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FERC Reinstates Procedures For Producer Tax Credits

FERC Reinstates Procedures For Producer Tax Credits

FERC last week issued a final rulemaking that reinstates its authority to make well determinations so that qualifying producers can obtain Section 29 tax credits for high-cost, hard-to-find gas produced from certain wells and formations.

In the notice of proposed rulemaking in January, the Commission sought to restore its authority to process well category determinations for only those gas wells that were recompleted after Jan. 1, 1993, when gas prices were completely decontrolled. In the final rule last week, however, FERC said it also would accept producer applications for well determinations on qualifying gas wells that were spudded and/or recompleted before that date. Recompletions are active wells where no additional drilling to deepen or extend the well is involved.

In addition, the Commission said it would consider designations of new tight gas formations by jurisdictional agencies (the states or other federal agencies) when determining which producers qualify for the tax credit.

The final rule is an attempt by the Commission to correct an oversight that occurred when Congress phased out price controls for natural gas under the Wellhead Decontrol Act of 1989, which stripped FERC of its authority to set price ceilings for wellhead gas.

The oversight was this: in order for producers to take advantage of the Section 29 tax credit of the Internal Revenue Code, they first had to get a ruling from FERC on whether their gas, in fact, met the definition for high-cost gas eligible for the credit. But the producers couldn't get such determinations because the Commission had scrapped its procedures after the total decontrol of gas prices.

A group of Rocky Mountain producers petitioned FERC last year to reinstate its well-determination procedures so it could qualify for the tax credit, which expires in late 2002. The producers' petition, which was backed by the Department of Energy, and FERC's final rule are in response to a decision by the Tenth Circuit Court of Appeals, which addressed the quandary involving the tax credit.

"This order is about doing equity to gas producers, fulfilling the expectations of large and small producers and royalty owners, who had no reason to think that these tax credits would not be available under the statute," said Chairman James Hoecker. "It has no impact on gas prices, although there may be some supply response as a result our actions today for new completions in the next two years." Producer requests for well determinations will mean more work for FERC staff, but "we are confident that we can handle [it]," he noted.

The Commission estimated that at least 4,000 recompletions were performed between 1993-1999 for which a well determination may be sought at FERC, and that another 1,500 recompletions may occur between now and 2002. That's when the tax credit is scheduled to expire, but it could be extended. Susan Parker

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