For the second time in two years a federal appeals court in Washington, DC, last Tuesday sent back to FERC a case in which Burlington Resources Oil & Gas Co. 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 Pipe Line.

The Houston-based producer, which is owned by ConocoPhillips, challenged a 2005 ruling in which the Federal Energy Regulatory Commission (FERC) on remand affirmed an earlier decision (2003) that 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.

"We grant [Burlington's] petition and vacate the orders" because the distinctions cited by FERC between the agreements involving Burlington and Northern Natural and Panhandle, and the agreements involving other Kansas producers and the two pipelines (omnibus settlements), "prove illusory," said a three-judge panel for the U.S. Court of Appeals for the District of Columbia.

"The factors on which the Commission justified its approval of the omnibus settlements are equally applicable to the Burlington settlements, which at the time addressed complex claims, avoided future litigation and resulted in an immediate exchange of consideration for the parties," the court said. "The only difference is that the Burlington settlements were made long ago, and with the advantage of hindsight one side [Northern Natural and Panhandle] now wants out...This is hardly a reason to disregard an otherwise lawful settlement."

In 1997 FERC ordered natural gas producers to refund an estimated $500 million for gas produced in Kansas in the 1980s at prices that, because they included the state's ad valorem taxes, were above the legal limit allowed under the Natural Gas Policy Act. 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 (see NGI, Feb. 2, 1998).

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.

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 at the time called the agreements "a reasonable compromise to resolve long drawn-out complex proceedings."

While approving the omnibus settlements, FERC ruled in 2003 that Burlington's 1989 and 1992 agreements with Northern Natural and Panhandle did not resolve the ad valorem tax refund claims. The producer petitioned the appellate court for review of the 2003 orders.

In early 2005 the court agreed that FERC's actions were inconsistent and sent the case back to the agency for further explanation (see NGI, Jan. 24, 2005). 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 court said at the time.

The Commission in its 2005 remand subsequently reaffirmed its original decision, prompting Burlington to petition the appellate court for a second review. The court responded with a more forceful ruling last Tuesday. It vacated FERC's 2005 decision upholding its original order, and remanded it to FERC to "proceed with the adjudication in accordance with this opinion."

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