Fortnightly
Gas Producers Must Refund Ad Valorem Tax
November 01, 1997
By Lori A. Burkhart
The Federal Energy Regulatory Commission has ordered natural gas producers in Kansas to refund to customers approximately $500 million for erroneously adding the state's ad valorem tax onto interstate rates.
In its Sept. 10 ruling, the FERC said such taxes are not eligible for rate recovery under the Natural Gas Policy Act of 1978 and, following court directive, ordered the customer refund. (See, Docket Nos. rp97-369-000 et al.).
The refund covers gas produced from October 1983, when the petition challenging the add-on tax originally was filed at the FERC, until June 1988. In 1988, the D.C. Circuit Court had ruled the tax was not eligible for recovery and ordered it removed from interstate rates. (See, Colorado Interstate Gas Co. v. FERC, 850 f.2d 769 [D.C.Cir. 1988.])
Amoco Production Co., Anadarko Petroleum Corp., Mobil Oil Corp., OXY USA Inc., Union Pacific Resources Co., and other smaller producers were ordered to issue refunds to pipelines within 180 days.
The pipelines will pass those refunds along to customers who paid the unlawful rates. The FERC will attempt to alleviate the cost burden on the companies by allowing limited waiver of principal upon a showing of hardship. It also will entertain requests to spread the payments over five years.
The producers had asked the FERC for a generic waiver of interest payments. But FERC replied that it had exhausted available mitigation measures and noted that it was "not writing upon a clean slate."
Chair James Hoecker emphasized the binding nature of the court's ruling: "Our hands are tied," he said.
Nevertheless, the FERC acknowledged that the order may cause difficulties to some producers, and encouraged them to work with their customers. The FERC promised it would be sympathetic to any arrangements.
In 1974, the FERC's predecessor, the Federal Power Commission, had allowed producers to increase the rate set under the Natural Gas Act to recover "production, severance, or similar taxes." Kansas had imposed an ad valorem tax on producers, which the FPC said qualified as a recoverable tax. t
Lori A. Burkhart is an associate legal editor with Public Utilities Fortnightly.
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