Natural gas producers lost a major battle last week when FERC denied hearing of an earlier decision ordering them to refund an estimated $500 million to customers who were sold 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 by federal law.

But the producers appear to have won a few small skirmishes. While it rejected producers’ requests for full or partial waivers of the refund and interest amounts, the Commission recognized the right of producers to contest the refund amounts that are being calculated by the individual pipelines to which the gas was originally sold. And if disputes cannot be settled by the deadline that the refunds are due, March 9, FERC said producers could pay their refund amounts into interest-bearing escrow accounts. This is a “vast improvement” over the September order, said a Washington D.C. lawyer representing several producers. “It’s a big positive,” particularly since the amount of the refund determines the amount of interest owed by each producer, he noted.

The refunds, which will be passed through by pipelines to mostly LDC customers, would cover the period between Oct. 4, 1983 and June 28, 1988. Due to the long and tortuous history of this case at the Commission and in the courts, it’s been estimated that the majority — at least 80% — of the $500 million owed by producers is interest.

In its decision, which was outlined in four separate orders, FERC said it was aware that its action could create “a serious financial problem to specific producers, particularly small producers or producers who no longer have producing wells.” It noted it would consider requests for adjustment relief under the Natural Gas Policy Act (NGPA) for “special hardship” cases. It’s estimated that hundreds of producers will be impacted by the Commission’s decision, including Amoco Production, Anadarko Petroleum Corp., Mobil Oil Corp., OXY USA, Union Pacific Resources and many small production companies.

Producers contend they are being made to pay for a mistake that FERC’s predecessor, the Federal Power Commission (FPC), made in 1974 when it incorrectly ruled that ad valorem taxes were a severance tax recoverable under the NGPA.

The latest FERC decision could very well wind up back in the courts. “I think that the producers will certainly review all the possible avenues that they might have both judicially and administratively, and I don’t think this will be the end of the issue,” said John Sharp, director of federal affairs and counsel for the Natural Gas Supply Association. “Some of the big boys have a lot at stake. My guess is they’ll think it’s worth another shot” in court, noted Dick Morgan, outside counsel for the Independent Petroleum Association of America (IPAA).

Producers have 60 days to decide whether to challenge the ruling in the D.C. appeals court. “My guess is if a petition for review is filed…it probably will come within the next two to three weeks,” said IPAA’s Morgan.

The case also has captured attention on Capitol Hill. Legislation has been introduced in both the House and the Senate to waive the interest amount for the producers. But very few, if any, believe Congress will act on these bills before the March 9 deadline by which producers have been ordered to pay the refund amounts. Conceding that making a “lump-sum payment” would be a “substantial hardship” for some producers, the Commission said it would allow producers to request permission to amortize their amounts over a period of up to five years.

Susan Parker

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