Enacted in 1978, the Natural Gas Policy Act allowed natural gas producers to pass on to consumers taxes on production, but not on property. The Federal Energy Regulatory Commission (FERC) determined at the time that the Kansas ad valorem tax was a production tax. FERC confirmed this ruling in 1983, 1986, and 1987.
In 1988, the United States Court of Appeals for the D.C. Circuit asked FERC to clarify this decision. Five years later, FERC completed its investigation of the matter and reversed all past decisions declaring the Kansas ad valorem tax a property tax that could not be passed on to consumers. FERC ordered natural gas producers to refund the tax to consumers, back to the 1988 court decision. In 1996, the D.C. Circuit court agreed with the commission that the ad valorem tax could not be passed on to consumers, and directed FERC to order producers to refund customers for ad valorem tax collected from 1983 to 1988. In 1997 the court affirmed this decision, denying a request to waive interest on the refund. According to FERC, producers now owe approximately $129 million in principal, and $210 million in interest, totalling $339 million in refunds.
|Rep. Joe Barton, subcommittee chair, (R-TX)||Rep. Ralph Hall, ranking Democrat, (D-TX)|
|Rep. Ed Bryant (R-TN)||Rep. Karen McCarthy (D-MO)|
|Rep. Steve Largent (R-OK)|
|Rep. Charles Pickering (R-MS)|
|Rep. James Rogan (R-CA)|
|Rep. John Shadegg (R-AZ)|
|Rep. John Shimkus (R-IL)|
|Rep. Cliff Stearns (R-FL)|
|Rep. Heather Wilson (R-NM)|
Rep. Ralph Hall (D-TX) began the hearing by reviewing the history of oil royalty cases in Texas during the 1980's, reminding committee members of the financial hardship experienced by the industry as a result of those cases. He declared that "justice delayed is justice denied," and that the committee faced "a lousy set of options" because the matter at hand was not resolved in what he considered a responsible amount of time. Chairman Barton (R-TX) also expressed concern for the financial impact on the natural gas industry of collecting "13 years of interest on a tax they didn't know of." He said the subcommittee would consider whether Moran's bill was the right solution.
Rep. Jerry Moran (R-KS)
Rep. Moran, author of H.R. 1117, emphasized in his testimony that "all royalty owners and producers followed all applicable laws, rules, and regulations." He added: "This was not a grey area, was not subject to interpretation, and none of these individuals could, should, or would have been expected to have handled it any differently." He declared that "to reverse a decision and then go back over 15 years and force the payment of refunds, with interest, isn't just unfair, it's unconscionable." Moran also asserted that the tax refund will be devastating for producers, particularly small oil and gas companies and royalty owners, and make little difference for consumers. He stated that "Although the damage is huge, the benefits are small" and the average household would receive only approximately $15. In conclusion, Moran declared that his "compromise" bill would "strike at the basic requirement of fairness" as it allowed for the collection of principal, but not interest, and requires that the refund only be collected when it can be delivered to the "ultimate consumer."
During a question and answer period, Moran stated his belief that locating original customers would be a significant problem. In answer to questions from Rep. Hall about his piece of legislation, he remarked that the Kansas state legislature has already taken steps to prevent this from happening again by creating a statue of limitations for such refunds. He agreed with Rep. Ed Bryant (R-TN) that about 15% of the total refund amount would come from small companies. Bryan also enquired about hardship waivers and Moran stated that FERC had granted very few, and all were opposed by "the other side." Rep. Shimkus (R-IL) clarified that the refund issue was created by a change in the legal classification of the tax.
Mr. Douglas Smith, General Counsel, Federal Energy Regulatory Commission
Ms. Carla Stovall, Attorney General, State of Kansas
Ms. Sheila Lumpe, Chair, Missouri Public Service Commission
Mr. Robert Krehbiel, Executive Vice President, Kansas Independent Oil & Gas Association
Mr. John Majeroni, Real Estate Department, Cornell University, representing Southwest
Kansas Royalty Owners
Mr. James Albright, Associate General Counsel, New Century Service, Inc.
Mr. Douglas Smith, FERC general counsel, declined to take a pro or con position on H.R. 1117, declaring he was a commission staff witness and did not speak for the commission or its members. However, he defended the commission's handling of the tax refund matter. He emphasized that the commission is reviewing petitions for waivers on a case-by-case basis, making "across-the-board relief from the interest" such as H.R. 1117 proposes, an unnecessary "detriment to consumers." He was particularly critical of the proposed legislation for not clearly defining how refunds already made should be handled. He vowed that the "Commission will continue to apply the law and consider the equities on all sides... working this matter through to completion in a timely manner."
Kansas Attorney General Carla Stovall testified before the subcommittee on behalf of Kansas producers. She expressed her support for Moran's bill as an acceptable compromise. Stovall also noted that the Kansas state legislature has requested that Congress provide relief from the interest. Stovall presented an historical review of natural gas tax legislation and court decisions since 1954. She attacked FERC for taking five years, from 1988 to 1993, to reverse their original classification of the ad valorem tax. She stated that "this delay is significant because... (it caused) interest claims amounting to millions of dollars to accrue during this period, through no fault of the producers." Stovall said the refund bills have caused small producers to "teeter on the brink of bankruptcy." She described royalty owners as "retired farmers who have come to rely on the little 'gas check' each quarter to supplement Social Security." She urged the committee to "support this bill in an effort to correct the effects of an unjust and unreasonable decision by an (sic) federal administrative agency against a sovereign state." Finally, Stovall contested that producers and royalty owners were not allowed due process and that FERC was assuming all companies charged their customers the maximum legal price plus the tax, while in reality the maximum price was often not charged in which case no refund is due.
Sheila Lumpe, Chair of the Missouri Public Service Commission, testified in opposition to H.R. 1117. She stated that natural gas customers in 23 states are entitled to the refund of the Kansas ad valorem tax, based on the decisions of FERC and the final decision of the United States Court of Appeals for the D.C. Circuit. While supporters of H.R. 1117 emphasized the refund's detrimental effect on small businesses and royalty owners, Lumpe advised the subcommittee that approximately 85% of the refunds are owed by 24 producers, described as mostly "major gas producers not small independent entrepreneurs." She also said producers "have no legitimate claim of surprise or lack of notice." She insisted producers should have created a contingency plan because they "have contested this matter at every turn." She argued that it is not the consumers' fault that there was a delay in properly enforcing the tax and that they must be compensated because: "It would be inequitable to deny consumers the interest to which they are entitled..." while producers have had "their use of these funds over the past 11-16 years." In conclusion, Lumpe stated that the Missouri Public Service Commission "respectfully requests that Congress not interject itself into a regulatory and judicial process that is providing all affected parties the opportunity to pursue fair resolutions of difficult issues."
Mr. Krehbiel appeared before the subcommittee to represent the interest of Kansas small independent oil and gas producers, in association with the Independent Petroleum Association of America. Detailing the plight of small company owners, he pointed out that many of those required to refund taxes were either not owners between 1983 and 1988, or were owners at that time but are not involved in the industry today. In cases where the original royalty owners or producers sold their assets or died and left them to family members, the new holders are now responsible to refund the ad valorem tax. Like Stovall, Krehbiel emphasized that in an unknown number of cases customers were charged less than the maximum lawful price allowed by the Natural Gas Act of 1978. He criticized FERC for not investigating this possibility before ordering the refund. In conclusion he added that "thousands of innocent, hardworking, productive people, who rely on and comply with federal rules and regulations should not be penalized for the mistakes of federal regulators."
Mr. Majeroni testified in support of H.R. 1117 on behalf of the Southwest Kansas Royalty Owners Association. Majeroni is director of the real estate department at Cornell University, where he manages the school's large oil and gas properties. He told the subcommittee that the refund "impacts thousands of people and organizations who own mineral and royalty interests, including not-for-profit organizations, such as Cornell University. It impacts local school districts and churches." He described the refund as "the unfair and unjust treatment which FERC has inflicted upon the royalty owners," adding that "Apparently it is legal, but it is wrong." He criticized FERC for "flip-flopping" in decisions. While supporting Moran's legislation, Majeroni called on Congress to overrule FERC's 1988 decision and subsequent orders. In explaining the role of royalty owners in the industry, Majeroni emphasized that they have no control over the way the taxes were handled in the first place. He declared that refunding interest is only "fair and proper if knowledgeable financial transactions are entered into," and therefore royalty owners cannot be held responsible for the ad valorem tax. Following Krehbiel's line of thought, he added that "those who benefited (from the collection of the tax) will not be the same as those who are (now) being punished" and that "collection is bound to be uneven and unequitable." Majeroni spoke of the effect of the refund in several specific instances and attacked FERC for giving some individuals only 10 days notice to pay bills of $25,000.
Mr. Albright is responsible for handling regulatory and legal matters regarding natural gas for private companies in Colorado. He testified against H.R.1117. In contrast to other witnesses, he argued that Kansas producers did collect the tax in excess of government-set ceiling prices. He insisted that Congress "should not interfere with the legal processes established in the NGPA [National Gas Policy Act] for the resolution of this dispute" and "deprive us of the procedural rights established by the NGPA simply because the total interest on the refunds is substantial and there may be individual cases of hardship." He repeatedly referred to the situation as an "ongoing dispute involving ongoing litigation." Albright echoed Lumpe as he called on the subcommittee to "not forsake the gas consumers who were illegally overcharged." He argued that "the vast majority of the dollars to be refunded will come from 'major' producers which are not Kansas corporations... (but) major international oil companies." He stated that any action Congress might take would "usurp the judicial power and truncate the rights of litigants already before the courts."
During a question and answer period, Rep. Karen McCarthy (D-MO) asked Stovall why the state of Kansas, recipient of the ad valorem tax, does not refund consumers itself to save producers the expense. Stovall replied that the tax was lawfully collected, and the state no longer has those funds. Concerning questions about the constitutionality of H.R. 1117, Albright, a lawyer, argued it is not constitutional.
Rep. John Shadegg (R-AZ) asked Smith why FERC delayed five years before determining the tax had not been collected properly. Smith was unable to provide an explanation. Asked why FERC did not waive the interest on all refunds, he responded that the commission "felt a generic waiver of interest (was) inconsistent with the court ruling."
Rep. John Shimkus (R-IL) asked Stovall if pipelines and distribution companies are to receive any of the refund money, thereby limiting what consumers receive. She responded that it may vary from state to state. In response to Bryant's questions, Smith stated that all but three of the pipelines will refund their customers. Those three have agreements with their customers to keep some or all of the refund.
Lumpe told Rep. Steve Largent (R-OK) that approximately $95 million has already been delivered to pipeline companies to refund local distributors. While some states may have held these funds in escrow, Missouri has already sent the funds on to consumers. Largent asked for further clarification of how the funds will be distributed, and Lumpe assured him that Missouri will refund 100% of the collection to consumers. Albright added that Colorado has done the same thing, holding none of the funds in escrow and giving none to the pipeline companies. Stovall stated that Kansas is keeping the funds in escrow until the matter is fully resolved.
In response to questioning by Rep. Barton, Albright revealed that there is no feasible way to determine the exact households who were inappropriately taxed between 1983 and 1988, and so the refund will go to the customer base. He clarified that the "ultimate consumer" is currently defined as the "body of consumers," not individual households. Barton stated that as the original customers can not be located, any form of legislation should distribute refund money to low income natural gas customers.
Members of the subcommittee expressed confusion about the billing procedure. Rep. Ed Bryant (R-TN) asked Smith to clarify who sends bills to producers and royalty owners. Smith explained that pipeline companies file with FERC, and FERC bills producers and royalty owners, directing them to refund the pipeline companies. Pipelines also notify bill recipients. Krehbiel stated that in at least one situation of which he is aware, a producer received a letter from FERC instructing her to pay the refund without any determination of liability. Smith confirmed that pipelines are only required to document the accuracy of their bills when appeals are made. Stovall contended that this constitutes a violation of due process by which to debate the accuracy of the bills. Rep. Shimkus asked Smith about this charge. Smith replied that producers can contest their bills through FERC. He acknowledged there has been no final resolution on petitions of adjustment. Stovall argued that it might cost producers as much as $13,000 to appeal their bills, especially for out of state royalty holders. She said this was often almost as much as the refund bill.
Rep. Steve Largent (R-OK) focused his questioning on the hardship appeal process. Smith told the subcommittee that approximately 130 appeals had been filed with FERC, and the commission had acted on 10 or 11 of these. Chairman Barton questioned Lumpe about three specific cases in which her commission challenged FERC's hardship waivers, which Barton felt were clearly deserved. Lumpe said she was not familiar with those cases specifically, but would gladly look into them. She restated her concern that hardship waivers are awarded without any documentation process. She did not feel a short letter from the individual was enough evidence of hardship. Smith confirmed this is the process FERC uses for waivers. Lumpe told Rep. Charles Pickering (R-MS) that she did not believe appeals would require individuals to get an attorney.
At the close of the question and answer period, members of the subcommittee expressed a keen interest in further debating Rep. Moran's H.R. 1117. Rep. Hall again said that in this case he does not believe "the help to the customers warrants hurt to the producers." Chairman Barton stated "quite frankly I don't give a hoot" for what the United States Court of Appeals says. Rep. Shadegg echoed this sentiment saying: "I think it [H.R. 1117] would be perfectly lawful... I do not see any problem with reversing a court decision." Rep. Shimkus also supported refund relief, but questioned whether Congress might be sending a mixed message by collecting the principal, but not the interest.
Hearing on H.R. 1117, a bill to provide
relief from unfair interest and penalties on refunds retroactively ordered
by the Federal Energy Regulatory Commission
House Subcommittee on Energy and Power
July 29, 1999
|Rep. Joe Barton, subcommittee chair, (R-TX)||Rep. Ralph Hall, ranking Democrat, (D-TX)|
|Rep. Ed Bryant (R-TN)||Rep. Karen McCarthy (D-MO)|
|Rep. Charles Pickering (R-MS)|
Chairman Joe Barton (R-TX) opened the hearing by calling it "the last step before we schedule this legislation for mark-up." He asked the witnesses to "tell us specifically what should be included in a mark-up of H.R. 1117," adding that he was interested to learn whether the witnesses "agree that Congressman Moran [author of H.R. 1117] has the right approach to resolving this issue or if we need to modify his bill at mark-up." Barton called the ad valorem tax refund "an unfortunate example of the Federal court system and the bureaucracy at its worst." He said H.R. 1117 "seeks to at least partially remedy this unfair situation by waiving the interest payments. I think it is a fair solution."
Rep. Ralph Hall (D-TX) questioned the enforceability of H.R. 1117 and asked whether the bill represented the best course of action to resolve this situation and prevent such occurrence in the future. He suggested that the best solution would be for the parties involved to work it out on their own, or in the courts. He noted that "no one has benefited" from this situation and expressed commitment to finding out "what if anything can be done to correct this." Following Rep. Hall's opening statement, Rep. Barton agreed with him that ideally the matter should have been handled privately or in the court system, but added that since that has not been done, he believes congressional action is necessary.
A statement by full committee chairman Tom Bliley (R-VA) was submitted for the record, but not read at the hearing. In that statement, Rep. Bliley said "I am sympathetic to the extreme hardship paying this refund, with interest, will cause for many of the producers and royalty owners located in Kansas and elsewhere. At the same time, I recognize that the consumers have already paid a tax the courts determined they didn't owe. This is a complex issue and it is still unclear to me on whose side the equities lie.... [I] hope we can come to an acceptable resolution for both sides."
Rep. Jerry Moran (R-KS)
Rep. Jerry Moran (R-KS), author of H.R. 1117, spoke in support of his bill. He pointed out that court ordered refunds will not be returned to the original consumers who paid the tax. He said that interest should not be collected on five years of "inaction" by the Federal Energy Regulatory Commission (FERC). Moran also stated that at the time, producers "followed orders." He said that while the "windfall is minimal" the "penalty is large." While maintaining that no penalty should be imposed, Moran said H.R. 1117 "attempts to strike a compromise" by allowing for collection of the principal but not the interest. Moran added that the state of Colorado originally perceived itself to be "a winner", but now sees that it will owe more than it will gain and is joining the state of Kansas in opposing the tax refund and supporting H.R. 1117.
Chairman Barton asked Moran what allocation formula his bill provides for. Moran said states and interested parties will debate that. He also clarified that under his bill no money can be accepted by pipeline companies and an effort must be made to return the money to the original customers. In the event that original customers cannot be located, the refund can be put in a public use fund. Asked why he did not include this provision in the original bill language, Moran said he was unaware that it was even an issue until the June oversight hearing. He also said he favors amending the bill to include hardship standards. The representative urged that "any solution that is [reached] sooner rather than later would be best for peace of mind and economic reasons."
Rep. Hall asked Moran if he was concerned about the constitutionality of his bill. Moran said he had "little or no" concern about this issue. Hall said he was concerned the bill may "discriminate some between those who can receive the refund, and those that can't."
Carla Stovall, Attorney General, State of Kansas
James D. Albright, Associate General Counsel, New Century Services, Inc.
The Attorney General of the State of Kansas, Carla Stovall, testified at the hearing in support of H.R. 1117, calling the legislation "a compromise". She said it is fair to waive interest collection because "FERC's unconscionable delay in issuing an order on remand has resulted in a staggering amount of interest having accrued." She noted that two thirds of the total refund is interest and said that "had there not been significant delay by FERC, the interest would have constituted a much lower portion of the refund claims." Stovall also argued that H.R. 1117 will "provide protection to the consumer by requiring that all amounts refunded be passed through to the ultimate consumer." She also stated that "had there been any warning of the impending change in federal policy, the Kansas legislature could have amended the ad valorem tax statute to ensure that the tax would qualify for the same treatment under the NGPA (Natural Gas Policy Act) as the tax had been treated under the Natural Gas Act."
James D. Albright, Associate General Counsel of New Century Services, Inc., testified against H.R. 1117. He represented Public Service Company of Colorado and Cheyenne Light, Fuel and Power Company, electricity and gas distribution companies which together serve over one million natural gas customers in Wyoming and Colorado. These companies were the lead petitioners in the court case that resulted in the order to reimburse the Kansas ad valorem tax. Albright noted that "for the record, neither... [of the companies] stand to retain any of these refunds; that will be flowed through to them by interstate pipelines."
Albright argued that the refund should proceed, despite small refunds to consumers. "The size of the refund on a customer-by-customer basis has never been the test for excusing refunds" he said. He also said that the proposed bill "can also be read to excuse all refunds (not just the interest component of the refunds) if a particular consumer who actually paid the overcharge... cannot be located for purposes of distributing the refunds." He dismissed claims by Stovall and others that the interest should be forgiven because liability was not determined for years. He expressed support for depositing refunds in public-use funds to assist low-income natural gas customers in paying their bills. Albright said H.R. 1117 is "overly board" as eighty-six percent of refunds are owed by major oil and gas producers. He also said the bill "does nothing to simplify or expedite the statutory hardship relief process at FERC for legitimate hardship cases." Finally, Albright suggested that Congress excuse liabilities of less than five hundred dollars, order that those owing less than $25,000 be allowed to establish a hardship exemption with an affidavit, and "require that expedited procedures be established... and a FERC decision issued within a set period of time" for claims over $25,000.
During questioning by Rep. Barton, Albright stated that following normal procedure, more than fifty percent of the refunds handled by the companies he represents will be returned to current customers within the original consumer base. The rest of the money, less than fifty percent of the original sum, will be put into a fund to help low-income customers. He said the only money going into "corporate coffers" are funds to cover the cost of the refund.
Rep. Hall questioned Stovall about Albright's proposal for handling smaller refunds. Stovall said the proposal does not go far enough. "It is still wrong," she said. "I'd hate to see anything less than [H.R.] 1117. In fact, I'd like to see more." Albright defended his proposal saying it would cover seventy-five claims under twenty-five thousand dollars. He said the current procedures for handling hardship applications are only working for those with "vested interests," and not working for those who are "just too small to play the game." Stovall said the tax refund is fundamentally wrong, and it would not be fair to help those with a small liability and not help the large companies that owe most of the total amount.
Rep. McCarthy asked Stovall why Congress should legislate on matters currently before the courts. Stovall said arguments on a generic waiver of interest are scheduled for September 7, but "we are not at all hopeful that the D.C. circuit will grant that waiver." Stovall said she wants Congress to tell the court that their decision was out of line with Congress' original intent. Albright countered Stovall's argument saying Congress should let the court do its work. McCarthy agreed with him, stating that she believes "to let the courts proceed is appropriate at this time."
During questioning, Rep. Barton asked the witnesses specifically about
the role of escrow accounts and FERC's evaluation of what producers owe.
In conclusion he said that the subcommittee would "see if a compromise
bill can be crafted" although he acknowledged "that may not be possible."
He said staff members will be working on this issue during August, while
Congress is not in session, and "we'll see what we can do legislatively
Please send any comments or requests for information to the AGI Government Affairs Program.
Contributed by Althea Cawley-Murphree, AGI Government Affairs Intern
Posted June 16, 1999; Last Updated August 12, 1999
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