Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-01298/USCOURTS-caDC-98-01298-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Kansas Corporation Commission
Petitioner
State of Kansas
Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 7, 1999 Decided October 29, 1999

No. 98-1227

Anadarko Petroleum Corporation, et al.,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

Amoco Production Company, et al.,

Intervenors

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Consolidated with

Nos. 98-1228, 98-1229, 98-1230, 98-1231,

98-1232, 98-1297, & 98-1298

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

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Carla J. Stovall argued the cause for petitioners State of

Kansas and Kansas Corporation Commission. On the briefs

were John McNish and Richard G. Morgan.

Mark H. Haskell argued the cause for petitioners Anadarko Petroleum Corporation, et al. With him on the briefs

were Gordon Gooch, Dena E. Wiggins, Kristin E. Gibbs,

James W. Moeller, J. Kyle McClain, Robert W. Johnson,

Michael L. Pate, Charles F. Hosmer, Kevin M. Sweeney,

Mickey Jo Lawrence, John E. Dickinson, Norma J. Rosner,

Matthew M. Schreck, Eugene A. Lang, and Eugene R. Elrod.

Andrew K. Soto, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on

the brief were Jay L. Witkin, Solicitor, and Susan J. Court,

Special Counsel.

Karol Lyn Newman argued the cause for intervenors in

support of respondent. With her on the brief were James D.

Albright, David W. D'Alessandro, Dennis D. Ahlers, James

Howard, Linda M. Billings, Richard Green, Dana C. Contratto, Gary W. Boyle, Jay V. Allen, Francis X. Berkemeier,

James F. Moriarty, Frank X. Kelly, Carl W. Ulrich, Drew J.

Fossum, and James R. Talcott.

Before: Edwards, Chief Judge, Sentelle and Randolph,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Randolph.

Randolph, Circuit Judge: Petitioners in these consolidated

cases are natural gas producers, and the State of Kansas and

the Kansas Corporation Commission. Four issues are presented. The first concerns our jurisdiction. The remaining

three deal with the Federal Energy Regulatory Commission's

resolution of proceedings initiated in the wake of Public

Service Co. of Colorado v. FERC, 91 F.3d 1478 (D.C. Cir.

1996).

Although we will presuppose knowledge of our opinion in

Public Service and its predecessor, Colorado Interstate Gas

Co. v. FERC, 850 F.2d 769 (D.C. Cir. 1988), a description of

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the issues before us requires some restatement of the litigation that brought this matter to its present posture.

I. Prior Proceedings

Title I of the Natural Gas Production Act (NGPA), enacted

in 1978, imposed maximum lawful prices on first sales of

certain categories of natural gas, but s 110 of the NGPA

allowed producers to recover from their customers charges in

excess of the maximum limits "to the extent necessary to

recover ... State severance taxes attributable to the production of such natural gas and borne by the seller." 15 U.S.C.

s 3320(a)(1) (1988) (repealed); see also id. ss 3311-3333

(1988) (repealed). After passage of the NGPA, the Commission continued to adhere to an earlier agency opinion1 treating the Kansas ad valorem tax imposed on producers as such

a severance tax. See, e.g., Independent Oil & Gas Ass'n of

W.Va., 7 F.E.R.C. p 61,094 (1979); Trio Petroleum Corp., 18

F.E.R.C. p 61,203 (1982). In a petition filed on October 4,

1983, several customers of Kansas producers tried unsuccessfully to persuade the Commission to change its mind. See

Notice of Petition to Reopen, Reconsider and Rescind Opinion

No. 699-D, 48 Fed. Reg. 45,287 (1983); Sun Exploration &

Prod. Co., 36 F.E.R.C. p 61,093 (1986), reh'g denied sub nom.

Northern Natural Gas Co., 38 F.E.R.C. p 61,062 (1987).

On judicial review, we held in Colorado Interstate that the

Commission's decision in Sun Exploration "fell short of reasoned decision-making." 850 F.2d at 770. We remanded the

matter to the Commission so that it might, if it could, offer

some "cogent theory of what makes a tax 'similar' to a

production or severance tax under s 110" of the NGPA. Id.

at 773. Five years passed before the Commission acted on

remand. In a ruling handed down after Congress had repealed s 110 of the NGPA,2 the Commission determined that

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1 See Opinion No. 699-D, Just and Reasonable Rates for Sales of

Natural Gas, 52 F.P.C. 915 (1974).

2 On January 1, 1993, the Natural Gas Wellhead Decontrol Act of

1989, Pub. L. No. 101-60, 103 Stat. 157, came into effect, eliminating

the price limitations Title I of the NGPA had imposed.

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the Kansas ad valorem tax was not the equivalent of a

severance tax attributable to production and therefore producers already charging the maximum price could not recover

the tax from their customers. See Colorado Interstate Gas

Co., 65 F.E.R.C. p 61,292 (1993), reh'g denied, 67 F.E.R.C.

p 61,209 (1994). The Commission ordered the producers to

repay all overcharges made after June 28, 1988, when our

Colorado Interstate opinion issued. Our opinion, the Commission believed, gave the producers sufficient notice to alter

their sales practices. See 65 F.E.R.C. at 62,372-73; 67

F.E.R.C. at 61,660.

When we reviewed the Commission's action in Public Service, we agreed with the Commission's reconsidered position

on the Kansas tax. But we disagreed with the Commission

about the extent of the producers' refund obligation. In our

opinion, "the producers' liability for refunds extends back to

October [4,] 1983, the date when all interested parties were

given notice in the Federal Register that the recoverability of

the Kansas tax under s 110 of the NGPA was at issue." 91

F.3d at 1490. Although "anything short of full retroactivity

(i.e., to 1978) allow[ed] the producers to keep some unlawful

overcharges without any justification at all," we limited the

producers' liability to October 1983 because that was "the

earliest date advocated by any party before the court." Id.

After our Public Service decision issued, the producers

invoked the Commission's procedures for making equitable

adjustments to refund payments "as may be necessary to

prevent special hardship, inequity, or an unfair distribution of

the burdens." 15 U.S.C. s 3412(c). Collectively, the producers advanced two claims not explicitly decided in Public

Service: they requested a waiver of the interest due on the

overcharges they had to repay for the period between October 1983 and June 1988; and they requested a reduction in

their repayment obligation to the extent Kansas had overvalued (and thus overtaxed) the gas they had sold under the

belief that those taxes were recoverable. In two orders, the

second on rehearing, the Commission rejected these petitions

for a blanket waiver but said it would allow individual producers to obtain relief upon a sufficient showing of hardship. See

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Public Service Co. of Colo., 80 F.E.R.C. p 61,264, at 61,952

(1997) (Public Service Order I), reh'g denied, 82 F.E.R.C.

p 61,058, at 61,213, 61,214 (1998) (Public Service Order II).

The producers also challenged the Commission's interpretation of the Public Service decision's starting date for their

repayment obligation. As the Commission read our opinion,

the producers were liable to pay refunds of revenues collected

in excess of the applicable maximum price based upon any tax

bill rendered after October 4, 1983. As against this, the

producers argued that the Commission should have prorated

the annual tax bill they received from Kansas in 1984, an

error which they believed added nine months to the repayment obligation imposed by this court. See Reply Brief of

Petitioners (Producers) at 19.

II. Jurisdiction

With respect to the portions of the orders denying the

producers' request for a generic, or collective, waiver of

interest on amounts to be refunded, the Commission tells us

the producers are not "aggrieved" within the meaning of 15

U.S.C. s 3416(a)(4). The idea is that they may still seek, and

the Commission may still grant, individual equitable adjustments based on a producer's unique circumstances. We do

not think this possibility eliminates the injury the producers,

as a whole, suffered as a consequence of the Commission's

rulings. The rulings have "necessary legal significance."

Marathon Oil Co. v. FERC, 68 F.3d 1376, 1379 (D.C. Cir.

1995). For one thing, no producer would need to request

individual relief if the Commission had granted a generic

waiver of interest. For another, the Commission set procedures in place for the customers to receive refunds back to

October 1983, including interest. See Public Service Order I,

80 F.E.R.C. at 61,956-57. If the Commission can deny the

producers' claim for a waiver of interest en masse and order

repayment--as it has done--then the producers may petition

for judicial review from the Commission's judgment. Otherwise, one might as well say that a class representative has no

standing to challenge a district court's order refusing to

certify a class because the potential members of the class may

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still bring individual claims for relief. That, of course, is not

the law. See, e.g., Deposit Guaranty Nat'l Bank v. Roper,

445 U.S. 326 (1980).

Marathon Oil Co. is not to the contrary. The details of the

case defy brief description. Suffice it to say that the court

held only this: injury-in-fact could not be established on the

basis of speculation about whether the Commission's refusal

to act would affect later determinations by the Internal

Revenue Service to grant or deny tax credits. See 68 F.3d at

1379. Nothing comparable is present here. There is no

guesswork involved in assessing the impact of the Commission's decision.3 If the decision stands, a producer could be

relieved from having to pay interest only by establishing

conditions specific to itself. See Public Service Order I, 80

F.E.R.C. at 61,952; Public Service Order II, 82 F.E.R.C. at

61,213, 61,214.

III. Interest

The Commission's general policy, in effect for many years,

requires interest to be paid on various kinds of overcharges.

See Natural Gas Policy and Procedures, FERC Statutes and

Regulations, Regulations Preambles 1977-1981, p 30,083

(1979), reprinted in 44 Fed. Reg. 53,493 (1979), aff'd United

States Gas Pipeline Co. v. FERC, 657 F.2d 790, 794-96 (5th

Cir. 1981). This policy serves three purposes: to "(1) provide

just compensation for the losses, or costs, imposed upon those

who have paid excessive rates; (2) reflect the benefits which

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3 In addition to Marathon, the Commission cites Southwest Gas

Corp. v. FERC, 40 F.3d 464, 468 (D.C. Cir. 1994), and Tenneco, Inc.

v. FERC, 688 F.2d 1018, 1022 (5th Cir. 1982), neither of which make

its point. Southwest Gas is a run-of-the-mill decision holding that

the petitioner failed to establish any nonspeculative injury resulting

from agency action. Tenneco merely holds that the petitioner was

not aggrieved by the agency's dismissal of an adjudicatory proceeding in order to allow the agency's newly formed investigative

division to gather more evidence before going forward. See 688

F.2d at 1021. The dismissal adjudicated nothing; it did not fix

petitioner's rights; and it did not command petitioner to do or to

refrain from doing anything. See id.

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were available to companies which collected excessive rates;

and (3) not provide incentives for any party to prolong

litigation." See id. at 30,546; 44 Fed. Reg. at 53,494. To

these ends, the regulation governing price increases for the

recovery of severance taxes gave notice that any such increases were "subject to a general obligation to refund any portion

of the price, together with interest." 18 C.F.R.

s 270.101(2)(e) (1993); see also 18 C.F.R. s 154.102(c).

"Compensation deferred is compensation reduced by the

time value of money." In re Milwaukee Cheese Wisconsin,

Inc., 112 F.3d 845, 849 (7th Cir. 1997). In this case, compensation has been deferred for a very long time--so long that

the interest on the producers' overcharges now amounts to

160 percent of the principal. See Reply Brief of Petitioners

(Producers) at 5, 10. The Commission is empowered, by

s 502(c) of the NGPA, to make adjustments giving relief from

its orders "as may be necessary to prevent special hardship,

inequity or an unfair distribution of burdens." 15 U.S.C.

s 3412(c). The producers have a list of "equitable" reasons

why the Commission should have relieved all of them of

having to pay interest: the litigation has gone on forever; the

Commission is responsible for much of the delay; the producers relied on the Commission's settled view that the Kansas

ad valorem tax was a severance tax. We think the Commission rightly brushed these objections aside.

The Commission's legal errors and the snail-like pace of its

administrative proceedings are cause for complaint, but are

not in themselves grounds for altering the producers' interest

obligation. See Southeastern Michigan Gas Co. v. FERC,

133 F.3d 34, 42-44 (D.C. Cir. 1998). It is the balance of

equities between the producers and their customers, not

between the producers and the Commission, that matters.

As the Commission has recognized, interest is simply a way of

ensuring full compensation. See Public Service Order II, 82

F.E.R.C. at 61,215. This is why the delay between the time

of the customers' injury and the granting of relief is a reason

for awarding interest, not for denying it, at least when the

delay cannot be laid at the feet of the customers. See

Milwaukee v. Cement Div. of Nat'l Gypsum Co., 515 U.S. 189,

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196 (1995); General Motors Corp. v. Devex Corp., 461 U.S.

648, 657 (1983). It is why the producers' contention that they

are being penalized for their good faith reliance on the

Commission's long-standing treatment of the Kansas tax misapprehends the purpose of awarding interest. Interest is not

awarded against someone for conducting litigation in bad

faith; it is, as the Commission knew, awarded to make the

prevailing party whole. See National Gypsum Co., 515 U.S.

at 196-97.

The Commission gave careful consideration to each of the

"equitable" reasons the producers offered for a generic waiver of interest and said this: "granting a generic waiver of

interest of the ad valorem Kansas refunds ordered by Public

Service would be inconsistent with the Court's mandate."

Public Service Order II, 82 F.E.R.C. at 61,214. That the

Commission correctly read our Public Service opinion cannot

be doubted. We there rejected the producers' equitable

arguments against full refunds back to 1983, arguments the

producers now repeat in support of their request for a

generic waiver of interest regarding the same period. In

holding that the producers "must refund the full amount that

they unlawfully collected," 91 F.3d at 1490, we determined

that the producers had not established "detrimental reliance,"

id.;4 that even if they had relied on the Commission's treatment of the Kansas tax, passage of the NGPA and the 1983

petition challenging this treatment rendered their reliance

unreasonable, id.; and that "we are hard pressed to see how

the producers would be harmed in any cognizable way even if

they were required to disgorge every dollar they received in

recovery of the tax," id. In view of these and other portions

of our Public Service opinion, the Commission properly concluded that it should not grant a generic waiver of interest

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4 This part of our Public Service decision distinguishes Panhandle Eastern Pipe Line Co. v. FERC, 93 F.3d 62 (D.C. Cir. 1996), in

which we sustained the Commission's order mandating a refund

without interest because the Commission's error not only prolonged

the litigation, but also caused the losing party to forego a viable

alternative means of recovering from the prevailing party. See id.

at 67-68.

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because, to do so, it would have to assess the equities in a

manner contrary to Public Service.5

Estate of French v. FERC, 603 F.2d 1158 (5th Cir. 1979),

which the producers invoke, does not favor a different outcome. The court of appeals held that "equitable considerations" did not allow the Commission to award interest

against a petitioner seeking an economic hardship waiver for

the seven years it took to decide his claim because a delay of

that length was unreasonable per se. See id. at 1167-68.

Here, by contrast, the Commission acted quite promptly on

the producers' petition for a waiver of interest. There may

have been untoward delay here, but it occurred between our

remand in Colorado Interstate and the Commission's reversal

of its treatment of the tax. There is an ocean of difference

between being required to pay interest on a lawful obligation

(as the producers are being required to do here) and being

required to pay interest while waiting for the Commission to

decide whether one deserves a hardship waiver (which is what

the court refused to allow in French).

IV. Tax-on-Tax

One of the curious features of the complex system by which

Kansas taxed the production of natural gas was the way in

which assessors "grossed up" the value of the gas by approximately 10 percent to reflect the producers' ability to recover

the Kansas tax at the time of sale. See Ensign Oil & Gas,

Inc., 71 F.E.R.C. p 61,204, at 61,750 (1995). The producers

now argue that the Commission should reduce the amount of

__________

5 Whether the Commission's determination that Public Service

"foreclosed the granting of relief on a generic basis to all producers,

regardless of their individual circumstances," Public Service Order

II, 82 F.E.R.C. at 61,214, is inconsistent with its statement that it

retains equitable discretion to adjust individual producer liability in

cases of hardship, see id.; see also id. at 61,217, is a question not

before us and one on which we reach no judgment. Our decision

today does not affect the Commission's established standards for

granting hardship waivers and does not prohibit individual parties

from seeking hardship waivers in a proceeding under NGPA

s 502(c), 15 U.S.C. s 3412(c).

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their refund liability to their customers by the amount of this

"tax-on-tax" because it rested on the false assumption that

they could recover the tax and because they now have no way

of recouping the inflated taxes they paid to Kansas. We hold

that the Commission properly determined that the producers

are responsible for refunding the Kansas tax-on-tax.

In terms of equity, the tax-on-tax problem disturbed the

balance of equities between the producers and Kansas, not

between the producers and their customers. There is no

reason why, in the Commission's words, "overcharged consumers should forego refunds they are entitled to, to the

extent producers paid more ad valorem taxes to Kansas

localities than they should have." Public Service Order II, 82

F.E.R.C. at 61,219.6

V. Refund Date

In Public Service, we said that we would "not require

refunds of taxes recovered with respect to production before

October 1983 because there is before us no controversy over

those monies." Public Service, 91 F.3d at 1490-91. Our use

of the phrase "with respect to production," which appears

three times in the opinion, see id. at 1490, 1492, has generated

some confusion, particularly in view of our decision on the

merits that the Kansas tax was not a severance tax attributable to production within s 110's meaning. 91 F.3d at 1482-

86. On remand, the Commission interpreted taxes "with

respect to production" to mean "revenues collected based

upon any tax bill rendered after October 4, 1983," Public

Service Order II, 82 F.E.R.C. at 61,220; accord Public Service Order I, 80 F.E.R.C. at 61,953 n.25. Because Kansas

levied its ad valorem tax annually and collected it through a

bill sent toward the end of each year, the producers objected

to the Commission's interpretation because it appeared to

them to impose an additional nine months of liability. See

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6 Given this ground of decision in Public Service Order II,

there is no need for us to address the producers' arguments that

the Commission misconstrued Ensign Oil & Gas, Inc., 71 F.E.R.C.

p 61,204 (1995), in Public Service Order I.

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Reply Brief of Petitioners (Producers) at 19. We find ourselves in agreement with neither the Commission nor the

producers. Both focus on the tax transaction between producers and Kansas rather than the sales transactions between

the producers and their customers. Our decision in Public

Service required the producers to refund all taxes passed

through to customers after October 4, 1983. In other words,

the phrase "with respect to production" means "when sold."

Public Service used the prepositional phrase "with respect

to production" three times to modify three different objects.

The opinion first stated that "we do not require refunds of

taxes recovered with respect to production before October

1983." 91 F.3d at 1491-92 (emphasis added). Here, "taxes

recovered" means taxes passed through at sale because that

is how taxes are "recovered." The second instance is this:

"Producers are liable to refund all Kansas ad valorem taxes

collected with respect to production since October 1983." Id.

at 1492 (emphasis added). Here, the natural first reading of

"taxes collected" might be taxes levied by Kansas because we

normally think of states, not private entities, as tax collectors.

In context, however, the better reading of "taxes collected" is

taxes collected from customers through higher prices. The

final instance is: "The customers are limited, however, to

recovery of taxes paid with respect to production since October 1983...." Id. (emphasis added). This last sentence

focuses most clearly on the sales transaction rather than the

tax transaction because it is the customers who are doing the

paying. In order to show that this is the correct interpretation, we need to look at the way the taxation and recovery

process worked.

During the period in question, Kansas would send a tax bill

to the producers near the end of the year assessing a well's

raw value during the previous year. See Public Service, 91

F.3d at 1484. That value was determined by a number of

factors including the volume of the reserve, the physical

capital at the well site, and the rate of production. See id. at

1484-85. It is also significant that the rate of production

factor was averaged over the lengthier of two time periods--

three or five years--whenever production had lasted that

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long. See id. at 1484. After receiving the state tax bill for a

given year, the producers would take advantage of the federal

recovery policy by raising their prices in individual transactions to reflect their individual tax liability.

Between October 1983 and January 1984, the producers

overcharged customers to recover state taxes assessed

against the value of their wells in 1982. The producers seem

to argue that one should look only to the tax bill they received

from Kansas in 1984 for the 1983 tax year and then reduce it

by roughly 75% (assuming even production over the year).7

That argument focuses on the tax transaction, which is the

wrong transaction. The transaction that caused the harm is

the sales transaction, and it is the overcharges made in those

individual transactions (plus interest) that the producers must

now repay.8

VI. Kansas

The State of Kansas and the Kansas Corporate Commission joined in this litigation to mitigate the "real and severe.... impact on the gas industry in Kansas as a whole and

the economy of the state of Kansas as a whole." Final Initial

Brief of Petitioners (Kansas) at 13. While it may be true that

interest refunds could cause some marginal producers to fold,

it is hard to see how the people of Kansas have actually been

injured. Kansas was able to collect taxes during this entire

period (including their "tax-on-tax"); it has enjoyed the time

value of this money; and no one is asking the State to pay

back anything. If it is important to Kansas to limit the

__________

7 An accurate calculation would be far more complex because of

variations in production levels, especially when a well is new. See

Public Service, 91 F.3d at 1483-85; Colorado Interstate, 850 F.2d at

773.

8 We are aware that although our decision reverses the Commission, it might put the producers in a worse position than they would

have been if they had not challenged the Commission's starting date

for refunds. At oral argument, we suggested this possible outcome

to producers' counsel, but despite receiving notice, the producers

continued to press their objection to the Commission's date.

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economic damage on marginal producers, it retains numerous

avenues for aiding them. It appears, however, the only

action taken by Kansas with respect to the producers' refund

liability was adverse. See Kan. Stat. Ann. s 55-1624 (enacted

Apr. 20, 1998). Indeed, some of the producers in this case

have already petitioned the Commission for equitable relief

from losses resulting from the state law. See Notice of

Motion for Waiver, 63 Fed. Reg. 30,736 (1998).

* * *

For the reasons stated, the Commission's decision regarding the starting date for refunds is set aside and the cases are

remanded for the entry of an order prescribing a starting

date consistent with this opinion. In all other respects, the

petitions for judicial review are denied.

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