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Appeals Court Remands Ad Valorem Tax Ruling, Cites Inconsistencies in FERC Decisions

Appeals Court Remands Ad Valorem Tax Ruling, Cites Inconsistencies in FERC Decisions

A federal appeals court in Washington, DC, on Friday sent back to FERC for further explanation a case in which Burlington Resources Oil & Gas Co. LP claimed that it was not responsible for payment of refunds for Kansas ad valorem taxes due to an indemnity clause in take-or-pay settlement agreements with Northern Natural Gas and Panhandle Eastern Pipeline.

Before the U.S. Court of Appeals for the District of Columbia, the Houston-based producer challenged several 2003 orders in which the Commission rejected Burlington Resources' argument that the take-or-pay agreements absolved it of any ad valorem tax refund liability and instead placed the liability on Northern Natural and Panhandle.

In 1997, FERC ordered natural gas producers to refund an estimated $500 million for natural gas produced in Kansas in the 1980s at prices that, because they include the state's ad valorem taxes, were above the legal limit allowed under the Natural Gas Policy Act (NGPA). The refunds, which were to be paid to pipeline purchasers of the gas, covered the period between Oct. 4, 1983 and June 28, 1988, and the pipelines were to pass through the refunds to their gas sales customers.

In 1987, Northern Natural and Panhandle entered into separate take-or-pay settlement agreements with Burlington Resources' predecessor to resolve claims and controversies involving multiple gas purchase contracts. Both agreements contained a clause releasing the parties (Burlington and the pipelines) "from and against all claims, demands, causes of action, damages, liabilities, expenses or payments known or unknown, present or future, that each has or may have had against the other party related to all the referenced contracts." The gas contracts ran through Jan. 31, 1993 for Panhandle and through Jan. 31, 1989 for Northern Natural.

When Burlington received statements of ad valorem tax refunds claimed by Northern Natural and Panhandle, it denied any responsibility for the refunds, citing the indemnity clause in the 1989 and 1992 settlement agreements, the court ruling said.

Later in 2000 and 2001, Northern Natural and Panhandle sought and received FERC approval of omnibus settlement agreements, which resolved their ad valorem tax refund claims under take-or-pay contracts "against certain producers, and reduced or eliminated ad valorem refund claims against other producers." The Commission call the agreements "a reasonable compromise to resolve, long drawn-out complex proceedings."

In its petition, Burlington argued that the "Commission's position, that the 1989 and 1992 settlement agreements did not provide a lawful or equitable basis to shift ad valorem tax refund liability to Northern and Panhandle, is unsupported by a reasoned explanation and is inconsistent with the Commission's approval of the omnibus settlement agreements."

The court agreed that FERC's actions were inconsistent and required further explanation. The Commission's orders "patch together a variety of arguments for rejecting Burlington's claim that its settlement agreements with Northern and Panhandle release it from 'all' claims arising from the underlying take-or-pay contracts, including excess ad valorem refund claims by the pipelines. But none of the challenged orders explain how the rule applied by the Commission to the 1989 or 1992 settlement agreements is consistent with its approval of the pipelines' omnibus settlement agreements allowing some producers to escape all or partial liability for ad valorem tax refunds," the three-judge panel said in a 13-page opinion.

"The Commission's position that its encouragement of settlement of take-or-pay liability did not intend for NGPA ceiling prices to be exceeded begs the question of how it could approve the omnibus settlement agreements, although such settlements would likewise violate...the NGPA under the Commission's interpretation here," the court noted.

"Because the Commission has failed to provide 'a reasoned and consistent explanation to which we can defer, we grant the petition and remand the case for further proceedings. We do not decide whether there could be a legally relevant distinction between the Northern and Panhandle settlement agreements and the omnibus settlement agreements."

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