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High Court Rejects Kansas Tax Case

High Court Rejects Kansas Tax Case

The Supreme Court last week refused to review a case in which Kansas gas producers could wind up paying millions of dollars in customer refunds for selling gas in the 1980s at prices that, because they incorporated the state's ad valorem tax, may have been above the allowed legal limit.

BP Amoco Plc, Occidental Petroleum, Exxon Mobil and Union Pacific Resources Group asked the high court to address the narrow issue of whether producers should have to pay interest on any refunds they might be liable for if they sold Kansas gas at prices that exceeded the legal levels of the Natural Gas Policy Act (NGPA). The issue is an important one, given that about 80% of the refund amounts potentially owed by producers are said to be interest.

The producers' request stems from a 1998 decision in which FERC directed Kansas producers to pay refunds to LDC customers who purchased gas produced in Kansas between 1983 and 1988 at illegal prices. At the time, it was estimated that the refunds could total $500 million-plus.

For many producers, both major and small, the FERC ruling was the ultimate irony since it required them to pay big time for a mistake that its predecessor, the Federal Power Commission, made in 1974 when it held the Kansas ad valorem tax could be recovered by producers as an add-on under the NGPA. A lawsuit was filed challenging the 1974 decision, and the U.S. Court of Appeals for the D.C. Circuit remanded the case to FERC, which reversed itself on the recoverability of the tax in 1998. Producers asked the Commission to give them an across-the-board waiver of the interest, but FERC rejected their request.

What now? The ball is in FERC's court, says one Washington D.C. lawyer close to the case. "The Commission better start some hearings now, and figure out who owes what," he said. He estimated that FERC will have to decide refund claims in about 1,000 separate cases or more.

Susan Parker

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