission had intervened in the Kansas case.<SUP>1</SUP> In 1986 the
FERC denied the petitions of both the Texas producers and the Kansas
pipelines, keeping in place the disparate treatment of the Texas and
Kansas property taxes under Section 110.
---------------------------------------------------------------------------
\1\ The intervening parties supporting preferential treatment of
the Kansas tax were: Arco Oil and Gas Co., Division of Atlantic
Richfield Co.; Amoco Production Co.; Chevron U.S.A., Inc,; Maurice L.
Brown Co.; Gulf Oil Corp.; Phillips Petroleum Co. and Phillips Oil Co.;
Mobil Oil Corp. and Northern Natural Gas Producing Co.; Aminoil--Inc.;
Champlin Petroleum Co.; Mesa Petroleum Co.; Pennzoil Co., Pennzoil
Producing Co. and Pennzoil Oil and Gas, Inc.; Ashland Exploration,
Inc.; Texaco Inc.; Kerr-McGee Corp.; Getty Oil Co.; Cities Service Oil
and Gas Corps.; Shell Oil Co.; Sun Exploration and Production Co.;
Kansas State Corporation Commission; Tenneco Oil Co.; Dorchester Gas
Producing Co.; and, Cabot Petroleum Corp. Sun Exploration and
Production Co. 36 FERC para. 61,093, Appendix B, (1986).
---------------------------------------------------------------------------
In 1988, the Court of Appeals remanded the matter to the FERC,
saying the FERC had failed to provide a reasoned decision for treating
the similar Kansas and Texas taxes differently. In 1993, the FERC
concluded the Kansas ad valorem property tax did not qualify under
Section 110 as a severance or similar tax eligible as an add-on to the
maximum lawful price and that the collection of such ad valorem taxes
on top of the ceiling prices caused the overall price of gas to exceed
the maximum lawful level. The FERC ordered first sellers to refund only
those amounts which were in excess of the maximum lawful price, and
which were collected after the 1988 Court of Appeals decision.
On appeal of this 1993 FERC order, the Court of Appeals affirmed
FERC's treatment of the Kansas property taxes. The Court, however,
reversed FERC's holdings on the refund period and determined refunds
were also owed dating back to 1983, when the challenge to the Kansas
tax was first made and first sellers put on notice of the potential
refund obligation. First sellers were allowed to retain all amounts
collected in excess of maximum lawful prices from 1978 through 1983.
Since 1997 the FERC has issued a series of orders to effectuate the
refunds to which consumers have a right under the NGPA. These orders
are being challenged by both first sellers and consumers in more than a
dozen cases currently pending before the Court of Appeals for the
District of Columbia Circuit. In addition, parties have initiated more
than one hundred cases before the FERC seeking adjustments or
enforcement of refund obligations. [See Exhibit B.]
Under the structure of the NGPA and FERC practice, consumers have
been required to pay the filed rates (which in this case have been
excessively high) and rely on the FERC's refund process to remedy the
inequities. FERC did not require the disputed amounts of contested
rates to be placed in escrow nor did it require that a bond be posted
for later payment. However, the fact that first sellers did not
voluntarily take any steps to notify their working and royalty interest
owners and financially protect the disputed amounts from an adverse
ruling in a pending case should not be a basis for denying ratepayers
interest due on the amounts they were overcharged. Congress should not
interfere with the process now, but instead preserve the equities.
In this respect, the Congress should be mindful that consumers have
been forced to pay gas producers billions of dollars in take-or-pay and
contract buyout costs. These costs were the result of the NGPA maximum
lawful prices escalating above market clearing levels and resulting
imbalances between supply and demand. Although consumer representatives
requested the FERC and the courts to reform the high-priced producer
contracts, no relief was forthcoming. Instead consumers were required
to pay billions of dollars in take-or-pay and gas supply realignment
costs to producers. [See Exhibit C.]
Much of the present turmoil springs from a later order in which the
FERC announced that it would limit each first seller's refund
obligation to the extent of its working interest in the well from which
the natural gas was sold and impose a direct refund obligation on
working and royalty interest owners. The Missouri Commission protested
this FERC decision, and has asked the Court of Appeals to review it.
The NGPA extended FERC jurisdiction only to first sales of natural gas.
Since neither working interest owners nor royalty interest owners
typically sell gas, the Missouri PSC believes this is a contract issue
for the courts, not the FERC.
iii. current status of the refund and interest payments
According to the refund procedures prescribed by FERC, pipelines
were directed to serve upon first sellers and file with the Commission
a Statement of Refunds Due by November 10, 1997. First Sellers who
collected revenues in excess of the applicable maximum lawful price as
a result of the reimbursement of Kansas ad valorem taxes were to refund
these excess revenues, with interest by March 9, 1998. FERC also
explained that a first seller would be permitted to amortize the
refunds over an extended period of time or be granted adjustment
relief, if appropriate financial data was submitted to support such a
request by an individual first seller. Additionally, FERC established a
process through which disputes between first sellers and pipelines are
to be resolved. First Sellers were allowed to place any disputed
amounts into an escrow account, which would toll the interest
obligation. FERC directed pipelines to flow through the refunds
received to their customers who had been overcharged.
Nine pipelines filed Statements of Refunds Due in November 1997.
These statements reflected a total of $335 million Kansas ad valorem
tax refunds due from producers. Of this amount, $207.5 million, or 62%,
was accrued interest. [See Exhibit D.] A review of the detailed
information regarding the reported amounts due from 404 individual
producers reveals the following information which we hope the
Subcommittee will find useful in placing the various issues into
perspective. [See Exhibit E.]
The first 24 producers owe 86% ($288.4 of $335 million) of the
refunds.
<bullet> The total refund owed by each of those producers ranged from
$62.3 million to $1.4 million.
<bullet> The amount of interest owed by each of those producers ranged
from $38.1 million to $0.9 million.
The next 25 producers owe 7% ($23.2 of $335 million) of the
refunds.
<bullet> Each owed less than $1.4 million but more than $0.5 million.
<bullet> Interest owed by each ranged from $.9 million to $0.3 million.
The remaining 355 producers owe 7% ($23.4 of $335 million) of the
refunds.
<bullet> The total refund owed by each of those producers ranged from
$494,000 to less than $100.
<bullet> The amount of interest owed by each of those producers ranged
from $311,000 to less than $100.
Exhibit F summarizes the information contained in the pipeline
annual refund reports filed in May of 1998 and May of 1999. The 1998
refund reports show that of the $335 million owed, $93.9 million had
been paid by producers. The 1999 refund reports show that further
amounts collected from producers during this second year are relatively
small ($3.1 million). Since interest continues to compound quarterly on
any unpaid balances, the Missouri PSC prepared estimates of the
additional interest that has accrued up through March 31, 1999.
There are no FERC filings that specifically show which states'
consumers are owed or have received Kansas ad valorem tax refunds.
Therefore the Missouri PSC applied a set of allocation factors that
were developed from data contained in pipelines' 1983-1988 annual FERC
Form--2 reports. [See Exhibit G.] Natural gas consumers in 23 states
are entitled to Kansas ad valorem tax refunds owed. The Missouri PSC
estimates that Kansas gas consumers are owed over $80 million, with
Missouri gas consumers being owed over $60 million. Other states which
are owed more than $10 million are: Minnesota $48 million, Nebraska $37
million, Colorado $24 million, Illinois $23 million, Iowa $20 million,
Indiana $17 million, and Michigan $13 million.
The Missouri PSC has actively participated in FERC dockets related
to refunds on the Williams and Panhandle pipeline systems and those
court cases which affect the amount of refunds owed Missouri natural
gas consumers.
iv. cons of the proposal to waive interest
Consumers have been overcharged for natural gas dating back to
1983. Interest on the refunds is the means by which consumers are
compensated for the time value of the money they were overcharged. It
would be inequitable to deny consumers the interest to which they are
entitled. It is equitable for producers to pay interest at the FERC's
refund interest rate for their use of these funds over the past 11-16
years.
The NGPA was a carefully crafted compromise of competing producer
and consumer interests. The Act provided for the phased deregulation of
various categories of new gas production while maintaining maximum
lawful ceiling prices for sales of gas produced from older wells. By
maintaining price ceilings on the older, flowing supplies of natural
gas, Congress intended to temper the effect of deregulation of certain
high cost gas through rolled-in pricing. To now allow producers to
benefit from exceeding such maximum lawful prices, upsets the balance
of producer and consumer interests reflected in the NGPA.
The issues of whether producers have overcharged consumers by
collecting prices in excess of those established by Congress have been
fully litigated at the FERC and affirmed by the Supreme Court. Issues
associated with the interest on refunds are pending review before the
United States Court of Appeals. Numerous petitions for adjustments and
relief from refund obligations are currently being processed by FERC.
It is unfair to disturb this regulatory and judicial process.
v. misconceptions
There is no basis to claims that producers were not provided notice
of potential refund liabilities associated with their collection of
Kansas ad valorem taxes from consumers. The large producers intervened
in response to the public notice of FERC's review of this issue. These
large producers have been involved throughout the entire regulatory and
judicial process. Large first sellers and operators should have taken
steps to insure that they could collect the contingent obligations from
their working interest owners and royalty owners.
There is no basis to the claim that the harm to small producers can
not be addressed absent a general waiver of interest. FERC is
processing numerous requests for adjustment and relief from refund
obligations, including interest, due to hardship. The Missouri PSC
believes that relief should be permitted in cases where small producers
demonstrate that the payment of refunds and interest will result in
special hardship.
Reports of harm to the Kansas economy should be tempered by the
fact that Kansas consumers are the single largest beneficiary of the
refunds. As indicated in the Missouri PSC study, an estimated $80
million in refunds will flow to Kansas consumers. The Kansas economy
also has benefited from the millions of dollars gas supply transition
costs paid by consumers to Kansas producers.
Reports have also surfaced that refunds are not flowing through to
consumers. While there are several instances where pipeline customers
have bargained away their rights to refunds, the vast majority of
refunds will be flowed back to consumers pursuant to the authority of
state utility commissions, such as the Missouri PSC. The issue of
whether pipelines will flow through refunds to non-jurisdictional
direct sales customers will generally depend upon contractual
provisions relating to refunds. Direct sales customers are typically
large industrial consumers who are capable of dealing with the pipeline
directly.
vi. conclusion
The Missouri PSC respectfully requests that Congress not interject
itself into a regulatory and judicial process that is providing all
affected parties the opportunity to pursue fair resolutions of
difficult issues.
Thank you for the opportunity to appear before you today. I will be
happy to answer any questions you may have. My staff is also available
to assist you and provide any additional information you may need in
your deliberations on this matter.
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Mr. Barton. Mr. Krehbiel is recognized for 5 minutes.
STATEMENT OF ROBERT E. KREHBIEL
Mr. Krehbiel. Thank you Chairman Barton, members of the
committee for the opportunity to testify. I am appearing today
as an independent producer of natural gas in the State of
Kansas and on behalf of an association of small independent oil
and gas producers who work and operate in the oil and gas
fields of Kansas.
Small independent producers are very important to energy in
America and very important to energy consumers in America. They
drill over 85 percent of all wells in the U.S. and account for
60 percent of gas production.
In Kansas, there are many small independent operators. They
are small, family owned operations very similar to family
farms. Many Kansas farmers, in fact, work in the oil fields and
some operate their own small oil and gas companies to
supplement depressed farm income.
But today while the U.S. economy flourishes, producers in
both agriculture and oil and gas production are facing
extraordinarily difficult economic times. Congressman Hall
recognized the condition of the oil and gas industry in his
opening statement. He was exactly correct.
The oil and gas producer was devastated by the crash in
prices in the 1980's and has never recovered. For example, in
the mid-1980's, there were over 220 rigs actively drilling for
oil and gas in Kansas. Today there are three rigs running in
Kansas. The value of oil and gas production in Kansas has
declined by over $1 billion annually and over 10,000 jobs in
the producing sector alone have been lost.
Now the Kansas producer land owners are facing a new
threat, the retroactive reversal of FERC policy. Producers are
facing refunds totaling $340 million resulting from gas sold to
interstate pipelines from 10 to 15 years ago. Many years of
good faith reliance and compliance with Federal policy has
turned into a nightmare for many honest, hard working, and
unsuspecting Kansas producers and royalty owners. I do not have
expertise in FERC law and I am not here to discuss the legal
issues. I simply want to share some producer stories with you
which are typical of much of our membership.
For example, in February 1993, one young Kansas producer
purchased 27 properties from a company that was being
liquidated for the total sum of $195,000. Ten of those
properties were gas wells. In October 1998, this producer
received a letter from the FERC telling him that he was liable
for $855,147, more than six times what he had paid for these
properties. Both seller and buyer were without knowledge that
any potential liability existed.
Many sales have occurred since 1983 to 1988, and this
scenario will be repeated hundreds of times over. Innocent
purchasers with no connection or relationship to the pipelines
involved will be held liable for large sums of money which was
paid to others.
Let me share the case of my good friend. In 1980, 19 years
ago when the oil patch was booming, my good friend embarked on
the American dream. He decided to raise some money and buy an
oil and gas lease and drill a well. I worked with him to
purchase an oil and gas lease from a farmer on 160 acres in
Edwards County, in Kansas.
He raised $150,000 by selling interest to other producers
in Kansas. He set up a corporation to operate the well and he
provided the expertise and his wife did the book keeping. That
is exactly the way the vast majority of wells are drilled in
Kansas, by a group of producers coming together to share the
costs of the risks of exploration. It is estimated that 5,000
independent producers sharing these costs and 50,000 royalty
owners will be impacted by this decision.
Now, this group was successful in drilling the Edwards
County well. They got a small gas well. A major interstate
pipeline offered to buy the gas and they offered to pay the
maximum lawful price set forth in the Natural Gas Policy of
1978.
And it is important to understand that never in the history
of the gas patch has the independent producer charged a price
for natural gas. Kansas producers, like Kansas farmers, are
price takers, not price makers. To penalize a producer for
charging a price in excess of the maximum lawful price when
that price was set and determined by the purchaser and the
government regulators is patently unfair and absurd on its
face. To retroactively declare the conduct of innocent people
unlawful is unconscionable.
With respect to the taxes, the attorneys in that contract
said that the purchaser would reimburse seller for ad valorem
taxes as provided in FPC opinion 699-D issued October 9, 1974.
In reliance upon this language written by attorneys for the gas
purchaser who referenced a valid order of the FPC, my friend
signed this pipeline contract.
Fifteen years after signing this contract, a D.C. Circuit
Court would say, as we see the issue, the apparent lack of
detrimental reliance on the part of the producer is the crucial
point. What would they have done differently if they had known
in 1983 that they were not entitled to recover the tax?
Clearly the operator relied on Opinion 699-D when he signed
that gas contract and accepted reimbursements for taxes. He was
simply not in court to tell the judge that. The answer to the
judge's query was simple. He would not have sold the gas or
collected the tax. On November 4, 1996, my friend died never
knowing that this case even existed. My friend's widow could
not handle the operations. She sold the production and
dissolved the corporation. One year later my friend's widow
received a letter from the FERC referencing a FERC order dated
September 10. This was the first knowledge that they had that
this issue even existed.
In a letter dated November 18, 1997, to her old partners,
to her husband's old partners, five of whom are now dead or
dissolved, who shared the cost of this well, she described this
as a big shock to all of us. Indeed it was. By the time that
operator or any non-operator, first had notice that this issue
even existed, FERC had already generated an interest penalty
which was early twice as much as the principal.
Now the pipelines have gone to court to try to overturn
another FERC decision. Previously FERC required the working
interest owners only to be responsible for their share of the
refund. Now they are trying to get the operator to be
responsible for everybody's interest. What that means is this
widow will now be responsible for the share of the taxes of the
five deceased partners in this well.
Mr. Barton. Mr. Krehbiel, I know it is important that you
get your comments on the record, but we have them in writing.
If you could summarize in the next minute or so, we would
appreciate it.
Mr. Krehbiel. Thank you very much, Mr. Chairman. This issue
should simply not exist. Thousands of innocent hardworking
productive people who rely on and comply with Federal rules and
regulations should not be penalized for the mistakes of Federal
regulators.
This situation is not the fault of Kansas producers. These
producers have served the American consumer with hard work and
productivity. Common sense and equity demands fairness for
producers as well as consumers. A healthy independent producing
sector is in the best interest of all Americans.
Today that producing sector is rapidly being dismantled in
the State of Kansas. Fairness in government regulations is
critical. We urge you and appreciate your serious consideration
of this issue. Thank you.
[The prepared statement of Robert E. Krehbiel follows:]
Prepared Statement of Robert E. Krehbiel, on Behalf of the Kansas
Independent Oil and Gas Association
Chairman Barton and members of the Subcommittee: Thank you for the
opportunity to testify. I am appearing today as an independent producer
of natural gas in the State of Kansas and as the Executive Vice-
President of the Kansas Independent Oil and Gas Association. This
association was organized over 63 years ago to provide a voice for the
many small independent oil and gas producers who work and operate in
the oil and gas fields of Kansas. We are a cooperating association of
the Independent Petroleum Association of America.
There are 7,000 independent producers in America who typically
employ 10 full time and 3 part time employees. They drill over 85% of
all wells in the United States and account for 43% of oil production
and 60% of gas production. In Kansas there are approximately 2,500
independent producers many of which are very small, family owned
operations very similar to family farms. Many Kansas farmers work in
the oil fields and some operate their own small oil and gas companies
to supplement depressed farm income. Many working and retired farmers
rely on royalty income resulting from production on their farm land.
Along with agriculture and manufacturing, the oil and gas industry
has been a mainstay of the Kansas economy for many years. But today,
while the U.S. economy flourishes, producers in both agriculture and
oil and gas production are facing extraordinarily difficult economic
conditions.
The independent oil and gas producer was devastated by the crash in
prices in the mid 1980's and has never recovered. In the mid 1980's
over 220 rigs were actively drilling for oil and gas in Kansas. Today,
3 rigs are running in Kansas. The value of oil and gas production in
Kansas has declined by over $1 billion annually and over 10,000 jobs in
the producing sector alone have been lost. The attached Kansas Report
reflects the most recent trends in the industry. Today, in Kansas, the
average oil well produces only 2.4 barrels of oil per day. The average
Kansas gas well produces less than 100 mcf of gas per day. Still,
thousands of these marginally economic wells across America provide an
enormous national resource. America still produces nearly half of the
oil it consumes and ranks second to Saudi Arabia in world oil
production. One Kansas stripper oil well making ten barrels of oil per
day or stripper gas well making 90 mcf per day provides enough fuel to
supply the needs of 150 Americans. Today, however, many of the stripper
wells in Kansas do not provide enough revenue for producers to continue
their operations.
Now, the Kansas producers and landowners are facing a new threat,
the retroactive reversal of Federal Energy Regulatory Commission
policy. After 19 years of reliance on Federal Power Commission Opinion
699-D by the State of Kansas and Kansas producers, the Federal Energy
Regulatory Commission, successor to the FPC, reversed its opinion and
ordered producers to pay the major inter state pipeline purchasers
refunds totaling $334 million resulting from the sale of gas produced
in Kansas and sold to interstate pipelines between October 3, 1983 and
June 28, 1988. Approximately two-thirds of this amount is interest. It
is estimated that just under $100 million of this amount is demanded of
small independent producers. Many years of good faith reliance on
federal policy has turned into a nightmare for many unsuspecting Kansas
producers.
This retroactive reversal of federal policy has created a series of
legal issues which are infinite and complex. I understand that lawyers
with expertise in these matters have identified issues ranging from
complex constitutional questions to simple questions of private
contract. New issues arise continually both at the federal and state
level. Lawyers should fare very well. Some independent operators have
pooled their resources to share the costs of counsel. Many of the small
independent operators, non-operators and royalty owners in Kansas,
however, lack the financial resources to employ skilled counsel. These
producers do not, however, need legal advice to feel the outrage of the
injustice of this federal regulatory action.
I do not have expertise in FERC law and I am not here to discuss
the legal issues. I want to simply share one producer's story which is
typical of much of our membership. The factual situation which I will
discuss is true and, while it is not my purpose to discuss legal
issues, many will appear. These issues are typical of what many Kansas
producers are facing.
In 1980, nineteen years ago when the oil patch was booming, my good
friend, a petroleum engineer with whom I had worked for several years,
decided to raise some money, buy an oil and gas lease and drill a well.
He was an honest, hardworking, productive man of utmost integrity. He
was good at his work and well respected by those who knew him. He
organized a corporation and, as a landman, I worked with him to
purchase an oil and gas lease from a farmer on 160 acres in Edwards
County, Kansas. He raised $150,000 by selling interests in an
exploratory well to ten friends or acquaintances with experience in the
oil and gas industry. The corporation would operate the well with my
friend providing the expertise and his wife doing the bookkeeping.
The vast majority of exploratory wells drilled in Kansas are
drilled by groups of individuals and companies who pool their resources
to share the costs and risks of this very risky business. Behind every
small operator is a group of non-operating working interest owners with
substantial interests in the well.
This group was successful in drilling the Edwards County well. By
the end of 1980 they had completed a small gas well. It appeared that
it would be good enough to recover their investment and possibly make
some money. One major interstate pipeline company had a pipeline nearby
as did several other gas purchasers. This pipeline offered to buy the
gas and by January, 1981, their attorneys had written a Gas Purchase
Contract. Sales commenced in March of 1981. Since the purchaser was an
interstate pipeline their contract provided that they would pay the
maximum lawful price as set forth in the Natural Gas Policy Act of
1978.
Until deregulation, the maximum lawful price of gas sold in
interstate commerce was always determined by the Federal Power
Commission, or its successor the Federal Energy Regulatory Commission.
In an unregulated market the price of gas is determined by the markets
created by the pipelines. Never in the history of the gas patch has the
independent producer ``charged'' a price for the natural gas he
produces. Kansas producers, like Kansas farmers, are price takers, not
price makers. To penalize a producer for charging a price in excess of
the maximum lawful price when that price was set and determined by the
purchaser and government regulators is patently unfair and absurd on
its face. To retroactively declare the conduct of innocent people
unlawful is unconscionable. I understand the lawyers will also argue
that it is unconstitutional.
The attorneys who wrote this gas purchase contract included a
provision with respect to taxes, which read: ``Purchaser shall
reimburse Seller for all existing and new production, gathering,
delivery, sales, severance, excise or other taxes or assessments of a
similar nature including ad valorem taxes as provided in FPC Opinion
No. 699-D, issued October 9, 1974.'' Under Opinion 699-D under specific
ruling of the FPC, the Kansas ad valorem taxes could be added on to
what otherwise was the maximum lawful price and could be re-imbursed as
a part of the maximum lawful price. This ruling was later re-affirmed
by the FPC's successor, the Federal Energy Regulatory Commission on at
least two occasions in 1986 and 1987. In 1986 the FERC wrote that ``it
is clear beyond question'' that the Kansas ad valorem tax can be paid
to producers as part of their costs, and reaffirmed Opinion 699-D.
Kansas producers relied on that opinion. Later, in 1993, nineteen years
after the opinion was issued, and declared to be ``clear beyond
question'', the Federal Energy Regulatory Commission reversed this
opinion.
In reliance upon this language written by Attorney's for the gas
purchaser who referenced a valid order of the Federal Power Commission,
Opinion 699-D, my friend signed the Pipe Line's contract as president
of the corporation, and acted in accordance with its terms .
Fifteen years later on August 2, 1996, in an effort by the Pipe
Lines to overturn Opinion 699-D, in the case of Public Service Company
of Colorado, et al., Petitioners v. Federal Energy Regulatory
Commission, Respondent, OXY USA, Inc. et al., Intervenors, United
States District Court of Appeals, District of Columbia Circuit, Judge
Ruth Bader Ginsburg would write for the Court: ``As we see the issue,
the apparent lack of detrimental reliance on the part of the producers
(on Opinion 699-D) is the crucial point. What would they have done
differently if they had known in 1983 that they were not entitled to
recover the Kansas tax?'' Clearly the operator did rely on Opinion 699-
D when he signed the gas contract and accepted re-imbursement for
taxes. He was simply not in court to tell the judge that. The answer to
the Judge's query was simple, they would not have sold the gas or
collected the tax re-imbursements. Seller had no idea this case even
existed. Had he been timely notified of this case he would have had the
opportunity to tell the Judge that he would not have signed that gas
purchase contract. Instead the Court ordered producers to refund any ad
valorem taxes paid by the gas purchaser pursuant to Opinion 699-D back
to October, 1983, ``the date when all interested parties were given
notice in the Federal Register that the recoverability of the Kansas
tax under Sec. 110 of the NGPA was at issue.'' This operator did not
subscribe to the federal register. Neither did his partners. Later the
FERC would triple the refund by adding interest at high rates
compounded quarterly.
On November 4, 1996, my friend died, never knowing that the Public
Service Company of Colorado case even existed. My friend's widow could
not handle the operations without the help of her husband and shortly
after his death she sold their production and dissolved the
corporation.
On November 10, 1997, the Pipe Line sent the widow a letter
addressed to the now dissolved corporation which referenced an Order of
the Federal Energy Regulatory Commission dated September 10, 1997. A
copy of that letter is attached. This was the first knowledge that she
had that this issue even existed. In a letter dated November 18, 1997,
to the old partners, five of whom were now dead or dissolved, who had
shared the costs and risks of drilling an exploratory well, the widow
described the letter from the Pipe Line as ``a big shock to all of
us''. By the time that the operator or any non-operator first had
notice that this issue even existed, FERC had already generated an
interest penalty which was nearly twice as much as the principal. In
the case of this group the principal was $6,502.88 and the interest was
$12,505.02, for a total liability at that time of $19,007.90. It is
very likely that even to this day many non-operating interests their
heirs, successors or assigns and hundreds of royalty owners have no
idea that this case even exists. Neither does the completely unknowing
purchaser of this depleted property have any idea of the potential
liability he purchased. The Edwards County farmer from who I purchased
the oil and gas lease is deceased and his children have no idea of
their potential liability. It appears that if the pipeline cannot
collect from the decedent they will attempt to collect from the
decedent's widow and children. If the pipeline cannot collect from the
widow and children they will attempt to collect from the unknowing
purchaser. Efforts to extend the jurisdiction of the FERC over persons
and property stretch the imagination. The litigation that will be
generated from these efforts will extend through the next decade.
In this case the Pipe Line purchased gas in accordance with the
terms of their Gas Purchase Contract dated January 15, 1981, and had
complied with FPC Opinion 699-D by reimbursing the producer for the ad
valorem taxes that the corporation had paid to Edwards County for tax
years 1983, 1984, and 1985. Even though the term of the contract was
for a period of 15 years, the Pipe Line determined that the gas market
had declined and they could buy the gas for a lesser price. Northern
notified the corporation that they would no longer take gas from the
Edwards County well and essentially voided the contract. Unable to
operate without cash flow and unable to market the gas from a well
which is now greatly depleted, the operator had little choice but to
sign an amended agreement. Effective October, 1986, the Pipe Line
reduced the price paid for natural gas from a then maximum lawful price
of $3.22 to approximately $1.81 per mcf. Ad Valorem taxes paid to
Edwards County were no longer refunded. By August of 1987, the Pipe
Line, knowing that the well was greatly depleted and that no other
purchaser would be willing to lay a pipeline to the wellhead to
purchase the remaining reserves offered to pay $1.18 per mcf. On August
29, 1987, the operator wrote to his working interest owners to tell
them that the well would be shut in. A copy of that letter is attached.
For the period of time for which refunds are set out in the
Colorado Public Service Company opinion, October 1983 through June of
1988, the period of the alleged overpayments, the Pipe Line actually
paid these producers an estimated $49,000.00 less than the maximum
lawful price allowed by the Natural Gas Policy Act of 1978, even with
the refund of ad valorem taxes in 1983, 1984 and 1985. I understand
that this is a typical scenario. Are producers supposed to suffer the
losses of a weak market while the government eliminates the benefits of
a good market? Can producers be required to refund monies alleged to
have been collected in excess of the maximum lawful price when they
were actually paid much less than the maximum lawful price during this
period of time? Were consumers not the beneficiaries of this price
reduction? Doesn't equity cry out?
In looking at my friend's scenario you also see a series of
contractual issues arise which have never been considered, or should be
reconsidered, by the FERC in ordering refunds. For example, on January
15, 1985, the Pipe Line proposed an amendment to the gas purchase
contract to continue purchasing gas at a reduced price. That amendment
included a provision which stated that Pipe Line would never be
required to pay seller a price in excess of the maximum lawful price
established by the FERC . . . and Seller agrees to promptly refund any
excess payments made by Northern including interest calculated at the
prime rate in effect at the Chase Manhattan Bank.'' Seller would not
agree to this proposal because it required the payment of interest on
some possible retroactive refund. With hindsight it becomes apparent
that by this time the Pipe Line attorneys knew that Opinion 699-D had
been challenged and if successful they wanted to get producers
contractually responsible to refund interest on any principal recovery
which might result. My friend would not agree to that and any refund of
interest was stricken from the contract. Clearly, and equitably, in
view of the price reduction accepted, any responsibility for a FERC
ordered payment of interest on a retroactive refund should be the
contractual responsibility of the purchaser.
Finally on January 14, 1994, producer and purchaser entered into a
Termination Agreement discharging each other from any and all
liabilities, claims and causes of action, whether known or not, arising
out of or relating to said contracts between the parties. Typically,
under these agreements, and the new gas purchase agreements entered
into concurrently with them, in addition to agreeing to price
reductions the producer releases claims which it could assert and which
would add to the cost of the purchaser. The consideration for the
producer's release is the release of possible claims against it.
Clearly a pipeline and a producer should be able to agree between
themselves as a matter of contract to indemnify and hold the other
harmless from cross claims and liabilities including any refund
obligations. The purchaser would not enter into the contract or mutual
release unless it was receiving sufficient consideration, and it is the
best judge of this. In this situation the pipeline is acting in the
best interests of the consumer, as it is entering into the contract to
reduce its costs. In fairness and under its power to make equitable
adjustments, FERC should honor the mutual release and require no refund
from either the producer or pipeline, as the consumer has already
received the benefit of the producer release by reduced costs.
Requiring a refund from the producer while retaining the benefits of
the producer release and revised contract is a double burden and
inequitable. The producer then pays twice, once by the release and
price reduction, and secondly by the refund.
Issues of private contract such as these have not been considered
on an equitable basis and are plentiful. If these issues cannot be
resolved en masse the Kansas courts will abound in litigation for years
to come.
Now, I understand, the Pipe Lines are asking the Washington, D.C.
Circuit Court to have another order of the FERC overturned. This order
stated that producers would only be liable for their own working
interest, which order has been reaffirmed on several occasions. The
FERC order holds producers responsible for their own working interest
only. The Pipe Lines would have the Court require the operator to be
liable for the interest of all working interest owners. In other words,
the Pipe Lines would have the Court require my friend's widow to refund
the interests of all of her husbands old partners. If she cannot
recover her partner's shares because they are deceased, missing or
bankrupt she will be forced to suffer their loss. The fairness of that
will be difficult to explain to her. It should be difficult to explain
to anyone.
While the dollars involved in this case are small, these situations
repeat themselves over and over amongst Kansas producers and the impact
on the people involved is significant. For many the cost of defense
will surely exceed the amount at issue. But the impact goes beyond the
money. Never have I seen an issue strike a nerve of honest, hardworking
productive people in such a manner. It generated a sense of injustice
among innocent people that was most accurately described by one state
senator as ``the worst taxation atrocity ever perpetrated by a federal
agency'' and it serves to generate a feeling of hostility. This should
not be.
Personal stories abound in an industry that has been devastated by
tough economic conditions. One geologist, whom I will call Bill, who
lost the benefits of many years work in the last price crash and now
works for $2,500 per month, will receive an order to refund $8,775 to
one major pipe line purchaser. Another elderly Kansas producer, who
lost many of his assets in the last crash and now lives on social
security, will receive an order to refund $12,000. The heirs of a
deceased geologist may well be required to refund $4,000. Before the
Colorado Public Service case was decided or anyone had knowledge of it,
one innocent purchaser bought a good amount of production which, during
the period from 1983 to 1988, had been sold to an interstate pipe line.
He was later aghast to learn that the FERC would order him to refund
$267,000 to a pipe line he had never been affiliated with.
These issue should not exist. Thousands of innocent, hardworking,
productive people, who rely on and comply with federal rules and
regulations should not be penalized for the mistakes of federal
regulators. These producers have served the American consumer with hard
work and productivity. Common sense and equity demands fairness for
producers as well as consumers. A healthy independent producing sector
is in the best interests of all Americans, producers and consumers
alike. Fairness in government regulation is critical to a free society.
We urge you to address this serious issue.
Mr. Barton. Thank you, sir.
We would now like to hear from Mr. Majeroni.
STATEMENT OF JOHN MAJERONI
Mr. Majeroni. Thank you, Mr. Chairman.
When you saw that a royalty owner was going to be here, you
probably didn't expect to see someone from an eastern
university talking about something from Kansas. But the royalty
owners, people affected by this are really all over the
country. This is a large field. It has been in existence for a
long time. I bet there are people in every one of your
districts who are royalty owners in this field.
The average royalty owner that I know of isn't a big rich
person or producer thereof. When I go to Kansas to the annual
meetings, they are farmers and ranchers and pretty common
people. A lot of them are elderly, and they look on these
royalty checks sort of like a supplemental security system. But
there are also not-for profits like Cornell. There are local
school districts and churches and others. We think this is
really unfair to the royalty owners who are a very affected
party by all this.
Mr. Barton. Is Cornell a royalty owner?
Mr. Majeroni. We are a royalty owner in the field, a large
royalty owner, yes. We already talked about the flip-flops and
the decisionmaking at FERC. I really don't want to comment any
more about that. But it is important to know that the royalty
owners really have no control. The nature of the lease is such
that we don't dictate where wells are drilled if they are
drilled.
We have nothing to do with who the gas is sold to or what
price is paid. We didn't direct the taxes to be paid. In most
instances, the taxes weren't even sent to the royalty owners.
They go right to the producers who pay them or else passed them
on to the pipeline companies to pay them directly.
For certain, the royalty owners have had absolutely no
control, no decisionmaking in what has occurred over the last
15 years. Most royalty owners aren't even aware of the
situation to my knowledge. There may have been a newsletter
from an association or something in the newspaper, but it is
the kind of thing you read and in the back of your mind you
don't understand; you just think that doesn't affect me.
If there was a mistake made, we feel that the royalty
owners shouldn't have to pay for it, especially true with
interest. We have yet to be billed. Most of us, including
Cornell University, have received no bills from anybody, and
yet the interest continues to accumulate. And we really have
nothing to say about it and don't even have an understanding of
the scope of what we would owe.
Three, royalty owners were already in a less than equitable
financial position and should not be punished further. The term
of an oil and gas lease is very long. Most of these leases are
40 or 50 or 60 years long and when the bargains were struck in
the 1930's and 1940's, one-eighth was a fair take for a royalty
owner. If you do a lease today, it is 20 or 25 percent. So the
royalty owners are already sort of on the short end of the
stick financially and we think to push this off on them just
sort of punishes them further.
Four, the intent of the interest here is really punitive.
If interest is part of a financial transaction, if I am going
to buy an expensive television set, I can make a decision. Do I
wait or is the interest worth it for me to borrow the money and
have it now. The other form of interest is a punishment. And
clearly that is the case here. We are being punished. It is
being tacked on because the producers should have known better,
but the royalty owners had nothing to say about this, not
involved in the decision, yet we are also being punished.
We didn't ask to pay the money. Many of us haven't been
given opportunities to pay it back, but the interest clock
continues to tick. And I think just by looking at the facts of
$130 million of the original debt and $210 million in interest
shows that it is really intended to be punitive. FERC mentioned
that if there is no interest, then they lose the time value of
money, but one of the earlier speakers said the average
consumer is looking at $15 so it is the difference between $6
or $7 for a consumer, $15, it is just not a big difference to
the consumer, I don't think.
The fifth reason is that in many cases those who have
benefited 15 years ago are not the same as the people who are
going to be punished now. Properties have been sold; parents
have passed away. There have been divorces. How does this money
get collected? So in the end, the collection is bound to be
uneven and equitable. And the producers recognize this, and
this is one of the reasons why they are not anxious to take on
this burden of trying to collect from the royalty owners
because they know what kind of a hassle and how unequitable
this is going to be.
Last, as was mentioned before, there are no real winners
here; but there are plenty of real losers. I too wonder if this
is all going to go to the consumers, why are the pipeline
companies fighting so hard for this. I have a feeling that some
of it is going to end up staying with them. I think I know why
some of the States are fighting hard for it too and some of the
commissions. I think they see this as going in their pocket,
but it is a real and painful impact to royalty owners.
I got a phone call over the weekend from someone who knew I
was going to be here, a Kimberly Nicholson who lives in
Vancouver, Washington, a royalty owner. Her mother had these
royalties for years. Kimberly, her mother, passed away a couple
of months ago from Lou Gehrig's disease and these royalties
took care of her mom. In March, Kimberly got a bill from a
producer saying you owe $25,000 due in 10 days just out of the
blue.
You know the people who live in your districts. They can't
pay a $5,000 bill out of the blue let alone a $25,000. This is
the impact it is having. Something should be done to provide
for the royalty owners. We think the bill waiving the interest
is a very good step in the right direction.
[The prepared statement of John Majeroni follows:]
Prepared Statement of John Majeroni, Cornell University Real Estate
Department, on Behalf of the Southwest Kansas Royalty Owners
Association
introduction
My name is John Majeroni of Ithaca, New York. I'm a West Point
graduate from the Class of 1974. During my six years in the Army I
served as a Platoon Leader, on General Staff, and as a Company
Commander. Shortly after getting out of the Service I went to work for
Cornell University and am now the Director of the University's Real
Estate Department. I have been managing Cornell's oil and gas
properties for 18 years. I am not an attorney. I think I represent a
knowledgeable, but lay-person's, point of view.
I was invited to speak by the Southwest Kansas Royalty Owners
Association (SWKROA)--a non-profit Kansas corporation, organized in
1948 to protect the rights of landowners in the Hugoton Gas Field.
Cornell is a member of this organization which has a membership of
around 2,500 members, many of whom are farmers and ranchers. Most of
its members are family owners of mineral interests, as distinguished
from the companies that act as producers, operators, or working
interest owners. SWKROA has been our primary source of information
about the ad valorem tax refund problem. In fact, to my knowledge,
we've had no communications from our producers or the FERC on this very
important issue.
You may be surprised to see a representative from a university
here. I'm probably not what you expected to see. When you think of a
royalty owner, perhaps you have visions of rich Texans, like ``J. R.
Ewing''. But the impact of the ad valorem tax refund issue is much
greater than a few rich oil men. It impacts thousands of people and
organizations who own mineral and royalty interests, including not-for-
profit organizations, such as Cornell University. It impacts local
school districts and churches.
The average royalty owner isn't rich. They are farmers and
ranchers. In many instances these royalty and mineral interests have
descended from generation to generation from people who lived in
Southwest Kansas many years ago. Current royalty owners often only own
a small fraction of the original interest. Many of the royalty owners
are elderly. These royalty checks are like their Social Security
supplements. Further, this is not an issue which affects only Kansas
residents. Persons throughout the United States and several foreign
countries own these minerals and are affected by this ruling. It is
certain that some royalty owners are among your constituents.
And so my remarks are being made on behalf of all affected royalty
owners to seek legislative relief from the impact of the Federal Energy
Regulatory Commission (FERC) order dated September 10, 1997. In that
ruling, FERC ordered first sellers of natural gas to make refunds of
reimbursement for Kansas ad valorem taxes paid from 1983 to 1988, plus
interest, including reimbursements attributable to royalty interest
owners.
I am here because of the unfair and unjust treatment which FERC has
inflicted upon the royalty owners. Apparently it is legal, but it is
wrong.
It is wrong because people are being punished for flip-flops in
decision making at FERC. It is wrong because royalty owners had, and
continue to have, absolutely no control over any decisions relating to
the issue, and yet we bear not equal, but even more liability, than
those who have control. It is wrong because royalty owners are already
in a less-than-equitable position financially in most wells and are
only being punished further. It is wrong because the nature of the
compound interest calculations on the amount due makes it punitive. It
is wrong because it in many cases, those who benefited will not be the
same as those who are being punished. And it is wrong because there
will be no real winners, but plenty of real losers--in other words: the
action will be an unearned windfall of profits for pipeline companies,
but will have a substantial, painful impact on the royalty owners from
whom it is being collected. And besides arguments of equity, there are
still legal questions relating to FERC's jurisdiction over royalty
owners and the statue of limitations. I'd like to go briefly into
detail on each of these issues.
Flip-Flops In Decisions At FERC.
FERC itself created the problem by first determining that the
Kansas ad valorem taxes could be passed through to pipeline companies,
and then later changing its mind, thus creating the problem that
royalty owners presently face.
Several years prior to the passage of the Natural Gas Policy Act of
1978, the Federal Power Commission (FPC), (the predecessor of the
Federal Energy Regulatory Commission (FERC)), had held that producers
could increase the applicable just and reasonable rate for natural gas
to recover ``state production, severance or similar taxes'', and that
any state ad valorem tax ``based on production factors'' was a
``similar tax'' which could be added to the national rate. In 1976, the
FPC held that the Kansas ad valorem tax qualified because the bulk of
the tax was based upon production factors.
In 1978, the Natural Gas Policy Act (``NGPA'') set maximum lawful
prices for the first sale of various categories of natural gas. Under
Section 110(a)(1) of the NGPA, the first sale was allowed to exceed the
maximum lawful price to the extent necessary to receive ``state
severance taxes attributable to the production of such natural gas.''
The NGPA defined ``state severance tax,'' as ``any severance,
production, or similar tax, fee or other levy imposed on the production
of natural gas.''
Oil and gas producers in Kansas, relying on FPC and FERC rules,
``passed through'' the Kansas ad valorem taxes to consumers of natural
gas. The time frame covered by the controversial ad valorem tax refund
is for the years 1983 through 1988.
The problem arose when FERC changed its position some fifteen years
after its order and retroactively ruled that the producers should not
have been allowed to pass the Kansas ad valorem taxes through the
pipeline companies to the consumers.
FERC then ordered producers (first sellers) to reimburse the
consumers, through the pipeline companies, for not only the ad valorem
tax which had been added to the maximum lawful price, but also for
interest. FERC has also attempted to exert control over Kansas royalty
owners by urging the producers to collect the refund from royalty
owners, taking the position the producer will be liable to also pay the
royalty owner's share of the refund with interest.
The projected impact of the FERC's unfair decision is estimated to
be approximately $340 million dollars. Of this amount, approximately
$200 million dollars represents interest. Congressman Moran has
introduced a bill to waive the interest portion of refund obligation.
This would be a significant help, but Congress should go further by
overruling FERC's September 10, 1997 and subsequent orders.
Kansas State Senator Stephen R. Morris, R-Hugoton, made an analogy
that FERC's actions should evoke a similar reaction that taxpayers
would make if the Internal Revenue Service (IRS) were to disallow the
deduction of home mortgage interest, with no justification, and require
taxpayers--who had been relying on regulations which the IRS had been
operating under for twenty or more years--to retroactively pay back the
amount of the home mortgage deduction, plus interest. Surely, such
action would raise a public outcry of illegal, unfair and unjust
treatment by a federal agency. Yet FERC, if left unchecked by Congress,
has caused such a travesty.
Royalty Owners Had No Control.
The way that a gas lease is structured, royalty owners have no
control over the wells. We don't control when or where the wells are
drilled. We don't control the price gas is sold for, or to whom the gas
is sold. We certainly don't control expenses of drillers. We didn't
direct taxes to be paid on our behalf. In most instances, royalty
owners didn't even see the tax bills. Generally, the taxes were billed
by the County Treasurer directly to the producer who either paid the
taxes, including the royalty share, and then sought reimbursement from
the pipeline companies for the taxes. Or, the producer billed the
pipeline company for the taxes and the pipeline company paid the taxes.
For certain, we have had absolutely no decision making in this
issue. None. In most cases, royalty owners don't even have any
knowledge or aren't aware that there is an issue. If there was as
mistake, royalty owners shouldn't pay for it. This is especially true
of having to pay interest. Most royalty owners have yet to be billed
(or even notified), and yet interest continues to grow and compound!
Despite this lack of control over any decisions relating to the ad
valorem issue, we bear not equal, but even more liability, than those
who did have control. Because of the way that ad valorem taxes are
determined, royalty owners generally pay more than \1/8\th of the
amount that producers pay because they have no effective deductions to
offset against the tax as do the producers, such as depreciation. (One-
eighth (\1/8\) is the normal fraction for royalty paid under old oil
and gas leases.) SWKROA has estimated the ad valorem tax bill for
royalty owners could be in the range of 20 to 30 percent of the total
ad valorem assessment rather than the usual \1/8\th. Based on that
estimate, Kansas royalty owners could potentially be asked to refund
between 68 to 100 million dollars. That, of course, is a huge amount by
anyone's standards.
Royalty Owners Were Already In A Less-Than-Equitable Position
Financially.
The FERC ruling is also wrong because it is seeking to ``adjust'' a
position that was inequitable to begin with. Prices for Hugoton gas in
the 1983-1988 time frame were capped at unrealistic levels of $.50 per
MCF or less. Pipeline companies were already profiting at royalty
owners' expense. The FERC ruling essentially directs us to pay over
even more profit for the pipeline companies. The leases from which the
affected mineral owners are receiving royalties, are for a long term,
most of them being fifty to sixty years old. Most of these leases
provide for \1/8\th royalty. This is already unfair to landowners since
new leases are at 20-25% royalty. Why punish the royalty owners
further?
The Interest Calculations On The Amount Due Make It Punitive.
Interest is fair and proper if knowledgeable financial transactions
are entered into. Decisions are made about whether or not ``the
interest'' is worth the advanced funds. This is the decision one makes
when deciding to buy an expensive TV on credit or save for it. In this
instance, royalty owners had no opportunity to make any decision on the
payment of interest.
The interest assessed by FERC isn't part of a financial
transaction. It's a form of punishment--a punishment for an act taken
by somebody else, not the royalty owner's. FERC arbitrarily assigned
interest to accrue. To my knowledge, there has been no judicial
determination that interest should be charged.
The FERC interest rates also appear to be very high, especially by
today's standards. We didn't ask to borrow the money. We haven't been
asked yet to repay it. The interest continues to accrue and we don't
even have information on what we supposedly owe. This is patently
unfair.
Further, the typical royalty owner certainly did not earn the level
of interest being charged. They spent it. They live on it. Interest is
bad enough, but compound interest is particularly punitive. Someone
once said ``interest never sleeps.'' It is certainly true in this case.
Look at the facts here: $140 million owed, $200 million in interest.
Those Who Benefitted Will Not Be The Same As Those Who Are Being
Punished.
The funds in question are 10 to 15 years old. In some cases
properties have been sold. In other cases, parents have passed away.
How are these funds to be collected?
Royalty owners who inherited minerals subsequent to 1988 are not
subject to the refund claim under the Wylee case. Different producers
are approaching the problem in different ways. Imagine, in your
district, going back and trying to collect an adjustment in taxes that
was levied on homeowners 15 years ago. Imagine the confusion as you try
to sort out who was living where when and who should pay.
Collection is bound to be uneven and unequitable. The producers
even recognize this and, as you will see by their statements in
subsequent pages, object to being put in the position of collecting
these funds.
SWKROA Director John Crump, in 1998, testified before the Kansas
Legislature in support of Kansas Senate Bill No. 685 (which later
became HB2419) and gave several reasons for supporting SB685. Among his
arguments was that collecting this debt would be difficult, expensive
and time-consuming for the producers to locate and correspond with
those royalty owners who owned the royalty interests from 1983 to 1988.
Crump then pointed out examples of the inconsistencies in the pattern
of billing by some of the producers on the claimed refunds.
There Are No Real Winners, But Plenty Of Real Losers.
There are really no injured parties in the FERC ruling, but
enforcing the ruling will certainly injure plenty of people. Who is the
money going to? While the ultimate destination of the funds to be
collected is not clear, you must also ask why are the pipeline
companies fighting this issue so hard. Is it to benefit the consumers
who should receive the recoupment? Or is it more likely that the
pipeline companies will keep it?
The action will be an unearned windfall of profits for pipeline
companies who, remember, are already reaping more than their fair share
of profits.
If efforts are made to somehow distribute the funds to all natural
gas users in America, it will provide no meaningful benefit to their
lives. It may end up getting distributed to them in the form of grocery
coupons or it might end up as a one-time deduction of a few cents off
their gas bill. However, there is a real, substantial, painful impact
on the royalty owners from whom it is being collected. Imagine the
typical family in your district getting a bill in the mail for $5,000,
or $25,000, or $100,000. They simply don't have the savings to pay it.
Some of the producers are signaling that if payments aren't made, they
will just stop making royalty payments and collect it that way. But if
royalties stop, it will still be have huge impact on royalty owners,
many of whom are elderly. They've adjusted their lives to live off of
it. In some cases, for generations.
Let me give you an example of the impact. I recently spoke on the
phone with Kimberly Nicholson. She lives in Vancouver, Washington. Her
family owns minerals in Kansas. They are a moderate family with three
children and an average income. She was also caring for her mother, who
lived nearby in a small two room house. Her mom was dying from Lou
Gehrig's disease.
In March, she got a letter from a producer, Helmerich and Payne,
saying they owed $25,000, which was due in ten days. $9,000 of this
amount was for the ad valorem tax, and $16,000 for interest.
There is absolutely no way the Nicholson family has this much money
available on 10 days notice. They had no advance notice whatsoever and
had no prior knowledge of the entire situation. They just got a bill in
the mail for $25,000, due in 10 days. They couldn't understand how a
mistake by the oil company in 1984-1985 could still apply. They
contacted their attorney about the statute of limitations which would
govern this situation. Even their local attorney didn't really know
what to tell them. She commented to me that they certainly had not
earned $16,000 interest on the money. They had spent it. They count on
their royalty checks as part of their income. In particular, it is what
they used to take care of her mother.
This is the way that most of the thousands of royalty owners will
be affected by FERC's actions.
By the way, Kimberly's mother passed away last month.
FERC's Lack Of Jurisdiction Over Royalty Owners
Producers have agreed that FERC lacks jurisdiction over a royalty
owner. In a motion before FERC, the producers stated that:
``The Commission (FERC) purports to design around this
obvious bar (Kansas House Bill No. 2419, which became K.S.A.
1998 Supp. 55-1624) by saying that the working interest owner
must underwrite royalty owners' share, even though the royalty
owners, not being first sellers, could not have violated the
NGPA (Natural Gas Policy Act). That is trying to do indirectly
what the law denies directly: regulate the royalty owners.
``Working interest owners cannot be the pawns in an issue of
the reach of the commerce clause and the related statutes. The
federal government cannot make the working interest owners take
money away from non-jurisdictional royalty owners without
notice and an opportunity to be heard, when to do so would
violate a state statute. It is unjust, unreasonable, and
unlawful to force producers to knowingly violate of a
putatively valid State law or else pay a penalty at the command
of the federal government.'' (Emphasis ours)
The FERC has no jurisdiction of Kansas royalty owners and yet it
has placed on Kansas producers the burden of attempting to collect the
tax. The order affects thousands of Kansas royalty owners.
Statute Of Limitations Arguments
Royalty owners have also asserted that the Kansas statute of
limitations bars recovery of the ad valorem tax recoupment from royalty
owners. Kansas lawmakers in 1998 specifically addressed the issue and
declared that the ad valorem tax refund is uncollectible due to the
expiration of the statute of limitations governing such recovery and
bars recovery against royalty owners. (Kansas 1998 House Bill No. 2419,
which became K.S.A. 1998 Supp. 55-1624)
On May 19, 1998, in order to determine whether FERC would honor the
Kansas legislation by finding that such legislation would render
recovery of royalty refunds uncollectible from the royalty owners and
thereby grant a waiver of those refunds, a number of producers filed a
Motion in all of the pipeline dockets for a waiver of their royalty
interest refunds or alternatively for a generic waiver as to all
refunds attributable to royalty interests. Public Service Company of
Colorado, et al., Dockets Nos. RP97-369, et al. This Motion attracted
numerous interventions, answers, and comments, both in support and
opposition. The Motion was vigorously opposed by the pipeline and gas
distribution companies.
On November 2, 1998, FERC denied the motion. On the question of
whether the Commission should waive the royalty owner amount of the
refund obligation on a generic basis, on the basis of the statute of
limitations provision of the newly enacted Kansas legislation, the
Commission found that, ``the recent Kansas legislation does not justify
waiver of the producer's obligation to refund the royalty owner's share
of the refund.'' The Commission stated that the purpose of Kansas House
Bill 2419 appears to have been to trigger the Commission's Wylee (Wylee
Petroleum Corp., 33 F.E.R.C. (CCH) 61,014 (1985)) standard for finding
the refunds attributable to the royalty owner to be uncollectible,
thereby leading the Commission to waive the producer's obligation to
refund those amounts to their customers.
The Order of Denial concluded that ``This order only addresses the
issue of whether Kansas House Bill No. 2419 justifies waiver of ad
valorem tax refunds. The Commission recognizes that there may be other
Kansas statutes of limitation, such as the general contract statute of
limitation in K.S.A. Sec. 60-511, which might satisfy the Wylee
uncollectibility statutes of limitation in this order, since they have
not been raised by the parties.''
A request for rehearing was filed. Kansas State Senator Stephen R.
Morris, R-Hugoton, who introduced the original bill (Senate Bill 685)
which eventually became House Bill 2419, was very concerned by FERC's
decision. In a sworn declaration before FERC on the rehearing, he
stated that,
``Based on my discussions with my senate colleagues on the
Ways and Means Committee, our intent in introducing SB 685 was
to simplify, clarify and codify existing Kansas law, so that
the public would have full knowledge that the five-year statute
of limitations on bringing actions on contractual matters set
forth in K.S.A. 60-511 applies to oil and gas refund matters.
Thus, it would specifically apply to first sellers' attempts to
collect ad valorem tax reimbursements from royalty owners,
regarding ad valorem taxes paid from 1983 to 1988. SB 685 was
not intended to create a new and different statute of
limitations, and SB 685 does not do so.
``I also explained this need for SB 685 at a hearing held on
the bill before the Senate Energy and Natural Resources
Committee on March 23, 1998. Based upon my discussions with my
senate colleagues on the Energy and Natural Resources Committee
after receiving testimony, both written and oral, the committee
also believed that the existing five-year statute of
limitations in K.S.A. 60-511 prohibits first sellers from
bringing an action against royalty owners for all claims that
are greater than five years old. I and my colleagues were
concerned that royalty owners may not be aware of the relevant
statute of limitations . . . A conference committee report on
HB 2419 was adopted by the Senate on April 2, 1998 by a vote of
38 yeas and 0 nays, and by the House of Representatives on
April 8, 1998 by a vote of 120 yeas and 0 nays. The governor
signed the bill on April 20, 1998.
``The purpose of simplifying, clarifying and codifying the
existing five-year statute of limitations on actions in
contractual matters, so that it specifically applies to first
sellers' attempts to collect ad valorem tax reimbursements from
royalty owners, was to prevent unnecessary litigation on such
matters. Litigation by each royalty owner over claims which are
barred by the statute of limitations would needlessly expend
substantial resources of Kansas citizens and courts.''
In spite of the clear indication of the intent of the legislation,
on February 16, 1999, FERC denied rehearing on its November 2, 1998
opinion regarding the Kansas statute. FERC stated that, ``nowhere in
the motion (for rehearing) was there any reference to K.S.A. 60-511.''
FERC seems to have clearly ignored the spirit and intent of House
Bill 2419 by declaring that when the Commission adopted the Wylee
standard for uncollectibility, it did not contemplate a specifically
created, ad hoc statute of limitations such as Kansas House Bill 2419,
crafted to apply to a specific situation.
It is obvious that Congressional help is needed to abate FERC's
rulings.
Aftermath Of FERC Decisions
So where do things stand now? Producers are handling their royalty
owners differently. A number of royalty owners have received letters
from their producers or pipeline companies (or in some instances
directly from FERC) demanding or requesting that they reimburse them
for the Kansas ad valorem tax and interest. However, perhaps only 5% of
Kansas royalty owners have received such notices.
SWKROA General Counsel, Gregory J. Stucky, summarized the impact of
the FERC decision, as follows:
``On or about March 9, 1998, producers had to pay over money
attributable to unlawful ad valorem tax payments, including
sums attributable to their royalty owners, to the pipeline
companies or place the money into escrow if there was a dispute
about the amount of money due pipeline companies from
producers. Although the escrow procedures were intended only to
be used when amounts actually were in controversy, many, if not
most, producers, both large and small, used the escrow
`loophole' to pay virtually all the money which the pipeline
companies claimed they owed into escrow, because the producers
wanted to preserve every possible defense. The FERC now has
before it a multitude of issues from a multitude of producers
that it must deal with in connection with the escrowed money.
With only a couple of staff members working on the project, it
could take months, if not years, to resolve all the disputes.''
``The only deadline which the producers are working against
at the moment is March 9, 1999, the date that producers have to
notify the FERC of any amounts that are not collectible from
royalty owners. Even that date may not be considered firm by
the FERC, if the producer can show some justifiable excuse for
missing that date.''
Taken to a more individual level, any potential refund obligation
could possibly represent several years of current royalty payments, or
with the compounding of interest and because of declining production
could last the life of the well. Most of the money at issue is
interest, which has been accruing at rates that royalty owners could
not make from their own investments. Although SWKROA has membership of
around 2,500, there are literally tens of thousands of royalty owners
throughout the United States who are completely unaware of this
potential financial bomb.
On behalf of the royalty owners I respectfully request your Sub-
committee and Congress grant relief to royalty owners from the burden
of this decision by FERC. What are your alternatives?
1. Seek no adjustment at all, from either producers or royalty
owners, recognizing that:
--the change in FERC's decisions are unfair;
--that collection benefits only pipeline companies who at the time
already had a financial edge;
--that collection efforts for a 15 year old debt will be uneven and
inequitable;
--that there will be no winners, but plenty of real losers from this
ruling; and
--that the statue of limitations may have expired on this issue.
2. Release producers from the burden of collecting from royalty
owners, recognizing that royalty owners:
--had no control over the actions which took place;
--were already in a less-than-equitable position financially and are
only being punished further; and
--FERC's ruling illegally expands their jurisdiction to regulate
royalty owners.
3. At the very least, prohibit interest from being charged on
royalty owners share, because it is punitive.
I started my remarks by saying that Cornell was not the typical
royalty owner. Because of our resources and our involvement with SWKROA
we are probably more knowledgeable and in some ways better prepared
than the average royalty owner to deal with this issue. As you proceed
in learning more about this issue and hopefully in becoming involved, I
urge that you keep them in mind--hard working farmers and ranchers who
are being punished for something they had no hand in.
Mr. Barton. Thank you, sir.
Now we would like to hear from Mr. Albright for 5 minutes,
please, sir.
STATEMENT OF JAMES D. ALBRIGHT
Mr. Albright. Thank you, Mr. Chairman. Good morning. Good
morning, members of the committee. My name is James Albright,
and I am associate general counsel for New Century Services
Inc. I am in-house counsel in charge of natural gas legal and
regulatory matters for Public Service Company of Colorado and
Cheyenne Light, Fuel, and Power Company which are natural gas
distribution companies operating in Colorado and Wyoming
respectively.
These two companies are pipeline customers and were
principal litigants in the 1996 court case before the United
States Court of Appeals for the D.C. Circuit which mandated the
refunds at issue in these hearings. I am here representing the
over 1 million customers of Public Service in Cheyenne who are
in line to receive $23 million in refunds including interest
resulting from the producers unlawful collection of Kansas ad
valorem taxes under the Natural Gas Policy Act.
It is important to point out that the consumers, not the
producers are the ones who have been aggrieved here. These
consumers were overcharged on their natural gas utility bills
during the 1980's as a result of the producers' unlawful
collection of these taxes, and they are entitled to these
refunds. Producers appropriated windfall profits during this
period at the expense of gas consumers which must be returned.
And because consumers have been deprived of the use of these
funds for up to 16 years, they are also entitled to be kept
whole through the inclusion of interest.
Now, my clients, Public Service and Cheyenne, are not
unsympathetic to the small producers and royalty owners in
individual cases of hardship. We have not participated in any
of the cases opposing hardship except for those seeking generic
relief. Many producers, however, who stand to pay these refunds
are multinational oil companies with billions and billions of
dollars of assets.
As the analysis submitted by Chair Lumpe in her written
testimony, the top 24 producers on the list owing these refunds
constitute 86 percent of the total outstanding refunds. The
legal question of whether producers were entitled under the
NGPA to collect this reimbursement for the Kansas ad valorem
tax in their gas prices has been in dispute and the subject of
litigation for over 15 years but the law itself has never
changed. There has been no flip-flop.
FERC, when they made the original determination that this
tax should be included as recoverable under the NGPA committed
legal error, and the court so found. It misapplied the NGPA
with respect to the Kansas ad valorem tax. Thus, the I.R.S.
analogy is not analogous here. It was an ongoing dispute
involving ongoing litigation. In the IRS analogy, that
circumstance, there is two parties: the taxpayer and the
government. Here there are two competing interests: the
producers and the consumers.
Refunds with interest in the context of regulated
industries is nothing new. The reality of Federal rate
regulation which producer sales were governed by for three and
a half decades is rates are collected subject to refund
together with interest until a final legal determination is
made. There is nothing different here. Until this litigation
was finally resolved and the producers' liability for refunds
confirmed and the U.S. Supreme Court denied certiorari in 1997,
the producers were always in jeopardy of having to make these
refunds. They should have taken account for this. These were
the rules of the game.
Producers' claims of unfairness based on their detrimental
reliance on prior commission orders was resoundingly rejected
by the U.S. Court of Appeals for the D.C. Circuit. In the words
of the court, such a claim is purely notional. And if it was
real, was unreasonable and foolhardy. Considering that the
matter was in dispute and the producers were on notice of the
pending litigation, the court concluded, and I quote, we are
hard pressed to see how the producers would be harmed in any
cognizable way even if they were required to disgorge every
dollar they received in recovery of the tax.
I would like to add we are not seeking recovery of every
dollar that was overcollected by these producers. The period
from 1978 to 1983 is still in the producers' hands and is not
at issue in these hearings. Congressional involvement simply is
not warranted here. There are winners and losers in all
litigation, but losers should not be entitled to run to
Congress for legislative relief from the result. That is the
domain of the judiciary.
Congress makes the laws and the Federal courts adjudicate
disputes under those laws. Congress already established in the
NGPA under section 502 the legal process for the Commission to
prevent special hardship inequity or unfair distribution of
burden resulting from its orders under the NGPA.
The fact of the matter is there is no sensible generic
solution to address the hardship that may be experienced by
producers and royalty owners from these refund obligations.
Each producer's refund obligation is different. Each producer's
circumstances associated with that liability are different and
each producer's ability to pay the refund amounts is different.
Only through consideration of the equities on an individual
case-by-case basis can hardship be properly addressed.
FERC has the delegated authority under section 502 of the
NGPA to address hardship claims on a case-by-case basis. Over
100 hardship cases are pending before FERC now. FERC is
competent to resolve these cases equitably and expediently.
Last, the issue of FERC's denial of producers' petitions
for generic waiver of interest on these refunds is currently
pending before the U.S. Court of appeals for the D.C. Circuit.
Anadarko Petroleum Company, et al. v. FERC has been fully
briefed. Oral arguments are scheduled for September 7, 1999.
This judicial review process was established by Congress under
the NGPA pursuant to section 506.
Congress should let the judicial process run its course and
allow the parties to see this litigation to its conclusion.
Mr. Chairman, before I conclude my statement, I would like
to have permission to introduce the United States Court of
Appeals decision on the issue in favor of the consumers be
included in the record and also a resolution from the State of
Nebraska and letters from nine Governors and a letter from the
State of Colorado's Office of Consumer Counsel.
Mr. Barton. Are they all relevant to the issue?
Mr. Albright. Yes, they are, Mr. Chairman.
Mr. Barton. Without objection so ordered.
[The information referred to follows:]
Nebraska Unicameral Legislature
April 28, 1999
The Honorable Bob Kerrey
United States Senate
141 Hart Senate Office Bldg.
Washington, DC 20510
Dear Senator Kerrey: I have enclosed a copy of engrossed
Legislative Resolution No. 69 as adopted by the Nebraska Unicameral
Legislature on the twenty-seventh day of April 1999. The members of the
Nebraska Legislature have directed me to forward this resolution to you
and request that it be officially entered into the Congressional Record
as a memorial to the Congress of the United States.
With kind regards.
Sincerely,
Patrick J. O'Donnell
Clerk of the Legislature
Enclosure
______
Ninety Sixth Legislature--First Session
legislative resolution 69
Introduced by Urban Affairs Committee: Hartnett, 45, Chairperson;
Connealy, 16; Preister, 5; Smith, 48; and Bruning, 3;
WHEREAS, until 1993, the federal Natural Gas Policy Act of 1978
established the lawful price that a natural gas producer could charge
its pipeline customers for natural gas, providing under section 110 of
the act that the producer could adjust the price upward in order to
recover from pipeline customers any state severance tax payments made
by the producer; and
WHEREAS, in 1988, in the case of Colorado Interstate Gas Co. v. the
Federal Energy Regulatory Commission, 850 F.2d 769, the United States
Court of Appeals for the District of Columbia Circuit ruled that the ad
valorem tax levied by the State of Kansas was not a severance tax
within the meaning of section 110 of the Natural Gas Policy Act and
ordered natural gas producers to refund that portion of the payments
received from the pipelines attributable to the cost of the Kansas ad
valorem taxes paid plus interest; and
WHEREAS, upon remand of the matter to the Federal Energy Regulatory
Commission, the commission ordered the refunds to be made on that
portion of all purchases which had included Kansas ad valorem taxes
which were charged after June 28, 1988, the date of the Appeals Court
ruling in the Colorado Interstate Gas Co. case; and
WHEREAS, in 1996, in the case of Public Service Company of Colorado
v. the Federal Energy Regulatory Commission, 91 F.3d 1478, the United
States Court of Appeals for the District of Columbia overruled the
commission, holding that the refunds should commence from October 1983,
when notice was filed in the Federal Register of the petition before
the commission challenging the propriety of including the Kansas ad
valorem taxes in the price charged for natural gas produced in Kansas;
and
WHEREAS, as of November 1997, the consumers of natural gas in
twenty-three states were entitled, pursuant to this ruling and the
subsequent order of the Federal Energy Regulatory Commission, to
refunds and accrued interest from natural gas producers for the period
of October 1983 through June 1988, amounting to more than $334,840,000,
with Nebraska consumers to receive approximately $34,360,000
(approximately ten percent of the total); and
WHEREAS, of those sums, over 60 percent of the total is accrued
interest as of that date with additional interest being compounded
quarterly on unpaid balances and on those sums not placed in escrow
accounts pursuant to commission order; and
WHEREAS, the United States Senate and the United States House of
Representatives in their individual versions of the Emergency
Supplemental Appropriations Act for Fiscal Year 1999 (S. 544 and H.R.
1141) have provisions, added by amendment, which would amend the
Natural Gas Policy Act of 1978 to prohibit the commission or any court
from ordering the payment of any interest or penalties with respect to
ordered refunds of rates or charges made, demanded, or received for
reimbursement of state ad valorem taxes in connection with the sale of
natural gas before 1989; and
WHEREAS, both acts were adopted by their respective houses of the
Congress on March 25 of this year, immediately prior to their Easter
adjournment and are pending consideration by a Joint Appropriations
Conference Committee; and
WHEREAS, legislation for the same purpose (S. 626 in the Senate and
H.R. 1117 in the House of Representatives) is currently pending; and
WHEREAS, the sole result of the final adoption of these amendments
or these bills will be to mitigate or reduce the liability of natural
gas producers for charges wrongfully imposed on consumers in the period
of 1983 to 1988 by denying consumers interest on the amount of those
charges and relieving the producers of any liability for future
penalties flowing from the failure to make court-ordered payments in
the prescribed manner; and
WHEREAS, the lost refunds to Nebraska natural gas consumers will
amount to more than 10 percent of the total reduction, representing the
fourth largest state loss of the twenty-four states receiving court-
ordered refunds; and
WHEREAS, Nebraska has been urged to join with other states in
petitioning Congress to reconsider the adoption of these ill-advised
and possibly unconstitutional provisions and avoid future litigation at
the expense of all parties involved.
NOW, THEREFORE, BE IT RESOLVED BY THE MEMBERS OF THE NINETY-SIXTH
LEGISLATURE OF NEBRASKA, FIRST SESSION:
1. That the Legislature hereby petitions the Congress of the United
States to oppose the enactment of S. 626 and H.R. 1117 or any version
thereof which would have the effect of waiving * * *
______
State of Colorado
Office of Consumer Counsel
Department of Regulatory Agencies
June 4, 1999
The Honorable Joe Barton, Chairman
The Honorable Ralph M. Hall
Subcommittee on Energy and Power
House of Representatives
Commerce Committee
2125 Rayburn House Office Building
Washington, DC 20515-6115
RE: Kansas ad valorem Tax Refund
Gentlemen: As Director of the Colorado Office of Consumer Counsel I
would like to express my concerns regarding H.R. 1117. My office
represents approximately 1,500,000 residential, agricultural and small
business gas consumers in the state of Colorado that have been
illegally charged Kansas ad valorem taxes in their gas rates. H.R. 1117
would deny Colorado consumers almost $20 million in interest out of a
$30 million refund that would otherwise be due to these consumers.
Colorado's low-income consumers in particular will be adversely
affected if the bill passes. Colorado law requires that up to 90
percent of any unclaimed refunds be paid to the Colorado Energy
Assistance Foundation to help low-income consumers pay their utility
bills. Because the refund dates back to 1983-1988, the unclaimed
portion of the refund will be substantial. If Congress eliminates the
interest and reduces the amount of the refund, the foundation will have
less to distribute to low-income consumers.
I recognize that some gas producers claim the interest obligation
is a hardship. However, the large gas producers have been on notice
about this refund since 1983. They made no attempt to provide for the
eventual refund of these amounts. Instead they fought the refund at
every turn. Small consumers have been waiting for years to have their
money returned while producers are exhausting all possible means to
keep the illegally collected amounts. That is a real hardship for small
consumers. In any event, the refund procedures of the Federal Energy
Regulatory Commission take into account the hardship claims and there
is no need for Congressional intervention.
The Office of Consumer Counsel urges you to ensure that Colorado
consumers receive the refunds to which they are entitled.
Very truly yours,
Ken Reif
Director
cc: Honorable Thomas J. Bliley Jr., Chairman, Commerce Committee
Honorable John D. Dingell
Honorable Diana DeGette
______
May 10, 1999
Chairman C.W. ``Bill'' Young
House Appropriations Committee
H-218, United States Capitol
Washington, D.C. 20515
Dear Chairman Young: We would like to ask for your assistance in
deleting Amendment 101 that was included in the Senate Emergency
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued
interest on refunds of Kansas ad valorem taxes. The amendment would
have a detrimental effect on natural gas consumers from 23 states, and
we urge you to oppose its inclusion in the conference report.
Between 1983 and 1988, Kansas natural gas producers collected ad
valorem taxes on natural gas that was purchased by numerous interstate
pipelines in Kansas and transported elsewhere. In 1997, the Federal
Energy Regulatory Commission (FERC) ordered refunds of these taxes
based on a final decision of the D.C. Circuit Court of Appeals. The
issues of whether interest should be paid on refunds of the taxes
collected prior to 1989 is currently before the D.C. Circuit with oral
argument scheduled for September 7, 1999. Consequently, we believe that
it would be improper for Congress to intervene at this time.
Consumers in 23 states, including our states, are entitled to
refunds and to the interest on those refunds. Of the estimated $363
million of total refunds owed as of March 31, 1999, more than $235
million of this was accrued interest and would be lost.
Please oppose the inclusion of the Roberts amendment, which would
prohibit payment of interest on the refunds that are due. On behalf of
natural gas consumers across the country, thank you for your assistance
in eliminating this amendment from the conference report.
Sincerely,
Governor Ventura of Minnesota
Governor Vilsack of Iowa
Governor Carnahan of Missouri
Governor Hull of Arizona
Governor O'Bannon of Indiana
Governor Johanns of Nebraska
Governor Janklow of South Dakota
______
May 10, 1999
The Honorable David Obey
Ranking Minority Member
House Appropriations Committee
2462 Rayburn House Office Building
Washington, D.C. 20515
Dear Chairman Young: We would like to ask for your assistance in
deleting Amendment 101 that was included in the Senate Emergency
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued
interest on refunds of Kansas ad valorem taxes. The amendment would
have a detrimental effect on natural gas consumers from 23 states, and
we urge you to oppose its inclusion in the conference report.
Between 1983 and 1988, Kansas natural gas producers collected ad
valorem taxes on natural gas that was purchased by numerous interstate
pipelines in Kansas and transported elsewhere. In 1997, the Federal
Energy Regulatory Commission (FERC) ordered refunds of these taxes
based on a final decision of the D.C. Circuit Court of Appeals. The
issues of whether interest should be paid on refunds of the taxes
collected prior to 1989 is currently before the D.C. Circuit with oral
argument scheduled for September 7, 1999. Consequently, we believe that
it would be improper for Congress to intervene at this time.
Consumers in 23 states, including our states, are entitled to
refunds and to the interest on those refunds. Of the estimated $363
million of total refunds owed as of March 31, 1999, more than $235
million of this was accrued interest and would be lost.
Please oppose the inclusion of the Roberts amendment, which would
prohibit payment of interest on the refunds that are due. On behalf of
natural gas consumers across the country, thank you for your assistance
in eliminating this amendment from the conference report.
Sincerely,
Governor Ventura of Minnesota
Governor Vilsack of Iowa
Governor Carnahan of Missouri
Governor Hull of Arizona
Governor O'Bannon of Indiana
Governor Johanns of Nebraska
Governor Janklow of South Dakota
______
May 12, 1999
Chairman C.W. ``Bill'' Young
House Appropriations Committee
H-218, United States Capitol
Washington, D.C. 20515
Dear Chairman Young: We would like to ask for your assistance in
deleting Amendment 101 that was included in the Senate Emergency
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued
interest on refunds of Kansas ad valorem taxes. The amendment would
have a detrimental effect on natural gas consumers from 23 states, and
we urge you to oppose its inclusion in the conference report.
Between 1983 and 1988, Kansas natural gas producers collected ad
valorem taxes on natural gas that was purchased by numerous interstate
pipelines in Kansas and transported elsewhere. In 1997, the Federal
Energy Regulatory Commission (FERC) ordered refunds of these taxes
based on a final decision of the D.C. Circuit Court of Appeals. The
issues of whether interest should be paid on refunds of the taxes
collected prior to 1989 is currently before the D.C. Circuit with oral
argument scheduled for September 7, 1999. Consequently, we believe that
it would be improper for Congress to intervene at this time.
Consumers in 23 states, including our states, are entitled to
refunds and to the interest on those refunds. Of the estimated $363
million of total refunds owed as of March 31, 1999, more than $235
million of this was accrued interest and would be lost.
Please oppose the inclusion of the Roberts amendment, which would
prohibit payment of interest on the refunds that are due. On behalf of
natural gas consumers across the country, thank you for your assistance
in eliminating this amendment from the conference report.
Sincerely,
Tommy G. Thompson
Governor of Wisconsin
______
May 12, 1999
The Honorable David Obey
Ranking Minority Member
House Appropriations Committee
2462 Rayburn House Office Building
Washington, D.C. 20515
Dear Congressman Obey: We would like to ask for your assistance in
deleting Amendment 101 that was included in the Senate Emergency
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued
interest on refunds of Kansas ad valorem taxes. The amendment would
have a detrimental effect on natural gas consumers from 23 states, and
we urge you to oppose its inclusion in the conference report.
Between 1983 and 1988, Kansas natural gas producers collected ad
valorem taxes on natural gas that was purchased by numerous interstate
pipelines in Kansas and transported elsewhere. In 1997, the Federal
Energy Regulatory Commission (FERC) ordered refunds of these taxes
based on a final decision of the D.C. Circuit Court of Appeals. The
issues of whether interest should be paid on refunds of the taxes
collected prior to 1989 is currently before the D.C. Circuit with oral
argument scheduled for September 7, 1999. Consequently, we believe that
it would be improper for Congress to intervene at this time.
Consumers in 23 states, including our states, are entitled to
refunds and to the interest on those refunds. Of the estimated $363
million of total refunds owed as of March 31, 1999, more than $235
million of this was accrued interest and would be lost.
Please oppose the inclusion of the Roberts amendment, which would
prohibit payment of interest on the refunds that are due. On behalf of
natural gas consumers across the country, thank you for your assistance
in eliminating this amendment from the conference report.
Sincerely,
Tommy G. Thompson
Governor of Wisconsin
______
May 11, 1999
Chairman C.W. ``Bill'' Young
House Appropriations Committee
H-218, United States Capitol
Washington, D.C. 20515
Dear Chairman Young: We would like to ask for your assistance in
deleting Amendment 101 that was included in the Senate Emergency
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued
interest on refunds of Kansas ad valorem taxes. The amendment would
have a detrimental effect on natural gas consumers from 23 states, and
we urge you to oppose its inclusion in the conference report.
Between 1983 and 1988, Kansas natural gas producers collected ad
valorem taxes on natural gas that was purchased by numerous interstate
pipelines in Kansas and transported elsewhere. In 1997, the Federal
Energy Regulatory Commission (FERC) ordered refunds of these taxes
based on a final decision of the D.C. Circuit Court of Appeals. The
issues of whether interest should be paid on refunds of the taxes
collected prior to 1989 is currently before the D.C. Circuit with oral
argument scheduled for September 7, 1999. Consequently, we believe that
it would be improper for Congress to intervene at this time.
Consumers in 23 states, including our states, are entitled to
refunds and to the interest on those refunds. Of the estimated $363
million of total refunds owed as of March 31, 1999, more than $235
million of this was accrued interest and would be lost.
Please oppose the inclusion of the Roberts amendment, which would
prohibit payment of interest on the refunds that are due. On behalf of
natural gas consumers across the country, thank you for your assistance
in eliminating this amendment from the conference report.
Sincerely,
M.J. Foster
Governor of Louisiana
______
May 12, 1999
The Honorable David Obey
Ranking Minority Member
House Appropriations Committee
2462 Rayburn House Office Building
Washington, D.C. 20515
Dear Congressman Obey: We would like to ask for your assistance in
deleting Amendment 101 that was included in the Senate Emergency
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued
interest on refunds of Kansas ad valorem taxes. The amendment would
have a detrimental effect on natural gas consumers from 23 states, and
we urge you to oppose its inclusion in the conference report.
Between 1983 and 1988, Kansas natural gas producers collected ad
valorem taxes on natural gas that was purchased by numerous interstate
pipelines in Kansas and transported elsewhere. In 1997, the Federal
Energy Regulatory Commission (FERC) ordered refunds of these taxes
based on a final decision of the D.C. Circuit Court of Appeals. The
issues of whether interest should be paid on refunds of the taxes
collected prior to 1989 is currently before the D.C. Circuit with oral
argument scheduled for September 7, 1999. Consequently, we believe that
it would be improper for Congress to intervene at this time.
Consumers in 23 states, including our states, are entitled to
refunds and to the interest on those refunds. Of the estimated $363
million of total refunds owed as of March 31, 1999, more than $235
million of this was accrued interest and would be lost.
Please oppose the inclusion of the Roberts amendment, which would
prohibit payment of interest on the refunds that are due. On behalf of
natural gas consumers across the country, thank you for your assistance
in eliminating this amendment from the conference report.
Sincerely,
M.J. Foster
Governor of Louisiana
Mr. Barton. Does that conclude your statement?
Mr. Albright. That concludes my statement, Mr. Chairman.
Thank you.
[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 in that capacity 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 combination electric and gas utilities. As
relevant to these hearings, Public Service and Cheyenne are local
distribution companies that provide retail natural gas service to
customers that is extensively regulated by their respective state
utility commissions. 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 together serve over one million
natural gas customers in Colorado and Wyoming. Public Service and
Cheyenne were the lead petitioners in the 1996 federal court case
mandating the refunds which are the subject of these hearings. Although
Public Service and Cheyenne do not stand to retain any of these
refunds--as, pursuant to applicable state regulatory requirements,
virtually all of the refunds will be passed through to customers--
Public Service and Cheyenne have found themselves championing the
interests of natural gas consumers in the 23 states who would receive
these refunds.
The purpose of these hearings, as I understand it, is to consider
whether Congress should entertain legislation that would forgive
interest on refunds ordered by the Federal Energy Regulatory Commission
(FERC) to be paid by first sellers, primarily natural gas producers,
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 are attributable to the producers
including, as an add-on to the gas prices charged, reimbursement for ad
valorem taxes paid to the State of Kansas which were ultimately found
by the 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 be ineligible as an add-on under section 110 of the NGPA.
I am pleased to appear here today to explain how the producers'
refund obligation came about and why it would be inappropriate for
Congress to excuse the interest component of these refunds. First and
foremost, the committee should not forsake the gas consumers who were
illegally overcharged in their natural gas bills as a result of these
over collections. These consumers have been waiting a long time for
these refunds. Interest on these refunds merely puts these consumers in
the position they would have been in had the illegal overcharges not
occurred. Fairness and equity is on the side of the consuming public,
not on the side of the gas producing enterprises that exacted excess
revenues through illegal gas prices. In addition, I urge the committee
not to undercut our right to complete the legal process established by
Congress in the NGPA for the very purpose of resolving disputes such as
this.
At the outset I would like to point out that the vast majority of
the monies to be refunded will not come from ``Kansas'' producers--if
that term is intended to imply that the producers owing the refunds are
Kansas corporations or other persons living in Kansas. Rather, the vast
majority of the dollars to be refunded will come from ``major''
producers which are not Kansas corporations, such as Amoco Production
Company, Anadarko Petroleum Corporation, Union Pacific Resources
Corporation, Mobil Oil Corporation, and OXY USA Inc. These major
international oil companies are also not ``small'' producers. For
example, Amoco has a market capitalization of $174.5 billion, Anadarko
has a market capitalization of $4.6 billion, and Union Pacific
Resources has a market capitalization of $3.59 billion.
I would also like to point out, as I am sure the committee is
aware, that there is currently pending in the D.C. Circuit, in Anadarko
Petroleum Corporation, et al. v. FERC, Nos. 98-1227, et al., a judicial
review proceeding brought by these large producers under section 506 of
the NGPA in which they challenge the legality of FERC's decision to
deny a generic waiver of interest on the refunds mandated by Public
Service Co. of Colorado. The exact same relief sought by the producers,
which was denied by the FERC and is pending before the D.C. Circuit, is
now presented to this committee for its consideration in these
hearings.
NGPA section 506(4) provides that ``[t]he judgment and decree of
the court, affirming, modifying, or setting aside, in whole or in part,
any such order of the Commission, shall be final subject to review by
the Supreme Court of the United States upon certiorari . . .'' This is
the process established by Congress in the NGPA for resolving disputes
over the rights and obligations of the parties under the statute and
the rules by which the parties have been bound for over 20 years. I
urge this committee not to disrupt the ongoing judicial process and
deprive us of the procedural rights established by the NGPA simply
because the total interest on the refunds is substantial and there may
be individual cases of hardship. The interest is substantial because
the producers have held and used money that was not theirs for a period
in the range of 11 to 16 years. Moreover, the procedure provided for in
the NGPA provides FERC with jurisdiction under section 502(c) to weigh
the equities in individual cases of hardship and determine whether or
not adjustment relief is required. The procedures for NGPA section
502(c) adjustments have been in place and used for over 20 years.
Requests for adjustments related to the Kansas ad valorem tax, recently
filed with the FERC, number over one hundred. The resolution of these
cases is proceeding under the FERC's duly-promulgated regulations and
that process should not be short-circuited by the Congress.
It should be clear that there is no inequity or injustice in
requiring producers to pay interest on amounts in excess of the roughly
$100 million they overcharged their customers from 1983 to 1988. There
is also no inequity or injustice in requiring producers to demonstrate
the kind of individualized showing of hardship required by NGPA section
502(c) if FERC is to grant an exception. Under our American system of
justice, there is a general obligation to compensate judgment creditors
through the payment of interest on the principal amount of outstanding
liabilities. The payment of interest here is necessary to make whole
the gas customers who were overcharged and denied the use of their
money for up to 16 years. Were Congress to forgive the interest
overcharged customers it would be allowing producers to retain the
earnings on consumer dollars and would strip the consumers, by
legislative action, of over $200 million (more than 60%) of their
claim.
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 have ad valorem or
other property-type taxes which have never been eligible for
reimbursement as an add-on to the maximum lawful price under the NGPA.
Texas's ad valorem tax, which in all material respects was identical to
Kansas's 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 in Texas and other gas
producing states 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 prefer producers of Kansas gas
over producers of gas from other states.
As is apparent from the history of the producers'' obligation to
refund the excessive collections, which this committee requested I
address, the producers'' claim that they relied to their detriment on
FERC's rulings that they could legally collect the Kansas tax under the
NGPA lacks credulity. The bankruptcy of that plea was recognized by the
D.C. Circuit which, in Public Service Co. of Colorado v. FERC, referred
to the producers'' detrimental reliance claim as ``purely notional,''
adding that, ``if real,'' it was both ``unreasonable'' and
``foolhardy.'' 91 F.3d at 1490.
history behind the refund obligations
On November 9, 1978, the NGPA became law. In an effort to encourage
production in the aftermath of natural gas shortages experienced during
the 1970's, Congress removed producer pricing from the strictures of
cost-based price regulation under the Natural Gas Act (NGA) and
established uniform, incentive ceiling prices for various categories of
natural gas production. As a part of the statutory scheme, Congress
made those new prices ceiling prices which could not be exceeded except
to the extent specifically allowed under NGPA section 110. NGPA section
110 provided, among other things, for an ``add-on'' to the maximum
lawful price for ``State severance taxes''--a term defined in section
110(c) of the NGPA. The NGPA further declared that sales of gas at
prices which exceeded the ceiling prices were ``unlawful.'' FERC was
charged with administration of the NGPA with full authority to issue
such orders as it deemed necessary and appropriate to carry out its
functions under the statute. See NGPA Section 501. The statutory scheme
enacted by Congress in the NGPA was well recognized as one which
substantially overhauled federal regulation of natural gas prices.
While under NGA price regulation, the Federal Power Commission
(FERC's predecessor agency) had allowed the cost of Kansas ad valorem
taxes to be added to the then-applicable cost-based national ceiling
price of gas. Just and Reasonable National Rates for Sales of Natural
Gas, Opinion No. 699-D, 52 FPC 915 (1974). The FPC had also determined
that the cost of Texas ad valorem taxes could not be added to the then-
applicable cost-based national ceiling price of gas. Mobil Oil Corp.,
55 FPC 917 (1976). Possibly because of the regulatory upheaval caused
by the NGPA and the need for FERC to promulgate comprehensive
regulations to implement the new statutory scheme, it was not until
1983 that the continued validity of the FPC's prior treatment of these
two ad valorem taxes under the NGA was challenged under the NGPA.
In January 1983, Sun Exploration and Production Company, a producer
and first-seller of gas, filed a petition at the FERC seeking a
determination that the Texas ad valorem tax was a ``State severance
tax'' as defined in NGPA section 110(c) and, therefore, could be
collected as an add-on to the maximum lawful price. Shortly after this
petition was filed, Northern Natural Gas Company, a pipeline purchaser
of gas, filed a petition at the FERC seeking a similar determination
that the Kansas ad valorem tax was not a ``State severance tax'' as
defined in NGPA section 110(c) and, therefore, could not be collected
as an add-on to the maximum lawful price.
FERC consolidated the petitions and, in a decision issued in 1986,
denied both. It ruled that the Texas ad valorem tax was a property tax,
not a State severance tax and, therefore, the ceiling price of gas
produced in Texas could not include an amount to reimburse the producer
for the Texas ad valorem tax. FERC also ruled that the Kansas ad
valorem tax was a State severance tax and, therefore, the ceiling price
of gas produced in Kansas, unlike the ceiling price of gas produced in
Texas, could include an amount to reimburse the producer for the Kansas
ad valorem tax. Sun Exploration and Production Co., 36 FERC para.
61,093 (1986).
Sun Exploration did not seek rehearing of the order. However,
Northern Natural Gas Company and Colorado Interstate Gas Company,
pursuant to NGPA section 506, filed petitions for rehearing of the
FERC's ruling regarding the qualification of the Kansas ad valorem tax
as a ``State severance tax'' under the NGPA. When the petitions were
denied in Northern Natural Gas Co., 38 FERC para. 61,062 (1987),
Colorado Interstate Gas Company filed a petition for review in the
United States Court of Appeals for the District of Columbia Circuit,
following the procedure mandated by NGPA section 506.
After reviewing the Commission's order classifying the Texas tax as
a ``property'' tax and the Kansas tax as a ``severance'' tax, the D.C.
Circuit, in Colorado Interstate Gas Co. v. FERC, 850 F.2d 769 (D.C.
Cir. 1988), found that the dissimilar treatment of what seemed to the
Court to be identical cases was the ``quintessence of arbitrariness and
caprice.'' 850 F.2d at 774. The Court remanded the case back to the
FERC for the FERC ``to exercise its interpretive authority, to identify
the features of the Kansas tax that point toward one classification or
another, and to offer sensible distinctions between taxes that it
chooses to treat differently.'' 850 F.2d at 774-775.
On remand, the FERC re-examined the Kansas tax under the statutory
standard of NGPA section 110(c) and determined that the Kansas tax,
after all, did not qualify as a tax ``imposed on the production of
natural gas''--the statutory requisite for a ``State severance tax''--
because, like the Texas tax, the Kansas tax was a tax on ``property,''
not a tax on production. As such, like the Texas tax, the Kansas tax
was not eligible as an add-on to the otherwise applicable NGPA maximum
lawful price. Colorado Interstate Gas Co., 65 FERC para. 61,292 (1993).
Having so ruled, FERC recognized that ``reimbursement of that tax in
addition to the ceiling [price] violates the Congressionally-set
maximum lawful prices.'' 65 FERC para. 61,292. Nevertheless, responding
to the producers'' claims that they had relied to their detriment on
the Commission's prior rulings, the Commission decided that the
producers had certain ``settled expectations'' to the collection of the
unlawful amounts and, therefore, required refunds only from June 28,
1988--the date of the D.C. Circuit's remand order.
Petitions for rehearing were filed by the producers challenging the
Commission's decision that the Kansas tax was a ``property'' tax, and
by Public Service and Cheyenne challenging the Commission's decision to
waive refunds for the 1983 to 1988 period. The Commission denied all of
the rehearing petitions in Colorado Interstate Gas Co., 67 FERC para.
61,209 (1994).
Again, following the procedures established in NGPA section 506,
petitions for review were filed by the producers and jointly by Public
Service and Cheyenne. In the judicial review proceeding, the producers
argued that it would be unfair to require producers to refund any of
the pre-1988 over collections because, until the FERC issued its 1993
decision in Colorado Interstate Gas Co., the producers had no reason to
believe that any refunds would be owed. Public Service and Cheyenne
argued that the FERC should not have waived refunds for the pre-1988
period because the legitimacy of the collection of the Kansas ad
valorem tax under the NGPA had been disputed in ongoing litigation
since 1983 and, consequently, there could not have been any ``settled
expectation'' to the retention of the overcharges on which the
producers could have relied to their detriment. In Public Service Co.
of Colorado, et al. v. FERC, 91 F.3d 1478 (D.C. Cir. 1996), the D.C.
Circuit affirmed the Commission's determination that the Kansas tax was
a ``property'' tax and not a tax on production that was eligible for
reimbursement under the NGPA. The court also rejected outright the
producers'' ``detrimental reliance'' argument. The court concluded that
all of the producers'' collections of reimbursements for the Kansas tax
that were in excess of the maximum lawful NGPA price had been unlawful
since 1978 and should be refunded but for the simple fact that the
issue of pre-1983 refunds was not before the Court. The Court,
therefore, concluded that refunds for the period 1983 to 1988 were
required. The following excerpt from the D.C. Circuit's decision says
it best:
Not only is the producers'' ``detrimental reliance'' purely
notional; if it were real it would not have been reasonable.
The enactment of a substantially new regulatory regime in 1978
undermined any assurance that the FPC's treatment of the Kansas
tax under the NGA would withstand scrutiny under the NGPA;
reliance would have been foolhardy. If that were not enough,
the status of the Kansas tax was expressly drawn into question
in 1983 when Northern Natural first petitioned the Commission
for a ruling that producers could not lawfully recover the tax
under Sec. 110. Once the recoverability of the tax was in
dispute, we do not see how the Commission could possibly find
that producers reasonably relied upon continuing to recover it.
Because no seller of natural gas could justifiably be
confident that it was entitled to recover the tax until the
legal question was settled anew under the new statute, we hold
that the producers'' liability for refunds extends back to
October 1983, the date when all interested parties were given
notice in the Federal Register that the recoverability of the
Kansas tax under Sec. 110 of the NGPA was at issue, and the
earliest date advocated by any party before this court. Absent
detrimental and reasonable reliance, anything short of full
retroactivity (i.e., to 1978) allows the producers to keep some
unlawful overcharges without any justification at all. The
court strongly resists the Commission's implication that the
Congress intended to grant the agency the discretion to allow
so capricious a thing. Still, we do not require refunds of
taxes recovered with respect to production before October 1983
because there is before us no controversy over those monies.
91 F.3d at 1490.
The producers attempted to obtain review of the D.C. Circuit's
decision in the United States Supreme Court but, following the advice
of the Solicitor General of the United States, the Supreme Court denied
their petition for certiorari.
The legal review of the issue having been concluded, it was left to
the FERC to implement the Court's mandate. Immediately following the
Supreme Court's ruling denying their petition for certiorari, the
producers filed a request with the FERC for generic adjustment under
NGPA section 502(c) asking for a blanket, all inclusive waiver of the
obligation to pay interest on the overcharges. Their argument before
FERC was the same as it had been before the Court; i.e., relief from
the interest component of the refunds was required because they had
relied to their detriment on prior agency orders. Four days later,
Public Service and Cheyenne filed a joint petition requesting the
Commission to establish procedures for the refund of the 1983 to 1988
over collections with interest. Public Service's petition urged the
Commission to follow virtually the same procedures that it had adopted
in 1993 in ordering refunds of the 1988 to 1993 over collections, which
have since been refunded. The Commission denied the producers'' request
and granted the joint petition of Public Service and Cheyenne. In so
ruling, the Commission rejected the producers'' request for a generic
waiver of the interest component of refunds, concluding that it could
not see ``how the same reliance that in the context of waiving all
refunds for the 1983-1988 period the Court concluded was foolhardy, can
somehow be transformed into reliance that would justify granting
adjustment relief of interest.'' Public Service Co. of Colorado, 80
FERC para. 61,264 at 61,216 (1997). Petitions for rehearing were filed
by the producers and, when those petitions were denied, the review
petition in Anadarko Petroleum Corp., et al. v. FERC, Nos. 98-1227, et
al. was filed. As I explained earlier, this case is now pending before
the D.C. Circuit. Briefing is completed and oral argument is scheduled
for September 7, 1999.
Reviewing this history and the arguments advanced by the producers,
it is clear that they have brought their plea to Congress because they
have lost before the court and the Commission and fear losing again.
Again, they press the claim that they relied to their detriment on
prior agency orders, but this time they make the claim before Congress,
asking Congress to undermine the very process it enacted and has had in
place for over 20 years for resolving these sorts of claims. The Court
of Appeals for the D.C. Circuit fully considered their argument and
rejected it--calling their claim to be ``purely notional'' or, ``if
real,'' ``foolhardy'' and ``unreasonable.'' Congress should not
intervene on behalf of the losing party in court litigation and alter
the outcome of the very judicial process it put in place--especially
here, where the issue involves the return of unlawfully collected
overcharges for the sale of natural gas.
The real problem with the producers'' ``reliance'' argument is that
it is not believable. It does not pass the ``red face'' test. The
producers themselves initiated action before the FERC questioning the
continued validity of the FPC's NGA ruling regarding the Texas tax.
From that point forward, the issues regarding the Texas tax and the
Kansas tax were joined. At all times relevant here (1983-1988), while
the producers were collecting from their customers reimbursements for
the Kansas ad valorem tax in addition to the maximum lawful price, the
qualification of the tax as a ``State severance tax'' under the NGPA
was disputed and the subject of litigation--the result of which would
either be that the tax qualified and no refunds were due or that it did
not qualify and refunds would have to be made. And that is as true for
the interest component of the refunds as it is for the principal
component. FERC's regulations throughout this period specifically
provided that all prices collected for the first sale of natural gas
were collected subject to a general obligation to refund any portion
``together with interest'' that exceeded the applicable maximum lawful
price established by Congress. 18 C.F.R. Sec. 270.101(e).
conclusion
As an active party to the proceedings before the FERC and as the
primary advocate in the Court of Appeals for the refund of these over
collections, with interest, to those who were overcharged, we urge the
committee to consider whether it is appropriate for Congress to usurp
the judicial power and truncate the rights of litigants already before
the courts. Congressional intervention is simply not warranted. The
status of this matter is that, after 16 years, the customers' rights to
the return of unlawfully collected and unlawfully held amounts (over
$300,000,000) has finally been determined subject only to review by the
United States Court of Appeals. This is the process Congress
established when it enacted section 506 of the NGPA. Congress should
not step in now to cut that process short and reverse the outcome
before the Court of Appeals can consider the case before it. To do so
would be no different than if Congress passed a law allowing banks to
charge only ``service fees,'' defined by statute, and class action
litigation ensued for many years over whether banks had unlawfully
charged their customers $100 million that did not qualify as a
``service fee'' under the statute. Finally, just after the customers
prevail and are awarded their $100 million plus interest by the courts,
the United States Congress passes a law excusing the banks from paying
interest simply because the banks thought their fee qualified as a
``service fee'' and did not expect to lose the litigation. Clearly, the
customers would not be made whole if Congress were to take such action.
It is no different here.
In this case, the producers'' obligation to refund the overcharges
was determined finally in May 1997, when the Supreme Court denied the
producers'' petition for certiorari. It is now June 1999. For the last
two years, despite the fact that the obligation to pay at least the
principal amount has been clear, only one large producer, Mobil Oil
Corporation, has paid the refunds it owes. The others, including
Anadarko Petroleum Corporation, Amoco Production Company, Union Pacific
Resources Corporation, and OXY USA Inc. have refused to refund one
dollar. Instead, they are allowing interest to continue to accrue by
their own refusal to refund even the principal amounts.
We ask the committee not to interfere with the judicial process and
the adjudication of our rights under the NGPA. We urge you not to
change the rules in the bottom of the 9th inning. The decision of the
D.C. Circuit in Anadarko Petroleum Corp., et al. v. FERC should be the
final determination of the rights of the parties to interest on the
principal amount of the overcharges, subject only to review by the
Supreme Court of the United States, as specified in section 506 of the
NGPA.
This concludes my written statement.
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Mr. Barton. The Chair is going to recognize himself for 10
minutes for questions.
The Chair first wants to say that the Chair has read the
Constitution and sees that there are three equal branches of
government and one of them is the legislative branch and the
legislative branch has the right and opportunity to take issue
of what the judicial branch does.
Quite frankly, I don't give a hoot what the D.C. Court of
Appeals ruled since I am not an attorney and I am not a judge
but I will have to admit that they ruled in your favor or your
clients' favor, Mr. Albright.
I do want to go to the Attorney General from Kansas and I
want to get the record straight about what the issue is. In
1978, we passed a Natural Gas Policy Act, the Congress did,
which regulated a wide range of natural gas prices that
heretofore had not been regulated and they did set a maximum
lawful ceiling price for a number of categories in natural gas.
My assumption is that most of the gas contracts that are in
question in this litigation were old gas contracts under the
definition of the Natural Gas Policy Act of 1978; is that
correct?
Ms. Stovall. That would be my understanding, but I don't
have that historical perspective. What I would offer though,
from 1954 the Federal Government has had the ability to
regulate gas at the wellhead so you had that even before the
Natural Gas Policy Act.
Mr. Barton. Interstate sales not intrastate sales. You
couldn't regulate natural gas prices intrastate until the
Natural Gas Policy Act of 1978. I used to be the natural gas
deregulation consultant for Atlantic Richfield Oil and Gas
Company so I am a little hazy on this, but it is still back
there somewhere.
Ms. Stovall. You at least had it there and I didn't. You
can be our expert on that issue then.
Mr. Barton. Kansas at the time the NGPA came in effect in
1978 had an ad valorem tax, not a production tax; is that
correct?
Ms. Stovall. That is true.
Mr. Barton. There was a Federal Power Commission or Federal
Energy Regulatory Commission, which was a successor to the
Federal Power Commission, ruling that said the Kansas ad
valorem tax could be passed through as an add-on to the maximum
lawful ceiling price; is that correct?
Ms. Stovall. You are absolutely right. In 1974, opinion
number 699 and 699-D from FERC said exactly that.
Mr. Barton. Because the gentlelady from Missouri made some
statements in her very precise soft voice about unlawful
prices, technically she is correct after the fact. She wasn't
completely correct because, at the time, there was a ruling
that you could sell at a regulated price. The Federal
Government or an agency of the Federal Government set the
regulated price.
The State of Kansas under the constitution has the right to
have State taxes, and they had an added value tax, an ad
valorem tax, not a production tax, not a severance tax but an
ad valorem tax. FPC or the FERC said that can be passed
through; is that correct?
Ms. Stovall. You are exactly right.
Mr. Barton. So Kansas got its taxes. The taxes were paid.
Ms. Stovall. True.
Mr. Barton. But the pipelines who bought the gas paid the
taxes because at that time most pipelines took ownership of the
gas that they purchased; is that correct?
Ms. Stovall. That is correct.
Mr. Barton. Now, the great FERC represented by the general
counsel here, Mr. Smith, who ruled, I am told, five times that
what Kansas was doing and what Kansas producers were doing was
legal came back and when the case went to the D.C. Court in
1988 and the D.C. Court said, well what FERC has ruled we don't
think is right and they remanded that to the FERC. And 5 years
later the FERC said, well, we guessed what the District Court
said is correct and what we have said all along is wrong. Is
that correct?
Ms. Stovall. Basically. If I could add something. In 1988
when the D.C. Circuit remanded it back, it wasn't to say we
don't think FERC made the right decision. It was simply to say
their decision fell short of explaining properly how they
classified the Kansas tax.
Mr. Barton. The D.C. Court didn't rule in favor of, I would
say, the plaintiff. The D.C. Court just said the FERC needs to
take another look at this.
Ms. Stovall. And explain it better.
Mr. Barton. And after 5 years, the FERC decided that they
were wrong, that they had ruled the wrong way all these other
times.
Ms. Stovall. That is correct.
Mr. Barton. Now, do you know of any attorney in oil and gas
practice in the great State of Kansas who, before the D.C.
Court remanded it back to the FERC, would have said that it was
unwise, unsound, imprudent to rely on the five previous FERC or
FPC rulings?
Ms. Stovall. I know of no oil and gas lawyer in Kansas that
would have given that advice.
Mr. Barton. At that time.
Ms. Stovall. True.
Mr. Barton. At that time.
Now, Mr. Smith, you said in your written testimony that the
FERC takes no position on the legislation that Mr. Moran has
introduced. It says neither the Commission as a whole nor
Chairman Hoecker has taken a position on the legislation
proposal.
Now, in a letter to the Chairman of the Appropriations
Committee which, according to the facts that I have, is dated
April 15, 1999, says this note responds to your request for
Chairman Hoecker's views on section 2316 of H.R. 1141, the
fiscal year 1999 Emergency Supplemental Appropriation Act, the
chairman would not oppose enactment of this amendment. Are you
cognizant of this particular document?
Mr. Smith. Yes.
Mr. Barton. So when I read the chairman would not oppose
enactment of this amendment if it is not identical it is very
similar to Mr. Moran's legislation, that the FERC would not
oppose enactment of Mr. Moran's legislation; is that correct?
Mr. Smith. As you may be aware, we provided that note in
response to an appropriations staff request for our views on
this subject. Almost instantaneously, we were asked questions
by third parties who saw that version of the statement and
said, well, does this mean that the chairman supports the
slightly different provision that was being discussed in the
context of the supplemental appropriations bill. That was
clearly not our intent.
The chairman's intent was to state a view of neither
opposing nor supporting that legislation, and when we received
written questions from the Appropriations Committee in
connection with their review of our budget which asked the same
question, we made that clarification, that the chairman----
Mr. Barton. Let's clarify for this subcommittee your
position on Mr. Moran's legislation. You are not a commissioner
at the FERC, but you are the general counsel. Can I
characterize the FERC's position is that they don't oppose the
Moran bill?
Mr. Smith. We don't oppose and don't support. We have taken
no position as my testimony said.
Mr. Barton. You are not opposed to it. You are not going to
be upset if we mark this up in subcommittee within the next
month and send it to the full committee?
Mr. Smith. Well, I can't speak for when the commission will
get upset but yes, that is right, we have carefully not taken a
position.
Mr. Barton. How long have you been at the FERC?
Mr. Smith. A year and a half, roughly.
Mr. Barton. Before you came to the FERC in your current
capacity, you weren't at the FERC in some other capacity?
Mr. Smith. No.
Mr. Barton. So you are not aware of the thinking of the
Commission at the time they reversed their position?
Mr. Smith. Only as evidenced by their written orders.
Mr. Barton. Can you summarize quickly why they flip-flopped
on this? Because if they had not, none of this would be an
issue.
Mr. Smith. As you are aware, the Commission in 1983 got a
request from a pipeline to reconsider its pre-NGPA position
that these Kansas ad valorem taxes should be recoverable. As
far as I am aware, there were only two FERC decisions in
response to that, the initial order in the case and the order
on rehearing, both of which found that the Kansas ad valorem
tax could be treated as recoverable under section 110.
Then in 1988 the D.C. Circuit critically reviewed the
Commission's reasoning, focusing on two aspects of it. First,
was there sufficient reasoning or explanation generally of the
commission's decision. And second, could the Commission
distinguish its position concerning the Kansas ad valorem tax
from its position on the Texas ad valorem tax, which the
Commission had consistently treated as not a tax on production
and not recoverable under section 110.
And in that remand, the court instructed the Commission to
go back and give a rigorous review of how it was going to
distinguish between property taxes and production taxes. In
doing that review based on the discussion in the D.C. Circuit
decision and the other issues that were discussed in the 1993
order, the Commission reversed its view.
Mr. Barton. My time has expired. There is a difference
between Texas and Kansas I believe. In Texas, we have severance
taxes, and we had ad valorem property taxes. But in Kansas I
think they just had the ad valorem tax. I don't think they had
a severance tax.
Mr. Smith. At that time.
Mr. Barton. So there was that distinction. My time has
expired. The Chair is going to recognize the gentlelady from
Missouri for 10 minutes.
Ms. McCarthy. Thank you for your generosity, Mr. Chairman.
Mr. Barton. I recognized myself for 10 minutes. I have to
be fair.
Ms. McCarthy. I would like to ask the Honorable Ms. Stovall
a question. I am going to put my Ways and Means cap on. This is
on taxes since Mr. Barton mentioned the Kansas tax situation.
The tax in question is the Kansas State tax; and ultimately,
the revenues from this tax ended up in the Kansas treasury. Why
then hasn't the State of Kansas offered to reimburse producers
for the cost of refunds using the original tax moneys plus the
interest earned over the years?
Ms. Stovall. Again, Kansas doesn't have that money set
aside just like the producers don't have that money set aside.
Kansas takes the position that the producers lawfully collected
that amount that they were entitled to do and it has been
utilized for purposes in the State of Kansas.
Kansas doesn't think it is our obligation to give it back.
We think that we lawfully collected it under the laws of FERC
at that time.
Ms. McCarthy. Given all the testimony we have heard today,
I am surprised that Kansas didn't set it aside in some sort of
fund but also given a sense that most States are in surplus
right now and budget surpluses because of the great economy. I
also find it difficult to understand how Kansas wouldn't--
having used this State tax not find it good on a solution
because my understanding is, and I am looking at the Missouri
data and some things that Mr. Albright said, Kansas people, the
people of Kansas as well as the Kansas-based pipelines, the
rate payers in the pipelines, there is $82 million due them.
Who in Kansas is advocating for the Kansas-based pipelines
and the rate payers? You are here today taking sides with the
producers and I understand that, but whose job is it in Kansas
to help them get that $82 million back?
Ms. Stovall. There is an organization that deals with
consumers on utility issues and they have the right to be any
place and say what they want. In Kansas, the way we have
evaluated it though is the small benefit to the consumers being
about the $15 total is absolutely outweighed by the detriment
to the producers and the royalty owners that would come about
by having to pay this.
Even though I am charged in my State with enforcing the
Consumer Protect Act, I find that the equities absolutely don't
support giving this $15 to the consumers in light of what would
happen. Again, those figures that you look at that talk about
$77 million that's absolutely an estimate----
Ms. McCarthy. $82 million.
Ms. Stovall. $82 million, whatever it is. There is no
certainty and my saying $77 million and your saying $82 million
indicates we don't know where the numbers have come from. They
are simply estimated bills that pipelines have submitted
assuming that the pipelines always paid the maximum lawful
price in addition to that tax.
The records we have had a chance to look at would suggest
that is not true across the board; but because we haven't been
given the opportunity, we being the producers and the royalty
owners to have a due process hearing, we can't even justify nor
respond to what those bills are and yet FERC has said that
those producers and royalty owners owe 100 percent already.
Ms. McCarthy. It is my understanding that the 85 percent of
the money that is due is owed by 24 large companies that are
mostly national and international and outside of Kansas. That
is who you are speaking of?
Ms. Stovall. Actually not. What we show is the median claim
of the royalty owners is $22,000. That breaks down to being 12
claims that are under $100; 97 that range from a $100 to a
$1,000; 125 claims between a $1,000 and $5,000; 76 that range
between $5,000 and $10,000; and then there are 9 that are over
$10 million.
Ms. McCarthy. Those are the Kansas companies you just gave
me----
Ms. Stovall. Those are the producers.
Ms. McCarthy. Are those the Kansas producers?
Ms. Stovall. They are the producers. They are not
necessarily all Kansas producers, but they do produce in the
State of Kansas.
Ms. McCarthy. Can you provide that information for the
committee? Because, obviously, the data that Mr. Albright was
referring to and the Missouri Public Service Commission
presented us is not quite in sync with that information.
Ms. Stovall. Again, and--this is the information we've been
able to put together. The information that Mr. Albright and the
Missouri Commission have are supported by the pipelines. That
information came from the pipelines which, again, are just very
base estimates.
Ms. McCarthy. We try to hear from all sides here. That is
what is great about this subcommittee.
Ms. Stovall. I appreciate that.
Ms. McCarthy. Commissioner Lumpe, I wonder if you, and, Mr.
Albright, you can weigh in on this if you would like, we don't
always have the right to legislate everything up here. We may
try, but my question is is this legislation constitutional? It
seems to alter final judgment by the court. And in my mind may
constitute a taking, and I would love your thoughts on that.
Ms. Lumpe?
Ms. Lumpe. I think, Ms. McCarthy, that you are asking me a
legal question and not being an attorney, I sort of hesitate to
answer that. But I would be happy to try to provide an opinion
for you on that, whether the current NGPA Act is constitutional
that this would involve a taking.
I would assume that in the challenge that was brought to
the court on this and the court's ruling that the refunds were
due, that that issue may have been addressed there and that we
would then rely on it. But not being an attorney, I really
couldn't give you my own take on whether this is a taking.
Ms. McCarthy. I would appreciate the thoughts from your
attorneys on this because I am quite curious that you and I
both have grappled with the issue of takings in our prior lives
as legislatures, and we grapple with again here in the
Congress. I certainly wouldn't want to be embracing legislation
that would exacerbate that difficult question.
Mr. Albright?
Mr. Albright. Yes. If I may weigh in on this, I am not a
constitutional lawyer. But we have taken a look at the issue
and the fact that years after the right to collection of these
refunds were vested, gas consumers are in fact entitled to
interest. That is part of the compensation under the American
jurisprudence is to receive interest on refunds.
We believe it would wrongfully sidestep the takings clause
to enact legislation now that forgives that interest. I think
the Natural Gas Policy Act vests exclusive jurisdiction in the
courts to resolve these matters too. So to the extent that
Congress acts now to take that legislation away and to usurp
the rights of parties that have vested rights now, that that
would be unconstitutional.
Ms. McCarthy. Thank you very much. Mr. Chairman, I thank
you and I am going to go vote.
Mr. Barton. Would the gentlelady yield.
Ms. McCarthy. Of course, Mr. Chairman.
Mr. Barton. We repealed the pricing provisions of the
Natural Gas Policy Act. We had not repealed the Act in its
entirety, but at the time the pricing provisions were still in
effect, the clients that you represent had contracts that gave
them the opportunity to purchase this gas. They were aware when
they purchased it that part of the fee they were making was an
ad valorem tax, were they not?
Mr. Albright. The clients I represent are local
distribution companies which were customers of the pipelines.
Mr. Barton. The clients which you represent purchased gas
knowing that included in the price were taxes; is that not
correct.
Mr. Albright. That is correct.
Mr. Barton. Are you aware of any of your clients, at the
time they received the gas to consume the gas or to resell the
gas, make an issue, at that time, of not paying the total price
they were asked to pay because of this issue?
Mr. Albright. Well, Mr. Chairman, for the period in
question, I was not even an attorney. I did not represent
Public Service Company of Colorado nor Cheyenne Light, Fuel,
and Power; but I would like to speak to the issue as being an
employee of a gas pipeline company, KN Energy, Inc. And I was
in the Kansas gas patch purchasing gas from producers and
negotiating contracts with gas producers, and I was very aware
of this issue. And our company was very familiar with the
litigation that was ongoing and paid close attention to it.
Mr. Barton. They voluntarily paid a price knowing that part
of the price included these taxes.
Mr. Albright. That is correct.
Mr. Barton. For that payment, they received a commodity,
i.e., natural gas; isn't that correct?
Mr. Albright. That is correct.
Mr. Barton. They got a good in return for paying a price
that included these taxes.
Mr. Albright. That is right.
Mr. Barton. This whole issue goes back to, again, we set a
ceiling price and Kansas chose to apply a tax in a different
way than other States, but the tax was paid, the State of
Kansas received the tax and now because of the D.C. Court and
because of the FERC change of position, there is several
hundreds of millions of dollars apparently at issue in taxes
that have been paid; is that not correct?
Mr. Albright. That is correct, Mr. Chairman.
Mr. Barton. I thank the gentlelady. Does the gentleman from
Arizona wish to be recognized now or do you wish to go vote and
come back? We are trying to continue the hearing.
Mr. Shadegg. I would just as soon go vote and come back.
Mr. Barton. The gentleman from Texas is recognized.
Mr. Hall. Mr. Albright, how much of a refund would your
electric and gas customers--how much would you collect if you
were successful in collecting all that is due you from Kansas
producers?
Mr. Albright. Calculations based on the interstate
pipelines from which we purchased gas during this period
indicates we would receive approximately $23 million for our
customers.
Mr. Hall. How much would that be per customer?
Mr. Albright. We made a rough calculation based on current
consumer base, our customer base as it exists now for
residential customers, the average refund to each customer
would be approximately $15, and for the average commercial
customer the refund would be approximately $90.
Mr. Hall. What would the State regulators do if you failed
to collect these amounts?
Mr. Albright. I can't speak for my regulators. Sometimes
they are unpredictable. I imagine they would be very upset, but
whether they would take any further action----
Mr. Hall. You folks had to make some kind of reserve. What
recommendations did you make to them?
Mr. Albright. We already received approximately $2.5
million of refunds for these Kansas ad valorem taxes.
Mr. Hall. You settle with any of them for less than what
their average would be? I don't know how you would do that.
Mr. Albright. I don't know how we would do that either. The
issue is for purposes of rate regulation for local distribution
companies, our customer base changes very significantly over
time and the way we purchase gas and flow those gas costs
through, it is on a dollar-for-dollar basis through an
adjustment mechanism we have on our tariffs. The Colorado
statutes provide for a low-income fund, a Colorado energy
assistance fund which is referred to in one of the letters I
submitted this morning.
And that provides for any undistributed amounts of refunds
from upstream suppliers to be credited to this fund for
purposes of administrating the low-income funds. So to the
extent the specific customers--existing customers on our system
don't get the full allocated average refund, the amounts would
go toward the low-income customers.
Mr. Hall. Been able to get the money back to the customers?
Mr. Albright. Yes, they would.
Mr. Hall. Have you been able to do that?
Mr. Albright. Yes, we have.
Mr. Hall. What is going to be the aftermath of this? What
is the effect of this bill if we pass this bill in the present
sense?
Mr. Albright. To the customers?
Mr. Hall. Yes.
Mr. Albright. They won't get $360 something million dollars
they are entitled to under the law.
Mr. Hall. The producers won't pay it.
Mr. Albright. And the producers won't pay it.
Mr. Hall. We, a lot of times, try to balance equities up
here. I am very pro producer myself. I don't--I will read the
testimony. I am sorry I didn't get to hear your testimony, but
you have given it to me. I will read it.
Mr. Chairman, I yield back the balance of my time.
Mr. Shimkus [presiding]. Thank you. I will recognize myself
for as much time as I may consume or until someone else comes
back and kicks me out of the Chair.
My opening statement had just the fact that Illinois rate-
payers and companies had, based on the dollar amount with the
principal and the interest of about $22 million, $994,000 due
them so I guess I have a couple of questions, and I will just
throw this open to the panel first.
Is there a risk that pipelines and local distribution
companies will keep a portion of the refund? I know Congressman
Moran suggested that that would occur.
Why or why not? Carla?
Ms. Stovall. We very much know that some of the pipelines
have that intention. In fact, two of the pipelines have
petitioned FERC to be allowed to keep 100 percent of the
refunds and that indeed has happened in ANR in El Paso. It is
our information in addition to that, that pipelines who have
retail customers, when they sell to big consumers that it is
their intention to argue that all that money should be kept by
the pipelines because no refund was contemplated in the
contracts that they had with those individuals.
And so it is very much the information we have that the
amounts of refunds to consumers will be very limited by what
the pipelines and/or the local distribution companies intend to
keep. The local distribution companies whether or not they can
keep any of the money is on a State-by-State basis with the
State regulatory agency, and so that will be yet to be
determined by those individuals.
Mr. Shimkus. Thank you. Anyone want to dispute that?
Mr. Albright. Mr. Chairman, as far as the refunds that are
received by Colorado utilities and Wyoming utilities, there is
a requirement that all of the refunds, except maybe for some
out-of-pocket expenses related to acquiring those refunds are
going to be dollar for dollar refunded to customers.
Now, there may be situations--as Ms. Stovall suggests,
there are some private contract matters between the interstate
pipelines and direct sales customers, which it could be that
the direct sales customer provided that it will receive the
refunds depending on the pricing provisions of those private
contracts, but that is not an NGPA- or NGA-regulated sale.
Mr. Shimkus. As far as I understand this issue, refunds
have been given back from 1988 on; is that correct?
This issue is from 1983 to about 1988 that we are dealing
with. What has been the process of the refunds from 1988 to
what was it, 1993? Anyone want to speak to the process of the
refunds? Mr. Albright, you look like you are interested in----
Mr. Albright. The process is virtually the same as adopted
for purposes of these refunds which is that the pipelines
submit a report to the FERC that gives a list of the providers,
the producers, the suppliers that provided the gas during this
period of time and its calculation of what the refunds are that
are due from those producers. They also sent notices to those
producers directly pursuant to the rule that perhaps Mr. Smith
can discuss a little bit more elaborately.
Mr. Shimkus. I wanted to ask Mr. Smith if Ms. Stovall is
correct.
How would you respond?
Mr. Smith. A couple of points.
First, the Commission's order in 1997 provided that the
refunds need to be flowed through by the pipelines. In
considering requests for clarification of that order, the
Commission permitted three pipelines that have by far the
smallest refund amounts due, to retain the refunds. They had
settlements with their customers that allowed the pipelines as
opposed to the pipeline customers to retain any refunds that
might be ordered.
There are nine pipelines that are affected by the refunds.
Those three account for, I think, 1.5 percent of the total
amount of refunds, so they are by far the smallest on the list.
The second issue is the flow through by the local
distribution company. The pipelines are required, with that
exception I noted to flow through the refund amounts to the
local distribution companies. The issue, as had been mentioned
earlier, of whether the local distribution companies flow those
refund amounts through to their end-use customers is a matter
of State regulation.
And as Mr. Albright mentioned, at least in some States and
maybe in all States that are affected, the State commissions
have been careful in reviewing how that works and are trying to
get the refund dollars through to end-use customers. The
mechanics of how that is happening may vary from State to
State.
Mr. Shimkus. Who determines how much is owed by each
individual producer or royalty owner? Who is making that final
determination? When someone opens up the mail, surprise you owe
$25,000; who is making that decision?
Ms. Stovall. Right now it has been made by the pipeline
companies. They have simply been ordered by FERC to come up
with a bill, and that is what they did. They did it by November
of last year and in 6 months then the royalty owners and the
gas producers had to have that amount put in escrow by March of
this year.
So there has been no determination. It is simply the
pipelines sending a bill and there has been no process yet to
have a due process hearing to contest those amounts because one
of the keys is that refunds are only owed if the companies paid
more than the maximum lawful price. Our understanding is from
what we have looked at, the bills are being submitted assuming
maximum lawful price was paid plus the tax, and that has not
been the case when we have had an opportunity to look at the
records.
Mr. Shimkus. Mr. Smith, I am going to follow up on some
other issues on the hardship issue. Talk to me about this--the
determination of the amounts.
Mr. Smith. The Commission's orders require the pipelines to
serve a notice on the producers that sold to them of the
pipelines' calculation of how much refund is due. The process
for resolving any disputes between the producer and the
pipeline is that the producers file with FERC a request for
adjustment that essentially says the pipeline gave us notice
that we owe X dollars and we think we owe Y dollars. Then there
is a process at FERC for resolving that issue.
Mr. Shimkus. Ms. Stovall, do you agree there is a process
for resolving the conflicts between the bill and what--the
person who is being charged this amount?
Ms. Stovall. Not to date.
Mr. Shimkus. I think our colleague Congressman Moran made
the statement that there was no due process.
Ms. Stovall. There has been no due process. FERC seems very
reluctant to grant those hearings to the producers. It is my
understanding producers have indeed asked for that and there is
no indication that FERC is eager to take this on because it is
thousands of people coming forward to contest these bills.
It would be a nightmare for them to do, but they need to.
The key is even though there hasn't been this process, they
have been ordered to pay 100 percent of the money without any
judicial determination.
Mr. Shimkus. Let me bounce back to Mr. Smith then. I know
you have addressed hardship cases. I still want to eventually
ask that, but have you addressed any dispute resolutions
between the person who has been billed and those who want to
question the amount? They are separate, and I want to make sure
we keep those separate.
Mr. Smith. I don't think we have come to a final resolution
on any of those issues.
Mr. Shimkus. What does that mean? Have you had a hearing on
a dispute resolution mechanism or not other than a hardship?
Mr. Smith. We have not set any of the petitions for
adjustment, which is the label we give to these disputes about
how much is owed, for an adjudicative hearing.
Mr. Shimkus. Are we going to?
Mr. Smith. That is a decision to be made by the Commission.
Mr. Shimkus. But in your testimony--just minutes ago,
didn't you say there was a process to do this?
Mr. Smith. There is a process, but it doesn't necessarily
involve an adjudicative hearing.
Mr. Shimkus. Well, what does it entail then? That is right;
I am having some success here.
Ms. Stovall, just hold off.
You are lucky that the ranking member is not here because
you would be smoking by now. I am much nicer than he is.
Mr. Smith. As I understand it, some producers have asked
for a formal adjucative hearing on their adjustment claims. As
far as I know, there aren't any issues about particular
disputes between particular producers and particular pipelines
about refund amount owed for which the Commission has yet
ordered such a hearing.
Mr. Shimkus. Well, let me move on. Because we would like to
get that answer maybe in writing somehow.
Mr. Smith. We can provide that answer.
Mr. Shimkus. Why I am following this line of questioning,
as I mentioned in maybe my opening statement that the Federal
agencies are supposed to be--we should serve our clients. Our
clients are the consumers, and we need to make every effort to
help them resolve conflicts prior to going to the court.
It is not just the FERC. This is the first time I heard of
FERC not responding rapidly. I have other problems with other
Federal agencies. So it is a good line of questioning. And
those of us who want government to work well and work with the
clients--I mean, I think all they are asking for is due
process, a chance to question the bill, which I think they
should have.
And I got a small producer here. Do you want to add
anything?
Mr. Krehbiel. Perhaps I can shed a little bit of light on
that question.
The example that I gave in my testimony of the widow in
Wichita, Kansas, she received a bill, letter from the FERC
directing her to refund $20,000. When I went back through what
information was available when I tried to help her, I learned
that she was actually underpaid by $49,000 during the period
from 1983 to 1988, and she is being held responsible for
$20,000 in a refund. She simply wrote back and said she didn't
owe it.
So then we don't know what happens next. We got producers
all across the State of Kansas who are being asked to pay
refunds without any determination that they are even liable for
the refunds. That is the really bizarre thing about this
procedure. How can you ask a producer to refund $20,000 based
upon an alleged overpayment that is just based upon a
conclusion presented to the FERC by the pipeline company? We
have got records here that are 15 years old. You have got to go
back and study a whole lot of issues and dig out a whole lot of
records to figure out whether any liability even exists, and to
my knowledge none of this has ever even been done.
Mr. Shimkus. Let me ask, since she hasn't been harassed
that much, Miss Lumpe from Missouri, sister State to Illinois.
In fact, some of the pipelines that go through Missouri end up
in Illinois. What do you think about the claims of the small
producers, chance that the FERC ought to at least hear the case
and do some adjudicative process which makes some validity of
their claims?
Ms. Lumpe. As I said, we are not unsympathetic to various
hardship cases.
Mr. Shimkus. This isn't just hardship. This is questioning
the billing, questioning the methodology, and coming to a
conclusion. I mean, this is--I didn't go down the hardship case
route. This is, are these bills certifiable? Are they--you
know, are they supportable with documents and should there be a
process by which the individuals who are claiming that they are
now being harmed by this ruling, that they have their day in
court?
Ms. Lumpe. My understanding is--and, again, I could be
wrong, but my understanding is that there are procedures set up
in the act that determine how----
Mr. Shimkus. Yeah, but you have been following our
discussions of the past 5 minutes. And there may be procedures,
but they are not----
Ms. Lumpe. Well, but they should be followed.
Mr. Shimkus. Thank you very much.
Ms. Lumpe. They should be followed.
Mr. Shimkus. Thank you.
Anyone else want to comment? Miss Stovall.
Ms. Stovall. To file the petition for alternate dispute
resolution, which some of the producers indeed have done as far
as back as March and not had response from FERC, costs $13,000
per pipeline to do that. For small producers, that is a huge
bit to ask them to resolve what they lawfully owe.
Mr. Shimkus. Mr. Majeroni.
Mr. Majeroni. If you think about the royalty owners' point
of view, unless you are really from Kansas, I mean, your local
attorney, your family attorney knows nothing about any of this.
And who do they turn to for help? You know, the cost of getting
that help is almost, you know, as much as the bill. So it is a
real problem. And----
Mr. Shimkus. Well, again----
Mr. Majeroni. [continuing] 15-year-old bill to try to find
those and verify those.
Mr. Shimkus. Again, we have done the same thing in a
landfill in Quincy, Illinois; and the consumers at least got an
opportunity to go back and pull out their own dumping records
and have at least a small portion of their day in court. And I
think that would probably make the individual parties at least
somewhat understandable of the process if they at least had a
chance to fight this charge.
With that, I am going to yield back my time to the
chairman.
Mr. Barton. Recognize the gentleman from Oklahoma for 10
minutes.
Mr. Shimkus. Do I have to? I mean, yes, I would like to
recognize the distinguished gentleman from the State of
Oklahoma for 10 minutes.
Mr. Largent. Thank you, Mr. Chairman.
Ms. Stovall, I want to get down to the basics a little bit.
Tell me about what is an ad valorem tax in this context? I
mean, what are we taxing?
Ms. Stovall. In Kansas, the way the tax has been put on is
a complex formula. I am not going to pretend that I have an in-
depth understanding of it, but it taxes various things
including the rate of production as well as other factors. And
there is a property valuation done as to what the reserves are
worth. There is a calculation taken based on how much
production is taken from the natural gas well each year which
is how those prior decisions were made saying that it is a
production tax.
Mr. Largent. Okay.
Mr. Barton. Would the gentleman yield on that?
Mr. Largent. Yes.
Mr. Barton. But the tax that was paid was paid on natural
gas that was actually produced from the well in a given month,
is that not correct? They didn't tax at the end of the year
based on the value of the reserves still on the ground. They
taxed on the amount of natural gas that actually came out of
the well.
Ms. Stovall. The amount that came out of the well was one
of the factors in calculation of the tax.
Mr. Barton. Only one of the factors.
Ms. Stovall. Yes, sir.
Mr. Barton. So they did have a kind of a reserve tax also.
Ms. Stovall. That is why it was an ad valorem tax.
Mr. Barton. I didn't know that. That is different.
Ms. Stovall. It was a little bit different than the ones--
--
Mr. Largent. Can you enlighten us on that at all?
Mr. Krehbiel. Perhaps I can. Ad valorem tax was based on
the amount of the production and the value of that production,
but there is a reserve analysis, as you suggest. So it was a
combination of factors.
And the law at the time said severance production or other
similar taxes, and in the FPC ruling they ruled this was a
similar tax. It was based upon production. You report the
amount of your production every year, and you report the value
of that production, the price that you got for the production.
So you have those production and price factors figured into it.
And that is where they come up with the idea that it was a
similar tax.
Now if the State of Kansas had known that they were going
to change their mind on how this was----
Mr. Largent. We got that part of the argument.
Mr. Albright, based upon that, the ad valorem tax, it
sounds like it is a fairly complicated issue that deals with
production and reserves, calculation, like that. You were--what
was the quote that you had that the Circuit Court had on
whether the ad valorem tax could be, basically, passed on to
the ratepayers?
Mr. Albright. According to the D.C. Circuit--let me pull
that exact quote: ``We are hard pressed to see how the
producers would be harmed in any cognizable way even if they
were required to disgorge every dollar they received in
recovery of the tax.''
Mr. Largent. But I am talking about in terms of what the
Circuit Court said to FERC about their allowing Kansas to pass
on to ratepayer the tax instead of going to the producers.
Mr. Albright. I didn't quote that, but that is the CIG case
in 1988 where the Court examined the analysis that FERC had
applied, in comparison to the Texas tax, the same analysis
against the Kansas tax. And in the Court's mind this was a
dissimilar treatment of what the Court viewed to be similar
taxes and called the Commission's actions the quintessence of
arbitrariness and caprice and remanded the case back to the
Commission to exercise its interpretive authority to identify
the features of the Kansas tax that point toward one
classification or another and to offer sensible distinctions
between taxes that it chooses to treat differently.
So there is a Commission decision which came out in 1993,
and that is Colorado Interstate Gas Company, 65 FERC, paragraph
61, 292, that the Commission issued which examine in length the
features of the Kansas tax supporting the determination that it
was not a severance tax but, in fact, a tax on property.
Mr. Largent. Okay. It sounds like it is much more
complicated than the conclusion reached by the Circuit Court.
That is my point. To me, when I hear the explanation of the
tax, it is not a real simple value-added tax that doesn't have
anything to do with production, it has a lot to do with
production. So I don't know that it is a clear-cut case that
this cannot or at that time could not be passed on to the
ratepayers.
But I want to go back to Mr. Smith. Mr. Smith, in 1988 FERC
was given this decision and remanded the case in 1988. It took
FERC 5 years to make a decision. Why the delay? In getting such
compelling language from the Circuit Court in DC, remanded the
case to FERC and said, you guys need to do something about
this, and there is a 5 year hold-your-breath. What happened?
Mr. Smith. Well, I wasn't at FERC at the time, so I can't
speak from personal knowledge, but, as you can hear from
today's hearings, these are difficult issues with strongly held
views on both sides, and it took that long to get an order out
of the Commission.
Mr. Largent. How many cases have there been where people
have been ordered to pay and they have sought, you know, some
reprieve from FERC?
Mr. Smith. The special hardship?
Mr. Largent. Yeah, how many cases.
Mr. Smith. I think we have got roughly 130 applications
already.
Mr. Largent. How many have you actually heard?
Mr. Smith. Well, we have acted on 10 roughly, 10 or 11.
Mr. Largent. And, Miss Lumpe, how many has Missouri
appealed?
Mr. Barton. Again, use the microphone for our recording
clerk.
Ms. Lumpe. Missouri has appealed a number of them.
Somewhere I have the precise number.
But what we have really done is say, have they given you
adequate data and information? We haven't said that they were
wrong. We said we think that the FERC should have adequate
documentation and data that these are truly hardship cases. And
if they are, we would not contest them further. We simply think
that they ought to have adequate information to make their
determination.
Mr. Largent. Okay. Mr. Smith, in somebody's testimony here
it said that $95 million has already been paid. Where is that
money?
Mr. Smith. It has been passed from the producers to the pay
plans, through the pay plans to the LDCs.
Mr. Largent. LDCs?
Mr. Smith. Local distribution companies. To the customers
of the pipelines.
Mr. Largent. So it actually has gotten to the consumers?
Mr. Smith. Well, the other witnesses can comment on what
happened to it, at least in a few particular States, after it
got to the local distribution companies.
Mr. Largent. Miss Stovall.
Ms. Stovall. It was my understanding the money is held in
escrow. Certainly the $21 million paid into Kansas has been
held in escrow pending resolution of who owes what and validity
of the claims.
Mr. Largent. Miss Lumpe.
Ms. Lumpe. The money in Missouri coming from the pipeline
to the local distribution company and through our purchase gas
agreement factor that we used flows directly then to the
consumer.
Mr. Largent. So there is checks already been handed to
consumers.
Ms. Lumpe. I am not aware of any of that. That would be the
process would occur should the refunds and interest come to us.
Mr. Largent. But you have gotten some refunds, is that
right, of this $95 million? Hasn't some of it come to the State
of Missouri?
Ms. Lumpe. I am not aware of that number, sir.
Mr. Largent. You are not aware of it?
Ms. Lumpe. I am not aware that we have passed to LDCs in
Missouri.
Mr. Albright. If I may speak. The Public Service Company of
Colorado received a refund of over $2.5 million, and almost all
of that has been refunded to its customers by now.
Mr. Largent. And that has gone to individual ratepayers.
Mr. Albright. Yes, it has been credited to the bills of the
customers.
Mr. Largent. Did any of it go to pipeline?
Mr. Albright. None. Some of it went to the Colorado Energy
Assistance Fund, which is a low-income fund for consumers.
Mr. Largent. Was it ever held in escrow?
Mr. Albright. None of it was held in escrow by public
service. I think Miss Stovall is referring to the fact that
some of the producers have the option of placing the funds in
escrow until the litigation is resolved.
Mr. Largent. But not in the State of Colorado.
Mr. Albright. Well, that is a FERC matter. That is a
Federal matter. I believe Mobil Oil Corporation actually did
pay some $62 million, in that ballpark, of refunds, which is
the bulk of the $90 million that Mr. Smith is referring to.
Mr. Largent. Miss Lumpe, do you have some new information?
Ms. Lumpe. Yes. About $8, $9 million has been sent back to
Missouri and through the MGE, the local distribution company
known as Missouri Gas Energy.
Mr. Largent. What they have done with it?
Ms. Lumpe. Then they come to us and through a credit we
refund it back to the consumers.
Mr. Largent. One hundred percent.
Ms. Lumpe. One hundred percent.
Mr. Largent. So the money was not held in escrow in
Missouri either.
Ms. Lumpe. I don't believe so.
Mr. Largent. I wanted to kind of walk through there--I
mean, the reason I ask that is because I want to talk through--
in the Chairman's remarks he said that the pipelines paid the
tax. Is that true? The pipelines paid this tax? Or did the
ratepayer pay the tax? Miss Stovall.
Ms. Stovall. Certainly, ultimately, it would have been the
ratepayer.
Mr. Largent. Because the pipeline just passed it right on
to the ratepayers.
Mr. Barton. I mean, when they paid the purchase price they
included the maximum lawful ceiling price and it also included
Kansas taxes. So the pipeline paid it, and the distribution
company paid it. Then they added to the price that the ultimate
consumer of the gas paid.
Ms. Stovall. True.
Mr. Largent. It was passed along.
Well, my time has expired, but I want to ask more questions
later.
Mr. Barton. The gentleman from Texas.
Mr. Hall. I have asked all I need to ask.
Mr. Barton. The Chair----
Mr. Hall. I have my mind made up.
Mr. Barton. We have some additional questions. But what we
are going to do, now that everybody has had a 10-minute round,
we will just have a general question period. And I will ask
some questions, and if Mr. Largent and Mr. Shimkus and Mr.
Hall--Mr. Shadegg indicated--oh, he is here.
The Chair would recognize Mr. Shadegg. We are not used to
him sitting with the staff in the back of the hearing room. The
gentleman from Arizona is recognized for 10 minutes. Mr.
Shadegg.
Mr. Shadegg. Thank you, Mr. Chairman. I will be brief. I
won't take my full 10 minutes and may be able to pass some on
to you.
Do I understand from the Attorney General of Kansas that,
having listened now to the other people in the room, that
Kansas is apparently the only State that is, in fact, holding
some of these moneys in escrow at this point?
Ms. Stovall. Oh, I am not at all sure that is true. There
are many, many States involved. The two here apparently aren't
holding in escrow, but there are lots of States who have
consumers who may get that $10 of refund if indeed it is paid.
So their individual corporation commissions have to rule on
what happens with that money, and it hasn't happened in many of
the States.
Mr. Shadegg. But your position as the Attorney General of
Kansas is it would be better to follow legislation such as
Congressman Moran has introduced and pass this back onto the
pipelines, as opposed to trying to carry it to the individual
consumers.
Ms. Stovall. Congressman Moran's bill would say the only
way that the producers have to pay this rebate is if it goes to
the ultimate consumer. And that guarantee we would want. If
anything is to be done, it has got to go ultimately to the
consumer, not to the pipelines.
The moneys that we have talked about earlier by Mr.
Albright, the hundred percent of the money went to the
consumers, it is my understanding that the money from the
pipeline--that the pipelines kept was taken off the top of
that. So, indeed, what he said was true. One hundred percent of
the money that he spoke of went to the consumers, but that was
after an element of the money was kept from the pipeline
companies.
Northern Natural Gas intends, it is our understanding, to
keep 20 percent of it, Panhandle Eastern to keep 11 percent,
and so on. That comes off of the top. So that needs to be
clarified and how much the consumers ultimately may get.
Mr. Shadegg. Do you agree with that interpretation, Mr.
Albright?
Mr. Albright. I don't know if I agree with those figures.
Colorado's primary interstate supplier is Colorado Interstate
Gas Company, and they have indicated that they are only going
to retain about 5 percent of the total refunds. This is a
result of direct sales, not sales for resale which is regulated
by FERC. The direct sales are not regulated by FERC but subject
to State regulation.
So if there is a matter of State regulation involved, I am
not sure how that is being passed on in other States. With
respect to Colorado, it is not regulated. It is a matter of
private contact law.
So it depends on the bargain that was struck by the direct
user, the end user of the gas, and the pipeline. It could be
that the direct end user will receive that refund pursuant to
the terms of the contract. Otherwise, the pipeline would retain
it because they get the benefit of the bargain.
Mr. Shadegg. Let's go back to the issue of the interest.
The largest portion of this, some $25 million of the $363
million is interest. However, under Mr. Moran's legislation,
that interest would be waived and the refunds. That would
simply be limited to the principal amount originally taken. Is
that correct?
Ms. Stovall. That is correct.
Mr. Shadegg. Your view is that is a necessary step for the
viability of the gas industry in Kansas?
Ms. Stovall. That is true, as the equity would require that
in recognition of the delay and reliance on FERC decisions and
the rest of it, absolutely.
Mr. Shadegg. Does FERC have a further explanation? I know
Mr. Largent asked a little bit about it as to why it did take
from a period of 5 years to try to decide this issue. I mean, I
understand it is complicated, but it seems to me the Court
language was fairly clear.
Do you know of any further explanation FERC has for this?
And, given the delay, why would FERC then at least not be
supportive of the aspect of Mr. Moran's decision which waives
interest--Mr. Moran's legislation which waives interest?
Mr. Smith. I don't have any further explanation of why it
took 5 years for the FERC to issue the remand order.
On the issue of what the Commission did in response to the
second D.C. Circuit decision, it concluded that a generic
waiver of interest wasn't consistent with the reasoning of the
D.C. Circuit in its 1996 decision.
The rationale for not taking a position on the current
legislation is that the Commission, in this respect views its
job as administering the current statutes interpreted by the
Commission and by the Courts. And if the Congress comes to a
different judgment about what the equities require in terms of
how to share the liabilities, that is a congressional
prerogative and the Commission will do its best to administer
the law however it might be amended.
Mr. Shadegg. I guess, too, that last point--I certainly
agree it is your job to administer the laws as we enact them.
Are you an attorney?
Mr. Smith. Yes.
Mr. Barton. No, he is just the General Counsel at the FERC.
Mr. Smith. It is buried in my job description someplace.
Mr. Shadegg. It is good to know that the FERC has an
attorney for their general counsel. I am pleased to hear that,
Mr. Chairman.
But in that regard I want to ask you a question that Mr.
Albright raised. You do not see a change by the Congress at
this point in time of the status of any interest as being
unconstitutional, do you?
Mr. Smith. I know the issue has been raised but, it has not
been raised with the Commission. So the Commission hasn't come
to a judgment about that. I would note that the Commission does
have authority under existing law, section 502 of the NGPA, to
provide for waiver relief, and I am not aware that anybody has
questioned that authority as being unconstitutional.
Mr. Barton. Would the gentleman yield on that?
Mr. Shadegg. Certainly.
Mr. Barton. What authority does the FERC have, since this
is a State tax that was levied, to assess penalties and
interest on a tax? I thought the Constitution gave the Congress
the right to assess taxes.
Mr. Smith. The relationship between the producer and the
State in terms of the tax payment was not something that the
NGPA envisioned the Commission having any role in. As you are
aware, the issue in this case is essentially one of rate
regulation under the NGPA and whether the tax payment can or
cannot be passed on from first seller to the pipeline.
Mr. Barton. I understand that. But my question is, if the
gentleman will continue to yield, and I don't know the answer.
Sometimes I ask questions to set people up because I think I
know the answer. But this time I am actually asking because I
actually don't know and, hopefully, you do.
Where does a Federal agency have the right, since this is a
State tax--I understand that FERC has the right to regulate
prices of natural gas because the Congress gave the Federal
Power Commission that right under a prior act to the NGPA, but
where do you have the right to establish an interest in what I
would call a pen leak because it is a State tax? Why wouldn't
you just say refund the principal as the Moran bill does? Where
do we get the authority to go above and beyond that--not you
personally but the Commission.
Mr. Smith. I think the authority is in the NGPA itself,
which provides the generic authority to set the rates, and in
the traditional exercise in rate making of applying interest to
refund calculations.
Mr. Shadegg. Reclaiming my time, if I might, perhaps I can
answer the gentleman's question.
I think the answer is that, as a regulatory agency charged
with setting the price, if a price is collected above the legal
maximum, a penalty can be imposed saying you charged a price
above what was allowed. And so you are going to have to give
that back, and you will have to give back interest on that. And
I don't know that. But----
Mr. Barton. But they never questioned the rate. There is no
dispute----
Mr. Shadegg. But it was included.
Mr. Barton. [continuing] the maximum lawful ceiling price.
And Kansas never hid the tax. Kansas never said, this isn't
really a tax. They were always up above board. The people that
purchased the gas knew that it was a tax.
Mr. Shadegg. We established that neither counsel nor I know
where they get the right to charge the interest.
Mr. Barton. I don't either.
Mr. Shadegg. And neither do you. But I would like to go
back to this point of constitutionality, because it is well
established in tax law in this country and has been for a very,
very long time that you can enact retroactive taxes. And indeed
I believe in North Dakota at one point in time the State went
back and enacted a retroactive tax that went back a period of
8, 10, 12, 15 years. They collected the tax, and it was
challenged, and it was upheld as being a lawful act of the
State legislature.
In that instance, I think what happened was the legislature
thought they had enacted the tax, they discovered that they had
not properly enacted the tax, and they went back years later
and reenacted the tax and that was upheld.
So I don't think that were this Congress to pass Mr.
Moran's legislation giving back this interest at this late
point in time that that would be unconstitutional, nor do I
think it was a taking. I think it would be perfectly lawful
under our law and indeed maybe demanded by the equities.
I guess the other point I want to make was in response to
Miss McCarthy's point and that was I do not see any problem
with this Congress reversing a decision of a court. That is a
part of the coequal branches of government. If we believe a
court has made an ill-advised decision, I think we are in a
position to and often do reverse court decisions. And I think,
at least in the State of Arizona where I am from, the
legislature frequently looked at court decisions with which it
disagreed and reversed those court decisions where the
legislature felt equity demanded it.
I will yield back what little of my time.
Mr. Barton. Well, I took some of the gentleman's time. So
did you have another question?
Mr. Shadegg. No, I am fine.
Mr. Barton. Well, I have a few wrap-up questions.
I want to thank the panel. You all have been here since 10,
and you have been testifying since about 10:45. And so,
hopefully, in the next 10 minutes we can conclude. And I know
Mr. Largent has some questions, too; and Mr. Shimkus does.
So my first question and, again, I will just recognize
people as they have questions instead of giving us each an X
amount of minutes.
Miss Lumpe, I heard you in your oral statement and again in
reply to a question that the great State of Missouri is not
interested in trying to go after the widows and the orphans, so
to speak, that your interest is in getting what is rightfully
due to the State in terms of those big old bad producers that
have all that money. But Senator Roberts sent over some case
histories for me to put into the record; and I am just going to
ask you about them because, if nothing else comes out of this
hearing, perhaps we can use your good offices to get some
justice.
The first case that Senator Roberts sent over is a Mrs.
Merland--I want to say Cope, C-o-p-e, Calvin of Arizona. Her
husband's health has failed--and I believe that her husband has
passed away. She owes $9,000 in refunds. She hired an attorney,
went to the FERC. The FERC gave her a hardship waiver after 7
months of consideration, and the Missouri Public Service
Commission has appealed that. Are you aware of that particular
case?
Ms. Lumpe. I am not aware of the particular one, but I do
know that we have appealed a number of them. And the reason we
have is because we are not aware that the FERC got adequate
data or information to make that determination. That is the
process that we are asking for in our request.
Mr. Barton. I am not going to read the inflammatory
sentence that Senator Roberts put in. But I am going to ask
that you look at court case number 99-1103. And, again, if
these documents are correct, this elderly lady only owes
$9,000; and the FERC did grant her a hardship waiver. And the
Missouri Public Service Commission, according to Senator
Robert's office, is appealing that.
The second case is a Mrs. Bone of Colorado, and her mother
passed away. So she inherited some royalties from her mother.
She was asked to pay $12,998. She appealed for a hardship
waiver, and the FERC again granted the hardship waiver, and the
Missouri Public Service Commission again is appealing that. Are
you aware of that case?
Ms. Lumpe. I am not aware, again, of the specific case. The
cases that we have appealed have been based on the process that
we felt that a letter being sent and just asking was not
sufficient, that there should be some evidence of hardship.
Mr. Barton. All right. Well, if you will look up the case
of Bone of Colorado.
And there is one more. This is a Mr. Freeman, who is still
alive. In this case, the person who actually had the royalties
is alive. But he has heart disease. He is 64 years old. He
owes, according to the documents, approximately $100,000. The
wells are no longer producing. His only income now is social
security, and he applied to the FERC for a hardship waiver.
Actually, Mr. Freeman's partner, a Mr. Lee Kizner, who is dead,
was the one that was supposed to pay this $100,000.
And it doesn't say that the FERC has actually given a
hardship waiver here, but that the Missouri Public Service
Commission has already intervened and protested Mr. Freeman's
request to waive the refund obligation. And they want to know--
and this is again according to Senator Roberts--they want proof
that the royalty owner is actually dead. They want information
demonstrating that he, Mr. Freeman, attempted to collect the
refund from the dead royalty owner, including lodging a claim
for the refund with the deceased's estate, and they want proof
or documentation that making such a refund payment would cause
special hardship. So could you check that one, too?
Ms. Lumpe. Certainly.
Mr. Barton. Okay.
Mr. Hall. And their boy is in jail, isn't he?
Mr. Barton. And I will provide----
Ms. Lumpe. Mr. Chairman, do you have the numbers?
Mr. Barton. Yes, ma'am.
Ms. Lumpe. You gave me the numbers of the one case, but not
the other two.
Mr. Barton. I will give you all the documentation that
Senator Roberts gave me. You seem to be a very honest and
decent woman, and if you will go back and check these out. If
they turn out to be as they are stated on the record, at least
we could get some justice for these three.
Ms. Lumpe. Right. And, as I said, we are not unsympathetic
to them. We just felt there should be the process and the
documentation before it is automatically granted.
Mr. Barton. My last question before I yield to Mr. Shimkus
or Mr. Largent, Mr. Krehbiel, you indicated in your answer to
Mr. Largent that the calculation of this tax was based on a
reserve, a reserve calculation as well as a production
calculation. What would be the case if there was a well that
has not produced but had an established reserve? Would they pay
a tax in that calendar year even if there was no production
from the well?
Mr. Krehbiel. They would pay--I am not an expert in the ad
valorem tax in Kansas as well, but they would pay a tax
probably on machinery and equipment.
Mr. Barton. I am talking about the value of the gas in the
reservoir. Would they pay on the expected value--again, under
the NGPA, you had a long-term contract, and you had a maximum
lawful ceiling price. This was old gas, so if they knew how
many mcf or billion mcf were in that well they would know the
value of the reservoir because they had a ceiling price. Would
they pay a tax?
Mr. Krehbiel. I think there was an element of valuation
based upon reserves in place.
Mr. Barton. It is possible you could pay it--it is
theoretically possible then----
Mr. Krehbiel. I think the answer to your question is yes,
theoretically.
Mr. Barton. I started to say somebody would have never
produced gas and then still be liable for this, but if they
never produced they would have never sold it, so there wouldn't
be a plaintiff out there wanting to be reimbursed.
Mr. Krehbiel. Yeah. That is a very unique issue.
Theoretically, yes.
Mr. Barton. The gentleman from Oklahoma, Mr. Largent.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Smith, what authority is there that oversees this
process? I mean, does FERC take authority? Who is sending out a
letter notifying a producer that you owe money? Who does that?
Mr. Smith. The pipelines have filed reports with us saying
what they believe the refund obligations are.
Mr. Largent. So then a letter comes from FERC to one of
these producers? Santa Fe Minerals would get a letter from FERC
saying you owe us.
Mr. Smith. They got both a notification from the pipeline
which had that producer on their list of people that owed
refunds, and they got a letter from the staff at the
Commission.
Mr. Largent. Okay. And they are ordered to pay X amount of
dollars to whom?
Mr. Smith. The refunds are to be paid to the pipeline.
Mr. Largent. To the pipeline.
Mr. Smith. Yes.
Mr. Largent. And then who tells the pipeline what to do
with this money?
Mr. Smith. We have told the pipeline what to do with it.
They need to pass it on to their customers, with the exception
of the three pipelines I noted before that have settlements
with their customers that allow the pipelines to retain any
refund amounts.
Mr. Barton. Would the gentleman yield on that point?
Mr. Largent. Yes.
Mr. Barton. What documentation did the FERC require of the
pipelines to prove the value of the refunds being requested?
Mr. Smith. My staff is helping me.
Mr. Barton. We appreciate that you have a staff that wants
to help. Hopefully, they actually can help.
Mr. Smith. I am especially appreciative.
The initial filing by the pipeline simply listed the
producers and the pipelines' estimate of the refund liability
for each producer. The Commission's letter to the producers
that was based on that list said that if the producer disputes
the amount that the pipeline has as the refund calculation,
then they should, in the first instance, see if they can work
it out with the pipeline, but, if they can't, then raise their
disputes with the Commission.
Mr. Barton. But there is no requirement that the pipeline
or the requester of the refund document the amount before the
fact.
Mr. Smith. Right. Only in the case when there is a dispute
presented to the Commission about the refund amount would we
get into who has got what evidence of that amount.
Mr. Largent. Is there documentation that the pipeline
company is responsible to produce for FERC in terms of the
distribution of those moneys?
Mr. Smith. Yes, they file something with the Commission
called pipeline refund reports.
Mr. Largent. And what happens to any money that is not
distributed? In other words, they can't find the ratepayer.
Where does that money go?
Mr. Smith. I don't think that issue has been raised with
the Commission yet.
Mr. Barton. Could we have the name of the lady in the
purple who seems to be answering most of these questions? Just
for the record I think we ought to----
Mr. Smith. Give her credit.
Mr. Barton. What is her name and title?
Mr. Smith. Marilyn Rand.
Mr. Barton. You are the Director for the Division of
Pipeline Certificates.
Ms. Rand. Yes.
Mr. Largent. We are glad you are here.
Okay. So we don't know what happens to any excess money? I
mean, would producers earn interest on that money that is being
held by the pipelines that could be credited? I mean, it has
got to go both ways, doesn't it?
Mr. Smith. I am sorry?
Mr. Largent. They pay in money. It is not being distributed
to the ratepayer, who we are so concerned about. It is being
held in escrow, in essence. Why can't they get interest
credited for that money?
Mr. Smith. If the pipeline holds the refund amount that
they receive from the producer for more than 30 days, then the
pipeline is liable for interest to its customers.
Mr. Largent. We are really getting complicated here. I have
one other question, and that is to Mr. Albright.
Mr. Albright, you said that when the State of Colorado got
some of this refund back that they distributed some of it to
who, $2.5 million?
Mr. Albright. It is called the Colorado Energy Assistance
Fund, which is a statutorily created agency to administer to
low-income consumers for energy.
Mr. Largent. Okay. Now, in your testimony in the summary it
says it took 16 years for the customers of these producers to
vindicate their right to the return of the excessive
collections with interest using the legal process established
by Congress in the NGPA. What right does the State of Colorado
have to divert that money without the consumers' authority to a
special slush fund for low income?
Mr. Albright. I think there is somewhat of a misconception
about which particular individual consumers will receive these
refunds. The way the regulatory process works in the States--
and I know of no exceptions--there is no way to identify
individual customers from 1983 to 1988 that were specifically
overcharged as a result of the Kansas ad valorem tax
overcharging.
Mr. Largent. So what are we talking about? Where is the
money going to go?
Mr. Albright. It goes to the customer base of those
utilities.
Mr. Barton. Would the gentleman yield?
Mr. Largent. Yes.
Mr. Barton. What if I could prove that I lived in Colorado
from 1983 to 1988 and that I was a natural gas consumer and I
even had records of what I paid to the Colorado Natural Gas
Company that provided gas to my home? Could I petition for a
refund with interest in penalties based on documents that I
lived there for that time period, even though I have now moved
to Texas and am living on a farm and become a hippie and are
using solar power and don't want any hydrocarbon energy of any
kind?
Mr. Albright. Then you would probably be in Colorado.
Mr. Barton. That may be true. I mean, what if I could
actually prove with documents that I was one of these consumers
that ended up paying the price that included the disputed
taxes?
Mr. Albright. Well, you would probably receive a refund
from the current natural gas service provider where you live in
Texas. You could petition to Colorado, but I believe the law
would not be on your side because of the fact that the
automatic adjustment mechanisms in the tariff provide notice of
how refunds will be processed, how gas costs and upstream
pipeline supplier costs are passed through to individual
customers.
Mr. Barton. Now, there is no dispute that the ultimate
payer of the tax was the person or the industry that ultimately
consumed the gas. The pipelines--again, at that time most of
the pipelines did take ownership. They actually paid the tax to
the State of Kansas, as I understand it.
Mr. Albright. I would take exception to that. Because
Colorado Interstate Gas Company actually received gas bills
from the producers from which it purchased gas and reimbursed
the producers directly. It may have been different for other
pipelines.
Mr. Barton. I am not enough of a natural gas expert to know
exactly how the billing was done. But, I mean, there is not a
pipeline that is saying that the pipeline themselves paid the
tax and didn't pass it on.
Mr. Albright. That is correct. They did pass it on.
Mr. Barton. They did pass it on. That being the case, if we
were to move legislation in this subcommittee that is similar
to the Moran bill, would pipelines take exception if we added
an amendment that if you can't find the actual consumer who
paid and purchased and consumed the gas any funds would go to
some sort of a public benefit fund to be distributed to the
State similar to what your line has apparently done in
Colorado?
Mr. Albright. Well, the way I understood Mr. Moran's bill
was the reference to ultimate consumer would be the body of
consumers that were customers of the utilities, the local
distribution companies of the pipeline. So to the extent Public
Service Company of Colorado is a customer of the pipeline, the
bill would require that Colorado Interstate Gas Company,
Williams Gas Pipelines, Cane Interstate Gas Transmission would
make those refunds to the Public Service Company of Colorado.
What happens after that point, I think if the bill is to
require that the actual consumer that received the bill that
included some allocated costs of the Kansas ad valorem tax--and
I would submit that that is an impossibility to do that because
of the way rates are determined--but if that could be done, the
cost of tracking each individual customer that was on our
system--we have 1 million customers on our system--would
outstrip the entire dollar amount of the refund.
We have 1 million customers on our system. And on an
average monthly basis 20,000 of them move addresses. So to be
able to track those customers that have moved from the service
area would be a virtual impossibility. But the equities still
weigh in favor of the consumers receiving these in refunds
because consumers in Colorado may have moved to Texas.
Mr. Barton. I understand that. But if you are going to have
pure equity though, if you can't identify the consumer, if we
are going to be fair about this, we ought to identify the
consumer. And if we can't because we are a just society,
instead of letting the pipelines, who admittedly never paid the
tax, I mean, they got compensated, why not give to the public
benefit funds of the State?
Mr. Albright. Because then refunds would never be made to
consumers for overcharged gas prices.
Mr. Barton. But you just admitted it is--I think your exact
words--it is virtually impossible to identify the consumer, the
real consumer.
Mr. Albright. It is physically possible to do, but the
costs would just be enormous.
Mr. Hall. Mr. Chairman, would you yield?
Mr. Barton. I am going to yield back to Mr. Largent, who
can yield back to you.
Mr. Hall. When you talk about consumer, are you talking
about the electric and gas customers?
Mr. Albright. The natural gas customers, not electric.
Mr. Hall. Back to just the consumer in general, that would
have to be a fund like the chairman suggested there----
Mr. Albright. I am not sure what the chairman was
suggesting.
Mr. Hall. [continuing] for my State to be part of those
consumers, if we are just going to throw back someone that is
not either a customer of the electric or the gas customer.
Mr. Albright. Well, it is all done under State authority.
The State regulatory Commissions provided for the pass-through
of these costs, and they are regulating the refunds as well.
Mr. Hall. I will yield back my time.
Mr. Largent. I want to follow up, just kind of hammer at
this point.
Mr. Barton. I think we have Shimkus and Mr. Pickering.
Mr. Largent. I am going to take 60 seconds or less.
The point is that this action by FERC is really punitive. I
mean, we are not trying to remedy a consumer, according to your
testimony, because we can't identify that consumer--or
customer. In fact, I would say that if we could put together a
bill not like Jerry's but just say every person that can
legitimately make their case that they were a consumer in the
State of Colorado or Missouri or wherever during these years
and you can validate that through your property taxes or State
income tax that you paid or if you got your bills from 1983 to
1988, whatever, and can show those, we will pay you back, with
interest. I bet that number would be significantly less than
the number that is on this, you know, on this information that
we have, $366 million.
But that is not what this is about. This is about getting
some extra money for consumers that were not necessarily harmed
by this action in the State of Colorado.
Mr. Albright. Except for the fact that they paid $15 per
natural gas bill too much.
Mr. Largent. Who did?
Mr. Albright. The customers that were overcharged.
Mr. Barton. If you can identify them, we will pay them. You
just said you couldn't identify them. You said it costs more
than it is worth to identify them.
Mr. Albright. I think the expenses would be more than it is
worth. I guess we are focusing on the relationship between the
gas distribution companies and its consumers, whereas the
matter here is between the pipelines and the customers of the
pipelines that were actually overcharged. The way that the
utility then refunds its customers, which in Colorado is 100
percent, is a matter of State regulation.
Mr. Largent. It is not 100 percent. You just said they put
it into a low-income----
Mr. Albright. But those are our customers. The low- income
customers are still customers on our system. They just get a
bigger share.
Mr. Largent. Well, it couldn't be 100 percent then. If you
are putting some of it in a special fund, then you did not do
100 percent. There is no way.
Mr. Albright. It is not a special--well----
Mr. Barton. Mr. Pickering hasn't even had a chance to ask
the first question yet.
Mr. Pickering, do you have questions? I know Mr. Shimkus
still has a question.
Mr. Pickering. Thank you, Mr. Chairman.
I appreciate you having this hearing. The longer I sit
here--this is one of those examples that you just grow
frustrated and outraged at the administrative, the regulatory,
administrative and legal malfeasance and mal-administration and
ridiculousness of trying to now rectify past wrong decisions
over a 15-to-20-year period.
I speak of someone with great respect for the law and the
courts. My father is a judge. But this is just beyond the pale
to me of what we are trying to do, to the harm that it causes
the independent producer, to the widow, to the student, to the
sick. I mean, it is just, in my view, ridiculous.
Ms. Lumpe, how many widows are going to go through a
traumatic experience? How many are near bankrupt or bankrupt?
How many universities like Cornell will lose opportunities to
educate for a perceived benefit of $15 per consumer that you
can never even find? You just said it is virtually impossible.
Now where is the proportionality here of weighing the benefits
to the cost?
And, Mr. Moran, I want to commend you for your effort here.
I want to say that he has been diligent and persistent in
calling every member on the committee. You could not find a
greater champion to right what has, in my view, been just one
of the cases that gives government and government confidence
and integrity a bad name. So I am very thankful that we are
having this hearing. I hope that we can move legislation
through the committee.
You know, I could ask some questions, but I don't think I
am going to find any more sense to this whole process than
anybody else has found here.
Mr. Krehbiel, let me just ask you a few questions. And.
Again, my home town of Laurel, Mississippi, is one where oil
and gas and independent producers really contributed to our
economy and to the founding as a major component of our
community. So I have great sympathy of what you are dealing
with and what the whole industry has been dealing with.
What will--if full refunds with interest are ordered, what
impact will that decision have on drilling activity in Kansas?
Mr. Krehbiel. The impact would be incredible. You are
talking about enough money to fund the drilling budget for the
entire State of Kansas for the next 3\1/2\ years. You will
fundamentally cripple an industry that is already fundamentally
crippled.
Mr. Pickering. If Kansas producers had known in 1993 they
couldn't keep reimbursements for Kansas ad valorem taxes, do
you think they would have paid those reimbursements out to
other working interest owners and royalty owners?
Mr. Krehbiel. The oil and gas industry in Kansas has always
complied with FERC regulations to the best of their knowledge
and ability. They wouldn't have done anything to not comply
with Federal law. They wouldn't have distributed those revenues
if they had any way of knowing.
Mr. Pickering. Mr. Chairman, just one final question. How
have the members of KIOGA been affected by FERC's answers
dealing with the Kansas ad valorem tax issue?
Mr. Krehbiel. We have got a lot of members totally in
shock. They are just amazed that this can happen in this
country. They can't project into the future. They can't set up
drilling budgets. They have no idea where this thing is going
to land. They are just sitting there waiting to see, waiting
for the hammer to fall.
Mr. Pickering. One final question for Ms. Lumpe.
You say that you want to process it as a case by case, that
somebody has to demonstrate, provide demonstrable evidence of
their hardship. Does that take retaining an attorney, a lawyer
where you have tremendous legal costs in doing that? Can many
of these people afford to do that?
Ms. Lumpe. I don't think it would take an attorney. I think
what we saw was just a letter coming, saying could I have a
hardship, and there was no evidence there. I think what we are
asking is that there be some evidence.
Mr. Pickering. But how do you collect and present
evidence--take this widow in Kansas.
Ms. Lumpe. If the gentlemen said, my only income is social
security and he has evidence of that, that is certainly enough.
All widows are not poor. All people are not poor that are here.
And we think that to get to the true hardship cases, you know,
is what we are after. And so, because we are looking for the
consumers of our State, I think that is our job and our
mission.
Mr. Pickering. The consumers that you could not find that
are actually harmed.
Ms. Lumpe. They are a class of consumers that paid the
unlawful rates over the----
Mr. Pickering. Lawful at the time, though, is that not
correct? It was a regulatory decision that was lawful at the
time at least.
Mr. Barton. Would the gentleman yield on that?
I think the gentlelady from Missouri is technically
correct, but I would have to go back and look at it. But I am
trying to remember what maximum lawful ceiling prices for old
gas out of the Hugoton Field were in 1983. Gordon Gooch, in the
back of the room, probably knows, but I will pull a number out
of the air and say it was $1 an mcf and then the severance tax
and the ad valorem tax on top of that may have added 3 cents,
maybe 4 cents. I don't know. Somewhere in that ball park.
The gas was consumed. The homes were heated. The turbines
were turned. We are talking about even by the gentleman
representing, you know, some of the larger plaintiffs in this,
$15 a customer over a period of years. There has been no harm
done, nobody forced a gun to these people's head to consume and
burn that natural gas. And the tax portion of it, unless Kansas
is just a hugely high tax State, was almost negligible to the
end consumer.
I yield back.
Mr. Pickering. Mr. Chairman, I am finished as well and
agree with your comments and views. And thank you for your
leadership.
Mr. Barton. Mr. Shimkus, do you want a final question?
Mr. Shimkus. Mr. Smith, on the--I mentioned when I was in
the chair I wanted to quickly cite the hardship applications
you have mentioned as the figures I have, that there are 130
requests and that I have 11 hardship applications that have
been granted relief. Where are we on the additional 100 and
will they see FERC responding in a timely manner to their
requests?
Mr. Smith. Let me just clarify the numbers. About 130
applications for hardship waiver have been filed. I think the
Commission has acted on 11. We haven't granted all of them. My
testimony stated how many were granted or denied or deemed
unnecessary.
Mr. Shimkus. I am more concerned about the 119 additional.
Mr. Smith. In most of those cases, there are two issues
which need to get resolved before the Commission can act. One
is simply getting enough information about the application for
waiver so that we can make a judgment about whether there is or
isn't hardship. At least some of the submissions we are
treating as applications for hardship waivers are short letters
that essentially just ask for the waiver without providing
enough information to come to a judgment about whether there is
or isn't hardship, and the Commission staff is trying to gather
and check that information.
Second, in some of the cases, the waiver requests raised
particular issues that are generic, and which are pending
before the Commission. Some of these issues have recently been
resolved at the Commission level. So that should permit us to
move forward and act on the bulk of those pending applications.
Mr. Shimkus. And we, in essence, have been talking about
$334 million, and I have a list here that talks about, for
example, what No. 1 is, Amoco Production Company, that has a
principal owed of $24 million and $38 million in interest.
Those interest rates keep accumulating; is that correct?
Mr. Smith. Yes.
Mr. Shimkus. So if I have a chart that approximates from
November 30th, 1997 to, well, just the end of December, 1997,
obviously the interest rates are much higher now.
Mr. Smith. I would note that some producers have paid.
About $95 million of the refund amounts have been paid.
Obviously those aren't accruing interest. And some producers
have paid refunds into escrow, so the escrow account itself is
earning interest.
Mr. Shimkus. And the last confusion I still have is that
the debate is on the ceiling set price when the natural gas
industry was deregulated. And the dispute that we have also is
whether at times from 1983 to 1988, was the actual additional
charge to the Kansas ad valorem tax--did it actually go over
the ceiling price? And there is still no reconciliation on that
issue.
Mr. Smith. One of the issues that has been raised before
the Commission is referred to as the ``head room'' issue. It is
basically the price that was actually charged below the maximum
lawful price, so that even if you added----
Mr. Shimkus. It wouldn't matter.
Mr. Smith. [continuing] the tax, it wouldn't matter, right.
Mr. Shimkus. I yield back to the chairman.
Mr. Barton. Before I recognize Mr. Hall for concluding
remarks, we are going to work to see if it is possible to get a
consensus on some version of the Moran bill and try to move it
in the next month or month and a half.
Now, that may not be possible.
Mr. Shimkus. Mr. Chairman, can I interrupt as you are
talking about that? It is a credible issue that has been raised
too, and it has created sympathy for relieving the penalty and
interest. And I know that is what my Congressman from Kansas
wants. But it does set an interesting precedent. If we agree
that there was an illegal tax, but it wasn't illegal enough to
recoup the full benefits of money withheld, we put ourselves in
an interesting position to say it was illegal enough to take
the initial principal, but it is not illegal enough to also
recover lost revenue over years.
Mr. Barton. Well, the tax was not illegal. No one is saying
that Kansas illegally levied a tax. The dispute is over whether
the tax should be included in the maximum lawful ceiling price
under the NGPA or whether it should be in addition to. And if
it were in addition to, then it should have been borne by the
producer, not by the consumer, not by the purchaser, because
the NGPA didn't allow above the maximum lawful ceiling price. I
think I am saying that right.
Mr. Shimkus. But is that bad enough to just ask for the
principal back, or is it bad enough to ask for principal and
interest.
Mr. Barton. Well, we are going to see if we can make some
people more happy and fewer people less happy than they are
right now.
Mr. Hall, to conclude the hearing.
Mr. Hall. Mr. Chairman, I am back interested in it again. I
am trying to figure who is stirring the pot.
Congressman Moran has absolutely touched all the bases. And
he is not only a good guy; he is highly respected here. And you
have given him his word that he is going to get a run. I don't
know what the Senate is doing. You have read me some letters
there from the Senator. You know, if each resident customer-
consumer is receiving $15, and each commercial resident
consumer-customer is getting $90, it is nothing to the
utilities, it is a flow-through for them, as I see it; and the
argument over interest is still in the Courts, and FERC is
still litigating the generic waivers. And when you boil it all
down it looks to me like the help to the customers doesn't seem
like it is enough to justify the hurt it puts on the producers.
And I don't think you are going to get lawyers to take any of
these cases on a contingency basis.
I am trying to figure where we are coming from. I guess my
question would be, who is the best constitutional lawyer there?
Who is the best trial lawyer? Does anybody want to volunteer
for that?
Mr. Barton. Well, ask who is a lawyer.
Mr. Hall. Can I get this lady in purple to----
Counsel, why wouldn't the defense of de minimis be
available to somebody here?
Ms. Stovall. It certainly would in terms of the equity
issue. We would argue very much, as you balance, that it is de
minimis, the benefit that the consumers were to receive in
light of the consequences, and that there isn't a
constitutional right of the consumers to interest, nor a
constitutional right to the refund, but merely a statutory
right to the refund.
Mr. Hall. Looks like everybody is in the same shape. The
broke gambler, what he lost hurt him more than what he won
helped him. I just don't see, other than courtesy to a good
Member of Congress in giving him a hearing, where we are going
with this.
Mr. Barton. Would the gentleman yield?
Mr. Hall. Sure.
Mr. Barton. Unfortunately, we had probably half the
Republican members here; we only had, I believe, two Democrat
members. But if we had had enough membership here to see what
the consensus of the subcommittee--I want to move a version of
the Moran bill.
Mr. Hall. You had the very best ones here.
Mr. Barton. I didn't talk about the quality, I am talking
about the quantity.
So if we can see that there is support for either the Moran
bill or a bill similar to it, that it doesn't just absolutely
cause heartburn to the great State of Missouri and the great
State of Colorado and some of the other attorneys general and
Governors that have sent letters on this issue, we will try to
find equity and justice and move a bill that again is not
identical to the Moran bill, but something that is similar to
it.
I would say the chief addition would be the addition of a
public benefits fund disbursement requirement, so that if you
can't identify the consumer that actually paid the tax, that
money would go to the State to use in some sort of low-income
energy assistance or similar fashion.
Mr. Hall. I yield back my time. I thank the Chair.
Mr. Barton. I want to thank this panel. There may be
additional questions for the record.
We thank you for your attendance and thank the audience for
their observation, and we are adjourned.
[Whereupon, at 1:18 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Missouri Public Service Commission
Jefferson City, Missouri
July 1, 1999
The Honorable Joe Barton, Chairman
Subcommittee on Energy and Power
Committee on Commerce
Room 2125, Rayburn House Office Building
Washington, DC 20515-6115
RE: H.R. 1117, Kansas Ad Valorem Tax Refunds
Dear Chairman Barton: This letter responds to various questions
asked by members of the subcommittee during my remarks at the public
hearing on Kansas Ad Valorem Tax Refunds on June 8, 1999. The specific
areas of inquiry covered by this response are the following:
1) whether enactment of H.R. 1117 would violate the ``takings clause''
of the Constitution;
2) whether the refunds per customer are insignificant; and
3) whether the Missouri PSC has taken positions at the FERC opposing
the grant of waivers of the ad valorem tax refund obligation in
cases of hardship.
1. The Fifth Amendment, made applicable to the states through the
Fourteenth Amendment, provides that ``private property'' shall not ``be
taken for public use, without just compensation.'' U.S. Const., Amend.
V. In order to state a claim under the ``Takings Clause,'' a plaintiff
must first demonstrate that he possesses a ``property interest'' that
is constitutionally protected. See, Ruckelshaus v. Monsato Co., 467
U.S. 986, 1000-01, 104 S. Ct. 2862 (1984). Thus, the fundamental
question presented by the proposed legislation is whether the pipeline
customers have a property interest in the accumulated interest
associated with the court-ordered refund.
Controlling authority is found in a 1980 U.S. Supreme Court case,
Webb's Fabulous Pharmacies v. Beckwith, 449 U.S. 155, 101 S. Ct. 446
(1980). In Webb's, the Florida Supreme Court had interpreted a statute
in a manner that allowed clerks of county courts to keep the interest
on monies deposited in interpleader cases. Noting that the principal
sums deposited in interpleader funds were plainly private property, 449
U.S. at 162, 101 S. Ct. at 451, as were ``[t]he earnings of the fund,''
449 U.S. at 163, 101 S. Ct. at 452, the Court ruled that the Florida
statute authorized takings in violation of the Fifth and Fourteenth
Amendments, and was therefore unconstitutional.
In 1998, the U.S. Supreme Court again revisited the question of
whether the interest generated by private funds is a property interest
cognizable under the Takings Clause. See, Phillips v. Washington Legal
Foundation, 118 S. Ct. 1925, 1928 (1998) (holding that interest earned
on client funds in IOLTA accounts is the private property of the
client.) Employing the ``interest follows principal'' rule,\1\ the
Court reaffirmed its earlier position in Webb's, noting that:
---------------------------------------------------------------------------
\1\ The Court noted that most states--Kansas and Missouri
included--had similar common law understandings regarding the property
rights associated with interest.
---------------------------------------------------------------------------
a State by ipse dixit, may not transform private property into
public property without compensation simply by legislatively
abrogating the traditional rule that `earnings of a fund are
incidents of ownership of the fund itself and are property just
as the fund itself is property.' In other words, at least as to
confiscatory regulations (as opposed to those regulating the
use of property), a State may not sidestep the Takings Clause
by disavowing traditional property interests long recognized
under state law.
Id. at 1931 (citations omitted).
Finally, in Blomberg v. Pinellas County, 836 F. Supp. 839 (M.D.Fla.
1993), a case somewhat analogous to the current situation, a Florida
District Court was asked to address whether a water utility customer
who pays a deposit to the utility is entitled to the interest that
accumulates on the deposit. Following Webb's, the court ruled that
interest on the deposited funds was the customer's private property and
that ``an unconstitutional taking occurred when the Defendant failed to
retum interest to utility customers.'' Id. at 846.
In the case at hand, there is no dispute as to whether the ad
valorem tax refund principal is the private property of pipeline
customers. The dispute relates to the interest that has accrued on
those funds since 1983. Under Webb's and its progeny, because the
refund principal is the customer's private property, and interest
follows the principal, the interest is also private property and
therefore subject to traditional Takings clause protections. Thus,
Congressional acts that redirect or otherwise nullify the interest
payments to pipeline customers would likely run afoul of Webb's, and
consequently, be found to be unconstitutional Takings.
2. Questions were raised and comments were made regarding the
effect of ad valorem tax refunds on a typical natural gas customer.
Contrary to others' statements that these refunds would ``end up as a
one-time deduction of a few cents off'' a customer's gas bill, the
impact of the ad valorem tax refunds on Missouri consumers is
significant. Based on calculations by the staff of the Missouri PSC, if
all owed ad valorem tax refunds were paid, each Missouri Gas Energy
residential gas customer would receive a $60-65 credit. This is
approximately 9.5% of the average customer's annual gas bill.
3. Questions were raised concerning the position taken by the
Missouri PSC in response to various petitions for adjustment of the
obligation to make refunds of ad valorem taxes.
In the case of M.A. Calvin, Docket No. SA98-9-000, the Missouri PSC
initially protested the petition for adjustment of the obligation to
make ad valorem tax refunds on grounds that the petitioner failed to
document financial hardship. In addition, the Missouri PSC contended
that M.A. Calvin was not a first seller, but instead was a working
interest owner. In this respect, it is the Missouri PSC's position that
the first seller/operator, CLX Energy, Inc., is responsible for the ad
valorem tax refunds attributable to all working interests in the well.
On November 27, 1998, the Federal Energy Regulatory Commission
(``FERC'') granted the adjustment requested by M.A. Calvin. The Order
denying Missouri PSC's petition for rehearing was issued on January 13,
1999. On March 12, 1999, the Missouri PSC filed its Petition for review
in the United States Court of Appeals in Case No. 99-1103.
The Missouri PSC notes that Commissioner Hebert's concurring
statement in the October 28, 1998 Letter Order (Attachment A)
highlights the Missouri PSC's generic concern over the lack of
information regarding the petitioner's financial status.
Notwithstanding this concern, the Missouri PSC did not challenge the
FERC's finding of hardship. The sole issue raised in the Missouri PSC's
appeal is whether FERC erred by imposing a refund obligation on each
individual interest owner rather than on the first seller/operator of
the well. FERC's decision to impose a refund obligation on each
interest owner departs from a longstanding practice, affirmed by the
Court, of treating only the first seller/operator as the sole
jurisdictional seller of gas from a well with multiple interest owners.
Sun Oil Company v. Federal Power Commission, 256 F.2d 233 (D.C. Cir.
1958). Missouri PSC's position if adopted, would reduce the
administrative burdens on small interest owners, pipelines, the
Missouri PSC and the FERC.
In the case of Sally L. Bone, Docket No. SA98-21-000, the Missouri
PSC protested the petition for adjustment from the obligation to make
ad valorem tax refunds because the petitioner failed to provide
documentation that she was financially unable to pay the refunds
attributable to her ownership interest. In addition, the Missouri PSC
protested the failure of petitioner to document the uncollectibility of
refunds attributable to her other interest owner. On November 25, 1998,
FERC granted the adjustment and the Missouri PSC did not appeal this
decision.
In the case of Continental Energy, Docket No. SA98-101-000, the
Missouri PSC protested the petition by Continental Energy for waiver of
the ad valorem tax refund obligation because the petitioner had failed
to document its claim of hardship and uncollectibility of refunds
attributable to royalty interests. The Missouri PSC would not oppose
the granting of this adjustment if adequate evidence of petitioner's
financial hardship and inability to collect refunds from royalty owners
is provided.
I hope this letter is responsive to the questions raised at the
hearing. Should you need further information or assistance, please do
not hesitate to contact me or my staff.
Respectfully submitted,
Sheila Lumpe
Chair
Attachment
Copy to Members of the Subcommittee on Energy and Power
[GRAPHIC] [TIFF OMITTED] HR038.046
[GRAPHIC] [TIFF OMITTED] HR038.047