[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                    THE KANSAS AD VALOREM TAX REFUND

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 8, 1999

                               __________

                           Serial No. 106-38

                               __________

            Printed for the use of the Committee on Commerce




                     U.S. GOVERNMENT PRINTING OFFICE
57-438 CC                    WASHINGTON : 1999




                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
                                     BILL LUTHER, Minnesota
                                     LOIS CAPPS, California

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                    Subcommittee on Energy and Power

                      JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RALPH M. HALL, Texas
CLIFF STEARNS, Florida               KAREN McCARTHY, Missouri
  Vice Chairman                      THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma              EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina         RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma              BART GORDON, Tennessee
JAMES E. ROGAN, California           BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING,       RON KLINK, Pennsylvania
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Albright, James D., Associate General Counsel, New Century 
      Services, Inc..............................................    64
    Khrehbiel, Robert E., Executive Vice President, Kansas 
      Independent Oil and Gas Association........................    51
    Lumpe, Hon. Sheila, Commissioner, Missouri Public Service 
      Commission.................................................    30
    Majereni, John, Real Estate Department, Cornell University...    57
    Moran, Hon. Jerry, a Representative in Congress from the 
      State of Kansas............................................     6
    Smith, Douglas W., General Counsel, Federal Energy Regulatory 
      Commission.................................................    19
    Stovall, Hon. Carla J., Attorney General, State of Kansas....    25
Material submitted for the record by:
    Lumpe, Hon. Sheila, Commissioner, Missouri Public Service 
      Commission, letter dated July 1, 1999, enclosing response 
      for the record.............................................   135

                                 (iii)

  


                    THE KANSAS AD VALOREM TAX REFUND

                              ----------                              


                         TUESDAY, JUNE 8, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Largent, Rogan, 
Shimkus, Wilson, Shadegg, Pickering, Fossella, Bryant, Hall, 
and McCarthy.
    Staff present: Cathy Van Way, majority counsel; Jeff 
Krilla, professional staff member; and Sue Sheridan, minority 
counsel.
    Mr. Largent [presiding]. We will call the meeting to order.
    The chairman, Mr. Barton, is on his way over, but we wanted 
to get started in deference to everybody's schedule.
    Today's hearing is on the Kansas ad valorem tax refund 
issue, and we are going to allow our panelists to speak on 
this. And I would like to defer to the ranking member, Mr. 
Hall, for his opening statement.
    Mr. Hall. Thank you, Mr. Chairman and members of the 
committee.
    The issues that are before us today only prove once again 
the old adage, justice delayed is justice denied, is very true. 
There aren't any good answers to this dilemma, and I think all 
parties probably realize that.
    I thank you for having this hearing. I have some 
familiarity with the situation that exists here today.
    The Hawkins oil field in east Texas is entirely within my 
district. In the 1980's the royalty owners were asked to refund 
hundreds of millions of dollars as a result of a determination 
by the Federal Government that the operator had charged too 
much for production in the Hawkins field during the time oil 
was under price controls.
    The result was an absolute financial catastrophe for a 
number of royalty owners, people who had no knowledge of what 
price was being charged and had no way to protect themselves 
even if they did. The producer really had no choice but to 
pursue collection of amounts they had paid to the royalty 
owners because failure to do so would have left the company 
vulnerable to stockholders' suits. It was just a sorry 
situation all the way around.
    The circumstances before us today are really very familiar. 
My sense is that the real villain is here is FERC, who appears 
to be the biggest contributor to the delay and has exacerbated 
this situation, in my opinion. But there is enough blame to go 
around.
    So after we hear the testimony, I think this committee is 
going to have some real decisions to make. What I hope 
ultimately will result is some forbearance on the parts of all 
parties. Yes, under the law these gas customers are entitled to 
recover the amount that they were overcharged, plus interest; 
however, those provisions were enacted to recover reasonable 
interest amounts over reasonable periods of time, in a matter 
of months, not 15 years or so.
    The inequities to royalty and working interest owners that 
results from letting the interest toll and for the delay in 
informing these owners of the extent of their liability are 
really enormous. So all parties, including the Congress, are 
faced with trying to determine what is the best course of 
action to take. Unfortunately, we can only select from a lousy 
set of options.
    I will listen very carefully to the testimony here today to 
see what remedies may be available and what might be done to 
prevent situations like this from arising to the future.
    Mr. Chairman, I thank you. I yield back the balance of my 
time.
    Mr. Largent. Thank you, Mr. Hall.
    At this time, the Chair recognizes the gentleman from 
Tennessee for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman. I do want to welcome 
my colleague from the First District in Kansas and certainly 
acknowledge his interest in this legislation and his what I 
believe incredible amount of work on this. I look forward to 
hearing not only his testimony, but the other panels that are 
here today and yield back my time.
    Mr. Largent. And the Chair recognizes the gentleman from 
Illinois for an opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I, too, want to welcome my colleague from Kansas who is a 
strong advocate on this issue and has been working us over on 
it early and often. So I am looking forward to learning about 
it and following the procedures. Welcome, Jerry.
    And I yield back my time.
    Mr. Barton. Has the gentleman from Texas given his opening 
statement?
    Mr. Hall. I would like unanimous consent to insert the 
Honorable John Dingell's statement into the record.
    Mr. Barton. Without objection.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, today's hearing explores issues relating to the 
treatment of the Kansas ad valorem tax on natural gas and its 
disposition under federal law: specifically the Natural Gas Act and the 
Natural Gas Policy Act.
    There is a long and complex history behind this issue, which I am 
sure we will have recounted today by our esteemed witnesses. I will 
only point out that Federal Energy Regulatory Commission (FERC) has 
ordered that the costs of the Kansas tax be refunded to gas consumers 
and that in 1997, the D.C. Circuit held that since refund claims had 
been pending from 1983 forward, that FERC should order refunds with 
interest from 1983 forward.
    Now, on March 18th of this year, Senator Roberts of Kansas 
succeeded in attaching language to the Supplemental Appropriations bill 
to exempt producers from having to pay interest on the refunds of the 
Kansas ad valorem tax. This is a very nice deal if you can get it, and 
it's certainly one that the IRS would never give you or me if we failed 
to pay our taxes for five years or more. However, Senator Roberts 
convinced his colleagues that this was a good idea and it passed the 
Senate along with the rest of the Supplemental bill. Noting that the 
House-passed bill contained no such provision, Chairman Bliley and I 
both conveyed our opposition to the Roberts language to the 
Appropriations Committee on the grounds that the provision was amending 
the Natural Gas Policy Act, a statute primarily within the jurisdiction 
of this Committee. Fortunately, the House position carried the day and 
the Roberts language was dropped in conference.
    But jurisdiction was not the only reason I objected to the Roberts 
amendment. I also opposed this language because it clearly represented 
a transfer of wealth from my state to gas producers in the State of 
Kansas. I know my esteemed colleague from Kansas is concerned about 
whether the refunded money would ultimately find its way into the 
pockets of ratepayers, and let me assure him I share his concern. I 
also share his concern for the small producers of natural gas, who may 
indeed require some assistance.
    Nonetheless, both issues are irrelevant to this debate. It is for 
state public utility commissions to decide how much money goes to 
companies and how much to ratepayers. And with regard to assisting 
natural gas producers, I would point out that there are other ways to 
help Kansas producers than by taking it directly from the pockets of my 
constituents or those residing in Missouri, Illinois, Iowa, Ohio, 
California or any of the other states owed refunds.
    I would also posit that my good friend from Kansas may be pursuing 
an avenue that may ultimately prove unconstitutional since his 
legislation appears to have the effect of altering a final judgement by 
the courts and, if enacted, could be considered a taking.
    Frankly, I find it difficult to understand why we are having this 
hearing today. The final disposition of refunds of the Kansas ad 
valorem tax is an issue that is still pending before the courts. Why 
should Congress legislate at this time? The producers are spending lots 
of their hard earned money to appeal the 1997 court ruling and I think 
it would be wrong for this Committee to deny them their day in court. 
Furthermore, if the issue is small, hardship cases, then I fail to 
understand these attempts to circumvent the FERC hardship process, 
because so far the Commission has granted exemptions in 6 out of the 11 
cases it has reviewed to date. It certainly makes me wonder whether 
this process is truly driven by small producers, rather than large 
producers who already know they have the ability to pay the refunds 
with interest.
    It's also unclear to me what action, if any, this Committee intends 
to take on the Kansas ad valorem issue. I note that this is being 
billed as an oversight hearing, yet the invitation letter to at least 
one of our witnesses asks them to comment on Mr. Moran's bill.
    What is also unclear to me is the position and the procedures of 
the Federal Energy Regulatory Commission. I have a memorandum from 
FERC, with Mr. Smith's name on it, that went to our friends on the 
Appropriations Committee stating that Chairman Hoecker would not oppose 
the language that was included in the Supplemental Appropriations bill. 
Now the Roberts language amended the Natural Gas Policy Act which is 
within our jurisdiction, yet no one from FERC saw fit to consult with 
Chairman Bliley or me about our views on legislation affecting a law 
within this Committee's jurisdiction. I am curious how this position 
was arrived at and how FERC came to the decision to involve itself in 
this matter. Was an open public meeting held to consider this issue? 
Did the Commission vote on this matter, or was this memorandum only the 
position of one commissioner? If it was only Chairman Hoecker's 
position, what were the positions of the other Commissioners and are 
they aware that he intervened in this matter both here and at the White 
House? I would also like to understand why FERC took a position on an 
issue that is still pending in the courts and why Mr. Smith's testimony 
states that FERC has no position, when it's clear that the Chairman has 
taken a position in favor of one side's view in this matter. These 
questions must be answered because they raise serious concerns for me 
at a time when we are being asked to grant them more power in the area 
of electricity transmission.
    Mr. Chairman, while I am certainly interested in hearing from our 
witnesses, it seems clear to me that this is a topic that, at the very 
least, is not yet ripe for legislative action. What may be ripe, 
however, is an oversight hearing on FERC and its procedures and I hope 
the Chairman will consider holding such a hearing before we take any 
action that would have the effect of increasing FERC's power.

    Mr. Barton. Does the gentleman wish to give an opening 
statement?
    Mr. Hall. I have given my statement, Mr. Chairman. It was 
very unusual, I beat you here. First time in about five 
meetings.
    Mr. Barton. Not the first time and, hopefully, it won't be 
the last.
    Well, the Chair would recognize himself for an opening 
statement.
    We want to thank everyone for being here today, especially 
Congressman Moran. We understand that he has worked on this 
issue quite a bit.
    Today's hearing is on the Kansas ad valorem tax refund 
issue. It is an important issue, and it is also an issue that 
is complex and has gone back and forth at the Federal Energy 
Regulatory Commission. It is an issue that I am personally 
deeply concerned about, and I have sent several letters to the 
various committees and to the Senate on this issue.
    This is an issue that comes from the days when natural gas 
prices were regulated at the wellhead. It is an unfortunate 
issue that arises at a time when independent oil and gas 
producers in many parts of the country, including Kansas, are 
struggling for survival.
    I am not going to recite the long history of the issue. I 
am sure the witnesses that we have before us today will do that 
much better than I could. I am going to say, though, that I am 
concerned that there are many small producers and royalty 
owners located in Kansas and also around the country today that 
they are facing a huge tax and penalty liability as a result of 
years of legal wrangling and of which in some cases they are 
just now becoming aware.
    I believe that this is an issue of equity. I believe it is 
an issue of fairness.
    Should producers and royalty owners be required to pay 13 
years' worth of interest on a tax that they didn't know that 
they owed at the time that it was incurred?
    Should they have known that it might be owed at some point 
in the future?
    Should pipelines and local distribution companies be 
required to prove their claims for refunds before producers are 
ordered to pay those claims?
    Are natural gas consumers harmed if the interest payments 
on the tax refund are waived?
    I hope today's witnesses can shed light on all of these 
questions and other questions that other members of the 
subcommittee may have as the hearing progresses. If this 
hearing reveals that congressional action on the issue is 
warranted, I would be very interested to learn if the interests 
believe that Congressman Moran's bill that is pending before 
the Congress is the right approach to resolve the issue at this 
point in time.
    Again, I want to welcome everyone to today's hearing. I am 
sure that it will be very informative.
    Are there other members present that have not been given a 
chance to give an opening statement?
    Mr. Shimkus, do you wish to give an opening statement?
    Mr. Shimkus. I have already given it.
    Mr. Barton. Seeing no other members present, all members 
shall have the requisite number of days to put their statement 
in the record at the appropriate point in time.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Mr. Chairman, thank you for holding this hearing on the Kansas ad 
valorem tax refund issue. I know natural gas producers and royalty 
owners are anxious to see this issue resolved quickly. However, I 
believe on complicated issues such as this one, holding a hearing and 
developing a record for action is important.
    Importantly, this issue arises from the days of natural gas price 
controls and serves as a reminder as we work on electric utility 
restructuring that free markets are preferable to government 
intervention. It is unfortunate that many years after wellhead prices 
of natural gas have been decontrolled, natural gas pipelines, producers 
and customers are still embroiled in battles over these regulations. I 
hope today's hearing can help us better understand this issue and 
discover ways to avoid such controversies in the future.
    I look forward to hearing the testimony of the witnesses. Thank 
you.
                                 ______
                                 
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress 
                       from the State of Missouri
    Thank you Mr. Chairman. I would like to thank the Chairman for 
holding this hearing on this issue which is so vitally important to 
Missouri and I would like to commend the Chairman for extending an 
invitation to my good friend and former colleague, Ms. Sheila Lumpe, 
Chair of the Missouri Public Service Commission. I would also like to 
recognize my friend and neighbor, Ms. Carla Stovall, Attorney General 
for the State of Kansas.
    We are here today to discuss the Kansas ad valorem tax and the 
legislation that has been introduced on this bill by our colleague Rep. 
Jerry Moran, H.R. 1117. Our task here today is to ensure that equitable 
and just results are reached for all parties involved.
    For over 15 years, the issue of whether and how much of a refund to 
be paid natural gas consumers has been litigated before the D.C. 
Circuit and before FERC. After years of litigation, the D.C. Circuit 
Court of Appeals finally determined that natural gas producers in the 
State of Kansas owed refunds on the amounts charged in excess of the 
maximum lawful price dating back to 1983, when the challenge to the 
Kansas ad valorem tax was first made and sellers were first put on 
notice of the potential refund obligation.
    In response to these determinations, legislation was introduced to 
mandate that only the amount charged, and not the interest on these 
amounts be paid by the producers. H.R. 1117 and advocates of this 
legislation argue that the measure presents an equitable solution to 
the decision reached by FERC and the D.C. Court of Appeals, which they 
say will unreasonably burden small businesses and hurt the economy.
    Arguably, the final determination which has been reached as a 
result of this litigation is equitable and just. Interest on the 
amounts paid is the only way to ensure that those so charged receive 
the full time value of their money. Since 1989, the Missouri Public 
Service Commission has been actively seeking recovery of the Kansas ad 
valorem refunds which are due to consumers in over 20 states, including 
Missouri. It is estimated that Missouri consumers are owed upwards of 
$60 million. Even with the notice as early as 1983 that they might be 
responsible for refunding monies, consumers in states, such as 
Missouri, have been paying rates above the maximum lawful amount.
    It would be unwise for this body to reverse the lengthy due process 
delivered within the judicial and administrative branches of our 
government and essentially legislate the taking of property, that is 
the taking of the refund and interest owed consumers in this country, 
including those in the State of Missouri.
    I look forward to hearing the testimony today on H.R. 1117 and the 
Kansas ad valorem tax, and yield back the balance of my time.

    Mr. Barton. The Chair would call the first witness to 
today's hearing, the Honorable Jerry Moran from the great State 
of Kansas.
    Mr. Moran, welcome to the committee. Senator Roberts sends 
his greetings. He called me earlier this morning to say that he 
couldn't be here, but he knew that you would do an outstanding 
job on the issue and that we would fairly inform the committee 
of the pros and cons of the issue. We will put your entire 
statement in the record, and we would recognize you for such 
time as you may consume. Hopefully, that will be less than 7 or 
8 minutes.

  STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF KANSAS

    Mr. Moran. Mr. Chairman, thank you for your admonition on 
time.
    I appreciate Mr. Robert's kind remarks. I wish he would say 
them more often in Kansas as well.
    It is a delight to be here on this issue. I wish the issue 
didn't exist, and I was somewhat disconcerted to hear Mr. Hall 
say all solutions are not very good, but I come with the 
suggestion of at least one.
    Imagine receiving a notice from the IRS saying that, while 
you had paid your taxes in full 15 years ago, the IRS has 
changed its mind on how you figured your taxes and could you 
please pay an additional $5,000 and, oh, by the way, $10,000 in 
penalty and interest. We would not tolerate this type of 
retroactive taxpayer abuse by the Internal Revenue Service. 
However, this is essentially what another government agency has 
done to Kansas natural gas producers and royalty owners.
    I do appreciate the opportunity to be here and discuss an 
injustice that is being perpetrated on many of my constituents. 
At issue is whether Kansas natural gas producers could pass 
through to their customers the Kansas ad valorem tax. In the 
regulated energy marketplace in the 1980's these decisions and 
the resulting price charged for natural gas were made by the 
Federal Power Commission, the predecessor to the Federal Energy 
Regulatory Commission.
    FPC and later FERC consistently ruled that Kansas ad 
valorem taxes could be included in the price of gas paid to 
these companies, to the producers, by their pipeline customers. 
It was not until 1993 that FERC reversed its previous rulings. 
FERC's reversal and subsequent court case provided the charges 
for ad valorem taxes should not have been passed through from 
1983 to 1988 and must now be refunded. In addition, interest 
penalties were assessed that now more than double the amount of 
tax in question.
    Let me make several points as we review this issue.
    First, my constituents and all royalty owners and producers 
followed all applicable laws, rules and regulations. The 
Federal agency responsible for regulating these matters 
explicitly gave its blessing to the pass through of these 
taxes. Many gas contracts were written with specific reference 
to FERC's ruling on the matter. It was not a gray area, it was 
not subject to interpretation, and none of these individuals 
could, should or would have been expected to have handled it 
any differently.
    There are those who would claim that producers and royalty 
owners somehow should have known that FERC would change its 
ruling. This is simply not the case. FERC ruled on this issue 
three separate times in 1983, 1986 and 1987. Each time, FERC 
ruled that the taxes were correctly applied.
    I don't know how many times we need to hear from a Federal 
agency to believe it, but I suspect that after three rulings 
since the issue was questioned and two rulings prior to 1983 
that producers rightfully believed they were following the law. 
After five separate successful rulings on my own tax return 
from 15 years ago, I might even be willing to throw the tax 
return away and sleep well at night.
    Second, a 15 year reach-back is outrageous. We have all 
heard of cases of unfair, arbitrary, irrational, convoluted 
decisions by Federal Government agencies, but this one takes 
the cake. To reverse a decision and then even go back over 15 
years and force the payment of refunds with interest isn't only 
unfair, it is unconscionable. Why is there no statute of 
limitations? What about ex post facto? This country was born 
out of protest against this type of improper governmental 
conduct, and we should not stand for it in this case.
    Third, the decision is devastating to producers and offers 
little for consumers. For royalty owners and small businesses 
this decision could not have come at a worse time. We read of 
the consolidation of the major oil and gas companies due to 
difficult times, but we do not as easily see the hundreds of 
small businesses that have closed their doors, laid off 
employees, gone bankrupt. In Kansas alone, the oil and gas 
industry has laid off 5,000 employees in the last year.
    The burden on small businesses as a result of this 
situation is enormous. For example, Mid Continent Energy, a 
small Kansas company with two employees, owes $244,000. Several 
of my elderly constituents have written and described bills 
they have received well over the value of their annual payments 
they receive from Social Security.
    A typical example is Mrs. Betty Shingler of Wichita, 
Kansas. She along with her husband were the owners of a company 
called Aurora, Inc. Early in the 1980's, Mr. and Mrs. Shingler, 
with outside investors, owned six gas wells. Today, Mrs. 
Shingler, who lost her husband 3 years ago, now faces a $19,000 
bill.
    FERC's decision not only affects the companies that explore 
for and produce natural gas, their far-reaching decision has a 
terrible impact on royalty owners. Royalty owners are those who 
own the land under which the natural gas is located, often the 
farmers and ranchers of southwest Kansas.
    Today you will hear examples from property owners who have 
been unknowingly attacked by this situation. You will also hear 
about consumers and how they are owed this refund. This issue 
deserves your review.
    Of the eight pipeline companies involved in obtaining the 
refund and interest, two have already filed with FERC to keep 
the refund and not pass it on to consumers. My counterparts in 
the Senate, Senator Roberts and Senator Brownback, have called 
for a GAO investigation on the distribution of refunds; and I 
fully support that request. One would like to think that each 
dollar collected would be returned to the original customer. 
However, after 15 years, many people have moved, retired or 
passed away. What happens to the money when customers can't be 
located? Could this be why pipelines fight this issue so 
aggressively?
    Although the damage is huge, the benefits are small. For 
the average household consumer, this refund is minimal and will 
likely be prorated. For example, in Kansas a typical house 
receiving gas from the Greeley Gas Company using 100 mcf per 
year will receive an estimated $6 refund. Among the estimates I 
have seen, a typical household across the country would receive 
around $15 or just about a little over a dollar a month for 12 
months.
    Keep in mind that Kansans, as well as producing the gas, 
are also the largest recipients of the refunds. Representing 
the largest positions on both side of this issue, I introduced 
what I consider compromise legislation that has been referred 
to this subcommittee, H.R. 1117. This legislation attempts to 
strike at the basic requirement of fairness. Under the bill, 
the amount of disputed tax would be collected, but an interest 
penalty would not be assessed and the refunds required would be 
required only to the extent that they will be received by the 
ultimate consumer.
    While I contend that the pass through of a tax, after being 
approved by FERC five times, should be allowed to stand and no 
refunds ordered, I introduced this bill as a compromise to try 
and protect the hundreds of individuals who had always acted in 
accordance with the law.
    Again, I thank this committee for their time and attention. 
I would be a happy to answer any questions.
    And I also welcome my Kansas colleagues, including the 
Attorney General of the State of Kansas, Carla Stovall.
    Mr. Barton. Does that conclude your statement?
    Mr. Moran. It does, Mr. Chairman.
    [The prepared statement of Hon. Jerry Moran follows:]
 Prepared Statement of Hon. Jerry Moran, a Representative in Congress 
                        from the State of Kansas
    Imagine receiving a notice from the IRS saying that, while you had 
paid your taxes in full fifteen years ago, the IRS has changed its mind 
about how you figured your taxes and could you please pay an additional 
$5000 and another $10,000 in penalty and interest. We would not 
tolerate this type of retroactive taxpayer abuse by the IRS. However, 
this is essentially what another government agency has done to Kansas 
natural gas producers and royalty owners.
    I appreciate having the opportunity to be here to discuss an 
injustice that is being perpetrated on many of my constituents. At 
issue here is whether Kansas natural gas producers could pass through 
to their customers the Kansas ad valorem tax. In the regulated energy 
marketplace in the 1980's these decisions and the resulting prices 
charged for natural gas, were made by the Federal Power Commission 
(FPC), the predecessor to the Federal Energy Regulatory Commission 
(FERC).
    In several rulings on this issue, FPC and later FERC, consistently 
ruled that the Kansas ad valorem tax could be included in the price of 
gas paid to these companies by their pipeline customers. It wasn't 
until 1993 that FERC reversed its previous rulings. FERC's reversal and 
subsequent court case provide that charges for ad valorem taxes should 
not have been passed through from 1983 to 1988 and must now be 
refunded. In addition, interest penalties were assessed and now more 
that double the actual amount of tax in question.
    I would like to make several points as we review the issue today:
    First, my constituents, and all royalty owners and producers, 
followed all applicable laws, rules and regulations. The federal agency 
responsible for regulating these matters explicitly gave its blessing 
to the passthrough of taxes. Many gas contracts were written with 
specific reference to FERC's rulings on the matter. This was not a gray 
area, was not subject to interpretation and none of these individuals 
could, should or would have been expected to have handled it any 
differently.
    There are those who would claim that producers and royalty owners 
somehow should have known that FERC would change its ruling. That is 
simply not the case. FERC ruled on the issue three separate times in 
1983, 1986, and 1987. Each time, FERC ruled that the taxes where 
correctly applied. I don't know how many times we need to hear from a 
Federal agency to believe it, but I suspect that after three rulings 
since the issue was questioned and the two rulings prior to 1983 that 
producers rightly believed they were following the law. After five 
separate successful rulings on my taxes from 15 years ago, I might even 
throw away my returns and sleep well at night.
    Second, a fifteen year reach-back is outrageous. We have all heard 
of cases of unfair, arbitrary, abusive, irrational or convoluted 
actions by federal government agencies, but this one takes the cake. 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. Why 
is there no statute of limitations? What about ex post facto? This 
country was born out of protest against this type of improper 
governmental conduct. We should not stand for it in this case.
    Third, the tax is devastating for producers and offers little for 
customers. For royalty owners and small businesses this tax could not 
have come at a more difficult time. We read of the consolidation of the 
major oil and gas companies due to the difficult times, but we do not 
so easily see the hundreds of small businesses that have gone bankrupt, 
gone through layoffs, or otherwise been forced to close their doors. In 
Kansas alone, the oil and gas industry lost some 5,000 jobs in the last 
year.
    The burden on small businesses as a result of this situation is 
enormous. For example, Mid Continent Energy, a small Kansas company 
with two employees owes $244,000. Several elderly constituents describe 
bills well over the value of their annual payments they now receive 
from Social Security. A typical example is Mrs. Betty Shingler, of 
Wichita, Kansas. She, along with her husband, were the owners of a 
company called Aurora, Inc. In the early 1980's, Mr. and Mrs. Shingler, 
with outside investors, had 6 gas wells. Today, Mrs. Shingler who lost 
her husband three years ago, now faces a $19,000 bill.
    FERC's decision not only effects the companies that explore for and 
produce natural gas, their far reaching decision has a terrible impact 
on royalty owners. Royalty owners are those who own the land under 
which the natural gas is located--often the farmers and ranchers of 
Southwest Kansas. Today you will hear examples from property owners who 
have been unknowingly attacked by this situation.
    You will also hear about consumers and how they are owed this 
refund. This issue deserves your review. Of the eight pipeline 
companies involved in obtaining the refund and interest, two have 
already filed to keep the refund and not pass it on to consumers. My 
counterparts in the Senate, Senators Roberts and Brownback, have called 
for a General Accounting Office investigation on the distribution of 
the refunds and I fully support that request. One would like to think 
that each dollar collected would be refunded to the original customer; 
however, after fifteen years, many people have moved, retired or passed 
away. What happens to the money when the customer can't be located? 
Could this be why the pipelines are fighting so aggressively?
    Although the damage is huge, the benefits are small. For the 
average household consumer, this refund is minimal and will likely be 
prorated. For example, in Kansas a typical house receiving gas from the 
Greeley Gas Company using 100 mcf per year will get an estimated $6 
refund. Among the estimates I have seen, a typical household will 
receive around $15, or just over a dollar a month for one year.
    Keep in mind, that Kansans, as well as producing the gas, are also 
the largest recipients of the refunds. Representing the largest 
positions on both sides in this issue, I introduced the compromise 
legislation that has been referred to this subcommittee, H.R. 1117.
    This legislation attempts to strike at the basic requirement of 
fairness. Under the bill, the amount of disputed tax would be 
collected, but an interest penalty would not be assessed and the 
refunds required only to the extent they will be received by the 
ultimate consumer.
    While I contend that the pass through of the tax, after being 
approved by FERC five times, should be allowed to stand and no refund 
ordered, I introduced this bill as a compromise to try and protect the 
hundreds of individuals who had always acted in accordance with the 
law.
    Again, I thank the committee for their time and attention and would 
be happy to answer any questions.
    Attached is just one example for the committee's review. In this 
situation, the accused company was not even involved in the gas 
business during the time in question.
                                 ______
                                 
                                        Argent Energy, Inc.
                                                       May 11, 1999
Congressman Jerry Moran
1519 Longworth
Washington, D.C. 20515

Re: Refunds of Kansas ad valorem tax reimbursements (Federal Energy 
Regulatory Commission Docket Nos. RP97-369-000, et al.)

    Dear Congressman Moran, Argent Energy, Inc. is a small independent 
Kansas oil and gas producer/operator. I formed Argent Energy November 
1, 1989, three years after the 1986 oil price collapse. At its 
inception, the company had no producing properties, only some cash the 
stockholders had contributed to get it started. Argent has survived and 
grown both by successful exploratory drilling and by acquiring 
producing properties. Additionally, it operates producing properties 
owned by others, and receives compensation for these services. It has 
three employees.
    Early in 1993, Argent purchased working interests in 27 wells from 
Kiwanda Energy, Inc. for $195,000. Ten of these wells were oil wells, 
two were saltwater disposal wells, and fifteen were gas wells. Prior to 
purchase, Argent had no connection whatsoever with any of those wells. 
The sales were an arms length, contractual transaction wherein Kiwanda 
agreed to indemnify and hold Argent harmless from all claim, 
liabilities, penalties, and losses arising out of any obligations 
incurred by Kiwanda concerning these properties (except as specifically 
assumed by Argent). Further, Kiwanda warranted that these properties 
were unencumbered and were free and clear of adverse claims.
    A few weeks after the purchase of these properties, Argent 
terminated the gas sales contract Kiwanda had in place with Northern 
Natural (now Enron). Under that termination agreement Northern 
discharged Argent (and its officer, directors, agents, and employees) 
from ``any and all liabilities, claims and causes of action, whether 
known and asserted or hereafter discovered, arising out of or relating 
to said contracts . . .'' Argent then entered into its own sales 
contract with Northern.
    By letters dated October 5, 1998, and October 12, 1999, FERC 
directed Kiwanda and its predecessor, Exploration and Production, Inc. 
to make payments for stated amounts due for reimbursement of Kansas ad 
valorem taxes paid them during the period 1983 to 1988. Since both 
Kiwanda and its predecessor were now out of business, the letters were 
sent to those two entities at Argent's mailing address. By letter dated 
November 2, 1998, Argent informed the Commission that it was not 
affiliated with and was not a mail drop for either Kiwanda or its 
predecessor. Further, Argent did not at that time own an interest in 
these properties, and indeed was not even in existence during the time 
of the alleged reimbursements, thus could not have received any such 
reimbursements.
    In spite of this reply, Argent received a letter from the FERC 
dated March 26, 1999, in which the Commission appears to have 
determined that Argent is indeed liable for these reimbursements as a 
successor to Kiwanda and its predecessor. The total of these alleged 
reimbursements plus interest is $855,147.60. I'm not sure but that we 
would have been better off had we thrown the first letters in the trash 
unopened. Argent has been forced to retain legal counsel to defend 
itself from being held responsible for an amount more than six times 
what it paid for these properties in 1993.
    I still don't understand how a 1974 FPC ruling which allowed pass-
through of Kansas ad valorem taxes (which was consistently upheld), 
could be reversed retroactively for fourteen years, have fourteen years 
of interest applied, then be assessed on natural gas producers who had 
complied with the law in effect at the time of these reimbursements. I 
just cannot comprehend such an action occurring in this country--and I 
cannot believe that a regulatory body constituted in this country could 
hold Argent Energy, Inc. liable for repayment of reimbursements which 
it did not receive, on properties it did not own, during a time period 
before it existed, and having no possibility of recoupment from the now 
non-existent seller.
    Congressman Moran, I join many Kansas gas producers in expressing 
my appreciation to you for your understanding and help. Your authoring 
of proposed legislation to remove the interest imposed on the repayment 
demanded on these reimbursements is indeed meaningful, both to Kansas 
royalty owners and to the produces. In the case of Argent Energy, 
however, the entire liability is inequitable. We have filed, through 
our attorneys, a reply to the FERC letter of March 26, 1999. I would 
hope that you will be able to monitor Argent's efforts to remove this 
liability. The filing is under Docket No. SA99-5-000. If there are 
further steps I should be taking, please let me know, and if I can 
furnish you with further documentation, I'll be happy to. Thank you for 
your consideration.
            Sincerely,
                                          James C. Remsberg
                                                          President

    Mr. Barton. The Chair would recognize himself for the first 
5 minutes of questions.
    Is there any estimate on the number of original consumers 
that are still in the area that can be found in order to give 
the direct refunds to?
    Mr. Moran. I have not seen any kind of specific numbers. I 
think there is a general agreement that there is a very 
difficult circumstance that--locating potential consumers out 
there; and the ones that were ultimately entitled perhaps to 
the refund, as I said in my testimony, may not be living and 
addresses cannot be found.
    Mr. Barton. Well, assuming that you can locate some of the 
original payers of the tax, consumers that consumed the gas, 
but let's just for estimation purposes say that only about 50 
percent of the original consumers can be located and 
identified, so that there is 50 percent of the remainder that 
cannot be and that 50 percent of the funds and 50 percent of 
the interest and 50 percent of the penalty is just sitting out 
there in a pot, is there a consensus on what is done with that 
money?
    Mr. Moran. I would guess there is great disagreement as to 
what should be done with that money. That is an issue between 
the royalty owners, the natural gas producers, the working 
interest, and the pipelines; and that is an issue that I think 
is awfully important.
    Mr. Barton. There is no defined protocol. There is not an 
automatic lump sum payment to the State of Kansas or lump sum 
payment to some charity in Kansas City or----
    Mr. Moran. Mr. Chairman, there is not.
    Mr. Barton. [continuing] or congressional campaign 
committee account.
    Mr. Moran. Certainly that is one I would be aware of, and I 
am not.
    Mr. Barton. Okay. In Kansas and in the general public, is 
this an issue that is talked about? Is this a front page story 
or is this pretty much an inside Washington and royalty owner 
producer pipeline story?
    Mr. Moran. No, I wish it was much more of a story than it 
has been. It is a significant issue in Kansas. It has been an 
issue of the Kansas legislature. Our Governor, Governor Graves, 
has come to Washington to meet with FERC, has written the 
President. This has a major impact upon Kansas.
    The Governor, one of his concerns is the resulting demise 
of the oil and gas industry as a result of the refunds, the 
penalty and interest at a time when there is no way that they 
can absorb those costs, results in less exploration, less 
drilling, and businesses going out of business.
    The State of Kansas is concerned about their financial 
security as far as a State. The revenue estimates in Kansas are 
impacted as a result of this issue being forced upon our 
working interest and royalty owners.
    Mr. Barton. What is the status right now? I know Senator 
Roberts had an amendment in one of the supplemental 
appropriation bills that came over from the Senate. What is the 
current status of this in terms of a resolution of the issue in 
the Congress?
    Mr. Moran. I know of nothing close to a resolution of this 
issue in Congress.
    There was an effort made to prohibit the collection of the 
penalty interest in the appropriation process in the emergency 
supplemental which was not included in the conference report. 
And to my knowledge, you, Mr. Chairman, and Mr. Hall, your 
subcommittee is the first to take a serious look at a serious 
issue.
    Mr. Barton. So have you gotten any input or feedback from 
either the Republican or Democrat leadership in the House on 
your bill that they support it, oppose it, neutral, haven't had 
a chance to look at it?
    Mr. Moran. I certainly would not admit nor would it be true 
that I haven't had the chance to talk about it. I have talked 
to the leadership, members of this committee, members of the 
full committee as well as Republican leadership of the House 
stressing the importance of this issue to many producers and to 
many royalty owners.
    I think it is a very difficult issue for anyone to 
understand. If you are not knowledgeable in what a royalty 
interest is and what FERC does in the regulated nature of the 
gas industry in the 1980's or many struggle to know what an ad 
valorem tax is. It is a very difficult issue for me as a Member 
of Congress to describe to my colleagues and get sympathy.
    I think the broad picture of how can any Federal agency do 
this to any taxpayers, to any business, through changing its 
mind 15 years after the fact, I think that is a bigger issue 
and easier one for me to talk about.
    Mr. Barton. My time is about to expire. But if I were to 
say this is an example of a tax that was assessed, when it was 
incurred it was passed through, it was paid, legally, and then 
a Federal agency changed its mind after the fact, how far off 
would I be from the truth?
    Mr. Moran. I think you accurately describe the truth.
    Mr. Barton. So that is not that complex an issue.
    Mr. Moran. If I could talk about it in a broad sense of how 
this could happen in any business, any Member of Congress, it 
is an easier issue to talk about.
    Mr. Barton. Okay. My time has expired.
    The Chair recognizes the gentleman from Texas, Mr. Hall, 
for 5 minutes.
    Mr. Hall. I didn't mean to be discouraging to you in my 
opening statement. But I sat where you sat back in the early 
1980's when Hawkins Field and Exxon had their collision and I 
saw the situation there where a lot of little royalty owners 
were absolutely wiped out. And I don't know if that is going to 
be the situation in Kansas or not, but it appears if they 
follow the cases that were tried in the Hawkins Field case then 
you are going to have a lot of bankruptcy lawyers get rich in 
Kansas. Because they absolutely came back on them years later 
when they couldn't tell them anything they had done wrong and 
they couldn't tell them how they could have corrected it if 
they had known what they had done wrong.
    And yet Exxon has shareholders. They were subject to 
shareholder suits and litigated. They didn't litigate it in the 
Hawkins Texas County courts, you know. They went to the Federal 
courts. And Federal courts, somehow some--impressed by the way 
the local people felt, and the royalty owners wound up, many of 
them, with bills of $100,000, $150,000 years and years and 
years later to pay, not understanding why they had to pay and 
where they were going to get it.
    And there was--over a period of about 2 or 3 years there I 
think that the companies did their best to settle as many of 
them as they could. But it was a disaster and still, in my 
district, suffering; and, of course, there is nothing good has 
happened to the oil and gas people in the last 10 years.
    It is a terrible time for you to be sitting where you are, 
doing what you are doing. And I admire you for doing it, but I 
must warn you that if you haven't read that series of cases--
and I am sure you have and followed the Hawkins Field--I 
suggest you do so. Because we were sitting there, we didn't 
hate Exxon for what they did, because they probably had to do 
what they did to stave off their own shareholders.
    I thought FERC was the enemy there and their delay and 
dilatory tactics. It just seemed that they were no help, 
really, to the royalty owners in the final analysis.
    So what does your bill do? I haven't had a chance to read 
it.
    Mr. Moran. Mr. Hall, I appreciate having you on this 
committee with your knowledge of what happened in Texas and 
your understanding of the oil and gas industry.
    Mr. Hall. Well, my knowledge and experience is bad, though, 
from where you sit.
    Mr. Moran. Appreciate your sympathy. And the Hugoton field, 
from which this gas is produced, is a Kansas, Oklahoma and 
Texas field. The reason this is a Kansas issue is because of 
the way they were treating Kansas ad valorems.
    This bill does two things, Mr. Hall. It eliminates the 
interest that goes back to 1983, leaving the principal amount 
of the refund in place; and it also says that no amount should 
be collected that can't ultimately be received by the original 
consumer.
    Mr. Hall. And would you say that knocks out the interest 
provision?
    Mr. Moran. That knocks out the interest provision.
    Mr. Hall. Does your bill toll the interest or how does your 
bill handle it?
    Mr. Moran. The bill, Mr. Hall, is very straightforward. 
Basically says that no interest should be collected on this 
amount, the principal amount of the tax.
    Mr. Hall. Think that will navigate the big court?
    Mr. Moran. One step at a time, Mr. Hall----
    Mr. Hall. You have nothing to lose.
    Mr. Moran. [continuing] from my perspective.
    Kansas has also attempted to address this issue in passing 
a statute of limitations to try to toll the collection for 
royalty owners.
    Mr. Hall. Well, ours wound up in just absolute disaster for 
a lot of royalty owners; and a lot of people, like your folks, 
had no knowledge of what price was being charged and had no way 
to protect themselves even if they did and still--yet they 
didn't prevail at the courthouse. It was a pretty sad 
situation.
    I yield back my time. I may think of something that will 
help you before we leave. But I will listen to the rest of the 
testimony.
    Mr. Moran. Thank you, Mr. Hall.
    Mr. Barton. I see Mr. Largent is not here.
    The gentleman from Mr. Tennessee, Mr. Bryant, is recognized 
for 5 minutes.
    Mr. Bryant. Thank you, Mr. Chairman.
    I agree with my colleague from Kansas that it is a very 
interesting issue and certainly one that you have a personal 
stake in in terms of your constituency. Do I understand that 
your bill would weigh the interest as well as the penalty in 
any such payments?
    Mr. Moran. That is correct. And, generally, the penalty and 
interest have been words that have been interchangeable as the 
parties have talked about this issue. It is basically interest 
that dates back to 1983. There is no additional penalty.
    Mr. Bryant. And interest would be calculated as straight 
percentage times whatever is owed per year?
    Mr. Moran. I am unable to determine exactly what interest 
rate is being charged, and I have been told anyplace from 6.5 
to 12.5 percent. That would be an opportunity to find out some 
facts today perhaps from the testimony from FERC.
    Mr. Bryant. Now, in reading some of the other comments in 
advance, I understand that the other side of this position says 
that, well, these folks were on notice, it was being 
challenged, and therefore they should have taken that into 
consideration. And you said today that you had a number of 
successful rulings and, therefore, they should have felt 
comfortable knowing that they were acting correctly.
    I share your concern, particularly with the smaller 
companies. To some extent, I guess, I really don't know enough 
about this issue to come down finally on one side on the other. 
But I understand something like 15 percent of the money 
involved here would have to come from small businesses and 
small producers.
    Mr. Moran. That is correct, Mr. Bryant.
    Mr. Bryant. Eighty-five percent would be from larger 
sources. How are smaller companies, the producers and the 
royalty owners, finding out about this liability?
    Mr. Moran. Well, that is a real problem, particularly for 
royalty owners. Many of them just received letters from the gas 
producers saying you owe X number of dollars and you have 10 
days to pay that amount of money. The royalty owners are not 
parties to the litigation, are not in front of FERC. And we 
will have testimony today from the Southwest Kansas Royalty 
Owners Association in which you might--I know their testimony 
will describe this further.
    But it is really like a shot in the dark. People who have 
no idea, had nothing to do with whether or not the tax was 
passed through by the gas company that is producing gas on 
their land, received a letter from the gas company saying we 
got to pay, you got to pay, we need money, and we need it 
quickly.
    Mr. Bryant. There is provision for some sort of waiver of 
this already for a hardship type situation. Does that require 
an application? How much of a cost from a legal standpoint 
would a small producer or a small royalty owner have to incur 
to successfully--or to apply for an application for hardship?
    Mr. Moran. FERC did provide for a hardship waiver, and 
there have been a number of applications for that waiver of 
which only a few have received favorable attention. And there 
are examples that will be given today of ones that most of us 
would think clearly a hardship exists. They have been opposed 
by other--the parties to the other side. I think every hardship 
waiver has been opposed.
    And so it is a time-consuming, expensive process and one, 
again, that, particularly when it comes to royalty owners but 
also the small business natural gas companies, the producers, 
the working interest, they are not involved in the FERC 
proceedings and therefore don't know why they are the ones who 
have to come forward to present a case for a hardship in a very 
time-consuming and expensive way. This has been an ongoing, 
expensive legal battle for those that can afford lawyers.
    Mr. Bryant. I thank you, and I will yield back my time.
    Mr. Hall. Mr. Chairman, can I correct one thing I said? I 
think I referred to FERC instead of the Department of Energy in 
the Hawkins case. You are dealing with FERC. FERC was the one 
that piddled around and didn't do anything about it for so 
long. But they are both north of the line, so it didn't make 
any difference.
    Mr. Moran. I am not sure where Kansas is, Mr. Hall.
    Mr. Barton. We will have to double check the meaning of 
``piddle'' but it doesn't sound like it is positive.
    Does the gentlelady from Missouri wish to ask questions of 
the first witness?
    Ms. McCarthy. I will forego that as I have an opportunity 
twice each week as we commute back and forth together to pop 
those questions, and I will.
    Mr. Barton. The gentleman from Illinois, Mr. Shimkus, is 
recognized for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I am very interested in how our Federal agencies approach 
our citizens who should be clients. And we have all heard the 
IRS, and we have all heard the EPA, and now it looks like some 
of the concerns of how FERC is dealing with small business 
individuals.
    But I do have a question, Jerry, on--in the committee memo 
it says, the FERC initially found that the tax was indeed a 
severance tax after appeal. This is in 1983. The FERC initially 
found that the tax was a severance tax. But, after appeal, the 
D.C. Circuit Court remanded the decision to the FERC which then 
determined that the tax was a property tax. And the D.C. 
Circuit Court's opinion was in 1988. Would that then have sent 
signal flags up that maybe there was a problem with the tax?
    Mr. Moran. The issue of whether or not the tax is a 
property tax or a severance tax is the key legal question 
before FERC in determining whether or not the tax can be passed 
through. If it is a production tax, it can be passed through 
according to FERC rulings and regulations in place at the time. 
If it was a property tax, it is to be borne by the producer. So 
that has been the legal issue for which FERC ruled twice before 
1988.
    Then this issue was raised by the pipelines. FERC again 
ruled that it was a severance tax based upon production. The 
appeal went to the court that remanded it back.
    And so two times before 1988 and three times subsequent 
this issue was determined by FERC. Ultimately, the reversal 
occurred in 1993. But even any kind of suggestion of notice we 
go back to 1983 in collecting the refund as well as the 
interest.
    Mr. Shimkus. Right. Okay.
    I yield back. That is the only question I had, Mr. 
Chairman.
    Mr. Barton. Thank you.
    We have a pending journal vote. I would like to finish with 
Congressman Moran, if possible, before we recess to go vote.
    We have Mr. Shadegg, Mrs. Wilson, and Mr. Rogan. In order 
of appearance, Mr. Shadegg would be recognized. If you could 
make your questions very brief so we can give Mrs. Wilson and 
Mr. Rogan a chance, too.
    Mr. Shadegg. I would happy to make my comments or my 
questions brief.
    Congressman Moran, I wanted to give you an opportunity to 
respond to what I understand to be FERC's position regarding 
H.R. 1117 and let you have a chance to put on the record kind 
of your responses to the arguments that they make.
    They argue, for example, that because the relief in H.R. 
1117 is across the board relief, some who are not adversely 
affected could benefit from the relief granted in the 
legislation. I would like to give you a chance to respond to 
that.
    Mr. Moran. I am not certain who FERC would describe as 
those not adversely affected by this decision. There are those 
that have more financial ability to stand--withstand this 
assault. But all of them, large and small, wealthy and poor, 
have faced the circumstances of relying upon FERC decisions, a 
line of decisions over a long period of time. So I think that 
the argument that there are those that are not adversely 
affected, that premise makes it very difficult to respond to 
their suggestions.
    Mr. Shadegg. Second question I have, and it will be the 
last one, what about refunds that have already been made?
    Mr. Moran. There are--my understanding--and this is 
probably, Mr. Shadegg, a better question for other witnesses, 
but it is my understanding there has been some money paid into 
escrow, that some gas companies have paid. But this is still 
continuing to be a battle in front of the agency.
    Mr. Shadegg. Thank you. I yield back.
    Mr. Barton. Thank you. Thank you for being expeditious.
    The gentlelady from New Mexico is recognized for, let's 
say, 2 minutes.
    Mrs. Wilson. Mr. Chairman, I will yield my time. I have had 
at least one conversation with Mr. Moran, and I will clear up 
my questions I have privately.
    Mr. Barton. We thank the gentlelady.
    And the gentleman from California is recognized for about 2 
minutes.
    Mr. Rogan. Thank you.
    I want to thank our colleague for joining us today. I am 
glad to have you here sharing this with us instead of just 
pestering me on the floor of the House as you have been doing 
on a regular basis.
    Mr. Chairman, I have become intimately familiar with both 
the gentleman from Kansas' position and, more importantly, his 
constituents' position, because he has not allowed me a moment 
of peace since this issue erupted. I want to thank you for your 
leadership on this, Congressman Moran.
    Mr. Chairman, I yield back.
    Mr. Barton. We have been piddling around, and now you have 
been pestering, and now we are trying to find peace. So maybe 
we can find some progress on this issue.
    We are going to recess very briefly to go vote on the 
journal. I would encourage all our members to come back because 
we have six witnesses on the next panel, and both sides of the 
issue will be presented. We have a very balanced panel.
    We want to thank you, Congressman Moran; and we will give 
you a chance to have the last word before we recess.
    Mr. Moran. Mr. Chairman, I would like to add for the record 
additional testimony and comments by constituents, including 
some letters I received.
    I also appreciate your seriousness in addressing this 
issue. It is clear to me this is not just a hand-holding 
hearing, and I look forward to----
    Mr. Barton. We are serious about moving your bill or a 
version of your bill, based on what the next panel says; and 
Chairman Bliley is fully cognizant and very willing to address 
the issue seriously also.
    We are going to recess until approximately 11 a.m. So I 
would encourage all members to come back very quickly.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order.
    Congressman Hall beat me into the room again, but he didn't 
beat me up to the podium.
    We would like to welcome our second panel:
    Mr. Doug Smith, who is the General Counsel for the Federal 
Energy Regulatory Commission.
    Is Mr. Smith here in the room? Okay.
    The Honorable Carla Stovall, the Attorney General for the 
great State of Kansas.
    Is she in the room?
    The Honorable Sheila Lumpe----
    Ms. Lumpe. Lumpe.
    Mr. Barton. [continuing] from the Missouri Public Service 
Commission.
    Is she in the room? Okay. If you will come forward please, 
ma'am.
    Mr. Robert Krehbiel, the Executive Vice President for the 
Kansas Independent Oil and Gas Association.
    Mr. John Majereni, the Real Estate Department of Cornell 
University.
    Is he here? Okay.
    How close was I on your name?
    Mr. Majeroni. Just like macaroni with a J.
    Mr. Barton. Majereni, okay.
    Mr. James Albright, the Associate General Counsel for New 
Century Energy Incorporated.
    Okay. We want to welcome you.
    We are going to yield to the gentlelady from Missouri to 
give special recognition to two of the witnesses.
    Ms. McCarthy. Thank you, Mr. Chairman, and thank you for 
holding this important hearing.
    I want to welcome a neighbor, Attorney General Stovall; and 
I am so glad that you are here.
    I also want to welcome Sheila Lumpe who I served with, Mr. 
Chairman, in the Missouri legislature for more years than we 
care to admit. I thought she had a pretty tough job there. She 
was Chair of the Appropriations Committee, and I served on the 
Appropriations Committee for most of my 18 years there while 
chairing the Ways and Means Committee. I made her serve on 
that.
    But I think she has the toughest job of all right now as 
the Public Service Commissioner, and she is doing an 
outstanding job. Mr. Chairman, she is leading the way on de-
reg. She has formed task forces with the Commission and got in 
all the experts and is moving Missouri forward on that issue. 
And we look forward very much to your remarks today on the 
issue, very much on the ad valorem situation out there in 
Missouri, and I thank all the panelists for being there.
    Thank you, Mr. Chairman.
    Mr. Barton. Mrs. Lumpe, if you need a negotiator to buy 
some rugs, Congressman McCarthy is the lady. I watched her in 
action in Morocco, and she bought a rug for about 10 cents on 
the dollar. I was very impressed that.
    Ms. McCarthy. I learned that in Ways and Means.
    Ms. Lumpe. Good experience on Ways and Means.
    Mr. Barton. We are going to recognize Mr. Smith, but the 
Chair wants to recognize a visitor in the audience who is a 
personal friend from Houston, Texas, who used to work at 
Atlantic Richfield Oil and Gas Company when I was a struggling 
young associate there. Mr. Earl Simms with Vastar is in the 
room, a good friend and gentleman and very bright person. So we 
are glad to have you.
    Mr. Smith, we are going to recognize you for 5 minutes. We 
are going to go right down the line. Each of your statements is 
in the record in its entirety. And I am sure by the time we get 
to Mr. Albright the rest of the Congressmen will be back so we 
will have a spirited question and answer period. So Mr. Smith, 
you are recognized for 5 minutes.
    Mr. Hall. Would the gentleman yield? Where did your friend 
go to school?
    Mr. Barton. I don't know where he went to school. He 
probably went to the University of Texas but I am just 
guessing.
    Mr. Simms. I went to the University of Tulsa and got a 
graduate degree from the University of Texas in Dallas.
    Mr. Hall. You just look like the kind of guy that was 
ruining the curve for guys like me.
    Mr. Barton. He was head of the policy shop at Arco Oil and 
Gas.
    Mr. Smith is recognized for 5 minutes.

STATEMENTS OF DOUGLAS W. SMITH, GENERAL COUNSEL, FEDERAL ENERGY 
REGULATORY COMMISSION; HON. CARLA J. STOVALL, ATTORNEY GENERAL, 
  STATE OF KANSAS; HON. SHEILA LUMPE, COMMISSIONER, MISSOURI 
PUBLIC SERVICE COMMISSION; ROBERT E. KHREHBIEL, EXECUTIVE VICE 
  PRESIDENT, KANSAS INDEPENDENT OIL AND GAS ASSOCIATION; JOHN 
MAJERENI, REAL ESTATE DEPARTMENT, CORNELL UNIVERSITY; AND JAMES 
 D. ALBRIGHT, ASSOCIATE GENERAL COUNSEL, NEW CENTURY SERVICES, 
                              INC.

    Mr. Smith. Mr. Chairman and members of the subcommittee, 
good morning. My name is Douglas Smith, and I am the general 
counsel at the Federal Energy Regulatory Commission. I am here 
today as a Commission staff witness and do not speak for the 
Commission as a whole or for individual members of the 
Commission. I appreciate the opportunity to appear before you 
today to discuss the complex issues surrounding the treatment 
of Kansas ad valorem tax payments for purposes of price 
regulation under the Natural Gas Policy Act.
    The Natural Gas Policy Act, enacted in 1978, set ceiling 
prices for sales of natural gas by producers. Section 110 of 
the act allowed producers to charge their customers amounts in 
excess of the applicable ceiling prices to the extent necessary 
to recover State severance taxes attributable to the production 
of natural gas.
    The application of section 110 to Kansas ad valorem taxes 
has a long litigation history which I will describe briefly. In 
1983 a pipeline company purchasing gas from Kansas producers 
asked the Commission to find that the Kansas ad valorem tax was 
a property tax rather than a tax on the production of gas, and 
thus was not eligible for collection over and above the ceiling 
prices. In response, the Commission found that the Kansas tax 
could be recovered under section 110. In June 1988, the U.S. 
Court of Appeals for the D.C. Circuit found that the Commission 
had not adequately explained its decision to treat the Kansas 
tax as a tax on production and remanded the matter to the 
Commission for development of a cogent theory for 
distinguishing property and severance taxes for NGPA purposes.
    In its order on remand, the Commission concluded that the 
Kansas ad valorem tax was a tax on property, not on production, 
and therefore producers could not recover it as an add-on under 
section 110. The Commission required Kansas producers to make 
refunds back to June 1988, the date of the court's Colorado 
Interstate decision. In 1996, the D.C. Circuit sustained the 
Commission's conclusion that the tax payments were not 
recoverable but held that refunds were due starting in 1983, 
not 1988 as had been ordered by the Commission.
    In 1997, a number of producers asked the Commission to 
grant an across-the-board waiver of the obligation to pay 
interest on the required refunds for the period of 1983 through 
1988. The Commission denied the request because such a waiver 
would be inconsistent with the court's decision requiring full 
refunds. The D.C. Circuit had already rejected the producers' 
argument that imposing refund obligations on them was unfair 
because they had relied on the Commission's prior rulings. The 
court had stated that any such reliance by producers would have 
been unreasonable.
    A petition for review of the Commission's denial of a 
generic interest waiver is now pending before the D.C. Circuit 
and will be argued in September. Although the Commission denied 
the request for across-the-board relief from interest 
obligations, the Commission did provide for consideration of 
requests for special hardship waivers on a case-by-case basis.
    Allow me now to describe briefly the current status of 
refunds related to the ad valorem tax. Refunds for 1988 through 
the end of price controls in 1993 amounting to $125 million in 
principal and interest were paid by producers in 1994 and 1995. 
With respect to the earlier period beginning in 1983, producers 
owe refunds of approximately $339 million, consisting of 
approximately $129 million in principal and $210 million in 
interest.
    As of May 1999, producers had paid about $95 million of 
these refunds for the 1983 to 1988 period. An additional $100 
million has been placed in escrow pending resolution of 
requests for refund adjustments now before the Commission.
    The Commission's orders require with limited exceptions 
that interstate pipelines receiving refunds must flow those 
refunds through to their customers. The refunds will be flowed 
through to local distribution companies serving consumers in at 
least 13 States.
    Let me now comment briefly on the bill introduced by 
Representative Moran. H.R. 1117 would make two changes to the 
NGPA. It would preclude assessment of interest or penalties in 
any refunds of pre-1989 State ad valorem taxes, and it would 
bar such refunds unless the refunds would be passed through to 
the ultimate consumers.
    Neither the Commission as a whole nor Chairman Hoecker has 
taken a position on this legislative proposal. I do, however, 
have several observations concerning the proposed legislation.
    First, the Commission recognized that the required refunds 
may cause some producers, and in particular some small 
producers, financial hardship. The Commission's September 1997 
order stated that the Commission would consider waiver of an 
individual producer's obligation to refund both principal and 
interest in cases of special hardship. The Commission 
consideres such petitions for waiver on a case-by-case basis. 
An across-the-board waiver of interest as proposed in H.R. 1117 
would give all Kansas producers, without regard to hardship, 
relief from the interest component of the refund obligation. If 
interest is not provided in refund amounts, consumers would not 
receive full compensation for the earlier overcharges because 
the refunds would not reflect the time value of money. The 
Commission's regulations concerning refunds provide for 
appropriate interest to be paid in connection with all refunds.
    Second, although H.R. 1117 would preclude penalties, 
penalties are not an issue in these cases. The Commission has 
not imposed any penalties on the producers. The assessment of 
interest in refund calculations is not intended to penalize the 
producer but rather to fully compensate the consumer for 
overcharges paid years earlier.
    Third, H.R. 1117 would preclude refunds unless the 
purchaser demonstrates that the refunds will be passed on to 
ultimate consumers. The Commission's orders require interstate 
pipelines to flow through all refunds to their consumers with 
an exception for three pipelines that have settlements with 
their customers permitting the pipelines to retain the refunds.
    Mr. Barton. The gentleman's time has expired about 2 
minutes ago. Can you summarize your summary rather quickly, 
please.
    Mr. Smith. I will do so.
    Finally, there are some questions about the intended effect 
of the legislation on refunds that have already been paid with 
respect to the period prior to 1989. As I mentioned, some 
refunds were made in 1994 and 1995 with respect to the 1988 tax 
year and $95 million in refunds have been made with respect to 
the earlier time period. In order to minimize costly litigation 
in this protracted dispute, any legislation in the area should 
be as clear as possible as to the intended effect with respect 
to refunds already made.
    The Commission is in the unenviable position of trying to 
bring to closure this dispute that lingers from an earlier era 
of pervasive Federal regulation of natural gas prices. The 
Commission will continue to apply the applicable law and 
consider the equities on all sides--producers, consumers, 
pipelines, and States--in working this matter through to 
completion in a timely manner.
    Thank you for the opportunity to testify.
    [The prepared statement of Douglas W. Smith follows:]
Prepared Statement of Douglas W. Smith, General Counsel, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: Good morning. My name 
is Douglas Smith, and I am the General Counsel at the Federal Energy 
Regulatory Commission. I am here today as a Commission staff witness, 
and do not speak for the Commission itself or for individual members of 
the Commission. Thank you for the opportunity to appear before you 
today to discuss the issues surrounding the treatment, for purposes of 
price regulation under the Natural Gas Policy Act, of payments of ad 
valorem taxes to the State of Kansas by natural gas producers.
    The central issues--Do Kansas producers owe refunds of amounts 
collected in excess of the statutory ceiling prices? For what time 
period are refunds due? Should refunds include interest on 
overcharges?--have been extensively litigated before the Commission and 
the courts beginning in 1983. H.R. 1117, which would preclude the 
inclusion of interest in any refunds ordered, would have the effect of 
modifying the outcome of Commission orders implementing a 1996 decision 
of the United States Court of Appeals for the District of Columbia 
Circuit requiring producers to refund all Kansas ad valorem tax 
reimbursements they received from their customers from October 1983 
through the removal of federal price ceilings on January 1, 1993.
    I will describe the background and history of the dispute 
concerning Kansas ad valorem taxes, discuss the current status of 
refunds and requests for waivers, and comment on issues raised by H.R. 
1117.
Statutory Framework
    Before 1978, the Commission regulated sales by natural gas 
producers under the Natural Gas Act (NGA), establishing just and 
reasonable rates to be charged by producers.
    The Natural Gas Policy Act of 1978 (NGPA) replaced the Commission's 
NGA regulation of producer sales with a system of cogressionally 
specified ceiling prices that producers could charge for their sales of 
natural gas. NGPA section 110 allowed producers to charge their 
customers amounts in excess of the applicable ceiling prices ``to the 
extent necessary to recover . . . State severance taxes attributable to 
the production'' of natural gas. Section 110 defined severance tax as 
``any severance, production, or similar tax, fee, or other levy imposed 
on the production of natural gas'' by a state. The Wellhead Decontrol 
Act of 1989 ended NGPA regulation of all sales by natural gas producers 
effective January 1, 1993.
History of the Case
    The State of Kansas has charged natural gas producers an ad valorem 
tax with respect to natural gas in Kansas since before the enactment of 
the NGPA. In 1974, the Commission's predecessor, the Federal Power 
Commission (FPC), held that Kansas producers could recover the cost of 
the Kansas ad valorem tax as an add-on to the national just and 
reasonable rates the FPC was then establishing for sales of natural gas 
by producers. Opinion No. 699-D, 52 FPC 915 (1974). The FPC held that 
the Kansas ad valorem tax could be considered as similar to a severance 
tax because it was based largely upon production factors.
    Following the enactment of the NGPA, the Commission similarly 
treated the Kansas ad valorem tax as a severance tax that producers 
could recover as an add-on to the ceiling prices under NGPA section 
110. However, in 1983, Northern Natural Gas Company, a pipeline company 
purchasing gas from Kansas producers, asked the Commission to reverse 
that ruling. It argued that the Kansas ad valorem tax was a property 
tax on the value of the gas in the ground, rather than a severance tax 
on the production of gas, and thus producers should not be permitted to 
recover the Kansas ad valorem tax as an add-on to the ceiling prices. 
Northern Natural argued that the Commission had made a similar finding 
with respect to Texas' ad valorem tax. In 1986, the Commission upheld 
its earlier rulings that the Kansas ad valorem tax could be recovered 
as an add-on to the ceiling price, while the Texas ad valorem tax could 
not. Sun Exploration & Prod. Co., 36 FERC para. 61,093 (1986), reh'g 
denied sub nom. Northern Natural Gas Co. 38 FERC para. 61,062 (1987).
    In June 1988, the U.S. Court of Appeals for the D.C. Circuit 
critically reviewed the Commission's analysis of the Kansas tax, and 
found that the Commission had not adequately explained its decision to 
treat the Kansas tax as a tax on production and had not adequately 
distinguished the Kansas and Texas ad valorem taxes. Colorado 
Interstate Gas Co. v. FERC, 850 F.2d 769 (D.C. Cir. 1988) (Colorado 
Interstate). The court therefore remanded the matter to the Commission 
for a more ``cogent theory'' of what distinguishes a production or 
severance tax which a producer can recover as an add-on under section 
110 from a non-recoverable property tax. Id. at 773.
    In a 1993 order on remand, the Commission set out the standards for 
determining whether NGPA section 110 permitted producers to recover a 
particular tax as an add-on to NGPA ceiling prices. Among other things, 
the Commission held that a recoverable severance tax is a tax on the 
value of the volumes of gas removed from the ground. A non-recoverable 
property tax, by contrast, is a tax on the value of the gas remaining 
in the ground, as well as on the value of wells and other production 
assets on the lease. Applying those standards, the Commission concluded 
that the Kansas ad valorem tax, like the Texas ad valorem tax, was a 
``tax on property, not on production,'' and, therefore, producers could 
not recover it as an add-on to the ceiling price under NGPA section 
110. Colorado Interstate Gas Co., 65 FERC para. 61,292 at 62,371 
(1993), order on reh'g, 67 FERC para. 61,209 (1994).
    However, the Commission required Kansas producers to make refunds 
only back to the June 1988 date of the court's decision in Colorado 
Interstate. The Commission held that, until the court's decision, 
producers could reasonably have relied upon the Commission's previously 
settled rule that the Kansas ad valorem tax could be recovered as an 
add-on to the ceiling price.
    Producers appealed the Commission's decision, arguing that the 
Commission should have reaffirmed its prior determination that the 
Kansas ad valorem tax could be recovered as an add-on to the ceiling 
price, and, in any event, should have ordered refunds only 
prospectively from the date of its decision in 1993. The Public Service 
Company of Colorado, supported by the Missouri Public Service 
Commission, also appealed the Commission's order, arguing that the 
Commission should have required refunds back to 1983, when the 
qualification of the Kansas ad valorem tax as an add-on to the ceiling 
prices was first challenged.
    In 1996, the U.S. Court of Appeals for the D.C. Circuit affirmed 
the Commission's holding that the Kansas ad valorem tax was a property 
tax that could not be recovered as an add-on to NGPA ceiling prices. 
Public Service Company of Colorado v. FERC, 91 F.3d 1478 (D.C. Cir. 
1996) (Public Service). However, the court rejected the Commission's 
finding that, before June 1988, producers had reasonably relied on the 
Commission's prior rule that the Kansas ad valorem tax could be 
recovered as an add-on to the ceiling price and thus that refunds 
should not be required before that date. The court explained its 
decision as follows:
        [T]he status of the Kansas tax was expressly drawn into 
        question in 1983 when Northern Natural first petitioned the 
        Commission for a ruling that producers could not lawfully 
        recover the tax under section 110. Once the recoverability of 
        the tax was in dispute, we do not see how the Commission could 
        possibly find that the producers reasonably relied upon 
        continuing to recover it . . . Absent detrimental and 
        reasonable reliance, anything short of full retroactivity 
        (i.e., to 1978) allows the producers to keep some unlawful 
        overcharges without any justification at all. The court 
        strongly resists the Commission's implication that the Congress 
        intended to grant the agency the discretion to allow so 
        capricious a thing. Still, we do not require refunds of taxes 
        recovered with respect to production before October 1983 
        because there is before us no controversy over those monies.
Id. at 1490. Accordingly, the court concluded that the producers' 
liability for refunds should extend back to October 1983, the date when 
parties were given notice that the recoverability of the tax was at 
issue. The court remanded the matter to the Commission to implement the 
refunds. The Supreme Court declined to review the Court of Appeals' 
Public Service decision. Public Service Company of Colorado v. FERC, 
520 U.S. 1224 (1997).
    In late 1994, while the appeal of the Commission's 1993 order 
requiring refunds for the period 1988-1993 was pending, the producers 
paid the refunds for the 1988-1993 period. The producers paid 
approximately $125 million, which included interest.
    In May 1997, after the Supreme Court declined to review the Public 
Service decision, a number of producers asked the Commission, in 
considering the Court of Appeals' remand, to grant all producers an 
across-the-board waiver of any requirement that they pay interest on 
their refunds of the reimbursement of ad valorem taxes collected during 
the period 1983 through 1988. The threshold question for the Commission 
was whether a waiver of interest would violate the court's decision. 
The court held that ``[p]roducers are liable to refund all Kansas ad 
valorem taxes collected with respect to production since October 
1983.'' 91 F.3d at 1492. The Commission concluded that refunds without 
interest would not satisfy the court's requirement of full refunds. The 
Commission explained that both the Commission and the courts have 
consistently treated interest as a necessary element of full refunds 
because interest is necessary to reflect the time value of money. The 
Commission pointed out that its regulations require interest to be paid 
on refunds both to provide just compensation for the losses, or costs, 
imposed on those who have paid excessive rates and to reflect the 
benefits which were available to companies which collected excessive 
rates. Public Service Company of Colorado, 80 FERC para. 61,264 (1997), 
reh'g denied, 82 FERC para. 61,058 (1997).
    The Commission found that the court's decision required rejection 
of the producers' equitable argument in favor of waiving interest. The 
producers argued that imposing interest charges on them was unfair 
because they had relied on the Commission's prior rulings that the 
Kansas ad valorem tax did qualify as an add-on to the ceiling prices. 
The Commission, however, stated that the court had already found any 
such reliance by producers was both ``foolhardy'' and unreasonable. 91 
F.3d at 1490. The Commission thus concluded that the Public Service 
decision left it with little choice but to deny an across-the-board 
waiver of the requirement to pay interest on the refunds required by 
the court.
    The Commission was mindful, however, that the refund obligation 
with interest could present serious financial problems to specific 
producers. Accordingly, the Commission stated that it would consider 
individual producers' requests for relief from the refund requirement 
based on their particular circumstances.
    A petition for review of the Commission's decision is currently 
pending before the U.S. Court of Appeals for the D.C. Circuit, which 
has scheduled oral argument for September 7, 1999.
Status of Refunds
    Based on the Commission's 1993 order, producers paid, in 1994 and 
1995, $125 million in refunds for the 1988-1993 period, which included 
interest. Because of the timing of the ad valorem tax bills, these 
refunds included the tax payments for all of 1988.
    Since the Commission's September 1997 order implementing the 
court's decision, nine pipelines have reported to the Commission that 
producers owe refunds for the reimbursement of Kansas ad valorem taxes 
of approximately $339 million for the 1983-1988 period. Of that amount, 
the Commission estimates that approximately $129 million is principal. 
The remaining $210 million is interest. Under the Commission's 
regulations, as set forth in 18 CFR Sec. 154.501(d), interest is 
calculated from the date of collection from the customer based on the 
average prime rate for each calendar quarter as published by the 
Federal Reserve. As of May 1999, the producers have paid about $95 
million of refunds, which includes both principal and interest. Thus, 
producers still owe about $244 million in refunds.
    Approximately 130 requests have been filed with the Commission for 
waiver of all or part of a producer's refund obligation. The Commission 
has acted on eleven of those requests, granting six, denying three, and 
dismissing two as unnecessary. In general, the Commission grants such 
requests where the applicant can show that payment of the refund will 
cause it a special hardship. Where a producer's application for relief 
contains insufficient information for the Commission to make a 
determination, the Commission's staff contacts the producer and 
indicates the type of information which it should file in order to 
support its application for a waiver.
    The Commission's orders require that interstate pipelines receiving 
refunds must flow those refunds through to their customers, with the 
exception of three pipelines (Natural Gas Pipeline Company, ANR 
Pipeline Company, and El Paso Natural Gas Company) which have 
Commission-approved settlements with their customers that permit the 
pipelines to retain all refunds they receive in exchange for certain 
benefits they granted to their customers. The initial refund reports 
filed by the pipelines in May 1998 indicate that the amount those three 
pipelines may retain is $4.9 million, or about 1.5% of the total $339 
million in ad valorem tax refunds. The remaining 98.5% of the refunds 
will be flowed through to at least 225 local distribution companies 
serving consumers in at least 13 states: Colorado, Illinois, Indiana, 
Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, Ohio, Texas, 
Wisconsin, and Wyoming.
    Proposed Legislation
    H.R. 1117 would add the following new section to the NGPA:

    Section 603. REFUNDS.

      In the event any refunds of any rates and charges made, demanded, 
        or received for reimbursement of State ad valorem taxes in 
        connection with the sale of natural gas prior to 1989 are 
        ordered to be made by the Commission, the refunds shall be 
        ordered to be made without interest or penalty of any kind, and 
        the refunds shall be required only to the extent that the 
        purchaser demonstrates to the Federal Energy Regulatory 
        Commission that the refund will be passed on to ultimate 
        consumers of the natural gas.
Chairman Barton's letter of invitation asked for comments on this 
proposal to waive the inclusion of interest in refund amounts.
    Neither the Commission as a whole nor Chairman Hoecker has taken a 
position on this legislative proposal. However, I do have several 
observations to make concerning the proposed legislation.
    First, the required refunds may cause some producers, particularly 
some small producers, financial hardship. As described above, the 
Commission's September 1997 order stated that the Commission may waive 
an individual producer's obligation to refund both principal and 
interest in cases of special hardship. The Commission considers such 
petitions for waiver on a case-by-case basis. An across-the-board 
waiver of interest, as proposed in H.R. 1117, would give all Kansas 
producers, without regard to hardship, partial (i.e., interest but not 
principal) relief without having to file with the Commission individual 
applications for relief from the refund requirement and supporting 
those requests.
    If interest is not provided in refunds, consumers would not receive 
full reparation for the overcharges, because the refunds would not 
reflect the time value of money. This would be contrary to the 
Commission's regulations concerning refunds, which provide for 
appropriate interest to be paid in connection with all refunds. 18 CFR 
Sec. 154.501 (1998). That requirement is consistent with a policy of 
requiring regulated entities that have overcharged consumers to provide 
full compensation for the overcharges.
    Second, although H.R. 1117 would preclude penalties, penalties are 
not at issue in these cases. The Commission's orders described above 
provide that producers must pay interest on their refunds of Kansas ad 
valorem tax amounts, but the Commission has not imposed any penalties 
on the producers. The assessment of interest in refund calculations is 
not intended to penalize the producer, but rather to fully compensate 
the consumer for overcharges paid years earlier.
    Third, H.R. 1117 would preclude refunds unless the purchaser 
demonstrates that refunds will be passed on to ultimate consumers. The 
Commission's orders require interstate pipelines to flow through all 
refunds to their customers, except for three pipelines that have 
settlements with their customers permitting the pipelines to retain the 
refunds. In those cases, in return for certain benefits the pipeline 
had granted to their customers, the customers had agreed to allow the 
pipeline to retain all refunds the pipeline received from the 
producers. Natural, 85 FERC para. 61,001 (1998); El Paso, 85 FERC para. 
61,003 (1998); ANR, 85 FERC para. 61,005 (1998). The flow through of 
refunds by local distribution companies is a matter subject to state 
regulation.
    Finally, the intended effect of the legislation on refunds already 
made is not clear. First, there is ambiguity with respect to refunds 
made after the Commission's 1993 order. By its terms, H.R. 1117 applies 
to the period before 1989. As discussed above, the 1993 Commission 
order provided that producers refund Kansas ad valorem taxes collected 
after June 1988. The 1993 order covered essentially all ad valorem 
taxes producers collected with respect to their 1988 sales, because 
Kansas generally calculated its ad valorem tax bills due as of January 
first as late as November of the same year, and sometimes even later, 
and the producers then billed their customers for reimbursement for 
their 1988 ad valorem tax payments. The Commission required producers 
to refund all such amounts as overcharge occurring after the June 1988 
cut-off date, and the producers refunded those amounts in 1994 and 
1995. As now worded, the proposed legislation could be interpreted as 
invalidating the requirement in the 1993 order that the producers' 1988 
refunds include interest, and producers might request the Commission to 
provide a means for them to recover that interest.
    In addition, it is not clear whether the proposed legislation would 
apply to the interest component of the approximately $95 million in 
refunds producers have already paid pursuant to the Commission's 1997 
order. Thus, if the proposed legislation is enacted in its current 
form, producers might ask the Commission to provide a means for them to 
recover from pipelines interest already paid pursuant to the 1997 
Commission order implementing the D.C. Circuit's Public Service 
decision. The pipelines could be expected to seek recovery of those 
amounts from their customers. In order to minimize further litigation 
of this protracted dispute, any legislation in this area should be 
clear as to its intended effect.
Conclusion
    The Commission is in the unenviable position of trying to bring to 
closure this dispute which lingers from an earlier era of pervasive 
Federal regulation of natural gas prices. Even a decade ago, the court 
in Colorado Interstate noted the ``special context'' of this case--a 
dispute about the application of the arcane law of price regulation at 
a time when natural gas markets were moving to competitively determined 
prices--and observed that ``FERC's task on remand may be about as 
inviting as having to make costly repairs on a building slated for 
demolition.'' 850 F.2d at 775. Nevertheless, the Commission will 
continue to apply the law and consider the equities on all sides--
producers, consumers, pipelines, and states--in working this matter 
through to completion in a timely manner.
    Thank you for the opportunity to testify this morning. I would be 
pleased to answer any questions you may have.

    Mr. Barton. Thank you. Attorney General Stovall, you are 
recognized for 5 minutes.
    Ms. Stovall. Thank you very much. I appreciate the 
opportunity----
    Mr. Barton. And put the microphone over there, please, 
ma'am.

               STATEMENT OF HON. CARLA J. STOVALL

    Ms. Stovall. I appreciate the opportunity to be here and 
represent Kansas' concerns. We are very supportive of the 
legislation that Congressman Moran has introduced. We are 
grateful for the support of our entire congressional 
delegation. Congressmen Tiahrt, Ryun and Moore, also Senators 
Roberts and Brownback. It is an issue that has great 
implications for Kansas. And while general counsel Mr. Smith 
has said FERC is in the unenviable position of trying to 
resolve these issues, FERC's position is not as unenviable as 
those of the small producers in Kansas and our royalty owners. 
That is where the problem is.
    Congressman Moran told you about the long history of the 
small producers in Kansas relying on decisions of FERC. In 1986 
he mentioned that northern decision. Not only did FERC say it 
is okay for our producers to pass on that ad valorem tax, they 
did so with language that said it is clear beyond question that 
they can do that.
    When the issue finally was reversed on behalf of FERC and 
they said we changed our mind now, it is not really a tax you 
can pass on, you need to rebate it. When the D.C. Circuit 
approved that decision, they actually said that producers in 
Kansas were foolhardy to rely on FERC decisions and that our 
reliance was not reasonable.
    I would suggest to you that what is not reasonable is 
changing those rules in the middle of the game and even 
changing what it is that Congress has said was appropriate. In 
1978, when the Natural Gas Policy Act passed, in section 110 
you specifically said an ad valorem tax like Kansas had can be 
passed on. So FERC not only has changed the rules on producers 
in Kansas and our legislature but they changed the rules on you 
as well. That is what we have a great problem with.
    With regard to Congressman Moran's bill, it addresses two 
of the concerns. I wish that we could go back in some way, what 
the chairman suggested, and have a perfect resolution of the 
situation, which would be to suggest that no rebates be due at 
all, but Jerry's bill doesn't ask for that. It says merely two 
things. One is that claims of interest that now are argued to 
be due back to 1983 would be waived. We strongly believe that 
equity requires that. FERC had the case when the D.C. Circuit 
remanded the Colorado case back to FERC for further 
explanation, not to reverse it but to say explain to us again 
how it is that this qualifies. FERC had that case for 5 years 
without doing anything on it. For 5 years.
    Once the D.C. Circuit said we are going to change the rules 
and you are going to owe this tax after all, those 5 years that 
FERC had the case and did nothing on it now counts against our 
Kansas producers. During those 5 years they wouldn't have had 
reason to think that the rules of the game were going to be 
changed in light of all those prior rulings. So the FERC delay 
has caused great problems.
    Equity second requires, in my opinion, that the bill be 
passed because the producers were very responsible in relying 
on those decisions. I can't fathom how the D.C. Court would say 
they were foolhardy or unreasonable to rely on that 
administrative agency. I can't explain it.
    Three, had the producers known this would be the ultimate 
result, they could 19 years ago have changed their practice. 
They could have not drilled wells, they could have capped 
wells, they could have altered production had they known this. 
But they didn't know this.
    And fourthly, the Kansas legislature, had they known this, 
rules would change, could have taken action. They could have 
repealed the ad valorem tax. They could have increased the 
percent of severance tax perhaps to compensate knowing the 
severance tax is a pass-through. They could have changed the ad 
valorem tax to comply with the new regulations like Colorado 
and Wyoming to be sure that it passed through. But the 
legislature didn't know that they needed to do anything to 
protect Kansas consumers either.
    What is important is that FERC has ordered the Kansas 
producers to pay 100 percent of the bills that the pipelines 
have sent to them by March of this year. They had to pay 100 
percent of it. Although there has been no due process hearing 
to determine what amount of liability a producer might owe, the 
pipeline simply calculated what they believed it was, sent the 
bill to the producers, and they have been ordered to pay 100 
percent of it. There is no due process in that at all. That is 
one of the things that we find additionally unconscionable.
    The producers have made those bills dependent on the fact 
they have assumed that the maximum lawful price was charged and 
on top of that was this ad valorem tax. Records that we have 
looked at shows that that is not true. FERC has ordered the 
rebate only when the maximum lawful price was exceeded by that 
tax. Sometimes the maximum lawful price was not charged. So the 
tax on top of that still fell below the maximum lawful price as 
authorized by statute. In that case no refund is owed. But 
without a due process hearing for our producers to determine 
those pipeline bills are accurate or inaccurate, the producers 
are absolutely in the untenable position of having to cough up 
tens of thousands of dollars, sometimes hundreds of thousands, 
without being able to have redress.
    And because of the other provision of Congressman Moran's 
bill which says that if the money is not to be paid to the 
ultimate consumers, it is not collected, that tries to balance 
the interest of the consumers with those of the producers.
    I thank the committee very much for the time to be here.
    [The prepared statement of Hon. Carla J. Stovall follows:]
    Prepared Statement of Carla J. Stovall, Kansas Attorney General
                              introduction
    Chairman Barton, Vice-Chairman Stearns, members of the Committee. I 
am Carla J. Stovall, Attorney General for the State of Kansas. Thank 
you for the opportunity to appear before your subcommittee in support 
of House Bill 1117, which has been introduced by Representative Moran 
of Kansas and is supported by Congressmen Tiahart, Ryun, and Moore. 
Before detailing Kansas' support of this bill, I have been asked to 
give a brief overview of the laws and legal decisions which have 
brought us to the current situation.
                            historic review
    In 1954, the United States Supreme Court held that the Natural Gas 
Act allowed the Federal Government, under the Interstate Commerce 
Clause, to control the price paid for natural gas at the wellhead if 
such gas was sold to an interstate pipeline. Phillips Petroleum Co. v. 
Wisconsin, 347 U.S. 672 (1954). From that time to 1993, the Federal 
Government, through the Federal Power Commission (FPC) and later its 
successor agency, the Federal Energy Regulatory Commission (FERC), 
established substantially all of the rates that could be recovered by 
natural gas producers across the nation. In 1974, the FPC in Opinion 
No. 699 authorized pipelines to increase the ceiling rates under the 
Natural Gas Act by allowing producers to recover ``production, 
severance, or other similar taxes.'' This was interpreted to mean that 
Kansas natural gas producers could charge pipelines the ``Maximum 
Lawful Price'' and, in addition, collect reimbursement for the Kansas 
ad valorem tax (Kansas did not have a severance tax until 1983).
    In an effort to be absolutely certain of its interpretation, the 
Kansas Corporation Commission filed a request with FPC in August of 
1974 seeking clarification of Opinion No. 699, concerning the right of 
producers to recover the Kansas ad valorem tax. The FPC responded on 
October 9, 1974 by issuing Opinion No. 699-D which reaffirmed that a 
proper interpretation of Opinion No. 699 allowed producers to increase 
the ceiling rates to recover their costs of the Kansas ad valorem tax 
imposed on natural gas production.
    Four years later in the Natural Gas Policy Act of 1978, Congress 
codified (in Section 110) the FPC's earlier decisions, contained in 
Opinions No. 699 and 699-D, which allowed reimbursement of State 
``production'' taxes. While Section 110 did not mention any specific 
state tax, the legislative history made it clear that the Kansas ad 
valorem tax was intended to be included as a tax allowed to be passed 
through. The Joint Explanatory Statement to the Conference Committee 
Report, accompanying the NGPA, noted that this cost included ``any tax 
imposed upon mineral or natural resource production including an ad 
valorem tax or a gross receipts tax.'' (Emphasis added.)
    In reliance upon FPC Opinions No. 699 and 699-D and Congress' 
passage of the Natural Gas Policy Act affirming those opinions, the 
Kansas Secretary of Revenue testified in 1981 before the Kansas Senate 
Tax Committee that was considering legislation which would have imposed 
a severance tax on natural gas production. In his testimony he 
accurately stated that the FPC had ruled that Kansas' current ad 
valorem property tax, as well as a severance tax if enacted, could be 
passed through to allow producers to recover the tax. In reliance on 
the FPC ruling and the Congressional action, the Kansas Legislature in 
1983 passed a severance tax, justifiably believing that Kansas 
producers could recover the cost of both the severance tax and the ad 
valorem property tax. Consequently, during the period from 1983 until 
1988, producers and royalty owners were collecting reimbursement of the 
Kansas tax from the pipelines under final, non-appealable FPC Orders.
    In 1983, the year that the severance tax was passed by the Kansas 
Legislature Northern Natural Gas Co. (Northern) filed an application 
with the FERC to ``reopen, reconsider and rescind'' Opinion No. 699-D. 
Three years later, in 1986--a full twelve years after FERC issued 
Opinion No. 699-D authorizing ``pass through'' of the Kansas ad valorem 
tax--FERC rejected Northern's request stating that it was ``clear 
beyond question, that the Kansas ad valorem tax is based, in large 
part, on gas production'' (emphasis added), and re-affirmed its prior 
opinion which allowed the tax to be passed through. FERC denied 
Northern's request for rehearing, once again confirming Opinion No. 
699-D and assuring Kansas and Kansas producers that ad valorem taxes 
could lawfully be passed through.
    Shortly thereafter, Colorado Interstate Gas Company (Colorado 
Interstate) appealed the Northern decision to the Federal D.C. Circuit 
which, on June 28, 1988, held that FERC had not adequately explained 
its order. The case was remanded to FERC for clarification of how the 
Kansas ad valorem tax was similar to a production or severance tax 
under NGPA, Section 110. Colorado Interstate Gas Co. v. FERC, 850 F.2d 
769,773 (D.C. Cir. 1988). The case sat idle on FERC's docket for a 
period of five years, from 1988 to 1993. This delay is significant 
because a subsequent FERC decision would cause interest claims 
amounting to millions of dollars to accrue during this period, through 
no fault of the producers.
    Finally, in 1993, FERC issued an Order on Court Remand reversing 
Opinion 699-D and ordering refund of those taxes that had been included 
in the rates paid to Kansas producers after June 28, 1988, the date the 
Court of Appeals had first remanded the case to FERC. This ruling was 
appealed to the D.C. Circuit and in 1996, the Court found that Kansas' 
ad valorem tax did not qualify under NGPA, Section 110 and held that 
refunds would be due for taxes recovered commencing in October of 
1983--expanding by five years the time period for which FERC had 
ordered refunds and exponentially increasing the claims of interest 
against Kansas producers and royalty owners! (October 1983 was when the 
notice of Northern's petition had been published in the Federal 
Register.) Public Service Company of Colorado v. FERC, 91 F.3d 1478 
(D.C. Cir. 1996). By this decision, the D.C. Circuit essentially held 
all producers should have known that the challenge by Colorado 
Interstate in the Northern case would prevail. The Court went so far as 
to say the producers were ``foolhardy'' to think that they could have 
relied on a final non-appealable order of FERC, notwithstanding the 
administrative finality provisions of NGPA. FERC refused to waive 
interest, interpreting the Court's decision to require the imposition 
of interest on the principal obligation of the ad valorem tax refund.
    During the next two years, various producers along with the State 
of Kansas, filed petitions and motions with FERC requesting relief 
from, and reconsideration of, its decision and additional relief in the 
form of waiver of interest on the principal obligation. In 1998, the 
Kansas Legislature passed Kansas Senate Concurrent Resolution No. 1616 
stating that the
        . . . retroactive reversal of a practice that had been legal 
        for 19 years places an unjust and punitive financial burden, 
        possibly exceeding $500 million, on the Kansas natural gas 
        industry, and that the ordered refunds threaten serious 
        financial harm not only to Kansas natural gas industry but to 
        the state and local economies and governmental budgets that 
        rely on the industry's economic base . . .
and asked the U.S. Congress to provide relief from penalties and 
interest. Indeed, FERC has refused to grant any form of relief to 
Kansas and Kansas producers through either reconsideration of FERC's 
position regarding the retroactivity of its change of rule and policy 
or the waiver of claims of interest on those refunds. Nevertheless, 
FERC has required that 100% of the pipeline's claims be paid without 
hearing.
                           position of kansas
    I do not appear on behalf of the Kansas to allege that FERC should 
be precluded from changing its position regarding the definition of the 
``pass through'' of ad valorem taxes or to challenge that authority. 
Clearly, such authority lies within the sound exercise of FERC's 
jurisdiction when applied on a prospective basis.
    I appear here to object to the inequity which arises from that part 
of FERC's ruling which held that the refund obligation resulting from 
this policy reversal was retroactive! FERC's ruling, coupled with the 
controlling decision of the D.C. Circuit, has resulted in an overnight 
change of a policy which had been in effect for nineteen years! If this 
change were applied on a prospective basis only, I would not be here 
objecting. The D.C. Circuit Court contends that the producer's 
allegation of detrimental reliance on the nineteen years allowing the 
pass through of the ad valorem tax was ``purely notional; if it were 
real it would not have been reasonable.'' Incredibly, how could the 
Court say it was not reasonable to rely on a 19-year history of 
consistent rulings by a federal regulatory agency? I agree something is 
not reasonable--but it was not the actions of natural gas producers! 
When Northern initially challenged the applicability of the ruling to 
Kansas' ad valorem tax, FERC said, in 1986, the pass through was 
``clear beyond question.'' How could the producers' action of relying 
on FERC's rulings be unreasonable when FERC itself continued to 
reaffirm them? Perhaps you could help me understand how to explain this 
to my constituents because I am absolutely at a loss as to how to do 
so. As my state's chief lawyer, I am unable to understand for myself 
and then explain to anyone else how our system of government and 
jurisprudence allows a 19-year ruling to be reversed overnight and be 
applied retroactively causing citizens to owe tens of millions of 
dollars in principal and interest.
    What if the IRS were to reverse its prior decisions, although based 
on Congressional legislation, and rule that home mortgage interest 
payments are no longer deductible from income taxes--and not only are 
they not deductible on a prospective basis but taxpayers must now pay 
the amount of taxes they would have owed plus interest on that amount. 
Can you imagine the calls and letters your offices would receive over 
such an action? You have not heard the same level of outrage on this 
issue simply because it does not affect as many people. But I believe 
the situation with natural gas producers and royalty owners is equally 
as repugnant as my IRS scenario and producers and royalty owners are as 
deserving of protection and remedy from this Congress as would be 
homeowners.
    The bills being sent to small natural gas producers have caused 
them to teeter on the brink of bankruptcy. Such adverse financial 
consequences, in a period of historic low prices, has spelled doom for 
the natural gas industry in my state. Not only do the owners, 
employees, and suppliers of the production companies suffer 
financially--the State of Kansas suffers as revenue from income, 
property, severance, ad valorem, conservation and anti-pollution taxes 
decline, including the income tax effects to the state of the refunds 
being ordered of major out of state producers.
    The royalty owners are not the J.R. Ewings we remember from the 
television show, living in mansions and driving expensive automobiles. 
The royalty owners are retired farmers who have come to rely on the 
little ``gas check'' each quarter to supplement Social Security. The 
royalty owners are school teachers whose grandparents may have 
bequeathed them a \1/8\ share of the gas well on the family farm. The 
royalty owners may be constituents of yours, not Kansas residents, who 
inherited or purchased an interest in a gas well in Kansas as a tax 
write-off. The bills the royalty owners are receiving are beyond the 
means of most of them and will ruin them financially. The interest the 
pipelines claim is due is now 160% of the principal!
    And why are they being made to pay these exorbitant bills? Not 
because they were cheating on their taxes. Not because they hid their 
interest in a gas well from government officials. Not because they 
thought of a scheme to overcharge the pipelines and ultimately 
consumers, but because they were following the law as it had been 
interpreted consistently for 19 years by the agency!
    Although it is the retroactive provision of the ruling itself that 
results in the present injustice and that I wish would be legislatively 
overturned, the Moran bill would at least provide a much needed 
remedy--albeit on a limited basis--to natural gas producers and royalty 
owners by making unlawful any interest or penalties assessed on those 
refunds. This bill will provide relief from the series of 
administrative and judicial decisions by FERC and the D.C. Circuit, 
respectively, which are manifestly unjust: decisions which penalize 
Kansas producers for complying with the law for 19 years; decisions 
which changed the rule and declared to be unlawful two decades of 
lawful actions of the producers; decisions which had called the 
legality of these very actions as ``clear beyond question.''
    Under rules of FERC, no government agency is ever required to pay 
interest or penalties. Without remedy by Congress, the State of Kansas 
will owe a refund of the ad valorem tax that the Department of Parks 
and Wildlife passed through, although it will not owe interest. The 
elderly, widowed royalty owner will owe a refund of the taxes AND 
interest on the refund. What justifies this disparate treatment?
    Under FERC's order, my great concern is that it is very likely that 
a large portion of the refunds and claimed interest will not flow 
through to the consumer. The second provision of House Bill 1117, which 
is just as important as the prohibition of claims of interest 
provision, would provide a protection to the consumer by requiring that 
all amounts refunded be passed through to the ultimate consumer.
    I urge each of you to support this bill not just because it 
redresses such an unjust and detrimental effect on a significant sector 
of the Kansas economy: I urge you to support this bill in an effort to 
correct the effects of an unjust and unreasonable decision by an 
federal administrative agency against a sovereign state.

    Mr. Barton. Thank you, General. We would now like to hear 
from the gentlelady from Missouri, and I am sure she is going 
to exactly echo what the gentlelady from Kansas said.
    Ms. Lumpe, you are recognized for 5 minutes.

                    STATEMENT OF SHEILA LUMPE

    Ms. Lumpe. Thank you, Chairman Barton and members of the 
committee. As Chair of the Missouri Public Service Commission, 
I am speaking on behalf of them today.
    And we thank you for the opportunity to present our 
testimony. I will not discuss the history in detail. I think it 
has been adequately presented. I would only like to reiterate 
that the issue did start in 1978 with the passage of the 
Natural Gas Policy Act.
    This act outlined procedures and processes leading to the 
deregulation of the gas industry and in it Congress set ceiling 
prices. The refunds with interest from the unlawful collection 
of the ad valorem tax from 1988 to 1993 have been paid. 
However, no refunds have been given for the unlawful collection 
over the maximum legal price which consumers paid from 1978 to 
1983.
    The time of issue here are the years 1983 to 1988, and it 
was the U.S. Court of Appeals that required the refund go back 
to 1983. They did not go back further because that issue had 
not been raised.
    The basic thought that we would like to leave with you is 
that consumers have been paying more than the maximum lawful 
price since the unlawful add on and passed through to them of 
the ad valorem tax. Our mission as commissioners under Missouri 
statutes is to provide adequate service at just and reasonable 
rates. The consumers have paid more than the just and 
reasonable price over that period of time. Our purpose is to 
see that they are refunded the money with interest to 
compensate them for the lost use of their money. The producers 
have had the use of these moneys, and we believe the consumers 
should have had the use of their moneys.
    It is also important to note that the consumers have paid 
billions of dollars in transition costs over this period 
between 1978 and 1993 through take or pay contracts and gas 
supply realignment costs, approximately $12 billion.
    The second point is that the producers were on notice about 
this issue. As a matter of fact, it was a producer that first 
raised it by asking in 1983 that Texas receive the same 
treatment as Kansas. The fact that the case has dragged on so 
long also is not the fault of the consumer. The parties demand 
due process. It is their right. And that takes time, and it is 
not unheard of for a party who may be benefiting from the 
status quo to wish to drag out a case as long as possible.
    The producers, when they first filed their petition I am 
sure were sophisticated enough to know that they could lose, 
and a prudent business practice would have been to plan for 
such a contingency.
    Third, we are not unsympathetic to the true hardship case 
of the small producers. However, we believe that each case has 
a unique set of facts and should be treated individually. We 
would not challenge hardship rulings where the information and 
the documentation are provided. Only if there appear to be 
significant discrepancies might we wish to take another look.
    Chairman Barton, Congress passed the Natural Gas Policy Act 
in 1978. As I said, it is a carefully crafted piece of 
legislation. It balanced the rights of the different parties. 
It established procedures and processes that have worked well 
over a 20-year period. We oppose H.R. 1117 because it would 
violate those procedures and invite unpredictability and hosts 
of appeals on regulatory matters to Congress to solve.
    We again thank you for the opportunity to appear before 
you. The Missouri Commission and its staff have worked long and 
hard to compile facts and information and we stand ready to 
assist you further in your deliberations.
    Thank you.
    Mr. Barton. Thank you. Before we recognize Mr. Krehbiel, I 
want the gentlelady to know I got elected to Congress in 1984 
on a platform of repealing the Natural Gas Policy Act of 1978. 
So I want you to know where I am coming from on this.
    [The prepared statement of Shiela Lumpe follows:]
  Prepared Statement of Sheila Lumpe, Chair, Missouri Public Service 
                               Commission
                            i. introduction
    Chairman Barton and Members of the House Subcommittee on Energy and 
Power, I am here today to testify on behalf of the Missouri Public 
Service Commission (``Missouri PSC''). The Missouri PSC is a 
governmental agency with jurisdiction to regulate the distribution and 
sale of natural gas to retail consumers in the state of Missouri. The 
Missouri PSC actively participates in Federal Energy Regulatory 
(``FERC'') proceedings which affect the price of natural gas sold to 
local gas distribution companies located in Missouri.
    Since 1989, the Missouri PSC has been on the front line with 
several other consumer advocates seeking recovery of the Kansas ad 
valorem refunds which are due to consumers in over 20 states. The 
Missouri PSC opposes H.R. 1117, because this bill seeks to relieve 
natural gas producers of their obligation to pay to natural gas 
consumers the accrued interest portion of ad valorem tax refunds 
related to the period 1983-1988.
    As your invitation requested, I will address three areas: (1) the 
background of the ad valorem tax refunds, (2) the current status of the 
refund and interest payments, and (3) the pros and cons of the proposed 
legislation. I also wish to address several misconceptions that may 
exist on this matter.
             ii. background--kansas ad valorem tax refunds
    By enacting the Natural Gas Policy Act of 1978 (``the NGPA'' or the 
``Act'') Congress established maximum lawful prices, or price ceilings, 
for first sales of natural gas. Section 110 of the NGPA provided for 
add-ons to the ceiling prices for state ``severance or similar taxes'' 
and for certain production costs. Section 504 of the Act made it 
unlawful for any person ``to sell natural gas at a first sale price in 
excess of any maximum lawful price under this Act.'' The FERC, by 
regulation (18 C.F.R. Sec. 273.301, attached as Exhibit A), imposed a 
refund obligation on any person, his successors, heirs and assigns who 
accepted a first sale price in excess of the maximum lawful price. FERC 
regulations also provide that refunds are to be paid with interest so 
that the recipient is made whole for the time value of money. NGPA 
Section--502(c) also permitted the FERC to make adjustments, 
``consistent with the purposes of the Act, as may be necessary to 
prevent special hardship, inequity or an unfair distribution of 
burdens.''
    In 1983, a Texas producer petitioned the FERC to reverse a decision 
of the former Federal Power Commission (``FPC''), and to treat Texas ad 
valorem property taxes as a severance or similar tax under Section 110. 
Later that same year a pipeline asked the FERC to disallow Kansas ad 
valorem property taxes as a severance tax add-on under Section 110. By 
October 31, 1983, 21 Kansas producers and the Kansas Corporation 
Commission had intervened in the Kansas case.1 In 1986 the 
FERC denied the petitions of both the Texas producers and the Kansas 
pipelines, keeping in place the disparate treatment of the Texas and 
Kansas property taxes under Section 110.
---------------------------------------------------------------------------
    \1\ The intervening parties supporting preferential treatment of 
the Kansas tax were: Arco Oil and Gas Co., Division of Atlantic 
Richfield Co.; Amoco Production Co.; Chevron U.S.A., Inc,; Maurice L. 
Brown Co.; Gulf Oil Corp.; Phillips Petroleum Co. and Phillips Oil Co.; 
Mobil Oil Corp. and Northern Natural Gas Producing Co.; Aminoil--Inc.; 
Champlin Petroleum Co.; Mesa Petroleum Co.; Pennzoil Co., Pennzoil 
Producing Co. and Pennzoil Oil and Gas, Inc.; Ashland Exploration, 
Inc.; Texaco Inc.; Kerr-McGee Corp.; Getty Oil Co.; Cities Service Oil 
and Gas Corps.; Shell Oil Co.; Sun Exploration and Production Co.; 
Kansas State Corporation Commission; Tenneco Oil Co.; Dorchester Gas 
Producing Co.; and, Cabot Petroleum Corp. Sun Exploration and 
Production Co. 36 FERC para. 61,093, Appendix B, (1986).
---------------------------------------------------------------------------
    In 1988, the Court of Appeals remanded the matter to the FERC, 
saying the FERC had failed to provide a reasoned decision for treating 
the similar Kansas and Texas taxes differently. In 1993, the FERC 
concluded the Kansas ad valorem property tax did not qualify under 
Section 110 as a severance or similar tax eligible as an add-on to the 
maximum lawful price and that the collection of such ad valorem taxes 
on top of the ceiling prices caused the overall price of gas to exceed 
the maximum lawful level. The FERC ordered first sellers to refund only 
those amounts which were in excess of the maximum lawful price, and 
which were collected after the 1988 Court of Appeals decision.
    On appeal of this 1993 FERC order, the Court of Appeals affirmed 
FERC's treatment of the Kansas property taxes. The Court, however, 
reversed FERC's holdings on the refund period and determined refunds 
were also owed dating back to 1983, when the challenge to the Kansas 
tax was first made and first sellers put on notice of the potential 
refund obligation. First sellers were allowed to retain all amounts 
collected in excess of maximum lawful prices from 1978 through 1983.
    Since 1997 the FERC has issued a series of orders to effectuate the 
refunds to which consumers have a right under the NGPA. These orders 
are being challenged by both first sellers and consumers in more than a 
dozen cases currently pending before the Court of Appeals for the 
District of Columbia Circuit. In addition, parties have initiated more 
than one hundred cases before the FERC seeking adjustments or 
enforcement of refund obligations. [See Exhibit B.]
    Under the structure of the NGPA and FERC practice, consumers have 
been required to pay the filed rates (which in this case have been 
excessively high) and rely on the FERC's refund process to remedy the 
inequities. FERC did not require the disputed amounts of contested 
rates to be placed in escrow nor did it require that a bond be posted 
for later payment. However, the fact that first sellers did not 
voluntarily take any steps to notify their working and royalty interest 
owners and financially protect the disputed amounts from an adverse 
ruling in a pending case should not be a basis for denying ratepayers 
interest due on the amounts they were overcharged. Congress should not 
interfere with the process now, but instead preserve the equities.
    In this respect, the Congress should be mindful that consumers have 
been forced to pay gas producers billions of dollars in take-or-pay and 
contract buyout costs. These costs were the result of the NGPA maximum 
lawful prices escalating above market clearing levels and resulting 
imbalances between supply and demand. Although consumer representatives 
requested the FERC and the courts to reform the high-priced producer 
contracts, no relief was forthcoming. Instead consumers were required 
to pay billions of dollars in take-or-pay and gas supply realignment 
costs to producers. [See Exhibit C.]
    Much of the present turmoil springs from a later order in which the 
FERC announced that it would limit each first seller's refund 
obligation to the extent of its working interest in the well from which 
the natural gas was sold and impose a direct refund obligation on 
working and royalty interest owners. The Missouri Commission protested 
this FERC decision, and has asked the Court of Appeals to review it. 
The NGPA extended FERC jurisdiction only to first sales of natural gas. 
Since neither working interest owners nor royalty interest owners 
typically sell gas, the Missouri PSC believes this is a contract issue 
for the courts, not the FERC.
        iii. current status of the refund and interest payments
    According to the refund procedures prescribed by FERC, pipelines 
were directed to serve upon first sellers and file with the Commission 
a Statement of Refunds Due by November 10, 1997. First Sellers who 
collected revenues in excess of the applicable maximum lawful price as 
a result of the reimbursement of Kansas ad valorem taxes were to refund 
these excess revenues, with interest by March 9, 1998. FERC also 
explained that a first seller would be permitted to amortize the 
refunds over an extended period of time or be granted adjustment 
relief, if appropriate financial data was submitted to support such a 
request by an individual first seller. Additionally, FERC established a 
process through which disputes between first sellers and pipelines are 
to be resolved. First Sellers were allowed to place any disputed 
amounts into an escrow account, which would toll the interest 
obligation. FERC directed pipelines to flow through the refunds 
received to their customers who had been overcharged.
    Nine pipelines filed Statements of Refunds Due in November 1997. 
These statements reflected a total of $335 million Kansas ad valorem 
tax refunds due from producers. Of this amount, $207.5 million, or 62%, 
was accrued interest. [See Exhibit D.] A review of the detailed 
information regarding the reported amounts due from 404 individual 
producers reveals the following information which we hope the 
Subcommittee will find useful in placing the various issues into 
perspective. [See Exhibit E.]
    The first 24 producers owe 86% ($288.4 of $335 million) of the 
refunds.

 The total refund owed by each of those producers ranged from 
        $62.3 million to $1.4 million.
 The amount of interest owed by each of those producers ranged 
        from $38.1 million to $0.9 million.
    The next 25 producers owe 7% ($23.2 of $335 million) of the 
refunds.

 Each owed less than $1.4 million but more than $0.5 million.
 Interest owed by each ranged from $.9 million to $0.3 million.
    The remaining 355 producers owe 7% ($23.4 of $335 million) of the 
refunds.

 The total refund owed by each of those producers ranged from 
        $494,000 to less than $100.
 The amount of interest owed by each of those producers ranged 
        from $311,000 to less than $100.
    Exhibit F summarizes the information contained in the pipeline 
annual refund reports filed in May of 1998 and May of 1999. The 1998 
refund reports show that of the $335 million owed, $93.9 million had 
been paid by producers. The 1999 refund reports show that further 
amounts collected from producers during this second year are relatively 
small ($3.1 million). Since interest continues to compound quarterly on 
any unpaid balances, the Missouri PSC prepared estimates of the 
additional interest that has accrued up through March 31, 1999.
    There are no FERC filings that specifically show which states' 
consumers are owed or have received Kansas ad valorem tax refunds. 
Therefore the Missouri PSC applied a set of allocation factors that 
were developed from data contained in pipelines' 1983-1988 annual FERC 
Form--2 reports. [See Exhibit G.] Natural gas consumers in 23 states 
are entitled to Kansas ad valorem tax refunds owed. The Missouri PSC 
estimates that Kansas gas consumers are owed over $80 million, with 
Missouri gas consumers being owed over $60 million. Other states which 
are owed more than $10 million are: Minnesota $48 million, Nebraska $37 
million, Colorado $24 million, Illinois $23 million, Iowa $20 million, 
Indiana $17 million, and Michigan $13 million.
    The Missouri PSC has actively participated in FERC dockets related 
to refunds on the Williams and Panhandle pipeline systems and those 
court cases which affect the amount of refunds owed Missouri natural 
gas consumers.
               iv. cons of the proposal to waive interest
    Consumers have been overcharged for natural gas dating back to 
1983. Interest on the refunds is the means by which consumers are 
compensated for the time value of the money they were overcharged. It 
would be inequitable to deny consumers the interest to which they are 
entitled. It is equitable for producers to pay interest at the FERC's 
refund interest rate for their use of these funds over the past 11-16 
years.
    The NGPA was a carefully crafted compromise of competing producer 
and consumer interests. The Act provided for the phased deregulation of 
various categories of new gas production while maintaining maximum 
lawful ceiling prices for sales of gas produced from older wells. By 
maintaining price ceilings on the older, flowing supplies of natural 
gas, Congress intended to temper the effect of deregulation of certain 
high cost gas through rolled-in pricing. To now allow producers to 
benefit from exceeding such maximum lawful prices, upsets the balance 
of producer and consumer interests reflected in the NGPA.
    The issues of whether producers have overcharged consumers by 
collecting prices in excess of those established by Congress have been 
fully litigated at the FERC and affirmed by the Supreme Court. Issues 
associated with the interest on refunds are pending review before the 
United States Court of Appeals. Numerous petitions for adjustments and 
relief from refund obligations are currently being processed by FERC. 
It is unfair to disturb this regulatory and judicial process.
                           v. misconceptions
    There is no basis to claims that producers were not provided notice 
of potential refund liabilities associated with their collection of 
Kansas ad valorem taxes from consumers. The large producers intervened 
in response to the public notice of FERC's review of this issue. These 
large producers have been involved throughout the entire regulatory and 
judicial process. Large first sellers and operators should have taken 
steps to insure that they could collect the contingent obligations from 
their working interest owners and royalty owners.
    There is no basis to the claim that the harm to small producers can 
not be addressed absent a general waiver of interest. FERC is 
processing numerous requests for adjustment and relief from refund 
obligations, including interest, due to hardship. The Missouri PSC 
believes that relief should be permitted in cases where small producers 
demonstrate that the payment of refunds and interest will result in 
special hardship.
    Reports of harm to the Kansas economy should be tempered by the 
fact that Kansas consumers are the single largest beneficiary of the 
refunds. As indicated in the Missouri PSC study, an estimated $80 
million in refunds will flow to Kansas consumers. The Kansas economy 
also has benefited from the millions of dollars gas supply transition 
costs paid by consumers to Kansas producers.
    Reports have also surfaced that refunds are not flowing through to 
consumers. While there are several instances where pipeline customers 
have bargained away their rights to refunds, the vast majority of 
refunds will be flowed back to consumers pursuant to the authority of 
state utility commissions, such as the Missouri PSC. The issue of 
whether pipelines will flow through refunds to non-jurisdictional 
direct sales customers will generally depend upon contractual 
provisions relating to refunds. Direct sales customers are typically 
large industrial consumers who are capable of dealing with the pipeline 
directly.
                             vi. conclusion
    The Missouri PSC 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.
    Thank you for the opportunity to appear before you today. I will be 
happy to answer any questions you may have. My staff is also available 
to assist you and provide any additional information you may need in 
your deliberations on this matter.
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    Mr. Barton. Mr. Krehbiel is recognized for 5 minutes.

                 STATEMENT OF ROBERT E. KREHBIEL

    Mr. Krehbiel. Thank you Chairman Barton, members of the 
committee for the opportunity to testify. I am appearing today 
as an independent producer of natural gas in the State of 
Kansas and on behalf of an association of small independent oil 
and gas producers who work and operate in the oil and gas 
fields of Kansas.
    Small independent producers are very important to energy in 
America and very important to energy consumers in America. They 
drill over 85 percent of all wells in the U.S. and account for 
60 percent of gas production.
    In Kansas, there are many small independent operators. They 
are small, family owned operations very similar to family 
farms. Many Kansas farmers, in fact, work in the oil fields and 
some operate their own small oil and gas companies to 
supplement depressed farm income.
    But today while the U.S. economy flourishes, producers in 
both agriculture and oil and gas production are facing 
extraordinarily difficult economic times. Congressman Hall 
recognized the condition of the oil and gas industry in his 
opening statement. He was exactly correct.
    The oil and gas producer was devastated by the crash in 
prices in the 1980's and has never recovered. For example, in 
the mid-1980's, there were over 220 rigs actively drilling for 
oil and gas in Kansas. Today there are three rigs running in 
Kansas. The value of oil and gas production in Kansas has 
declined by over $1 billion annually and over 10,000 jobs in 
the producing sector alone have been lost.
    Now the Kansas producer land owners are facing a new 
threat, the retroactive reversal of FERC policy. Producers are 
facing refunds totaling $340 million resulting from gas sold to 
interstate pipelines from 10 to 15 years ago. Many years of 
good faith reliance and compliance with Federal policy has 
turned into a nightmare for many honest, hard working, and 
unsuspecting Kansas producers and royalty owners. I do not have 
expertise in FERC law and I am not here to discuss the legal 
issues. I simply want to share some producer stories with you 
which are typical of much of our membership.
    For example, in February 1993, one young Kansas producer 
purchased 27 properties from a company that was being 
liquidated for the total sum of $195,000. Ten of those 
properties were gas wells. In October 1998, this producer 
received a letter from the FERC telling him that he was liable 
for $855,147, more than six times what he had paid for these 
properties. Both seller and buyer were without knowledge that 
any potential liability existed.
    Many sales have occurred since 1983 to 1988, and this 
scenario will be repeated hundreds of times over. Innocent 
purchasers with no connection or relationship to the pipelines 
involved will be held liable for large sums of money which was 
paid to others.
    Let me share the case of my good friend. In 1980, 19 years 
ago when the oil patch was booming, my good friend embarked on 
the American dream. He decided to raise some money and buy an 
oil and gas lease and drill a well. I worked with him to 
purchase an oil and gas lease from a farmer on 160 acres in 
Edwards County, in Kansas.
    He raised $150,000 by selling interest to other producers 
in Kansas. He set up a corporation to operate the well and he 
provided the expertise and his wife did the book keeping. That 
is exactly the way the vast majority of wells are drilled in 
Kansas, by a group of producers coming together to share the 
costs of the risks of exploration. It is estimated that 5,000 
independent producers sharing these costs and 50,000 royalty 
owners will be impacted by this decision.
    Now, this group was successful in drilling the Edwards 
County well. They got a small gas well. A major interstate 
pipeline offered to buy the gas and they offered to pay the 
maximum lawful price set forth in the Natural Gas Policy of 
1978.
    And it is important to understand that never in the history 
of the gas patch has the independent producer charged a price 
for natural gas. Kansas producers, like Kansas farmers, are 
price takers, not price makers. To penalize a producer for 
charging a price in excess of the maximum lawful price when 
that price was set and determined by the purchaser and the 
government regulators is patently unfair and absurd on its 
face. To retroactively declare the conduct of innocent people 
unlawful is unconscionable.
    With respect to the taxes, the attorneys in that contract 
said that the purchaser would reimburse seller for ad valorem 
taxes as provided in FPC opinion 699-D issued October 9, 1974. 
In reliance upon this language written by attorneys for the gas 
purchaser who referenced a valid order of the FPC, my friend 
signed this pipeline contract.
    Fifteen years after signing this contract, a D.C. Circuit 
Court would say, as we see the issue, the apparent lack of 
detrimental reliance on the part of the producer is the crucial 
point. What would they have done differently if they had known 
in 1983 that they were not entitled to recover the tax?
    Clearly the operator relied on Opinion 699-D when he signed 
that gas contract and accepted reimbursements for taxes. He was 
simply not in court to tell the judge that. The answer to the 
judge's query was simple. He would not have sold the gas or 
collected the tax. On November 4, 1996, my friend died never 
knowing that this case even existed. My friend's widow could 
not handle the operations. She sold the production and 
dissolved the corporation. One year later my friend's widow 
received a letter from the FERC referencing a FERC order dated 
September 10. This was the first knowledge that they had that 
this issue even existed.
    In a letter dated November 18, 1997, to her old partners, 
to her husband's old partners, five of whom are now dead or 
dissolved, who shared the cost of this well, she described this 
as a big shock to all of us. Indeed it was. By the time that 
operator or any non-operator, first had notice that this issue 
even existed, FERC had already generated an interest penalty 
which was early twice as much as the principal.
    Now the pipelines have gone to court to try to overturn 
another FERC decision. Previously FERC required the working 
interest owners only to be responsible for their share of the 
refund. Now they are trying to get the operator to be 
responsible for everybody's interest. What that means is this 
widow will now be responsible for the share of the taxes of the 
five deceased partners in this well.
    Mr. Barton. Mr. Krehbiel, I know it is important that you 
get your comments on the record, but we have them in writing. 
If you could summarize in the next minute or so, we would 
appreciate it.
    Mr. Krehbiel. Thank you very much, Mr. Chairman. This issue 
should simply not exist. 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.
    This situation is not the fault of Kansas producers. These 
producers have served the American consumer with hard work and 
productivity. Common sense and equity demands fairness for 
producers as well as consumers. A healthy independent producing 
sector is in the best interest of all Americans.
    Today that producing sector is rapidly being dismantled in 
the State of Kansas. Fairness in government regulations is 
critical. We urge you and appreciate your serious consideration 
of this issue. Thank you.
    [The prepared statement of Robert E. Krehbiel follows:]
   Prepared Statement of Robert E. Krehbiel, on Behalf of the Kansas 
                  Independent Oil and Gas Association
    Chairman Barton and members of the Subcommittee: Thank you for the 
opportunity to testify. I am appearing today as an independent producer 
of natural gas in the State of Kansas and as the Executive Vice-
President of the Kansas Independent Oil and Gas Association. This 
association was organized over 63 years ago to provide a voice for the 
many small independent oil and gas producers who work and operate in 
the oil and gas fields of Kansas. We are a cooperating association of 
the Independent Petroleum Association of America.
    There are 7,000 independent producers in America who typically 
employ 10 full time and 3 part time employees. They drill over 85% of 
all wells in the United States and account for 43% of oil production 
and 60% of gas production. In Kansas there are approximately 2,500 
independent producers many of which are very small, family owned 
operations very similar to family farms. Many Kansas farmers work in 
the oil fields and some operate their own small oil and gas companies 
to supplement depressed farm income. Many working and retired farmers 
rely on royalty income resulting from production on their farm land.
    Along with agriculture and manufacturing, the oil and gas industry 
has been a mainstay of the Kansas economy for many years. But today, 
while the U.S. economy flourishes, producers in both agriculture and 
oil and gas production are facing extraordinarily difficult economic 
conditions.
    The independent oil and gas producer was devastated by the crash in 
prices in the mid 1980's and has never recovered. In the mid 1980's 
over 220 rigs were actively drilling for oil and gas in Kansas. Today, 
3 rigs are running in Kansas. The value of oil and gas production in 
Kansas has declined by over $1 billion annually and over 10,000 jobs in 
the producing sector alone have been lost. The attached Kansas Report 
reflects the most recent trends in the industry. Today, in Kansas, the 
average oil well produces only 2.4 barrels of oil per day. The average 
Kansas gas well produces less than 100 mcf of gas per day. Still, 
thousands of these marginally economic wells across America provide an 
enormous national resource. America still produces nearly half of the 
oil it consumes and ranks second to Saudi Arabia in world oil 
production. One Kansas stripper oil well making ten barrels of oil per 
day or stripper gas well making 90 mcf per day provides enough fuel to 
supply the needs of 150 Americans. Today, however, many of the stripper 
wells in Kansas do not provide enough revenue for producers to continue 
their operations.
    Now, the Kansas producers and landowners are facing a new threat, 
the retroactive reversal of Federal Energy Regulatory Commission 
policy. After 19 years of reliance on Federal Power Commission Opinion 
699-D by the State of Kansas and Kansas producers, the Federal Energy 
Regulatory Commission, successor to the FPC, reversed its opinion and 
ordered producers to pay the major inter state pipeline purchasers 
refunds totaling $334 million resulting from the sale of gas produced 
in Kansas and sold to interstate pipelines between October 3, 1983 and 
June 28, 1988. Approximately two-thirds of this amount is interest. It 
is estimated that just under $100 million of this amount is demanded of 
small independent producers. Many years of good faith reliance on 
federal policy has turned into a nightmare for many unsuspecting Kansas 
producers.
    This retroactive reversal of federal policy has created a series of 
legal issues which are infinite and complex. I understand that lawyers 
with expertise in these matters have identified issues ranging from 
complex constitutional questions to simple questions of private 
contract. New issues arise continually both at the federal and state 
level. Lawyers should fare very well. Some independent operators have 
pooled their resources to share the costs of counsel. Many of the small 
independent operators, non-operators and royalty owners in Kansas, 
however, lack the financial resources to employ skilled counsel. These 
producers do not, however, need legal advice to feel the outrage of the 
injustice of this federal regulatory action.
    I do not have expertise in FERC law and I am not here to discuss 
the legal issues. I want to simply share one producer's story which is 
typical of much of our membership. The factual situation which I will 
discuss is true and, while it is not my purpose to discuss legal 
issues, many will appear. These issues are typical of what many Kansas 
producers are facing.
    In 1980, nineteen years ago when the oil patch was booming, my good 
friend, a petroleum engineer with whom I had worked for several years, 
decided to raise some money, buy an oil and gas lease and drill a well. 
He was an honest, hardworking, productive man of utmost integrity. He 
was good at his work and well respected by those who knew him. He 
organized a corporation and, as a landman, I worked with him to 
purchase an oil and gas lease from a farmer on 160 acres in Edwards 
County, Kansas. He raised $150,000 by selling interests in an 
exploratory well to ten friends or acquaintances with experience in the 
oil and gas industry. The corporation would operate the well with my 
friend providing the expertise and his wife doing the bookkeeping.
    The vast majority of exploratory wells drilled in Kansas are 
drilled by groups of individuals and companies who pool their resources 
to share the costs and risks of this very risky business. Behind every 
small operator is a group of non-operating working interest owners with 
substantial interests in the well.
    This group was successful in drilling the Edwards County well. By 
the end of 1980 they had completed a small gas well. It appeared that 
it would be good enough to recover their investment and possibly make 
some money. One major interstate pipeline company had a pipeline nearby 
as did several other gas purchasers. This pipeline offered to buy the 
gas and by January, 1981, their attorneys had written a Gas Purchase 
Contract. Sales commenced in March of 1981. Since the purchaser was an 
interstate pipeline their contract provided that they would pay the 
maximum lawful price as set forth in the Natural Gas Policy Act of 
1978.
    Until deregulation, the maximum lawful price of gas sold in 
interstate commerce was always determined by the Federal Power 
Commission, or its successor the Federal Energy Regulatory Commission. 
In an unregulated market the price of gas is determined by the markets 
created by the pipelines. Never in the history of the gas patch has the 
independent producer ``charged'' a price for the natural gas he 
produces. Kansas producers, like Kansas farmers, are price takers, not 
price makers. To penalize a producer for charging a price in excess of 
the maximum lawful price when that price was set and determined by the 
purchaser and government regulators is patently unfair and absurd on 
its face. To retroactively declare the conduct of innocent people 
unlawful is unconscionable. I understand the lawyers will also argue 
that it is unconstitutional.
    The attorneys who wrote this gas purchase contract included a 
provision with respect to taxes, which read: ``Purchaser shall 
reimburse Seller for all existing and new production, gathering, 
delivery, sales, severance, excise or other taxes or assessments of a 
similar nature including ad valorem taxes as provided in FPC Opinion 
No. 699-D, issued October 9, 1974.'' Under Opinion 699-D under specific 
ruling of the FPC, the Kansas ad valorem taxes could be added on to 
what otherwise was the maximum lawful price and could be re-imbursed as 
a part of the maximum lawful price. This ruling was later re-affirmed 
by the FPC's successor, the Federal Energy Regulatory Commission on at 
least two occasions in 1986 and 1987. In 1986 the FERC wrote that ``it 
is clear beyond question'' that the Kansas ad valorem tax can be paid 
to producers as part of their costs, and reaffirmed Opinion 699-D. 
Kansas producers relied on that opinion. Later, in 1993, nineteen years 
after the opinion was issued, and declared to be ``clear beyond 
question'', the Federal Energy Regulatory Commission reversed this 
opinion.
    In reliance upon this language written by Attorney's for the gas 
purchaser who referenced a valid order of the Federal Power Commission, 
Opinion 699-D, my friend signed the Pipe Line's contract as president 
of the corporation, and acted in accordance with its terms .
    Fifteen years later on August 2, 1996, in an effort by the Pipe 
Lines to overturn Opinion 699-D, in the case of Public Service Company 
of Colorado, et al., Petitioners v. Federal Energy Regulatory 
Commission, Respondent, OXY USA, Inc. et al., Intervenors, United 
States District Court of Appeals, District of Columbia Circuit, Judge 
Ruth Bader Ginsburg would write for the Court: ``As we see the issue, 
the apparent lack of detrimental reliance on the part of the producers 
(on Opinion 699-D) is the crucial point. What would they have done 
differently if they had known in 1983 that they were not entitled to 
recover the Kansas tax?'' Clearly the operator did rely on Opinion 699-
D when he signed the gas contract and accepted re-imbursement for 
taxes. He was simply not in court to tell the judge that. The answer to 
the Judge's query was simple, they would not have sold the gas or 
collected the tax re-imbursements. Seller had no idea this case even 
existed. Had he been timely notified of this case he would have had the 
opportunity to tell the Judge that he would not have signed that gas 
purchase contract. Instead the Court ordered producers to refund any ad 
valorem taxes paid by the gas purchaser pursuant to Opinion 699-D back 
to October, 1983, ``the date when all interested parties were given 
notice in the Federal Register that the recoverability of the Kansas 
tax under Sec. 110 of the NGPA was at issue.'' This operator did not 
subscribe to the federal register. Neither did his partners. Later the 
FERC would triple the refund by adding interest at high rates 
compounded quarterly.
    On November 4, 1996, my friend died, never knowing that the Public 
Service Company of Colorado case even existed. My friend's widow could 
not handle the operations without the help of her husband and shortly 
after his death she sold their production and dissolved the 
corporation.
    On November 10, 1997, the Pipe Line sent the widow a letter 
addressed to the now dissolved corporation which referenced an Order of 
the Federal Energy Regulatory Commission dated September 10, 1997. A 
copy of that letter is attached. This was the first knowledge that she 
had that this issue even existed. In a letter dated November 18, 1997, 
to the old partners, five of whom were now dead or dissolved, who had 
shared the costs and risks of drilling an exploratory well, the widow 
described the letter from the Pipe Line as ``a big shock to all of 
us''. By the time that the operator or any non-operator first had 
notice that this issue even existed, FERC had already generated an 
interest penalty which was nearly twice as much as the principal. In 
the case of this group the principal was $6,502.88 and the interest was 
$12,505.02, for a total liability at that time of $19,007.90. It is 
very likely that even to this day many non-operating interests their 
heirs, successors or assigns and hundreds of royalty owners have no 
idea that this case even exists. Neither does the completely unknowing 
purchaser of this depleted property have any idea of the potential 
liability he purchased. The Edwards County farmer from who I purchased 
the oil and gas lease is deceased and his children have no idea of 
their potential liability. It appears that if the pipeline cannot 
collect from the decedent they will attempt to collect from the 
decedent's widow and children. If the pipeline cannot collect from the 
widow and children they will attempt to collect from the unknowing 
purchaser. Efforts to extend the jurisdiction of the FERC over persons 
and property stretch the imagination. The litigation that will be 
generated from these efforts will extend through the next decade.
    In this case the Pipe Line purchased gas in accordance with the 
terms of their Gas Purchase Contract dated January 15, 1981, and had 
complied with FPC Opinion 699-D by reimbursing the producer for the ad 
valorem taxes that the corporation had paid to Edwards County for tax 
years 1983, 1984, and 1985. Even though the term of the contract was 
for a period of 15 years, the Pipe Line determined that the gas market 
had declined and they could buy the gas for a lesser price. Northern 
notified the corporation that they would no longer take gas from the 
Edwards County well and essentially voided the contract. Unable to 
operate without cash flow and unable to market the gas from a well 
which is now greatly depleted, the operator had little choice but to 
sign an amended agreement. Effective October, 1986, the Pipe Line 
reduced the price paid for natural gas from a then maximum lawful price 
of $3.22 to approximately $1.81 per mcf. Ad Valorem taxes paid to 
Edwards County were no longer refunded. By August of 1987, the Pipe 
Line, knowing that the well was greatly depleted and that no other 
purchaser would be willing to lay a pipeline to the wellhead to 
purchase the remaining reserves offered to pay $1.18 per mcf. On August 
29, 1987, the operator wrote to his working interest owners to tell 
them that the well would be shut in. A copy of that letter is attached.
    For the period of time for which refunds are set out in the 
Colorado Public Service Company opinion, October 1983 through June of 
1988, the period of the alleged overpayments, the Pipe Line actually 
paid these producers an estimated $49,000.00 less than the maximum 
lawful price allowed by the Natural Gas Policy Act of 1978, even with 
the refund of ad valorem taxes in 1983, 1984 and 1985. I understand 
that this is a typical scenario. Are producers supposed to suffer the 
losses of a weak market while the government eliminates the benefits of 
a good market? Can producers be required to refund monies alleged to 
have been collected in excess of the maximum lawful price when they 
were actually paid much less than the maximum lawful price during this 
period of time? Were consumers not the beneficiaries of this price 
reduction? Doesn't equity cry out?
    In looking at my friend's scenario you also see a series of 
contractual issues arise which have never been considered, or should be 
reconsidered, by the FERC in ordering refunds. For example, on January 
15, 1985, the Pipe Line proposed an amendment to the gas purchase 
contract to continue purchasing gas at a reduced price. That amendment 
included a provision which stated that Pipe Line would never be 
required to pay seller a price in excess of the maximum lawful price 
established by the FERC . . . and Seller agrees to promptly refund any 
excess payments made by Northern including interest calculated at the 
prime rate in effect at the Chase Manhattan Bank.'' Seller would not 
agree to this proposal because it required the payment of interest on 
some possible retroactive refund. With hindsight it becomes apparent 
that by this time the Pipe Line attorneys knew that Opinion 699-D had 
been challenged and if successful they wanted to get producers 
contractually responsible to refund interest on any principal recovery 
which might result. My friend would not agree to that and any refund of 
interest was stricken from the contract. Clearly, and equitably, in 
view of the price reduction accepted, any responsibility for a FERC 
ordered payment of interest on a retroactive refund should be the 
contractual responsibility of the purchaser.
    Finally on January 14, 1994, producer and purchaser entered into a 
Termination Agreement discharging each other from any and all 
liabilities, claims and causes of action, whether known or not, arising 
out of or relating to said contracts between the parties. Typically, 
under these agreements, and the new gas purchase agreements entered 
into concurrently with them, in addition to agreeing to price 
reductions the producer releases claims which it could assert and which 
would add to the cost of the purchaser. The consideration for the 
producer's release is the release of possible claims against it. 
Clearly a pipeline and a producer should be able to agree between 
themselves as a matter of contract to indemnify and hold the other 
harmless from cross claims and liabilities including any refund 
obligations. The purchaser would not enter into the contract or mutual 
release unless it was receiving sufficient consideration, and it is the 
best judge of this. In this situation the pipeline is acting in the 
best interests of the consumer, as it is entering into the contract to 
reduce its costs. In fairness and under its power to make equitable 
adjustments, FERC should honor the mutual release and require no refund 
from either the producer or pipeline, as the consumer has already 
received the benefit of the producer release by reduced costs. 
Requiring a refund from the producer while retaining the benefits of 
the producer release and revised contract is a double burden and 
inequitable. The producer then pays twice, once by the release and 
price reduction, and secondly by the refund.
    Issues of private contract such as these have not been considered 
on an equitable basis and are plentiful. If these issues cannot be 
resolved en masse the Kansas courts will abound in litigation for years 
to come.
    Now, I understand, the Pipe Lines are asking the Washington, D.C. 
Circuit Court to have another order of the FERC overturned. This order 
stated that producers would only be liable for their own working 
interest, which order has been reaffirmed on several occasions. The 
FERC order holds producers responsible for their own working interest 
only. The Pipe Lines would have the Court require the operator to be 
liable for the interest of all working interest owners. In other words, 
the Pipe Lines would have the Court require my friend's widow to refund 
the interests of all of her husbands old partners. If she cannot 
recover her partner's shares because they are deceased, missing or 
bankrupt she will be forced to suffer their loss. The fairness of that 
will be difficult to explain to her. It should be difficult to explain 
to anyone.
    While the dollars involved in this case are small, these situations 
repeat themselves over and over amongst Kansas producers and the impact 
on the people involved is significant. For many the cost of defense 
will surely exceed the amount at issue. But the impact goes beyond the 
money. Never have I seen an issue strike a nerve of honest, hardworking 
productive people in such a manner. It generated a sense of injustice 
among innocent people that was most accurately described by one state 
senator as ``the worst taxation atrocity ever perpetrated by a federal 
agency'' and it serves to generate a feeling of hostility. This should 
not be.
    Personal stories abound in an industry that has been devastated by 
tough economic conditions. One geologist, whom I will call Bill, who 
lost the benefits of many years work in the last price crash and now 
works for $2,500 per month, will receive an order to refund $8,775 to 
one major pipe line purchaser. Another elderly Kansas producer, who 
lost many of his assets in the last crash and now lives on social 
security, will receive an order to refund $12,000. The heirs of a 
deceased geologist may well be required to refund $4,000. Before the 
Colorado Public Service case was decided or anyone had knowledge of it, 
one innocent purchaser bought a good amount of production which, during 
the period from 1983 to 1988, had been sold to an interstate pipe line. 
He was later aghast to learn that the FERC would order him to refund 
$267,000 to a pipe line he had never been affiliated with.
    These issue should not exist. 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. These producers have served the American consumer with hard 
work and productivity. Common sense and equity demands fairness for 
producers as well as consumers. A healthy independent producing sector 
is in the best interests of all Americans, producers and consumers 
alike. Fairness in government regulation is critical to a free society. 
We urge you to address this serious issue.

    Mr. Barton. Thank you, sir.
    We would now like to hear from Mr. Majeroni.

                   STATEMENT OF JOHN MAJERONI

    Mr. Majeroni. Thank you, Mr. Chairman.
    When you saw that a royalty owner was going to be here, you 
probably didn't expect to see someone from an eastern 
university talking about something from Kansas. But the royalty 
owners, people affected by this are really all over the 
country. This is a large field. It has been in existence for a 
long time. I bet there are people in every one of your 
districts who are royalty owners in this field.
    The average royalty owner that I know of isn't a big rich 
person or producer thereof. When I go to Kansas to the annual 
meetings, they are farmers and ranchers and pretty common 
people. A lot of them are elderly, and they look on these 
royalty checks sort of like a supplemental security system. But 
there are also not-for profits like Cornell. There are local 
school districts and churches and others. We think this is 
really unfair to the royalty owners who are a very affected 
party by all this.
    Mr. Barton. Is Cornell a royalty owner?
    Mr. Majeroni. We are a royalty owner in the field, a large 
royalty owner, yes. We already talked about the flip-flops and 
the decisionmaking at FERC. I really don't want to comment any 
more about that. But it is important to know that the royalty 
owners really have no control. The nature of the lease is such 
that we don't dictate where wells are drilled if they are 
drilled.
    We have nothing to do with who the gas is sold to or what 
price is paid. We didn't direct the taxes to be paid. In most 
instances, the taxes weren't even sent to the royalty owners. 
They go right to the producers who pay them or else passed them 
on to the pipeline companies to pay them directly.
    For certain, the royalty owners have had absolutely no 
control, no decisionmaking in what has occurred over the last 
15 years. Most royalty owners aren't even aware of the 
situation to my knowledge. There may have been a newsletter 
from an association or something in the newspaper, but it is 
the kind of thing you read and in the back of your mind you 
don't understand; you just think that doesn't affect me.
    If there was a mistake made, we feel that the royalty 
owners shouldn't have to pay for it, especially true with 
interest. We have yet to be billed. Most of us, including 
Cornell University, have received no bills from anybody, and 
yet the interest continues to accumulate. And we really have 
nothing to say about it and don't even have an understanding of 
the scope of what we would owe.
    Three, royalty owners were already in a less than equitable 
financial position and should not be punished further. The term 
of an oil and gas lease is very long. Most of these leases are 
40 or 50 or 60 years long and when the bargains were struck in 
the 1930's and 1940's, one-eighth was a fair take for a royalty 
owner. If you do a lease today, it is 20 or 25 percent. So the 
royalty owners are already sort of on the short end of the 
stick financially and we think to push this off on them just 
sort of punishes them further.
    Four, the intent of the interest here is really punitive. 
If interest is part of a financial transaction, if I am going 
to buy an expensive television set, I can make a decision. Do I 
wait or is the interest worth it for me to borrow the money and 
have it now. The other form of interest is a punishment. And 
clearly that is the case here. We are being punished. It is 
being tacked on because the producers should have known better, 
but the royalty owners had nothing to say about this, not 
involved in the decision, yet we are also being punished.
    We didn't ask to pay the money. Many of us haven't been 
given opportunities to pay it back, but the interest clock 
continues to tick. And I think just by looking at the facts of 
$130 million of the original debt and $210 million in interest 
shows that it is really intended to be punitive. FERC mentioned 
that if there is no interest, then they lose the time value of 
money, but one of the earlier speakers said the average 
consumer is looking at $15 so it is the difference between $6 
or $7 for a consumer, $15, it is just not a big difference to 
the consumer, I don't think.
    The fifth reason is that in many cases those who have 
benefited 15 years ago are not the same as the people who are 
going to be punished now. Properties have been sold; parents 
have passed away. There have been divorces. How does this money 
get collected? So in the end, the collection is bound to be 
uneven and equitable. And the producers recognize this, and 
this is one of the reasons why they are not anxious to take on 
this burden of trying to collect from the royalty owners 
because they know what kind of a hassle and how unequitable 
this is going to be.
    Last, as was mentioned before, there are no real winners 
here; but there are plenty of real losers. I too wonder if this 
is all going to go to the consumers, why are the pipeline 
companies fighting so hard for this. I have a feeling that some 
of it is going to end up staying with them. I think I know why 
some of the States are fighting hard for it too and some of the 
commissions. I think they see this as going in their pocket, 
but it is a real and painful impact to royalty owners.
    I got a phone call over the weekend from someone who knew I 
was going to be here, a Kimberly Nicholson who lives in 
Vancouver, Washington, a royalty owner. Her mother had these 
royalties for years. Kimberly, her mother, passed away a couple 
of months ago from Lou Gehrig's disease and these royalties 
took care of her mom. In March, Kimberly got a bill from a 
producer saying you owe $25,000 due in 10 days just out of the 
blue.
    You know the people who live in your districts. They can't 
pay a $5,000 bill out of the blue let alone a $25,000. This is 
the impact it is having. Something should be done to provide 
for the royalty owners. We think the bill waiving the interest 
is a very good step in the right direction.
    [The prepared statement of John Majeroni follows:]
  Prepared Statement of John Majeroni, Cornell University Real Estate 
     Department, on Behalf of the Southwest Kansas Royalty Owners 
                              Association
                              introduction
    My name is John Majeroni of Ithaca, New York. I'm a West Point 
graduate from the Class of 1974. During my six years in the Army I 
served as a Platoon Leader, on General Staff, and as a Company 
Commander. Shortly after getting out of the Service I went to work for 
Cornell University and am now the Director of the University's Real 
Estate Department. I have been managing Cornell's oil and gas 
properties for 18 years. I am not an attorney. I think I represent a 
knowledgeable, but lay-person's, point of view.
    I was invited to speak by the Southwest Kansas Royalty Owners 
Association (SWKROA)--a non-profit Kansas corporation, organized in 
1948 to protect the rights of landowners in the Hugoton Gas Field. 
Cornell is a member of this organization which has a membership of 
around 2,500 members, many of whom are farmers and ranchers. Most of 
its members are family owners of mineral interests, as distinguished 
from the companies that act as producers, operators, or working 
interest owners. SWKROA has been our primary source of information 
about the ad valorem tax refund problem. In fact, to my knowledge, 
we've had no communications from our producers or the FERC on this very 
important issue.
    You may be surprised to see a representative from a university 
here. I'm probably not what you expected to see. When you think of a 
royalty owner, perhaps you have visions of rich Texans, like ``J. R. 
Ewing''. But the impact of the ad valorem tax refund issue is much 
greater than a few rich oil men. It 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.
    The average royalty owner isn't rich. They are farmers and 
ranchers. In many instances these royalty and mineral interests have 
descended from generation to generation from people who lived in 
Southwest Kansas many years ago. Current royalty owners often only own 
a small fraction of the original interest. Many of the royalty owners 
are elderly. These royalty checks are like their Social Security 
supplements. Further, this is not an issue which affects only Kansas 
residents. Persons throughout the United States and several foreign 
countries own these minerals and are affected by this ruling. It is 
certain that some royalty owners are among your constituents.
    And so my remarks are being made on behalf of all affected royalty 
owners to seek legislative relief from the impact of the Federal Energy 
Regulatory Commission (FERC) order dated September 10, 1997. In that 
ruling, FERC ordered first sellers of natural gas to make refunds of 
reimbursement for Kansas ad valorem taxes paid from 1983 to 1988, plus 
interest, including reimbursements attributable to royalty interest 
owners.
    I am here because of the unfair and unjust treatment which FERC has 
inflicted upon the royalty owners. Apparently it is legal, but it is 
wrong.
    It is wrong because people are being punished for flip-flops in 
decision making at FERC. It is wrong because royalty owners had, and 
continue to have, absolutely no control over any decisions relating to 
the issue, and yet we bear not equal, but even more liability, than 
those who have control. It is wrong because royalty owners are already 
in a less-than-equitable position financially in most wells and are 
only being punished further. It is wrong because the nature of the 
compound interest calculations on the amount due makes it punitive. It 
is wrong because it in many cases, those who benefited will not be the 
same as those who are being punished. And it is wrong because there 
will be no real winners, but plenty of real losers--in other words: the 
action will be an unearned windfall of profits for pipeline companies, 
but will have a substantial, painful impact on the royalty owners from 
whom it is being collected. And besides arguments of equity, there are 
still legal questions relating to FERC's jurisdiction over royalty 
owners and the statue of limitations. I'd like to go briefly into 
detail on each of these issues.
Flip-Flops In Decisions At FERC.
    FERC itself created the problem by first determining that the 
Kansas ad valorem taxes could be passed through to pipeline companies, 
and then later changing its mind, thus creating the problem that 
royalty owners presently face.
    Several years prior to the passage of the Natural Gas Policy Act of 
1978, the Federal Power Commission (FPC), (the predecessor of the 
Federal Energy Regulatory Commission (FERC)), had held that producers 
could increase the applicable just and reasonable rate for natural gas 
to recover ``state production, severance or similar taxes'', and that 
any state ad valorem tax ``based on production factors'' was a 
``similar tax'' which could be added to the national rate. In 1976, the 
FPC held that the Kansas ad valorem tax qualified because the bulk of 
the tax was based upon production factors.
    In 1978, the Natural Gas Policy Act (``NGPA'') set maximum lawful 
prices for the first sale of various categories of natural gas. Under 
Section 110(a)(1) of the NGPA, the first sale was allowed to exceed the 
maximum lawful price to the extent necessary to receive ``state 
severance taxes attributable to the production of such natural gas.'' 
The NGPA defined ``state severance tax,'' as ``any severance, 
production, or similar tax, fee or other levy imposed on the production 
of natural gas.''
    Oil and gas producers in Kansas, relying on FPC and FERC rules, 
``passed through'' the Kansas ad valorem taxes to consumers of natural 
gas. The time frame covered by the controversial ad valorem tax refund 
is for the years 1983 through 1988.
    The problem arose when FERC changed its position some fifteen years 
after its order and retroactively ruled that the producers should not 
have been allowed to pass the Kansas ad valorem taxes through the 
pipeline companies to the consumers.
    FERC then ordered producers (first sellers) to reimburse the 
consumers, through the pipeline companies, for not only the ad valorem 
tax which had been added to the maximum lawful price, but also for 
interest. FERC has also attempted to exert control over Kansas royalty 
owners by urging the producers to collect the refund from royalty 
owners, taking the position the producer will be liable to also pay the 
royalty owner's share of the refund with interest.
    The projected impact of the FERC's unfair decision is estimated to 
be approximately $340 million dollars. Of this amount, approximately 
$200 million dollars represents interest. Congressman Moran has 
introduced a bill to waive the interest portion of refund obligation. 
This would be a significant help, but Congress should go further by 
overruling FERC's September 10, 1997 and subsequent orders.
    Kansas State Senator Stephen R. Morris, R-Hugoton, made an analogy 
that FERC's actions should evoke a similar reaction that taxpayers 
would make if the Internal Revenue Service (IRS) were to disallow the 
deduction of home mortgage interest, with no justification, and require 
taxpayers--who had been relying on regulations which the IRS had been 
operating under for twenty or more years--to retroactively pay back the 
amount of the home mortgage deduction, plus interest. Surely, such 
action would raise a public outcry of illegal, unfair and unjust 
treatment by a federal agency. Yet FERC, if left unchecked by Congress, 
has caused such a travesty.
Royalty Owners Had No Control.
    The way that a gas lease is structured, royalty owners have no 
control over the wells. We don't control when or where the wells are 
drilled. We don't control the price gas is sold for, or to whom the gas 
is sold. We certainly don't control expenses of drillers. We didn't 
direct taxes to be paid on our behalf. In most instances, royalty 
owners didn't even see the tax bills. Generally, the taxes were billed 
by the County Treasurer directly to the producer who either paid the 
taxes, including the royalty share, and then sought reimbursement from 
the pipeline companies for the taxes. Or, the producer billed the 
pipeline company for the taxes and the pipeline company paid the taxes.
    For certain, we have had absolutely no decision making in this 
issue. None. In most cases, royalty owners don't even have any 
knowledge or aren't aware that there is an issue. If there was as 
mistake, royalty owners shouldn't pay for it. This is especially true 
of having to pay interest. Most royalty owners have yet to be billed 
(or even notified), and yet interest continues to grow and compound!
    Despite this lack of control over any decisions relating to the ad 
valorem issue, we bear not equal, but even more liability, than those 
who did have control. Because of the way that ad valorem taxes are 
determined, royalty owners generally pay more than \1/8\th of the 
amount that producers pay because they have no effective deductions to 
offset against the tax as do the producers, such as depreciation. (One-
eighth (\1/8\) is the normal fraction for royalty paid under old oil 
and gas leases.) SWKROA has estimated the ad valorem tax bill for 
royalty owners could be in the range of 20 to 30 percent of the total 
ad valorem assessment rather than the usual \1/8\th. Based on that 
estimate, Kansas royalty owners could potentially be asked to refund 
between 68 to 100 million dollars. That, of course, is a huge amount by 
anyone's standards.
Royalty Owners Were Already In A Less-Than-Equitable Position 
        Financially.
    The FERC ruling is also wrong because it is seeking to ``adjust'' a 
position that was inequitable to begin with. Prices for Hugoton gas in 
the 1983-1988 time frame were capped at unrealistic levels of $.50 per 
MCF or less. Pipeline companies were already profiting at royalty 
owners' expense. The FERC ruling essentially directs us to pay over 
even more profit for the pipeline companies. The leases from which the 
affected mineral owners are receiving royalties, are for a long term, 
most of them being fifty to sixty years old. Most of these leases 
provide for \1/8\th royalty. This is already unfair to landowners since 
new leases are at 20-25% royalty. Why punish the royalty owners 
further?
The Interest Calculations On The Amount Due Make It Punitive.
    Interest is fair and proper if knowledgeable financial transactions 
are entered into. Decisions are made about whether or not ``the 
interest'' is worth the advanced funds. This is the decision one makes 
when deciding to buy an expensive TV on credit or save for it. In this 
instance, royalty owners had no opportunity to make any decision on the 
payment of interest.
    The interest assessed by FERC isn't part of a financial 
transaction. It's a form of punishment--a punishment for an act taken 
by somebody else, not the royalty owner's. FERC arbitrarily assigned 
interest to accrue. To my knowledge, there has been no judicial 
determination that interest should be charged.
    The FERC interest rates also appear to be very high, especially by 
today's standards. We didn't ask to borrow the money. We haven't been 
asked yet to repay it. The interest continues to accrue and we don't 
even have information on what we supposedly owe. This is patently 
unfair.
    Further, the typical royalty owner certainly did not earn the level 
of interest being charged. They spent it. They live on it. Interest is 
bad enough, but compound interest is particularly punitive. Someone 
once said ``interest never sleeps.'' It is certainly true in this case. 
Look at the facts here: $140 million owed, $200 million in interest.
Those Who Benefitted Will Not Be The Same As Those Who Are Being 
        Punished.
    The funds in question are 10 to 15 years old. In some cases 
properties have been sold. In other cases, parents have passed away. 
How are these funds to be collected?
    Royalty owners who inherited minerals subsequent to 1988 are not 
subject to the refund claim under the Wylee case. Different producers 
are approaching the problem in different ways. Imagine, in your 
district, going back and trying to collect an adjustment in taxes that 
was levied on homeowners 15 years ago. Imagine the confusion as you try 
to sort out who was living where when and who should pay.
    Collection is bound to be uneven and unequitable. The producers 
even recognize this and, as you will see by their statements in 
subsequent pages, object to being put in the position of collecting 
these funds.
    SWKROA Director John Crump, in 1998, testified before the Kansas 
Legislature in support of Kansas Senate Bill No. 685 (which later 
became HB2419) and gave several reasons for supporting SB685. Among his 
arguments was that collecting this debt would be difficult, expensive 
and time-consuming for the producers to locate and correspond with 
those royalty owners who owned the royalty interests from 1983 to 1988. 
Crump then pointed out examples of the inconsistencies in the pattern 
of billing by some of the producers on the claimed refunds.
There Are No Real Winners, But Plenty Of Real Losers.
    There are really no injured parties in the FERC ruling, but 
enforcing the ruling will certainly injure plenty of people. Who is the 
money going to? While the ultimate destination of the funds to be 
collected is not clear, you must also ask why are the pipeline 
companies fighting this issue so hard. Is it to benefit the consumers 
who should receive the recoupment? Or is it more likely that the 
pipeline companies will keep it?
    The action will be an unearned windfall of profits for pipeline 
companies who, remember, are already reaping more than their fair share 
of profits.
    If efforts are made to somehow distribute the funds to all natural 
gas users in America, it will provide no meaningful benefit to their 
lives. It may end up getting distributed to them in the form of grocery 
coupons or it might end up as a one-time deduction of a few cents off 
their gas bill. However, there is a real, substantial, painful impact 
on the royalty owners from whom it is being collected. Imagine the 
typical family in your district getting a bill in the mail for $5,000, 
or $25,000, or $100,000. They simply don't have the savings to pay it. 
Some of the producers are signaling that if payments aren't made, they 
will just stop making royalty payments and collect it that way. But if 
royalties stop, it will still be have huge impact on royalty owners, 
many of whom are elderly. They've adjusted their lives to live off of 
it. In some cases, for generations.
    Let me give you an example of the impact. I recently spoke on the 
phone with Kimberly Nicholson. She lives in Vancouver, Washington. Her 
family owns minerals in Kansas. They are a moderate family with three 
children and an average income. She was also caring for her mother, who 
lived nearby in a small two room house. Her mom was dying from Lou 
Gehrig's disease.
    In March, she got a letter from a producer, Helmerich and Payne, 
saying they owed $25,000, which was due in ten days. $9,000 of this 
amount was for the ad valorem tax, and $16,000 for interest.
    There is absolutely no way the Nicholson family has this much money 
available on 10 days notice. They had no advance notice whatsoever and 
had no prior knowledge of the entire situation. They just got a bill in 
the mail for $25,000, due in 10 days. They couldn't understand how a 
mistake by the oil company in 1984-1985 could still apply. They 
contacted their attorney about the statute of limitations which would 
govern this situation. Even their local attorney didn't really know 
what to tell them. She commented to me that they certainly had not 
earned $16,000 interest on the money. They had spent it. They count on 
their royalty checks as part of their income. In particular, it is what 
they used to take care of her mother.
    This is the way that most of the thousands of royalty owners will 
be affected by FERC's actions.
    By the way, Kimberly's mother passed away last month.
FERC's Lack Of Jurisdiction Over Royalty Owners
    Producers have agreed that FERC lacks jurisdiction over a royalty 
owner. In a motion before FERC, the producers stated that:
          ``The Commission (FERC) purports to design around this 
        obvious bar (Kansas House Bill No. 2419, which became K.S.A. 
        1998 Supp. 55-1624) by saying that the working interest owner 
        must underwrite royalty owners' share, even though the royalty 
        owners, not being first sellers, could not have violated the 
        NGPA (Natural Gas Policy Act). That is trying to do indirectly 
        what the law denies directly: regulate the royalty owners.
          ``Working interest owners cannot be the pawns in an issue of 
        the reach of the commerce clause and the related statutes. The 
        federal government cannot make the working interest owners take 
        money away from non-jurisdictional royalty owners without 
        notice and an opportunity to be heard, when to do so would 
        violate a state statute. It is unjust, unreasonable, and 
        unlawful to force producers to knowingly violate of a 
        putatively valid State law or else pay a penalty at the command 
        of the federal government.'' (Emphasis ours)
    The FERC has no jurisdiction of Kansas royalty owners and yet it 
has placed on Kansas producers the burden of attempting to collect the 
tax. The order affects thousands of Kansas royalty owners.
Statute Of Limitations Arguments
    Royalty owners have also asserted that the Kansas statute of 
limitations bars recovery of the ad valorem tax recoupment from royalty 
owners. Kansas lawmakers in 1998 specifically addressed the issue and 
declared that the ad valorem tax refund is uncollectible due to the 
expiration of the statute of limitations governing such recovery and 
bars recovery against royalty owners. (Kansas 1998 House Bill No. 2419, 
which became K.S.A. 1998 Supp. 55-1624)
    On May 19, 1998, in order to determine whether FERC would honor the 
Kansas legislation by finding that such legislation would render 
recovery of royalty refunds uncollectible from the royalty owners and 
thereby grant a waiver of those refunds, a number of producers filed a 
Motion in all of the pipeline dockets for a waiver of their royalty 
interest refunds or alternatively for a generic waiver as to all 
refunds attributable to royalty interests. Public Service Company of 
Colorado, et al., Dockets Nos. RP97-369, et al. This Motion attracted 
numerous interventions, answers, and comments, both in support and 
opposition. The Motion was vigorously opposed by the pipeline and gas 
distribution companies.
    On November 2, 1998, FERC denied the motion. On the question of 
whether the Commission should waive the royalty owner amount of the 
refund obligation on a generic basis, on the basis of the statute of 
limitations provision of the newly enacted Kansas legislation, the 
Commission found that, ``the recent Kansas legislation does not justify 
waiver of the producer's obligation to refund the royalty owner's share 
of the refund.'' The Commission stated that the purpose of Kansas House 
Bill 2419 appears to have been to trigger the Commission's Wylee (Wylee 
Petroleum Corp., 33 F.E.R.C. (CCH) 61,014 (1985)) standard for finding 
the refunds attributable to the royalty owner to be uncollectible, 
thereby leading the Commission to waive the producer's obligation to 
refund those amounts to their customers.
    The Order of Denial concluded that ``This order only addresses the 
issue of whether Kansas House Bill No. 2419 justifies waiver of ad 
valorem tax refunds. The Commission recognizes that there may be other 
Kansas statutes of limitation, such as the general contract statute of 
limitation in K.S.A. Sec. 60-511, which might satisfy the Wylee 
uncollectibility statutes of limitation in this order, since they have 
not been raised by the parties.''
    A request for rehearing was filed. Kansas State Senator Stephen R. 
Morris, R-Hugoton, who introduced the original bill (Senate Bill 685) 
which eventually became House Bill 2419, was very concerned by FERC's 
decision. In a sworn declaration before FERC on the rehearing, he 
stated that,
          ``Based on my discussions with my senate colleagues on the 
        Ways and Means Committee, our intent in introducing SB 685 was 
        to simplify, clarify and codify existing Kansas law, so that 
        the public would have full knowledge that the five-year statute 
        of limitations on bringing actions on contractual matters set 
        forth in K.S.A. 60-511 applies to oil and gas refund matters. 
        Thus, it would specifically apply to first sellers' attempts to 
        collect ad valorem tax reimbursements from royalty owners, 
        regarding ad valorem taxes paid from 1983 to 1988. SB 685 was 
        not intended to create a new and different statute of 
        limitations, and SB 685 does not do so.
          ``I also explained this need for SB 685 at a hearing held on 
        the bill before the Senate Energy and Natural Resources 
        Committee on March 23, 1998. Based upon my discussions with my 
        senate colleagues on the Energy and Natural Resources Committee 
        after receiving testimony, both written and oral, the committee 
        also believed that the existing five-year statute of 
        limitations in K.S.A. 60-511 prohibits first sellers from 
        bringing an action against royalty owners for all claims that 
        are greater than five years old. I and my colleagues were 
        concerned that royalty owners may not be aware of the relevant 
        statute of limitations . . . A conference committee report on 
        HB 2419 was adopted by the Senate on April 2, 1998 by a vote of 
        38 yeas and 0 nays, and by the House of Representatives on 
        April 8, 1998 by a vote of 120 yeas and 0 nays. The governor 
        signed the bill on April 20, 1998.
          ``The purpose of simplifying, clarifying and codifying the 
        existing five-year statute of limitations on actions in 
        contractual matters, so that it specifically applies to first 
        sellers' attempts to collect ad valorem tax reimbursements from 
        royalty owners, was to prevent unnecessary litigation on such 
        matters. Litigation by each royalty owner over claims which are 
        barred by the statute of limitations would needlessly expend 
        substantial resources of Kansas citizens and courts.''
    In spite of the clear indication of the intent of the legislation, 
on February 16, 1999, FERC denied rehearing on its November 2, 1998 
opinion regarding the Kansas statute. FERC stated that, ``nowhere in 
the motion (for rehearing) was there any reference to K.S.A. 60-511.''
    FERC seems to have clearly ignored the spirit and intent of House 
Bill 2419 by declaring that when the Commission adopted the Wylee 
standard for uncollectibility, it did not contemplate a specifically 
created, ad hoc statute of limitations such as Kansas House Bill 2419, 
crafted to apply to a specific situation.
    It is obvious that Congressional help is needed to abate FERC's 
rulings.
Aftermath Of FERC Decisions
    So where do things stand now? Producers are handling their royalty 
owners differently. A number of royalty owners have received letters 
from their producers or pipeline companies (or in some instances 
directly from FERC) demanding or requesting that they reimburse them 
for the Kansas ad valorem tax and interest. However, perhaps only 5% of 
Kansas royalty owners have received such notices.
    SWKROA General Counsel, Gregory J. Stucky, summarized the impact of 
the FERC decision, as follows:
          ``On or about March 9, 1998, producers had to pay over money 
        attributable to unlawful ad valorem tax payments, including 
        sums attributable to their royalty owners, to the pipeline 
        companies or place the money into escrow if there was a dispute 
        about the amount of money due pipeline companies from 
        producers. Although the escrow procedures were intended only to 
        be used when amounts actually were in controversy, many, if not 
        most, producers, both large and small, used the escrow 
        `loophole' to pay virtually all the money which the pipeline 
        companies claimed they owed into escrow, because the producers 
        wanted to preserve every possible defense. The FERC now has 
        before it a multitude of issues from a multitude of producers 
        that it must deal with in connection with the escrowed money. 
        With only a couple of staff members working on the project, it 
        could take months, if not years, to resolve all the disputes.''
          ``The only deadline which the producers are working against 
        at the moment is March 9, 1999, the date that producers have to 
        notify the FERC of any amounts that are not collectible from 
        royalty owners. Even that date may not be considered firm by 
        the FERC, if the producer can show some justifiable excuse for 
        missing that date.''
    Taken to a more individual level, any potential refund obligation 
could possibly represent several years of current royalty payments, or 
with the compounding of interest and because of declining production 
could last the life of the well. Most of the money at issue is 
interest, which has been accruing at rates that royalty owners could 
not make from their own investments. Although SWKROA has membership of 
around 2,500, there are literally tens of thousands of royalty owners 
throughout the United States who are completely unaware of this 
potential financial bomb.
    On behalf of the royalty owners I respectfully request your Sub-
committee and Congress grant relief to royalty owners from the burden 
of this decision by FERC. What are your alternatives?
    1. Seek no adjustment at all, from either producers or royalty 
owners, recognizing that:

--the change in FERC's decisions are unfair;
--that collection benefits only pipeline companies who at the time 
        already had a financial edge;
--that collection efforts for a 15 year old debt will be uneven and 
        inequitable;
--that there will be no winners, but plenty of real losers from this 
        ruling; and
--that the statue of limitations may have expired on this issue.
    2. Release producers from the burden of collecting from royalty 
owners, recognizing that royalty owners:

--had no control over the actions which took place;
--were already in a less-than-equitable position financially and are 
        only being punished further; and
--FERC's ruling illegally expands their jurisdiction to regulate 
        royalty owners.
    3. At the very least, prohibit interest from being charged on 
royalty owners share, because it is punitive.
    I started my remarks by saying that Cornell was not the typical 
royalty owner. Because of our resources and our involvement with SWKROA 
we are probably more knowledgeable and in some ways better prepared 
than the average royalty owner to deal with this issue. As you proceed 
in learning more about this issue and hopefully in becoming involved, I 
urge that you keep them in mind--hard working farmers and ranchers who 
are being punished for something they had no hand in.

    Mr. Barton. Thank you, sir.
    Now we would like to hear from Mr. Albright for 5 minutes, 
please, sir.

                 STATEMENT OF JAMES D. ALBRIGHT

    Mr. Albright. Thank you, Mr. Chairman. Good morning. Good 
morning, members of the committee. My name is James Albright, 
and I am associate general counsel for New Century Services 
Inc. I am in-house counsel in charge of natural gas legal and 
regulatory matters for Public Service Company of Colorado and 
Cheyenne Light, Fuel, and Power Company which are natural gas 
distribution companies operating in Colorado and Wyoming 
respectively.
    These two companies are pipeline customers and were 
principal litigants in the 1996 court case before the United 
States Court of Appeals for the D.C. Circuit which mandated the 
refunds at issue in these hearings. I am here representing the 
over 1 million customers of Public Service in Cheyenne who are 
in line to receive $23 million in refunds including interest 
resulting from the producers unlawful collection of Kansas ad 
valorem taxes under the Natural Gas Policy Act.
    It is important to point out that the consumers, not the 
producers are the ones who have been aggrieved here. These 
consumers were overcharged on their natural gas utility bills 
during the 1980's as a result of the producers' unlawful 
collection of these taxes, and they are entitled to these 
refunds. Producers appropriated windfall profits during this 
period at the expense of gas consumers which must be returned. 
And because consumers have been deprived of the use of these 
funds for up to 16 years, they are also entitled to be kept 
whole through the inclusion of interest.
    Now, my clients, Public Service and Cheyenne, are not 
unsympathetic to the small producers and royalty owners in 
individual cases of hardship. We have not participated in any 
of the cases opposing hardship except for those seeking generic 
relief. Many producers, however, who stand to pay these refunds 
are multinational oil companies with billions and billions of 
dollars of assets.
    As the analysis submitted by Chair Lumpe in her written 
testimony, the top 24 producers on the list owing these refunds 
constitute 86 percent of the total outstanding refunds. The 
legal question of whether producers were entitled under the 
NGPA to collect this reimbursement for the Kansas ad valorem 
tax in their gas prices has been in dispute and the subject of 
litigation for over 15 years but the law itself has never 
changed. There has been no flip-flop.
    FERC, when they made the original determination that this 
tax should be included as recoverable under the NGPA committed 
legal error, and the court so found. It misapplied the NGPA 
with respect to the Kansas ad valorem tax. Thus, the I.R.S. 
analogy is not analogous here. It was an ongoing dispute 
involving ongoing litigation. In the IRS analogy, that 
circumstance, there is two parties: the taxpayer and the 
government. Here there are two competing interests: the 
producers and the consumers.
    Refunds with interest in the context of regulated 
industries is nothing new. The reality of Federal rate 
regulation which producer sales were governed by for three and 
a half decades is rates are collected subject to refund 
together with interest until a final legal determination is 
made. There is nothing different here. Until this litigation 
was finally resolved and the producers' liability for refunds 
confirmed and the U.S. Supreme Court denied certiorari in 1997, 
the producers were always in jeopardy of having to make these 
refunds. They should have taken account for this. These were 
the rules of the game.
    Producers' claims of unfairness based on their detrimental 
reliance on prior commission orders was resoundingly rejected 
by the U.S. Court of Appeals for the D.C. Circuit. In the words 
of the court, such a claim is purely notional. And if it was 
real, was unreasonable and foolhardy. Considering that the 
matter was in dispute and the producers were on notice of the 
pending litigation, the court concluded, and I quote, 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.
    I would like to add we are not seeking recovery of every 
dollar that was overcollected by these producers. The period 
from 1978 to 1983 is still in the producers' hands and is not 
at issue in these hearings. Congressional involvement simply is 
not warranted here. There are winners and losers in all 
litigation, but losers should not be entitled to run to 
Congress for legislative relief from the result. That is the 
domain of the judiciary.
    Congress makes the laws and the Federal courts adjudicate 
disputes under those laws. Congress already established in the 
NGPA under section 502 the legal process for the Commission to 
prevent special hardship inequity or unfair distribution of 
burden resulting from its orders under the NGPA.
    The fact of the matter is there is no sensible generic 
solution to address the hardship that may be experienced by 
producers and royalty owners from these refund obligations. 
Each producer's refund obligation is different. Each producer's 
circumstances associated with that liability are different and 
each producer's ability to pay the refund amounts is different. 
Only through consideration of the equities on an individual 
case-by-case basis can hardship be properly addressed.
    FERC has the delegated authority under section 502 of the 
NGPA to address hardship claims on a case-by-case basis. Over 
100 hardship cases are pending before FERC now. FERC is 
competent to resolve these cases equitably and expediently.
    Last, the issue of FERC's denial of producers' petitions 
for generic waiver of interest on these refunds is currently 
pending before the U.S. Court of appeals for the D.C. Circuit. 
Anadarko Petroleum Company, et al. v. FERC has been fully 
briefed. Oral arguments are scheduled for September 7, 1999. 
This judicial review process was established by Congress under 
the NGPA pursuant to section 506.
    Congress should let the judicial process run its course and 
allow the parties to see this litigation to its conclusion.
    Mr. Chairman, before I conclude my statement, I would like 
to have permission to introduce the United States Court of 
Appeals decision on the issue in favor of the consumers be 
included in the record and also a resolution from the State of 
Nebraska and letters from nine Governors and a letter from the 
State of Colorado's Office of Consumer Counsel.
    Mr. Barton. Are they all relevant to the issue?
    Mr. Albright. Yes, they are, Mr. Chairman.
    Mr. Barton. Without objection so ordered.
    [The information referred to follows:]

                            Nebraska Unicameral Legislature
                                                     April 28, 1999
The Honorable Bob Kerrey
United States Senate
141 Hart Senate Office Bldg.
Washington, DC 20510
    Dear Senator Kerrey: I have enclosed a copy of engrossed 
Legislative Resolution No. 69 as adopted by the Nebraska Unicameral 
Legislature on the twenty-seventh day of April 1999. The members of the 
Nebraska Legislature have directed me to forward this resolution to you 
and request that it be officially entered into the Congressional Record 
as a memorial to the Congress of the United States.
    With kind regards.
            Sincerely,
                                       Patrick J. O'Donnell
                                           Clerk of the Legislature
Enclosure
                                 ______
                                 
                Ninety Sixth Legislature--First Session
                       legislative resolution 69
   Introduced by Urban Affairs Committee: Hartnett, 45, Chairperson; 
         Connealy, 16; Preister, 5; Smith, 48; and Bruning, 3;
    WHEREAS, until 1993, the federal Natural Gas Policy Act of 1978 
established the lawful price that a natural gas producer could charge 
its pipeline customers for natural gas, providing under section 110 of 
the act that the producer could adjust the price upward in order to 
recover from pipeline customers any state severance tax payments made 
by the producer; and
    WHEREAS, in 1988, in the case of Colorado Interstate Gas Co. v. the 
Federal Energy Regulatory Commission, 850 F.2d 769, the United States 
Court of Appeals for the District of Columbia Circuit ruled that the ad 
valorem tax levied by the State of Kansas was not a severance tax 
within the meaning of section 110 of the Natural Gas Policy Act and 
ordered natural gas producers to refund that portion of the payments 
received from the pipelines attributable to the cost of the Kansas ad 
valorem taxes paid plus interest; and
    WHEREAS, upon remand of the matter to the Federal Energy Regulatory 
Commission, the commission ordered the refunds to be made on that 
portion of all purchases which had included Kansas ad valorem taxes 
which were charged after June 28, 1988, the date of the Appeals Court 
ruling in the Colorado Interstate Gas Co. case; and
    WHEREAS, in 1996, in the case of Public Service Company of Colorado 
v. the Federal Energy Regulatory Commission, 91 F.3d 1478, the United 
States Court of Appeals for the District of Columbia overruled the 
commission, holding that the refunds should commence from October 1983, 
when notice was filed in the Federal Register of the petition before 
the commission challenging the propriety of including the Kansas ad 
valorem taxes in the price charged for natural gas produced in Kansas; 
and
    WHEREAS, as of November 1997, the consumers of natural gas in 
twenty-three states were entitled, pursuant to this ruling and the 
subsequent order of the Federal Energy Regulatory Commission, to 
refunds and accrued interest from natural gas producers for the period 
of October 1983 through June 1988, amounting to more than $334,840,000, 
with Nebraska consumers to receive approximately $34,360,000 
(approximately ten percent of the total); and
    WHEREAS, of those sums, over 60 percent of the total is accrued 
interest as of that date with additional interest being compounded 
quarterly on unpaid balances and on those sums not placed in escrow 
accounts pursuant to commission order; and
    WHEREAS, the United States Senate and the United States House of 
Representatives in their individual versions of the Emergency 
Supplemental Appropriations Act for Fiscal Year 1999 (S. 544 and H.R. 
1141) have provisions, added by amendment, which would amend the 
Natural Gas Policy Act of 1978 to prohibit the commission or any court 
from ordering the payment of any interest or penalties with respect to 
ordered refunds of rates or charges made, demanded, or received for 
reimbursement of state ad valorem taxes in connection with the sale of 
natural gas before 1989; and
    WHEREAS, both acts were adopted by their respective houses of the 
Congress on March 25 of this year, immediately prior to their Easter 
adjournment and are pending consideration by a Joint Appropriations 
Conference Committee; and
    WHEREAS, legislation for the same purpose (S. 626 in the Senate and 
H.R. 1117 in the House of Representatives) is currently pending; and
    WHEREAS, the sole result of the final adoption of these amendments 
or these bills will be to mitigate or reduce the liability of natural 
gas producers for charges wrongfully imposed on consumers in the period 
of 1983 to 1988 by denying consumers interest on the amount of those 
charges and relieving the producers of any liability for future 
penalties flowing from the failure to make court-ordered payments in 
the prescribed manner; and
    WHEREAS, the lost refunds to Nebraska natural gas consumers will 
amount to more than 10 percent of the total reduction, representing the 
fourth largest state loss of the twenty-four states receiving court-
ordered refunds; and
    WHEREAS, Nebraska has been urged to join with other states in 
petitioning Congress to reconsider the adoption of these ill-advised 
and possibly unconstitutional provisions and avoid future litigation at 
the expense of all parties involved.
    NOW, THEREFORE, BE IT RESOLVED BY THE MEMBERS OF THE NINETY-SIXTH 
LEGISLATURE OF NEBRASKA, FIRST SESSION:
    1. That the Legislature hereby petitions the Congress of the United 
States to oppose the enactment of S. 626 and H.R. 1117 or any version 
thereof which would have the effect of waiving  *  *  *
                                 ______
                                 
                              State of Colorado    
                             Office of Consumer Counsel    
                          Department of Regulatory Agencies
                                                       June 4, 1999
The Honorable Joe Barton, Chairman
The Honorable Ralph M. Hall
Subcommittee on Energy and Power
House of Representatives
Commerce Committee
2125 Rayburn House Office Building
Washington, DC 20515-6115

RE: Kansas ad valorem Tax Refund

    Gentlemen: As Director of the Colorado Office of Consumer Counsel I 
would like to express my concerns regarding H.R. 1117. My office 
represents approximately 1,500,000 residential, agricultural and small 
business gas consumers in the state of Colorado that have been 
illegally charged Kansas ad valorem taxes in their gas rates. H.R. 1117 
would deny Colorado consumers almost $20 million in interest out of a 
$30 million refund that would otherwise be due to these consumers.
    Colorado's low-income consumers in particular will be adversely 
affected if the bill passes. Colorado law requires that up to 90 
percent of any unclaimed refunds be paid to the Colorado Energy 
Assistance Foundation to help low-income consumers pay their utility 
bills. Because the refund dates back to 1983-1988, the unclaimed 
portion of the refund will be substantial. If Congress eliminates the 
interest and reduces the amount of the refund, the foundation will have 
less to distribute to low-income consumers.
    I recognize that some gas producers claim the interest obligation 
is a hardship. However, the large gas producers have been on notice 
about this refund since 1983. They made no attempt to provide for the 
eventual refund of these amounts. Instead they fought the refund at 
every turn. Small consumers have been waiting for years to have their 
money returned while producers are exhausting all possible means to 
keep the illegally collected amounts. That is a real hardship for small 
consumers. In any event, the refund procedures of the Federal Energy 
Regulatory Commission take into account the hardship claims and there 
is no need for Congressional intervention.
    The Office of Consumer Counsel urges you to ensure that Colorado 
consumers receive the refunds to which they are entitled.
            Very truly yours,
                                                   Ken Reif
                                                           Director
cc: Honorable Thomas J. Bliley Jr., Chairman, Commerce Committee
   Honorable John D. Dingell
   Honorable Diana DeGette
                                 ______
                                 
                                                       May 10, 1999
Chairman C.W. ``Bill'' Young
House Appropriations Committee
H-218, United States Capitol
Washington, D.C. 20515
    Dear Chairman Young: We would like to ask for your assistance in 
deleting Amendment 101 that was included in the Senate Emergency 
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued 
interest on refunds of Kansas ad valorem taxes. The amendment would 
have a detrimental effect on natural gas consumers from 23 states, and 
we urge you to oppose its inclusion in the conference report.
    Between 1983 and 1988, Kansas natural gas producers collected ad 
valorem taxes on natural gas that was purchased by numerous interstate 
pipelines in Kansas and transported elsewhere. In 1997, the Federal 
Energy Regulatory Commission (FERC) ordered refunds of these taxes 
based on a final decision of the D.C. Circuit Court of Appeals. The 
issues of whether interest should be paid on refunds of the taxes 
collected prior to 1989 is currently before the D.C. Circuit with oral 
argument scheduled for September 7, 1999. Consequently, we believe that 
it would be improper for Congress to intervene at this time.
    Consumers in 23 states, including our states, are entitled to 
refunds and to the interest on those refunds. Of the estimated $363 
million of total refunds owed as of March 31, 1999, more than $235 
million of this was accrued interest and would be lost.
    Please oppose the inclusion of the Roberts amendment, which would 
prohibit payment of interest on the refunds that are due. On behalf of 
natural gas consumers across the country, thank you for your assistance 
in eliminating this amendment from the conference report.
            Sincerely,
                                      Governor Ventura of Minnesota
                                           Governor Vilsack of Iowa
                                      Governor Carnahan of Missouri
                                           Governor Hull of Arizona
                                       Governor O'Bannon of Indiana
                                       Governor Johanns of Nebraska
                                   Governor Janklow of South Dakota
                                 ______
                                 
                                                       May 10, 1999
The Honorable David Obey
Ranking Minority Member
House Appropriations Committee
2462 Rayburn House Office Building
Washington, D.C. 20515
    Dear Chairman Young: We would like to ask for your assistance in 
deleting Amendment 101 that was included in the Senate Emergency 
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued 
interest on refunds of Kansas ad valorem taxes. The amendment would 
have a detrimental effect on natural gas consumers from 23 states, and 
we urge you to oppose its inclusion in the conference report.
    Between 1983 and 1988, Kansas natural gas producers collected ad 
valorem taxes on natural gas that was purchased by numerous interstate 
pipelines in Kansas and transported elsewhere. In 1997, the Federal 
Energy Regulatory Commission (FERC) ordered refunds of these taxes 
based on a final decision of the D.C. Circuit Court of Appeals. The 
issues of whether interest should be paid on refunds of the taxes 
collected prior to 1989 is currently before the D.C. Circuit with oral 
argument scheduled for September 7, 1999. Consequently, we believe that 
it would be improper for Congress to intervene at this time.
    Consumers in 23 states, including our states, are entitled to 
refunds and to the interest on those refunds. Of the estimated $363 
million of total refunds owed as of March 31, 1999, more than $235 
million of this was accrued interest and would be lost.
    Please oppose the inclusion of the Roberts amendment, which would 
prohibit payment of interest on the refunds that are due. On behalf of 
natural gas consumers across the country, thank you for your assistance 
in eliminating this amendment from the conference report.
            Sincerely,
                                      Governor Ventura of Minnesota
                                           Governor Vilsack of Iowa
                                      Governor Carnahan of Missouri
                                           Governor Hull of Arizona
                                       Governor O'Bannon of Indiana
                                       Governor Johanns of Nebraska
                                   Governor Janklow of South Dakota
                                 ______
                                 
                                                       May 12, 1999
Chairman C.W. ``Bill'' Young
House Appropriations Committee
H-218, United States Capitol
Washington, D.C. 20515
    Dear Chairman Young: We would like to ask for your assistance in 
deleting Amendment 101 that was included in the Senate Emergency 
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued 
interest on refunds of Kansas ad valorem taxes. The amendment would 
have a detrimental effect on natural gas consumers from 23 states, and 
we urge you to oppose its inclusion in the conference report.
    Between 1983 and 1988, Kansas natural gas producers collected ad 
valorem taxes on natural gas that was purchased by numerous interstate 
pipelines in Kansas and transported elsewhere. In 1997, the Federal 
Energy Regulatory Commission (FERC) ordered refunds of these taxes 
based on a final decision of the D.C. Circuit Court of Appeals. The 
issues of whether interest should be paid on refunds of the taxes 
collected prior to 1989 is currently before the D.C. Circuit with oral 
argument scheduled for September 7, 1999. Consequently, we believe that 
it would be improper for Congress to intervene at this time.
    Consumers in 23 states, including our states, are entitled to 
refunds and to the interest on those refunds. Of the estimated $363 
million of total refunds owed as of March 31, 1999, more than $235 
million of this was accrued interest and would be lost.
    Please oppose the inclusion of the Roberts amendment, which would 
prohibit payment of interest on the refunds that are due. On behalf of 
natural gas consumers across the country, thank you for your assistance 
in eliminating this amendment from the conference report.
            Sincerely,
                                          Tommy G. Thompson
                                              Governor of Wisconsin
                                 ______
                                 
                                                       May 12, 1999
The Honorable David Obey
Ranking Minority Member
House Appropriations Committee
2462 Rayburn House Office Building
Washington, D.C. 20515
    Dear Congressman Obey: We would like to ask for your assistance in 
deleting Amendment 101 that was included in the Senate Emergency 
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued 
interest on refunds of Kansas ad valorem taxes. The amendment would 
have a detrimental effect on natural gas consumers from 23 states, and 
we urge you to oppose its inclusion in the conference report.
    Between 1983 and 1988, Kansas natural gas producers collected ad 
valorem taxes on natural gas that was purchased by numerous interstate 
pipelines in Kansas and transported elsewhere. In 1997, the Federal 
Energy Regulatory Commission (FERC) ordered refunds of these taxes 
based on a final decision of the D.C. Circuit Court of Appeals. The 
issues of whether interest should be paid on refunds of the taxes 
collected prior to 1989 is currently before the D.C. Circuit with oral 
argument scheduled for September 7, 1999. Consequently, we believe that 
it would be improper for Congress to intervene at this time.
    Consumers in 23 states, including our states, are entitled to 
refunds and to the interest on those refunds. Of the estimated $363 
million of total refunds owed as of March 31, 1999, more than $235 
million of this was accrued interest and would be lost.
    Please oppose the inclusion of the Roberts amendment, which would 
prohibit payment of interest on the refunds that are due. On behalf of 
natural gas consumers across the country, thank you for your assistance 
in eliminating this amendment from the conference report.
            Sincerely,
                                          Tommy G. Thompson
                                              Governor of Wisconsin
                                 ______
                                 
                                                       May 11, 1999
Chairman C.W. ``Bill'' Young
House Appropriations Committee
H-218, United States Capitol
Washington, D.C. 20515
    Dear Chairman Young: We would like to ask for your assistance in 
deleting Amendment 101 that was included in the Senate Emergency 
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued 
interest on refunds of Kansas ad valorem taxes. The amendment would 
have a detrimental effect on natural gas consumers from 23 states, and 
we urge you to oppose its inclusion in the conference report.
    Between 1983 and 1988, Kansas natural gas producers collected ad 
valorem taxes on natural gas that was purchased by numerous interstate 
pipelines in Kansas and transported elsewhere. In 1997, the Federal 
Energy Regulatory Commission (FERC) ordered refunds of these taxes 
based on a final decision of the D.C. Circuit Court of Appeals. The 
issues of whether interest should be paid on refunds of the taxes 
collected prior to 1989 is currently before the D.C. Circuit with oral 
argument scheduled for September 7, 1999. Consequently, we believe that 
it would be improper for Congress to intervene at this time.
    Consumers in 23 states, including our states, are entitled to 
refunds and to the interest on those refunds. Of the estimated $363 
million of total refunds owed as of March 31, 1999, more than $235 
million of this was accrued interest and would be lost.
    Please oppose the inclusion of the Roberts amendment, which would 
prohibit payment of interest on the refunds that are due. On behalf of 
natural gas consumers across the country, thank you for your assistance 
in eliminating this amendment from the conference report.
            Sincerely,
                                                M.J. Foster
                                              Governor of Louisiana
                                 ______
                                 
                                                       May 12, 1999
The Honorable David Obey
Ranking Minority Member
House Appropriations Committee
2462 Rayburn House Office Building
Washington, D.C. 20515
    Dear Congressman Obey: We would like to ask for your assistance in 
deleting Amendment 101 that was included in the Senate Emergency 
Supplemental Appropriations Bill (S. 544) by Senator Pat Roberts (R-
KS). This amendment would waive approximately $235 million of accrued 
interest on refunds of Kansas ad valorem taxes. The amendment would 
have a detrimental effect on natural gas consumers from 23 states, and 
we urge you to oppose its inclusion in the conference report.
    Between 1983 and 1988, Kansas natural gas producers collected ad 
valorem taxes on natural gas that was purchased by numerous interstate 
pipelines in Kansas and transported elsewhere. In 1997, the Federal 
Energy Regulatory Commission (FERC) ordered refunds of these taxes 
based on a final decision of the D.C. Circuit Court of Appeals. The 
issues of whether interest should be paid on refunds of the taxes 
collected prior to 1989 is currently before the D.C. Circuit with oral 
argument scheduled for September 7, 1999. Consequently, we believe that 
it would be improper for Congress to intervene at this time.
    Consumers in 23 states, including our states, are entitled to 
refunds and to the interest on those refunds. Of the estimated $363 
million of total refunds owed as of March 31, 1999, more than $235 
million of this was accrued interest and would be lost.
    Please oppose the inclusion of the Roberts amendment, which would 
prohibit payment of interest on the refunds that are due. On behalf of 
natural gas consumers across the country, thank you for your assistance 
in eliminating this amendment from the conference report.
            Sincerely,
                                                M.J. Foster
                                              Governor of Louisiana

    Mr. Barton. Does that conclude your statement?
    Mr. Albright. That concludes my statement, Mr. Chairman. 
Thank you.
    [The prepared statement of James D. Albright follows:]
Prepared Statement of James D. Albright, Associate General Counsel, New 
                         Century Services, Inc.
                              introduction
    Mr. Chairman and members of the committee, my name is James D. 
Albright. I am Associate General Counsel, New Century Services, Inc., a 
wholly-owned subsidiary of New Century Energies, Inc. My 
responsibilities in that capacity include all regulatory and legal 
matters regarding natural gas for Public Service Company of Colorado 
(Public Service) and Cheyenne Light, Fuel and Power Company (Cheyenne), 
both wholly-owned subsidiaries of New Century Energies, Inc. Public 
Service and Cheyenne are combination electric and gas utilities. As 
relevant to these hearings, Public Service and Cheyenne are local 
distribution companies that provide retail natural gas service to 
customers that is extensively regulated by their respective state 
utility commissions. Both Public Service and Cheyenne purchased natural 
gas during the 1980's from interstate pipelines which, in turn, 
purchased natural gas produced in various states, including the State 
of Kansas. Public Service and Cheyenne together serve over one million 
natural gas customers in Colorado and Wyoming. Public Service and 
Cheyenne were the lead petitioners in the 1996 federal court case 
mandating the refunds which are the subject of these hearings. Although 
Public Service and Cheyenne do not stand to retain any of these 
refunds--as, pursuant to applicable state regulatory requirements, 
virtually all of the refunds will be passed through to customers--
Public Service and Cheyenne have found themselves championing the 
interests of natural gas consumers in the 23 states who would receive 
these refunds.
    The purpose of these hearings, as I understand it, is to consider 
whether Congress should entertain legislation that would forgive 
interest on refunds ordered by the Federal Energy Regulatory Commission 
(FERC) to be paid by first sellers, primarily natural gas producers, 
who sold natural gas from 1983 to 1988 at prices which exceeded the 
maximum lawful prices prescribed under the Natural Gas Policy Act of 
1978 (NGPA). These over collections are attributable to the producers 
including, as an add-on to the gas prices charged, reimbursement for ad 
valorem taxes paid to the State of Kansas which were ultimately found 
by the FERC, and affirmed by the United States Court of Appeals for the 
District of Columbia Circuit in Public Service Co. of Colorado, et al. 
v. FERC, 91 F.3d 1478 (D.C. Cir. 1996), cert. denied 520 U.S. 1224 
(1997), to be ineligible as an add-on under section 110 of the NGPA.
    I am pleased to appear here today to explain how the producers' 
refund obligation came about and why it would be inappropriate for 
Congress to excuse the interest component of these refunds. First and 
foremost, the committee should not forsake the gas consumers who were 
illegally overcharged in their natural gas bills as a result of these 
over collections. These consumers have been waiting a long time for 
these refunds. Interest on these refunds merely puts these consumers in 
the position they would have been in had the illegal overcharges not 
occurred. Fairness and equity is on the side of the consuming public, 
not on the side of the gas producing enterprises that exacted excess 
revenues through illegal gas prices. In addition, I urge the committee 
not to undercut our right to complete the legal process established by 
Congress in the NGPA for the very purpose of resolving disputes such as 
this.
    At the outset I would like to point out that the vast majority of 
the monies to be refunded will not come from ``Kansas'' producers--if 
that term is intended to imply that the producers owing the refunds are 
Kansas corporations or other persons living in Kansas. Rather, the vast 
majority of the dollars to be refunded will come from ``major'' 
producers which are not Kansas corporations, such as Amoco Production 
Company, Anadarko Petroleum Corporation, Union Pacific Resources 
Corporation, Mobil Oil Corporation, and OXY USA Inc. These major 
international oil companies are also not ``small'' producers. For 
example, Amoco has a market capitalization of $174.5 billion, Anadarko 
has a market capitalization of $4.6 billion, and Union Pacific 
Resources has a market capitalization of $3.59 billion.
    I would also like to point out, as I am sure the committee is 
aware, that there is currently pending in the D.C. Circuit, in Anadarko 
Petroleum Corporation, et al. v. FERC, Nos. 98-1227, et al., a judicial 
review proceeding brought by these large producers under section 506 of 
the NGPA in which they challenge the legality of FERC's decision to 
deny a generic waiver of interest on the refunds mandated by Public 
Service Co. of Colorado. The exact same relief sought by the producers, 
which was denied by the FERC and is pending before the D.C. Circuit, is 
now presented to this committee for its consideration in these 
hearings.
    NGPA section 506(4) provides that ``[t]he judgment and decree of 
the court, affirming, modifying, or setting aside, in whole or in part, 
any such order of the Commission, shall be final subject to review by 
the Supreme Court of the United States upon certiorari . . .'' This is 
the process established by Congress in the NGPA for resolving disputes 
over the rights and obligations of the parties under the statute and 
the rules by which the parties have been bound for over 20 years. I 
urge this committee not to disrupt the ongoing judicial process 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. The interest is substantial because 
the producers have held and used money that was not theirs for a period 
in the range of 11 to 16 years. Moreover, the procedure provided for in 
the NGPA provides FERC with jurisdiction under section 502(c) to weigh 
the equities in individual cases of hardship and determine whether or 
not adjustment relief is required. The procedures for NGPA section 
502(c) adjustments have been in place and used for over 20 years. 
Requests for adjustments related to the Kansas ad valorem tax, recently 
filed with the FERC, number over one hundred. The resolution of these 
cases is proceeding under the FERC's duly-promulgated regulations and 
that process should not be short-circuited by the Congress.
    It should be clear that there is no inequity or injustice in 
requiring producers to pay interest on amounts in excess of the roughly 
$100 million they overcharged their customers from 1983 to 1988. There 
is also no inequity or injustice in requiring producers to demonstrate 
the kind of individualized showing of hardship required by NGPA section 
502(c) if FERC is to grant an exception. Under our American system of 
justice, there is a general obligation to compensate judgment creditors 
through the payment of interest on the principal amount of outstanding 
liabilities. The payment of interest here is necessary to make whole 
the gas customers who were overcharged and denied the use of their 
money for up to 16 years. Were Congress to forgive the interest 
overcharged customers it would be allowing producers to retain the 
earnings on consumer dollars and would strip the consumers, by 
legislative action, of over $200 million (more than 60%) of their 
claim.
    Not only would there be unfairness and inequity in failing to make 
consumers whole for these illegal overcharges, a legislative 
forgiveness of interest would unduly discriminate in favor of natural 
gas produced in Kansas and the state treasury of Kansas over natural 
gas produced in other states and their state treasuries. Other gas 
producing states, including particularly Texas, also have ad valorem or 
other property-type taxes which have never been eligible for 
reimbursement as an add-on to the maximum lawful price under the NGPA. 
Texas's ad valorem tax, which in all material respects was identical to 
Kansas's ad valorem tax, was expressly found by the FERC in 1986 not to 
qualify as a recoverable ``add-on'' to the maximum lawful price under 
section 110 of the NGPA. Thus, gas producers in Texas and other gas 
producing states have never been allowed to collect reimbursement for 
these types of state taxes in the prices charged for natural gas. To 
forgive interest on these refunds would prefer producers of Kansas gas 
over producers of gas from other states.
    As is apparent from the history of the producers'' obligation to 
refund the excessive collections, which this committee requested I 
address, the producers'' claim that they relied to their detriment on 
FERC's rulings that they could legally collect the Kansas tax under the 
NGPA lacks credulity. The bankruptcy of that plea was recognized by the 
D.C. Circuit which, in Public Service Co. of Colorado v. FERC, referred 
to the producers'' detrimental reliance claim as ``purely notional,'' 
adding that, ``if real,'' it was both ``unreasonable'' and 
``foolhardy.'' 91 F.3d at 1490.
                 history behind the refund obligations
    On November 9, 1978, the NGPA became law. In an effort to encourage 
production in the aftermath of natural gas shortages experienced during 
the 1970's, Congress removed producer pricing from the strictures of 
cost-based price regulation under the Natural Gas Act (NGA) and 
established uniform, incentive ceiling prices for various categories of 
natural gas production. As a part of the statutory scheme, Congress 
made those new prices ceiling prices which could not be exceeded except 
to the extent specifically allowed under NGPA section 110. NGPA section 
110 provided, among other things, for an ``add-on'' to the maximum 
lawful price for ``State severance taxes''--a term defined in section 
110(c) of the NGPA. The NGPA further declared that sales of gas at 
prices which exceeded the ceiling prices were ``unlawful.'' FERC was 
charged with administration of the NGPA with full authority to issue 
such orders as it deemed necessary and appropriate to carry out its 
functions under the statute. See NGPA Section 501. The statutory scheme 
enacted by Congress in the NGPA was well recognized as one which 
substantially overhauled federal regulation of natural gas prices.
    While under NGA price regulation, the Federal Power Commission 
(FERC's predecessor agency) had allowed the cost of Kansas ad valorem 
taxes to be added to the then-applicable cost-based national ceiling 
price of gas. Just and Reasonable National Rates for Sales of Natural 
Gas, Opinion No. 699-D, 52 FPC 915 (1974). The FPC had also determined 
that the cost of Texas ad valorem taxes could not be added to the then-
applicable cost-based national ceiling price of gas. Mobil Oil Corp., 
55 FPC 917 (1976). Possibly because of the regulatory upheaval caused 
by the NGPA and the need for FERC to promulgate comprehensive 
regulations to implement the new statutory scheme, it was not until 
1983 that the continued validity of the FPC's prior treatment of these 
two ad valorem taxes under the NGA was challenged under the NGPA.
    In January 1983, Sun Exploration and Production Company, a producer 
and first-seller of gas, filed a petition at the FERC seeking a 
determination that the Texas ad valorem tax was a ``State severance 
tax'' as defined in NGPA section 110(c) and, therefore, could be 
collected as an add-on to the maximum lawful price. Shortly after this 
petition was filed, Northern Natural Gas Company, a pipeline purchaser 
of gas, filed a petition at the FERC seeking a similar determination 
that the Kansas ad valorem tax was not a ``State severance tax'' as 
defined in NGPA section 110(c) and, therefore, could not be collected 
as an add-on to the maximum lawful price.
    FERC consolidated the petitions and, in a decision issued in 1986, 
denied both. It ruled that the Texas ad valorem tax was a property tax, 
not a State severance tax and, therefore, the ceiling price of gas 
produced in Texas could not include an amount to reimburse the producer 
for the Texas ad valorem tax. FERC also ruled that the Kansas ad 
valorem tax was a State severance tax and, therefore, the ceiling price 
of gas produced in Kansas, unlike the ceiling price of gas produced in 
Texas, could include an amount to reimburse the producer for the Kansas 
ad valorem tax. Sun Exploration and Production Co., 36 FERC para. 
61,093 (1986).
    Sun Exploration did not seek rehearing of the order. However, 
Northern Natural Gas Company and Colorado Interstate Gas Company, 
pursuant to NGPA section 506, filed petitions for rehearing of the 
FERC's ruling regarding the qualification of the Kansas ad valorem tax 
as a ``State severance tax'' under the NGPA. When the petitions were 
denied in Northern Natural Gas Co., 38 FERC para. 61,062 (1987), 
Colorado Interstate Gas Company filed a petition for review in the 
United States Court of Appeals for the District of Columbia Circuit, 
following the procedure mandated by NGPA section 506.
    After reviewing the Commission's order classifying the Texas tax as 
a ``property'' tax and the Kansas tax as a ``severance'' tax, the D.C. 
Circuit, in Colorado Interstate Gas Co. v. FERC, 850 F.2d 769 (D.C. 
Cir. 1988), found that the dissimilar treatment of what seemed to the 
Court to be identical cases was the ``quintessence of arbitrariness and 
caprice.'' 850 F.2d at 774. The Court remanded the case back to the 
FERC for the FERC ``to exercise its interpretive authority, to identify 
the features of the Kansas tax that point toward one classification or 
another, and to offer sensible distinctions between taxes that it 
chooses to treat differently.'' 850 F.2d at 774-775.
    On remand, the FERC re-examined the Kansas tax under the statutory 
standard of NGPA section 110(c) and determined that the Kansas tax, 
after all, did not qualify as a tax ``imposed on the production of 
natural gas''--the statutory requisite for a ``State severance tax''--
because, like the Texas tax, the Kansas tax was a tax on ``property,'' 
not a tax on production. As such, like the Texas tax, the Kansas tax 
was not eligible as an add-on to the otherwise applicable NGPA maximum 
lawful price. Colorado Interstate Gas Co., 65 FERC para. 61,292 (1993). 
Having so ruled, FERC recognized that ``reimbursement of that tax in 
addition to the ceiling [price] violates the Congressionally-set 
maximum lawful prices.'' 65 FERC para. 61,292. Nevertheless, responding 
to the producers'' claims that they had relied to their detriment on 
the Commission's prior rulings, the Commission decided that the 
producers had certain ``settled expectations'' to the collection of the 
unlawful amounts and, therefore, required refunds only from June 28, 
1988--the date of the D.C. Circuit's remand order.
    Petitions for rehearing were filed by the producers challenging the 
Commission's decision that the Kansas tax was a ``property'' tax, and 
by Public Service and Cheyenne challenging the Commission's decision to 
waive refunds for the 1983 to 1988 period. The Commission denied all of 
the rehearing petitions in Colorado Interstate Gas Co., 67 FERC para. 
61,209 (1994).
    Again, following the procedures established in NGPA section 506, 
petitions for review were filed by the producers and jointly by Public 
Service and Cheyenne. In the judicial review proceeding, the producers 
argued that it would be unfair to require producers to refund any of 
the pre-1988 over collections because, until the FERC issued its 1993 
decision in Colorado Interstate Gas Co., the producers had no reason to 
believe that any refunds would be owed. Public Service and Cheyenne 
argued that the FERC should not have waived refunds for the pre-1988 
period because the legitimacy of the collection of the Kansas ad 
valorem tax under the NGPA had been disputed in ongoing litigation 
since 1983 and, consequently, there could not have been any ``settled 
expectation'' to the retention of the overcharges on which the 
producers could have relied to their detriment. In Public Service Co. 
of Colorado, et al. v. FERC, 91 F.3d 1478 (D.C. Cir. 1996), the D.C. 
Circuit affirmed the Commission's determination that the Kansas tax was 
a ``property'' tax and not a tax on production that was eligible for 
reimbursement under the NGPA. The court also rejected outright the 
producers'' ``detrimental reliance'' argument. The court concluded that 
all of the producers'' collections of reimbursements for the Kansas tax 
that were in excess of the maximum lawful NGPA price had been unlawful 
since 1978 and should be refunded but for the simple fact that the 
issue of pre-1983 refunds was not before the Court. The Court, 
therefore, concluded that refunds for the period 1983 to 1988 were 
required. The following excerpt from the D.C. Circuit's decision says 
it best:
          Not only is the producers'' ``detrimental reliance'' purely 
        notional; if it were real it would not have been reasonable. 
        The enactment of a substantially new regulatory regime in 1978 
        undermined any assurance that the FPC's treatment of the Kansas 
        tax under the NGA would withstand scrutiny under the NGPA; 
        reliance would have been foolhardy. If that were not enough, 
        the status of the Kansas tax was expressly drawn into question 
        in 1983 when Northern Natural first petitioned the Commission 
        for a ruling that producers could not lawfully recover the tax 
        under Sec. 110. Once the recoverability of the tax was in 
        dispute, we do not see how the Commission could possibly find 
        that producers reasonably relied upon continuing to recover it.
          Because no seller of natural gas could justifiably be 
        confident that it was entitled to recover the tax until the 
        legal question was settled anew under the new statute, we hold 
        that the producers'' liability for refunds extends back to 
        October 1983, the date when all interested parties were given 
        notice in the Federal Register that the recoverability of the 
        Kansas tax under Sec. 110 of the NGPA was at issue, and the 
        earliest date advocated by any party before this court. Absent 
        detrimental and reasonable reliance, anything short of full 
        retroactivity (i.e., to 1978) allows the producers to keep some 
        unlawful overcharges without any justification at all. The 
        court strongly resists the Commission's implication that the 
        Congress intended to grant the agency the discretion to allow 
        so capricious a thing. Still, we do not require refunds of 
        taxes recovered with respect to production before October 1983 
        because there is before us no controversy over those monies.
91 F.3d at 1490.
    The producers attempted to obtain review of the D.C. Circuit's 
decision in the United States Supreme Court but, following the advice 
of the Solicitor General of the United States, the Supreme Court denied 
their petition for certiorari.
    The legal review of the issue having been concluded, it was left to 
the FERC to implement the Court's mandate. Immediately following the 
Supreme Court's ruling denying their petition for certiorari, the 
producers filed a request with the FERC for generic adjustment under 
NGPA section 502(c) asking for a blanket, all inclusive waiver of the 
obligation to pay interest on the overcharges. Their argument before 
FERC was the same as it had been before the Court; i.e., relief from 
the interest component of the refunds was required because they had 
relied to their detriment on prior agency orders. Four days later, 
Public Service and Cheyenne filed a joint petition requesting the 
Commission to establish procedures for the refund of the 1983 to 1988 
over collections with interest. Public Service's petition urged the 
Commission to follow virtually the same procedures that it had adopted 
in 1993 in ordering refunds of the 1988 to 1993 over collections, which 
have since been refunded. The Commission denied the producers'' request 
and granted the joint petition of Public Service and Cheyenne. In so 
ruling, the Commission rejected the producers'' request for a generic 
waiver of the interest component of refunds, concluding that it could 
not see ``how the same reliance that in the context of waiving all 
refunds for the 1983-1988 period the Court concluded was foolhardy, can 
somehow be transformed into reliance that would justify granting 
adjustment relief of interest.'' Public Service Co. of Colorado, 80 
FERC para. 61,264 at 61,216 (1997). Petitions for rehearing were filed 
by the producers and, when those petitions were denied, the review 
petition in Anadarko Petroleum Corp., et al. v. FERC, Nos. 98-1227, et 
al. was filed. As I explained earlier, this case is now pending before 
the D.C. Circuit. Briefing is completed and oral argument is scheduled 
for September 7, 1999.
    Reviewing this history and the arguments advanced by the producers, 
it is clear that they have brought their plea to Congress because they 
have lost before the court and the Commission and fear losing again. 
Again, they press the claim that they relied to their detriment on 
prior agency orders, but this time they make the claim before Congress, 
asking Congress to undermine the very process it enacted and has had in 
place for over 20 years for resolving these sorts of claims. The Court 
of Appeals for the D.C. Circuit fully considered their argument and 
rejected it--calling their claim to be ``purely notional'' or, ``if 
real,'' ``foolhardy'' and ``unreasonable.'' Congress should not 
intervene on behalf of the losing party in court litigation and alter 
the outcome of the very judicial process it put in place--especially 
here, where the issue involves the return of unlawfully collected 
overcharges for the sale of natural gas.
    The real problem with the producers'' ``reliance'' argument is that 
it is not believable. It does not pass the ``red face'' test. The 
producers themselves initiated action before the FERC questioning the 
continued validity of the FPC's NGA ruling regarding the Texas tax. 
From that point forward, the issues regarding the Texas tax and the 
Kansas tax were joined. At all times relevant here (1983-1988), while 
the producers were collecting from their customers reimbursements for 
the Kansas ad valorem tax in addition to the maximum lawful price, the 
qualification of the tax as a ``State severance tax'' under the NGPA 
was disputed and the subject of litigation--the result of which would 
either be that the tax qualified and no refunds were due or that it did 
not qualify and refunds would have to be made. And that is as true for 
the interest component of the refunds as it is for the principal 
component. FERC's regulations throughout this period specifically 
provided that all prices collected for the first sale of natural gas 
were collected subject to a general obligation to refund any portion 
``together with interest'' that exceeded the applicable maximum lawful 
price established by Congress. 18 C.F.R. Sec. 270.101(e).
                               conclusion
    As an active party to the proceedings before the FERC and as the 
primary advocate in the Court of Appeals for the refund of these over 
collections, with interest, to those who were overcharged, we urge the 
committee to consider whether it is appropriate for Congress to usurp 
the judicial power and truncate the rights of litigants already before 
the courts. Congressional intervention is simply not warranted. The 
status of this matter is that, after 16 years, the customers' rights to 
the return of unlawfully collected and unlawfully held amounts (over 
$300,000,000) has finally been determined subject only to review by the 
United States Court of Appeals. This is the process Congress 
established when it enacted section 506 of the NGPA. Congress should 
not step in now to cut that process short and reverse the outcome 
before the Court of Appeals can consider the case before it. To do so 
would be no different than if Congress passed a law allowing banks to 
charge only ``service fees,'' defined by statute, and class action 
litigation ensued for many years over whether banks had unlawfully 
charged their customers $100 million that did not qualify as a 
``service fee'' under the statute. Finally, just after the customers 
prevail and are awarded their $100 million plus interest by the courts, 
the United States Congress passes a law excusing the banks from paying 
interest simply because the banks thought their fee qualified as a 
``service fee'' and did not expect to lose the litigation. Clearly, the 
customers would not be made whole if Congress were to take such action. 
It is no different here.
    In this case, the producers'' obligation to refund the overcharges 
was determined finally in May 1997, when the Supreme Court denied the 
producers'' petition for certiorari. It is now June 1999. For the last 
two years, despite the fact that the obligation to pay at least the 
principal amount has been clear, only one large producer, Mobil Oil 
Corporation, has paid the refunds it owes. The others, including 
Anadarko Petroleum Corporation, Amoco Production Company, Union Pacific 
Resources Corporation, and OXY USA Inc. have refused to refund one 
dollar. Instead, they are allowing interest to continue to accrue by 
their own refusal to refund even the principal amounts.
    We ask the committee not to interfere with the judicial process and 
the adjudication of our rights under the NGPA. We urge you not to 
change the rules in the bottom of the 9th inning. The decision of the 
D.C. Circuit in Anadarko Petroleum Corp., et al. v. FERC should be the 
final determination of the rights of the parties to interest on the 
principal amount of the overcharges, subject only to review by the 
Supreme Court of the United States, as specified in section 506 of the 
NGPA.
    This concludes my written statement.
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    Mr. Barton. The Chair is going to recognize himself for 10 
minutes for questions.
    The Chair first wants to say that the Chair has read the 
Constitution and sees that there are three equal branches of 
government and one of them is the legislative branch and the 
legislative branch has the right and opportunity to take issue 
of what the judicial branch does.
    Quite frankly, I don't give a hoot what the D.C. Court of 
Appeals ruled since I am not an attorney and I am not a judge 
but I will have to admit that they ruled in your favor or your 
clients' favor, Mr. Albright.
    I do want to go to the Attorney General from Kansas and I 
want to get the record straight about what the issue is. In 
1978, we passed a Natural Gas Policy Act, the Congress did, 
which regulated a wide range of natural gas prices that 
heretofore had not been regulated and they did set a maximum 
lawful ceiling price for a number of categories in natural gas.
    My assumption is that most of the gas contracts that are in 
question in this litigation were old gas contracts under the 
definition of the Natural Gas Policy Act of 1978; is that 
correct?
    Ms. Stovall. That would be my understanding, but I don't 
have that historical perspective. What I would offer though, 
from 1954 the Federal Government has had the ability to 
regulate gas at the wellhead so you had that even before the 
Natural Gas Policy Act.
    Mr. Barton. Interstate sales not intrastate sales. You 
couldn't regulate natural gas prices intrastate until the 
Natural Gas Policy Act of 1978. I used to be the natural gas 
deregulation consultant for Atlantic Richfield Oil and Gas 
Company so I am a little hazy on this, but it is still back 
there somewhere.
    Ms. Stovall. You at least had it there and I didn't. You 
can be our expert on that issue then.
    Mr. Barton. Kansas at the time the NGPA came in effect in 
1978 had an ad valorem tax, not a production tax; is that 
correct?
    Ms. Stovall. That is true.
    Mr. Barton. There was a Federal Power Commission or Federal 
Energy Regulatory Commission, which was a successor to the 
Federal Power Commission, ruling that said the Kansas ad 
valorem tax could be passed through as an add-on to the maximum 
lawful ceiling price; is that correct?
    Ms. Stovall. You are absolutely right. In 1974, opinion 
number 699 and 699-D from FERC said exactly that.
    Mr. Barton. Because the gentlelady from Missouri made some 
statements in her very precise soft voice about unlawful 
prices, technically she is correct after the fact. She wasn't 
completely correct because, at the time, there was a ruling 
that you could sell at a regulated price. The Federal 
Government or an agency of the Federal Government set the 
regulated price.
    The State of Kansas under the constitution has the right to 
have State taxes, and they had an added value tax, an ad 
valorem tax, not a production tax, not a severance tax but an 
ad valorem tax. FPC or the FERC said that can be passed 
through; is that correct?
    Ms. Stovall. You are exactly right.
    Mr. Barton. So Kansas got its taxes. The taxes were paid.
    Ms. Stovall. True.
    Mr. Barton. But the pipelines who bought the gas paid the 
taxes because at that time most pipelines took ownership of the 
gas that they purchased; is that correct?
    Ms. Stovall. That is correct.
    Mr. Barton. Now, the great FERC represented by the general 
counsel here, Mr. Smith, who ruled, I am told, five times that 
what Kansas was doing and what Kansas producers were doing was 
legal came back and when the case went to the D.C. Court in 
1988 and the D.C. Court said, well what FERC has ruled we don't 
think is right and they remanded that to the FERC. And 5 years 
later the FERC said, well, we guessed what the District Court 
said is correct and what we have said all along is wrong. Is 
that correct?
    Ms. Stovall. Basically. If I could add something. In 1988 
when the D.C. Circuit remanded it back, it wasn't to say we 
don't think FERC made the right decision. It was simply to say 
their decision fell short of explaining properly how they 
classified the Kansas tax.
    Mr. Barton. The D.C. Court didn't rule in favor of, I would 
say, the plaintiff. The D.C. Court just said the FERC needs to 
take another look at this.
    Ms. Stovall. And explain it better.
    Mr. Barton. And after 5 years, the FERC decided that they 
were wrong, that they had ruled the wrong way all these other 
times.
    Ms. Stovall. That is correct.
    Mr. Barton. Now, do you know of any attorney in oil and gas 
practice in the great State of Kansas who, before the D.C. 
Court remanded it back to the FERC, would have said that it was 
unwise, unsound, imprudent to rely on the five previous FERC or 
FPC rulings?
    Ms. Stovall. I know of no oil and gas lawyer in Kansas that 
would have given that advice.
    Mr. Barton. At that time.
    Ms. Stovall. True.
    Mr. Barton. At that time.
    Now, Mr. Smith, you said in your written testimony that the 
FERC takes no position on the legislation that Mr. Moran has 
introduced. It says neither the Commission as a whole nor 
Chairman Hoecker has taken a position on the legislation 
proposal.
    Now, in a letter to the Chairman of the Appropriations 
Committee which, according to the facts that I have, is dated 
April 15, 1999, says this note responds to your request for 
Chairman Hoecker's views on section 2316 of H.R. 1141, the 
fiscal year 1999 Emergency Supplemental Appropriation Act, the 
chairman would not oppose enactment of this amendment. Are you 
cognizant of this particular document?
    Mr. Smith. Yes.
    Mr. Barton. So when I read the chairman would not oppose 
enactment of this amendment if it is not identical it is very 
similar to Mr. Moran's legislation, that the FERC would not 
oppose enactment of Mr. Moran's legislation; is that correct?
    Mr. Smith. As you may be aware, we provided that note in 
response to an appropriations staff request for our views on 
this subject. Almost instantaneously, we were asked questions 
by third parties who saw that version of the statement and 
said, well, does this mean that the chairman supports the 
slightly different provision that was being discussed in the 
context of the supplemental appropriations bill. That was 
clearly not our intent.
    The chairman's intent was to state a view of neither 
opposing nor supporting that legislation, and when we received 
written questions from the Appropriations Committee in 
connection with their review of our budget which asked the same 
question, we made that clarification, that the chairman----
    Mr. Barton. Let's clarify for this subcommittee your 
position on Mr. Moran's legislation. You are not a commissioner 
at the FERC, but you are the general counsel. Can I 
characterize the FERC's position is that they don't oppose the 
Moran bill?
    Mr. Smith. We don't oppose and don't support. We have taken 
no position as my testimony said.
    Mr. Barton. You are not opposed to it. You are not going to 
be upset if we mark this up in subcommittee within the next 
month and send it to the full committee?
    Mr. Smith. Well, I can't speak for when the commission will 
get upset but yes, that is right, we have carefully not taken a 
position.
    Mr. Barton. How long have you been at the FERC?
    Mr. Smith. A year and a half, roughly.
    Mr. Barton. Before you came to the FERC in your current 
capacity, you weren't at the FERC in some other capacity?
    Mr. Smith. No.
    Mr. Barton. So you are not aware of the thinking of the 
Commission at the time they reversed their position?
    Mr. Smith. Only as evidenced by their written orders.
    Mr. Barton. Can you summarize quickly why they flip-flopped 
on this? Because if they had not, none of this would be an 
issue.
    Mr. Smith. As you are aware, the Commission in 1983 got a 
request from a pipeline to reconsider its pre-NGPA position 
that these Kansas ad valorem taxes should be recoverable. As 
far as I am aware, there were only two FERC decisions in 
response to that, the initial order in the case and the order 
on rehearing, both of which found that the Kansas ad valorem 
tax could be treated as recoverable under section 110.
    Then in 1988 the D.C. Circuit critically reviewed the 
Commission's reasoning, focusing on two aspects of it. First, 
was there sufficient reasoning or explanation generally of the 
commission's decision. And second, could the Commission 
distinguish its position concerning the Kansas ad valorem tax 
from its position on the Texas ad valorem tax, which the 
Commission had consistently treated as not a tax on production 
and not recoverable under section 110.
    And in that remand, the court instructed the Commission to 
go back and give a rigorous review of how it was going to 
distinguish between property taxes and production taxes. In 
doing that review based on the discussion in the D.C. Circuit 
decision and the other issues that were discussed in the 1993 
order, the Commission reversed its view.
    Mr. Barton. My time has expired. There is a difference 
between Texas and Kansas I believe. In Texas, we have severance 
taxes, and we had ad valorem property taxes. But in Kansas I 
think they just had the ad valorem tax. I don't think they had 
a severance tax.
    Mr. Smith. At that time.
    Mr. Barton. So there was that distinction. My time has 
expired. The Chair is going to recognize the gentlelady from 
Missouri for 10 minutes.
    Ms. McCarthy. Thank you for your generosity, Mr. Chairman.
    Mr. Barton. I recognized myself for 10 minutes. I have to 
be fair.
    Ms. McCarthy. I would like to ask the Honorable Ms. Stovall 
a question. I am going to put my Ways and Means cap on. This is 
on taxes since Mr. Barton mentioned the Kansas tax situation. 
The tax in question is the Kansas State tax; and ultimately, 
the revenues from this tax ended up in the Kansas treasury. Why 
then hasn't the State of Kansas offered to reimburse producers 
for the cost of refunds using the original tax moneys plus the 
interest earned over the years?
    Ms. Stovall. Again, Kansas doesn't have that money set 
aside just like the producers don't have that money set aside. 
Kansas takes the position that the producers lawfully collected 
that amount that they were entitled to do and it has been 
utilized for purposes in the State of Kansas.
    Kansas doesn't think it is our obligation to give it back. 
We think that we lawfully collected it under the laws of FERC 
at that time.
    Ms. McCarthy. Given all the testimony we have heard today, 
I am surprised that Kansas didn't set it aside in some sort of 
fund but also given a sense that most States are in surplus 
right now and budget surpluses because of the great economy. I 
also find it difficult to understand how Kansas wouldn't--
having used this State tax not find it good on a solution 
because my understanding is, and I am looking at the Missouri 
data and some things that Mr. Albright said, Kansas people, the 
people of Kansas as well as the Kansas-based pipelines, the 
rate payers in the pipelines, there is $82 million due them.
    Who in Kansas is advocating for the Kansas-based pipelines 
and the rate payers? You are here today taking sides with the 
producers and I understand that, but whose job is it in Kansas 
to help them get that $82 million back?
    Ms. Stovall. There is an organization that deals with 
consumers on utility issues and they have the right to be any 
place and say what they want. In Kansas, the way we have 
evaluated it though is the small benefit to the consumers being 
about the $15 total is absolutely outweighed by the detriment 
to the producers and the royalty owners that would come about 
by having to pay this.
    Even though I am charged in my State with enforcing the 
Consumer Protect Act, I find that the equities absolutely don't 
support giving this $15 to the consumers in light of what would 
happen. Again, those figures that you look at that talk about 
$77 million that's absolutely an estimate----
    Ms. McCarthy. $82 million.
    Ms. Stovall. $82 million, whatever it is. There is no 
certainty and my saying $77 million and your saying $82 million 
indicates we don't know where the numbers have come from. They 
are simply estimated bills that pipelines have submitted 
assuming that the pipelines always paid the maximum lawful 
price in addition to that tax.
    The records we have had a chance to look at would suggest 
that is not true across the board; but because we haven't been 
given the opportunity, we being the producers and the royalty 
owners to have a due process hearing, we can't even justify nor 
respond to what those bills are and yet FERC has said that 
those producers and royalty owners owe 100 percent already.
    Ms. McCarthy. It is my understanding that the 85 percent of 
the money that is due is owed by 24 large companies that are 
mostly national and international and outside of Kansas. That 
is who you are speaking of?
    Ms. Stovall. Actually not. What we show is the median claim 
of the royalty owners is $22,000. That breaks down to being 12 
claims that are under $100; 97 that range from a $100 to a 
$1,000; 125 claims between a $1,000 and $5,000; 76 that range 
between $5,000 and $10,000; and then there are 9 that are over 
$10 million.
    Ms. McCarthy. Those are the Kansas companies you just gave 
me----
    Ms. Stovall. Those are the producers.
    Ms. McCarthy. Are those the Kansas producers?
    Ms. Stovall. They are the producers. They are not 
necessarily all Kansas producers, but they do produce in the 
State of Kansas.
    Ms. McCarthy. Can you provide that information for the 
committee? Because, obviously, the data that Mr. Albright was 
referring to and the Missouri Public Service Commission 
presented us is not quite in sync with that information.
    Ms. Stovall. Again, and--this is the information we've been 
able to put together. The information that Mr. Albright and the 
Missouri Commission have are supported by the pipelines. That 
information came from the pipelines which, again, are just very 
base estimates.
    Ms. McCarthy. We try to hear from all sides here. That is 
what is great about this subcommittee.
    Ms. Stovall. I appreciate that.
    Ms. McCarthy. Commissioner Lumpe, I wonder if you, and, Mr. 
Albright, you can weigh in on this if you would like, we don't 
always have the right to legislate everything up here. We may 
try, but my question is is this legislation constitutional? It 
seems to alter final judgment by the court. And in my mind may 
constitute a taking, and I would love your thoughts on that.
    Ms. Lumpe?
    Ms. Lumpe. I think, Ms. McCarthy, that you are asking me a 
legal question and not being an attorney, I sort of hesitate to 
answer that. But I would be happy to try to provide an opinion 
for you on that, whether the current NGPA Act is constitutional 
that this would involve a taking.
    I would assume that in the challenge that was brought to 
the court on this and the court's ruling that the refunds were 
due, that that issue may have been addressed there and that we 
would then rely on it. But not being an attorney, I really 
couldn't give you my own take on whether this is a taking.
    Ms. McCarthy. I would appreciate the thoughts from your 
attorneys on this because I am quite curious that you and I 
both have grappled with the issue of takings in our prior lives 
as legislatures, and we grapple with again here in the 
Congress. I certainly wouldn't want to be embracing legislation 
that would exacerbate that difficult question.
    Mr. Albright?
    Mr. Albright. Yes. If I may weigh in on this, I am not a 
constitutional lawyer. But we have taken a look at the issue 
and the fact that years after the right to collection of these 
refunds were vested, gas consumers are in fact entitled to 
interest. That is part of the compensation under the American 
jurisprudence is to receive interest on refunds.
    We believe it would wrongfully sidestep the takings clause 
to enact legislation now that forgives that interest. I think 
the Natural Gas Policy Act vests exclusive jurisdiction in the 
courts to resolve these matters too. So to the extent that 
Congress acts now to take that legislation away and to usurp 
the rights of parties that have vested rights now, that that 
would be unconstitutional.
    Ms. McCarthy. Thank you very much. Mr. Chairman, I thank 
you and I am going to go vote.
    Mr. Barton. Would the gentlelady yield.
    Ms. McCarthy. Of course, Mr. Chairman.
    Mr. Barton. We repealed the pricing provisions of the 
Natural Gas Policy Act. We had not repealed the Act in its 
entirety, but at the time the pricing provisions were still in 
effect, the clients that you represent had contracts that gave 
them the opportunity to purchase this gas. They were aware when 
they purchased it that part of the fee they were making was an 
ad valorem tax, were they not?
    Mr. Albright. The clients I represent are local 
distribution companies which were customers of the pipelines.
    Mr. Barton. The clients which you represent purchased gas 
knowing that included in the price were taxes; is that not 
correct.
    Mr. Albright. That is correct.
    Mr. Barton. Are you aware of any of your clients, at the 
time they received the gas to consume the gas or to resell the 
gas, make an issue, at that time, of not paying the total price 
they were asked to pay because of this issue?
    Mr. Albright. Well, Mr. Chairman, for the period in 
question, I was not even an attorney. I did not represent 
Public Service Company of Colorado nor Cheyenne Light, Fuel, 
and Power; but I would like to speak to the issue as being an 
employee of a gas pipeline company, KN Energy, Inc. And I was 
in the Kansas gas patch purchasing gas from producers and 
negotiating contracts with gas producers, and I was very aware 
of this issue. And our company was very familiar with the 
litigation that was ongoing and paid close attention to it.
    Mr. Barton. They voluntarily paid a price knowing that part 
of the price included these taxes.
    Mr. Albright. That is correct.
    Mr. Barton. For that payment, they received a commodity, 
i.e., natural gas; isn't that correct?
    Mr. Albright. That is correct.
    Mr. Barton. They got a good in return for paying a price 
that included these taxes.
    Mr. Albright. That is right.
    Mr. Barton. This whole issue goes back to, again, we set a 
ceiling price and Kansas chose to apply a tax in a different 
way than other States, but the tax was paid, the State of 
Kansas received the tax and now because of the D.C. Court and 
because of the FERC change of position, there is several 
hundreds of millions of dollars apparently at issue in taxes 
that have been paid; is that not correct?
    Mr. Albright. That is correct, Mr. Chairman.
    Mr. Barton. I thank the gentlelady. Does the gentleman from 
Arizona wish to be recognized now or do you wish to go vote and 
come back? We are trying to continue the hearing.
    Mr. Shadegg. I would just as soon go vote and come back.
    Mr. Barton. The gentleman from Texas is recognized.
    Mr. Hall. Mr. Albright, how much of a refund would your 
electric and gas customers--how much would you collect if you 
were successful in collecting all that is due you from Kansas 
producers?
    Mr. Albright. Calculations based on the interstate 
pipelines from which we purchased gas during this period 
indicates we would receive approximately $23 million for our 
customers.
    Mr. Hall. How much would that be per customer?
    Mr. Albright. We made a rough calculation based on current 
consumer base, our customer base as it exists now for 
residential customers, the average refund to each customer 
would be approximately $15, and for the average commercial 
customer the refund would be approximately $90.
    Mr. Hall. What would the State regulators do if you failed 
to collect these amounts?
    Mr. Albright. I can't speak for my regulators. Sometimes 
they are unpredictable. I imagine they would be very upset, but 
whether they would take any further action----
    Mr. Hall. You folks had to make some kind of reserve. What 
recommendations did you make to them?
    Mr. Albright. We already received approximately $2.5 
million of refunds for these Kansas ad valorem taxes.
    Mr. Hall. You settle with any of them for less than what 
their average would be? I don't know how you would do that.
    Mr. Albright. I don't know how we would do that either. The 
issue is for purposes of rate regulation for local distribution 
companies, our customer base changes very significantly over 
time and the way we purchase gas and flow those gas costs 
through, it is on a dollar-for-dollar basis through an 
adjustment mechanism we have on our tariffs. The Colorado 
statutes provide for a low-income fund, a Colorado energy 
assistance fund which is referred to in one of the letters I 
submitted this morning.
    And that provides for any undistributed amounts of refunds 
from upstream suppliers to be credited to this fund for 
purposes of administrating the low-income funds. So to the 
extent the specific customers--existing customers on our system 
don't get the full allocated average refund, the amounts would 
go toward the low-income customers.
    Mr. Hall. Been able to get the money back to the customers?
    Mr. Albright. Yes, they would.
    Mr. Hall. Have you been able to do that?
    Mr. Albright. Yes, we have.
    Mr. Hall. What is going to be the aftermath of this? What 
is the effect of this bill if we pass this bill in the present 
sense?
    Mr. Albright. To the customers?
    Mr. Hall. Yes.
    Mr. Albright. They won't get $360 something million dollars 
they are entitled to under the law.
    Mr. Hall. The producers won't pay it.
    Mr. Albright. And the producers won't pay it.
    Mr. Hall. We, a lot of times, try to balance equities up 
here. I am very pro producer myself. I don't--I will read the 
testimony. I am sorry I didn't get to hear your testimony, but 
you have given it to me. I will read it.
    Mr. Chairman, I yield back the balance of my time.
    Mr. Shimkus [presiding]. Thank you. I will recognize myself 
for as much time as I may consume or until someone else comes 
back and kicks me out of the Chair.
    My opening statement had just the fact that Illinois rate-
payers and companies had, based on the dollar amount with the 
principal and the interest of about $22 million, $994,000 due 
them so I guess I have a couple of questions, and I will just 
throw this open to the panel first.
    Is there a risk that pipelines and local distribution 
companies will keep a portion of the refund? I know Congressman 
Moran suggested that that would occur.
    Why or why not? Carla?
    Ms. Stovall. We very much know that some of the pipelines 
have that intention. In fact, two of the pipelines have 
petitioned FERC to be allowed to keep 100 percent of the 
refunds and that indeed has happened in ANR in El Paso. It is 
our information in addition to that, that pipelines who have 
retail customers, when they sell to big consumers that it is 
their intention to argue that all that money should be kept by 
the pipelines because no refund was contemplated in the 
contracts that they had with those individuals.
    And so it is very much the information we have that the 
amounts of refunds to consumers will be very limited by what 
the pipelines and/or the local distribution companies intend to 
keep. The local distribution companies whether or not they can 
keep any of the money is on a State-by-State basis with the 
State regulatory agency, and so that will be yet to be 
determined by those individuals.
    Mr. Shimkus. Thank you. Anyone want to dispute that?
    Mr. Albright. Mr. Chairman, as far as the refunds that are 
received by Colorado utilities and Wyoming utilities, there is 
a requirement that all of the refunds, except maybe for some 
out-of-pocket expenses related to acquiring those refunds are 
going to be dollar for dollar refunded to customers.
    Now, there may be situations--as Ms. Stovall suggests, 
there are some private contract matters between the interstate 
pipelines and direct sales customers, which it could be that 
the direct sales customer provided that it will receive the 
refunds depending on the pricing provisions of those private 
contracts, but that is not an NGPA- or NGA-regulated sale.
    Mr. Shimkus. As far as I understand this issue, refunds 
have been given back from 1988 on; is that correct?
    This issue is from 1983 to about 1988 that we are dealing 
with. What has been the process of the refunds from 1988 to 
what was it, 1993? Anyone want to speak to the process of the 
refunds? Mr. Albright, you look like you are interested in----
    Mr. Albright. The process is virtually the same as adopted 
for purposes of these refunds which is that the pipelines 
submit a report to the FERC that gives a list of the providers, 
the producers, the suppliers that provided the gas during this 
period of time and its calculation of what the refunds are that 
are due from those producers. They also sent notices to those 
producers directly pursuant to the rule that perhaps Mr. Smith 
can discuss a little bit more elaborately.
    Mr. Shimkus. I wanted to ask Mr. Smith if Ms. Stovall is 
correct.
    How would you respond?
    Mr. Smith. A couple of points.
    First, the Commission's order in 1997 provided that the 
refunds need to be flowed through by the pipelines. In 
considering requests for clarification of that order, the 
Commission permitted three pipelines that have by far the 
smallest refund amounts due, to retain the refunds. They had 
settlements with their customers that allowed the pipelines as 
opposed to the pipeline customers to retain any refunds that 
might be ordered.
    There are nine pipelines that are affected by the refunds. 
Those three account for, I think, 1.5 percent of the total 
amount of refunds, so they are by far the smallest on the list.
    The second issue is the flow through by the local 
distribution company. The pipelines are required, with that 
exception I noted to flow through the refund amounts to the 
local distribution companies. The issue, as had been mentioned 
earlier, of whether the local distribution companies flow those 
refund amounts through to their end-use customers is a matter 
of State regulation.
    And as Mr. Albright mentioned, at least in some States and 
maybe in all States that are affected, the State commissions 
have been careful in reviewing how that works and are trying to 
get the refund dollars through to end-use customers. The 
mechanics of how that is happening may vary from State to 
State.
    Mr. Shimkus. Who determines how much is owed by each 
individual producer or royalty owner? Who is making that final 
determination? When someone opens up the mail, surprise you owe 
$25,000; who is making that decision?
    Ms. Stovall. Right now it has been made by the pipeline 
companies. They have simply been ordered by FERC to come up 
with a bill, and that is what they did. They did it by November 
of last year and in 6 months then the royalty owners and the 
gas producers had to have that amount put in escrow by March of 
this year.
    So there has been no determination. It is simply the 
pipelines sending a bill and there has been no process yet to 
have a due process hearing to contest those amounts because one 
of the keys is that refunds are only owed if the companies paid 
more than the maximum lawful price. Our understanding is from 
what we have looked at, the bills are being submitted assuming 
maximum lawful price was paid plus the tax, and that has not 
been the case when we have had an opportunity to look at the 
records.
    Mr. Shimkus. Mr. Smith, I am going to follow up on some 
other issues on the hardship issue. Talk to me about this--the 
determination of the amounts.
    Mr. Smith. The Commission's orders require the pipelines to 
serve a notice on the producers that sold to them of the 
pipelines' calculation of how much refund is due. The process 
for resolving any disputes between the producer and the 
pipeline is that the producers file with FERC a request for 
adjustment that essentially says the pipeline gave us notice 
that we owe X dollars and we think we owe Y dollars. Then there 
is a process at FERC for resolving that issue.
    Mr. Shimkus. Ms. Stovall, do you agree there is a process 
for resolving the conflicts between the bill and what--the 
person who is being charged this amount?
    Ms. Stovall. Not to date.
    Mr. Shimkus. I think our colleague Congressman Moran made 
the statement that there was no due process.
    Ms. Stovall. There has been no due process. FERC seems very 
reluctant to grant those hearings to the producers. It is my 
understanding producers have indeed asked for that and there is 
no indication that FERC is eager to take this on because it is 
thousands of people coming forward to contest these bills.
    It would be a nightmare for them to do, but they need to. 
The key is even though there hasn't been this process, they 
have been ordered to pay 100 percent of the money without any 
judicial determination.
    Mr. Shimkus. Let me bounce back to Mr. Smith then. I know 
you have addressed hardship cases. I still want to eventually 
ask that, but have you addressed any dispute resolutions 
between the person who has been billed and those who want to 
question the amount? They are separate, and I want to make sure 
we keep those separate.
    Mr. Smith. I don't think we have come to a final resolution 
on any of those issues.
    Mr. Shimkus. What does that mean? Have you had a hearing on 
a dispute resolution mechanism or not other than a hardship?
    Mr. Smith. We have not set any of the petitions for 
adjustment, which is the label we give to these disputes about 
how much is owed, for an adjudicative hearing.
    Mr. Shimkus. Are we going to?
    Mr. Smith. That is a decision to be made by the Commission.
    Mr. Shimkus. But in your testimony--just minutes ago, 
didn't you say there was a process to do this?
    Mr. Smith. There is a process, but it doesn't necessarily 
involve an adjudicative hearing.
    Mr. Shimkus. Well, what does it entail then? That is right; 
I am having some success here.
    Ms. Stovall, just hold off.
    You are lucky that the ranking member is not here because 
you would be smoking by now. I am much nicer than he is.
    Mr. Smith. As I understand it, some producers have asked 
for a formal adjucative hearing on their adjustment claims. As 
far as I know, there aren't any issues about particular 
disputes between particular producers and particular pipelines 
about refund amount owed for which the Commission has yet 
ordered such a hearing.
    Mr. Shimkus. Well, let me move on. Because we would like to 
get that answer maybe in writing somehow.
    Mr. Smith. We can provide that answer.
    Mr. Shimkus. Why I am following this line of questioning, 
as I mentioned in maybe my opening statement that the Federal 
agencies are supposed to be--we should serve our clients. Our 
clients are the consumers, and we need to make every effort to 
help them resolve conflicts prior to going to the court.
    It is not just the FERC. This is the first time I heard of 
FERC not responding rapidly. I have other problems with other 
Federal agencies. So it is a good line of questioning. And 
those of us who want government to work well and work with the 
clients--I mean, I think all they are asking for is due 
process, a chance to question the bill, which I think they 
should have.
    And I got a small producer here. Do you want to add 
anything?
    Mr. Krehbiel. Perhaps I can shed a little bit of light on 
that question.
    The example that I gave in my testimony of the widow in 
Wichita, Kansas, she received a bill, letter from the FERC 
directing her to refund $20,000. When I went back through what 
information was available when I tried to help her, I learned 
that she was actually underpaid by $49,000 during the period 
from 1983 to 1988, and she is being held responsible for 
$20,000 in a refund. She simply wrote back and said she didn't 
owe it.
    So then we don't know what happens next. We got producers 
all across the State of Kansas who are being asked to pay 
refunds without any determination that they are even liable for 
the refunds. That is the really bizarre thing about this 
procedure. How can you ask a producer to refund $20,000 based 
upon an alleged overpayment that is just based upon a 
conclusion presented to the FERC by the pipeline company? We 
have got records here that are 15 years old. You have got to go 
back and study a whole lot of issues and dig out a whole lot of 
records to figure out whether any liability even exists, and to 
my knowledge none of this has ever even been done.
    Mr. Shimkus. Let me ask, since she hasn't been harassed 
that much, Miss Lumpe from Missouri, sister State to Illinois. 
In fact, some of the pipelines that go through Missouri end up 
in Illinois. What do you think about the claims of the small 
producers, chance that the FERC ought to at least hear the case 
and do some adjudicative process which makes some validity of 
their claims?
    Ms. Lumpe. As I said, we are not unsympathetic to various 
hardship cases.
    Mr. Shimkus. This isn't just hardship. This is questioning 
the billing, questioning the methodology, and coming to a 
conclusion. I mean, this is--I didn't go down the hardship case 
route. This is, are these bills certifiable? Are they--you 
know, are they supportable with documents and should there be a 
process by which the individuals who are claiming that they are 
now being harmed by this ruling, that they have their day in 
court?
    Ms. Lumpe. My understanding is--and, again, I could be 
wrong, but my understanding is that there are procedures set up 
in the act that determine how----
    Mr. Shimkus. Yeah, but you have been following our 
discussions of the past 5 minutes. And there may be procedures, 
but they are not----
    Ms. Lumpe. Well, but they should be followed.
    Mr. Shimkus. Thank you very much.
    Ms. Lumpe. They should be followed.
    Mr. Shimkus. Thank you.
    Anyone else want to comment? Miss Stovall.
    Ms. Stovall. To file the petition for alternate dispute 
resolution, which some of the producers indeed have done as far 
as back as March and not had response from FERC, costs $13,000 
per pipeline to do that. For small producers, that is a huge 
bit to ask them to resolve what they lawfully owe.
    Mr. Shimkus. Mr. Majeroni.
    Mr. Majeroni. If you think about the royalty owners' point 
of view, unless you are really from Kansas, I mean, your local 
attorney, your family attorney knows nothing about any of this. 
And who do they turn to for help? You know, the cost of getting 
that help is almost, you know, as much as the bill. So it is a 
real problem. And----
    Mr. Shimkus. Well, again----
    Mr. Majeroni. [continuing] 15-year-old bill to try to find 
those and verify those.
    Mr. Shimkus. Again, we have done the same thing in a 
landfill in Quincy, Illinois; and the consumers at least got an 
opportunity to go back and pull out their own dumping records 
and have at least a small portion of their day in court. And I 
think that would probably make the individual parties at least 
somewhat understandable of the process if they at least had a 
chance to fight this charge.
    With that, I am going to yield back my time to the 
chairman.
    Mr. Barton. Recognize the gentleman from Oklahoma for 10 
minutes.
    Mr. Shimkus. Do I have to? I mean, yes, I would like to 
recognize the distinguished gentleman from the State of 
Oklahoma for 10 minutes.
    Mr. Largent. Thank you, Mr. Chairman.
    Ms. Stovall, I want to get down to the basics a little bit. 
Tell me about what is an ad valorem tax in this context? I 
mean, what are we taxing?
    Ms. Stovall. In Kansas, the way the tax has been put on is 
a complex formula. I am not going to pretend that I have an in-
depth understanding of it, but it taxes various things 
including the rate of production as well as other factors. And 
there is a property valuation done as to what the reserves are 
worth. There is a calculation taken based on how much 
production is taken from the natural gas well each year which 
is how those prior decisions were made saying that it is a 
production tax.
    Mr. Largent. Okay.
    Mr. Barton. Would the gentleman yield on that?
    Mr. Largent. Yes.
    Mr. Barton. But the tax that was paid was paid on natural 
gas that was actually produced from the well in a given month, 
is that not correct? They didn't tax at the end of the year 
based on the value of the reserves still on the ground. They 
taxed on the amount of natural gas that actually came out of 
the well.
    Ms. Stovall. The amount that came out of the well was one 
of the factors in calculation of the tax.
    Mr. Barton. Only one of the factors.
    Ms. Stovall. Yes, sir.
    Mr. Barton. So they did have a kind of a reserve tax also.
    Ms. Stovall. That is why it was an ad valorem tax.
    Mr. Barton. I didn't know that. That is different.
    Ms. Stovall. It was a little bit different than the ones--
--
    Mr. Largent. Can you enlighten us on that at all?
    Mr. Krehbiel. Perhaps I can. Ad valorem tax was based on 
the amount of the production and the value of that production, 
but there is a reserve analysis, as you suggest. So it was a 
combination of factors.
    And the law at the time said severance production or other 
similar taxes, and in the FPC ruling they ruled this was a 
similar tax. It was based upon production. You report the 
amount of your production every year, and you report the value 
of that production, the price that you got for the production. 
So you have those production and price factors figured into it. 
And that is where they come up with the idea that it was a 
similar tax.
    Now if the State of Kansas had known that they were going 
to change their mind on how this was----
    Mr. Largent. We got that part of the argument.
    Mr. Albright, based upon that, the ad valorem tax, it 
sounds like it is a fairly complicated issue that deals with 
production and reserves, calculation, like that. You were--what 
was the quote that you had that the Circuit Court had on 
whether the ad valorem tax could be, basically, passed on to 
the ratepayers?
    Mr. Albright. According to the D.C. Circuit--let me pull 
that exact quote: ``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.''
    Mr. Largent. But I am talking about in terms of what the 
Circuit Court said to FERC about their allowing Kansas to pass 
on to ratepayer the tax instead of going to the producers.
    Mr. Albright. I didn't quote that, but that is the CIG case 
in 1988 where the Court examined the analysis that FERC had 
applied, in comparison to the Texas tax, the same analysis 
against the Kansas tax. And in the Court's mind this was a 
dissimilar treatment of what the Court viewed to be similar 
taxes and called the Commission's actions the quintessence of 
arbitrariness and caprice and remanded the case back to the 
Commission to exercise its interpretive authority to identify 
the features of the Kansas tax that point toward one 
classification or another and to offer sensible distinctions 
between taxes that it chooses to treat differently.
    So there is a Commission decision which came out in 1993, 
and that is Colorado Interstate Gas Company, 65 FERC, paragraph 
61, 292, that the Commission issued which examine in length the 
features of the Kansas tax supporting the determination that it 
was not a severance tax but, in fact, a tax on property.
    Mr. Largent. Okay. It sounds like it is much more 
complicated than the conclusion reached by the Circuit Court. 
That is my point. To me, when I hear the explanation of the 
tax, it is not a real simple value-added tax that doesn't have 
anything to do with production, it has a lot to do with 
production. So I don't know that it is a clear-cut case that 
this cannot or at that time could not be passed on to the 
ratepayers.
    But I want to go back to Mr. Smith. Mr. Smith, in 1988 FERC 
was given this decision and remanded the case in 1988. It took 
FERC 5 years to make a decision. Why the delay? In getting such 
compelling language from the Circuit Court in DC, remanded the 
case to FERC and said, you guys need to do something about 
this, and there is a 5 year hold-your-breath. What happened?
    Mr. Smith. Well, I wasn't at FERC at the time, so I can't 
speak from personal knowledge, but, as you can hear from 
today's hearings, these are difficult issues with strongly held 
views on both sides, and it took that long to get an order out 
of the Commission.
    Mr. Largent. How many cases have there been where people 
have been ordered to pay and they have sought, you know, some 
reprieve from FERC?
    Mr. Smith. The special hardship?
    Mr. Largent. Yeah, how many cases.
    Mr. Smith. I think we have got roughly 130 applications 
already.
    Mr. Largent. How many have you actually heard?
    Mr. Smith. Well, we have acted on 10 roughly, 10 or 11.
    Mr. Largent. And, Miss Lumpe, how many has Missouri 
appealed?
    Mr. Barton. Again, use the microphone for our recording 
clerk.
    Ms. Lumpe. Missouri has appealed a number of them. 
Somewhere I have the precise number.
    But what we have really done is say, have they given you 
adequate data and information? We haven't said that they were 
wrong. We said we think that the FERC should have adequate 
documentation and data that these are truly hardship cases. And 
if they are, we would not contest them further. We simply think 
that they ought to have adequate information to make their 
determination.
    Mr. Largent. Okay. Mr. Smith, in somebody's testimony here 
it said that $95 million has already been paid. Where is that 
money?
    Mr. Smith. It has been passed from the producers to the pay 
plans, through the pay plans to the LDCs.
    Mr. Largent. LDCs?
    Mr. Smith. Local distribution companies. To the customers 
of the pipelines.
    Mr. Largent. So it actually has gotten to the consumers?
    Mr. Smith. Well, the other witnesses can comment on what 
happened to it, at least in a few particular States, after it 
got to the local distribution companies.
    Mr. Largent. Miss Stovall.
    Ms. Stovall. It was my understanding the money is held in 
escrow. Certainly the $21 million paid into Kansas has been 
held in escrow pending resolution of who owes what and validity 
of the claims.
    Mr. Largent. Miss Lumpe.
    Ms. Lumpe. The money in Missouri coming from the pipeline 
to the local distribution company and through our purchase gas 
agreement factor that we used flows directly then to the 
consumer.
    Mr. Largent. So there is checks already been handed to 
consumers.
    Ms. Lumpe. I am not aware of any of that. That would be the 
process would occur should the refunds and interest come to us.
    Mr. Largent. But you have gotten some refunds, is that 
right, of this $95 million? Hasn't some of it come to the State 
of Missouri?
    Ms. Lumpe. I am not aware of that number, sir.
    Mr. Largent. You are not aware of it?
    Ms. Lumpe. I am not aware that we have passed to LDCs in 
Missouri.
    Mr. Albright. If I may speak. The Public Service Company of 
Colorado received a refund of over $2.5 million, and almost all 
of that has been refunded to its customers by now.
    Mr. Largent. And that has gone to individual ratepayers.
    Mr. Albright. Yes, it has been credited to the bills of the 
customers.
    Mr. Largent. Did any of it go to pipeline?
    Mr. Albright. None. Some of it went to the Colorado Energy 
Assistance Fund, which is a low-income fund for consumers.
    Mr. Largent. Was it ever held in escrow?
    Mr. Albright. None of it was held in escrow by public 
service. I think Miss Stovall is referring to the fact that 
some of the producers have the option of placing the funds in 
escrow until the litigation is resolved.
    Mr. Largent. But not in the State of Colorado.
    Mr. Albright. Well, that is a FERC matter. That is a 
Federal matter. I believe Mobil Oil Corporation actually did 
pay some $62 million, in that ballpark, of refunds, which is 
the bulk of the $90 million that Mr. Smith is referring to.
    Mr. Largent. Miss Lumpe, do you have some new information?
    Ms. Lumpe. Yes. About $8, $9 million has been sent back to 
Missouri and through the MGE, the local distribution company 
known as Missouri Gas Energy.
    Mr. Largent. What they have done with it?
    Ms. Lumpe. Then they come to us and through a credit we 
refund it back to the consumers.
    Mr. Largent. One hundred percent.
    Ms. Lumpe. One hundred percent.
    Mr. Largent. So the money was not held in escrow in 
Missouri either.
    Ms. Lumpe. I don't believe so.
    Mr. Largent. I wanted to kind of walk through there--I 
mean, the reason I ask that is because I want to talk through--
in the Chairman's remarks he said that the pipelines paid the 
tax. Is that true? The pipelines paid this tax? Or did the 
ratepayer pay the tax? Miss Stovall.
    Ms. Stovall. Certainly, ultimately, it would have been the 
ratepayer.
    Mr. Largent. Because the pipeline just passed it right on 
to the ratepayers.
    Mr. Barton. I mean, when they paid the purchase price they 
included the maximum lawful ceiling price and it also included 
Kansas taxes. So the pipeline paid it, and the distribution 
company paid it. Then they added to the price that the ultimate 
consumer of the gas paid.
    Ms. Stovall. True.
    Mr. Largent. It was passed along.
    Well, my time has expired, but I want to ask more questions 
later.
    Mr. Barton. The gentleman from Texas.
    Mr. Hall. I have asked all I need to ask.
    Mr. Barton. The Chair----
    Mr. Hall. I have my mind made up.
    Mr. Barton. We have some additional questions. But what we 
are going to do, now that everybody has had a 10-minute round, 
we will just have a general question period. And I will ask 
some questions, and if Mr. Largent and Mr. Shimkus and Mr. 
Hall--Mr. Shadegg indicated--oh, he is here.
    The Chair would recognize Mr. Shadegg. We are not used to 
him sitting with the staff in the back of the hearing room. The 
gentleman from Arizona is recognized for 10 minutes. Mr. 
Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. I will be brief. I 
won't take my full 10 minutes and may be able to pass some on 
to you.
    Do I understand from the Attorney General of Kansas that, 
having listened now to the other people in the room, that 
Kansas is apparently the only State that is, in fact, holding 
some of these moneys in escrow at this point?
    Ms. Stovall. Oh, I am not at all sure that is true. There 
are many, many States involved. The two here apparently aren't 
holding in escrow, but there are lots of States who have 
consumers who may get that $10 of refund if indeed it is paid. 
So their individual corporation commissions have to rule on 
what happens with that money, and it hasn't happened in many of 
the States.
    Mr. Shadegg. But your position as the Attorney General of 
Kansas is it would be better to follow legislation such as 
Congressman Moran has introduced and pass this back onto the 
pipelines, as opposed to trying to carry it to the individual 
consumers.
    Ms. Stovall. Congressman Moran's bill would say the only 
way that the producers have to pay this rebate is if it goes to 
the ultimate consumer. And that guarantee we would want. If 
anything is to be done, it has got to go ultimately to the 
consumer, not to the pipelines.
    The moneys that we have talked about earlier by Mr. 
Albright, the hundred percent of the money went to the 
consumers, it is my understanding that the money from the 
pipeline--that the pipelines kept was taken off the top of 
that. So, indeed, what he said was true. One hundred percent of 
the money that he spoke of went to the consumers, but that was 
after an element of the money was kept from the pipeline 
companies.
    Northern Natural Gas intends, it is our understanding, to 
keep 20 percent of it, Panhandle Eastern to keep 11 percent, 
and so on. That comes off of the top. So that needs to be 
clarified and how much the consumers ultimately may get.
    Mr. Shadegg. Do you agree with that interpretation, Mr. 
Albright?
    Mr. Albright. I don't know if I agree with those figures. 
Colorado's primary interstate supplier is Colorado Interstate 
Gas Company, and they have indicated that they are only going 
to retain about 5 percent of the total refunds. This is a 
result of direct sales, not sales for resale which is regulated 
by FERC. The direct sales are not regulated by FERC but subject 
to State regulation.
    So if there is a matter of State regulation involved, I am 
not sure how that is being passed on in other States. With 
respect to Colorado, it is not regulated. It is a matter of 
private contact law.
    So it depends on the bargain that was struck by the direct 
user, the end user of the gas, and the pipeline. It could be 
that the direct end user will receive that refund pursuant to 
the terms of the contract. Otherwise, the pipeline would retain 
it because they get the benefit of the bargain.
    Mr. Shadegg. Let's go back to the issue of the interest. 
The largest portion of this, some $25 million of the $363 
million is interest. However, under Mr. Moran's legislation, 
that interest would be waived and the refunds. That would 
simply be limited to the principal amount originally taken. Is 
that correct?
    Ms. Stovall. That is correct.
    Mr. Shadegg. Your view is that is a necessary step for the 
viability of the gas industry in Kansas?
    Ms. Stovall. That is true, as the equity would require that 
in recognition of the delay and reliance on FERC decisions and 
the rest of it, absolutely.
    Mr. Shadegg. Does FERC have a further explanation? I know 
Mr. Largent asked a little bit about it as to why it did take 
from a period of 5 years to try to decide this issue. I mean, I 
understand it is complicated, but it seems to me the Court 
language was fairly clear.
    Do you know of any further explanation FERC has for this? 
And, given the delay, why would FERC then at least not be 
supportive of the aspect of Mr. Moran's decision which waives 
interest--Mr. Moran's legislation which waives interest?
    Mr. Smith. I don't have any further explanation of why it 
took 5 years for the FERC to issue the remand order.
    On the issue of what the Commission did in response to the 
second D.C. Circuit decision, it concluded that a generic 
waiver of interest wasn't consistent with the reasoning of the 
D.C. Circuit in its 1996 decision.
    The rationale for not taking a position on the current 
legislation is that the Commission, in this respect views its 
job as administering the current statutes interpreted by the 
Commission and by the Courts. And if the Congress comes to a 
different judgment about what the equities require in terms of 
how to share the liabilities, that is a congressional 
prerogative and the Commission will do its best to administer 
the law however it might be amended.
    Mr. Shadegg. I guess, too, that last point--I certainly 
agree it is your job to administer the laws as we enact them. 
Are you an attorney?
    Mr. Smith. Yes.
    Mr. Barton. No, he is just the General Counsel at the FERC.
    Mr. Smith. It is buried in my job description someplace.
    Mr. Shadegg. It is good to know that the FERC has an 
attorney for their general counsel. I am pleased to hear that, 
Mr. Chairman.
    But in that regard I want to ask you a question that Mr. 
Albright raised. You do not see a change by the Congress at 
this point in time of the status of any interest as being 
unconstitutional, do you?
    Mr. Smith. I know the issue has been raised but, it has not 
been raised with the Commission. So the Commission hasn't come 
to a judgment about that. I would note that the Commission does 
have authority under existing law, section 502 of the NGPA, to 
provide for waiver relief, and I am not aware that anybody has 
questioned that authority as being unconstitutional.
    Mr. Barton. Would the gentleman yield on that?
    Mr. Shadegg. Certainly.
    Mr. Barton. What authority does the FERC have, since this 
is a State tax that was levied, to assess penalties and 
interest on a tax? I thought the Constitution gave the Congress 
the right to assess taxes.
    Mr. Smith. The relationship between the producer and the 
State in terms of the tax payment was not something that the 
NGPA envisioned the Commission having any role in. As you are 
aware, the issue in this case is essentially one of rate 
regulation under the NGPA and whether the tax payment can or 
cannot be passed on from first seller to the pipeline.
    Mr. Barton. I understand that. But my question is, if the 
gentleman will continue to yield, and I don't know the answer. 
Sometimes I ask questions to set people up because I think I 
know the answer. But this time I am actually asking because I 
actually don't know and, hopefully, you do.
    Where does a Federal agency have the right, since this is a 
State tax--I understand that FERC has the right to regulate 
prices of natural gas because the Congress gave the Federal 
Power Commission that right under a prior act to the NGPA, but 
where do you have the right to establish an interest in what I 
would call a pen leak because it is a State tax? Why wouldn't 
you just say refund the principal as the Moran bill does? Where 
do we get the authority to go above and beyond that--not you 
personally but the Commission.
    Mr. Smith. I think the authority is in the NGPA itself, 
which provides the generic authority to set the rates, and in 
the traditional exercise in rate making of applying interest to 
refund calculations.
    Mr. Shadegg. Reclaiming my time, if I might, perhaps I can 
answer the gentleman's question.
    I think the answer is that, as a regulatory agency charged 
with setting the price, if a price is collected above the legal 
maximum, a penalty can be imposed saying you charged a price 
above what was allowed. And so you are going to have to give 
that back, and you will have to give back interest on that. And 
I don't know that. But----
    Mr. Barton. But they never questioned the rate. There is no 
dispute----
    Mr. Shadegg. But it was included.
    Mr. Barton. [continuing] the maximum lawful ceiling price. 
And Kansas never hid the tax. Kansas never said, this isn't 
really a tax. They were always up above board. The people that 
purchased the gas knew that it was a tax.
    Mr. Shadegg. We established that neither counsel nor I know 
where they get the right to charge the interest.
    Mr. Barton. I don't either.
    Mr. Shadegg. And neither do you. But I would like to go 
back to this point of constitutionality, because it is well 
established in tax law in this country and has been for a very, 
very long time that you can enact retroactive taxes. And indeed 
I believe in North Dakota at one point in time the State went 
back and enacted a retroactive tax that went back a period of 
8, 10, 12, 15 years. They collected the tax, and it was 
challenged, and it was upheld as being a lawful act of the 
State legislature.
    In that instance, I think what happened was the legislature 
thought they had enacted the tax, they discovered that they had 
not properly enacted the tax, and they went back years later 
and reenacted the tax and that was upheld.
    So I don't think that were this Congress to pass Mr. 
Moran's legislation giving back this interest at this late 
point in time that that would be unconstitutional, nor do I 
think it was a taking. I think it would be perfectly lawful 
under our law and indeed maybe demanded by the equities.
    I guess the other point I want to make was in response to 
Miss McCarthy's point and that was I do not see any problem 
with this Congress reversing a decision of a court. That is a 
part of the coequal branches of government. If we believe a 
court has made an ill-advised decision, I think we are in a 
position to and often do reverse court decisions. And I think, 
at least in the State of Arizona where I am from, the 
legislature frequently looked at court decisions with which it 
disagreed and reversed those court decisions where the 
legislature felt equity demanded it.
    I will yield back what little of my time.
    Mr. Barton. Well, I took some of the gentleman's time. So 
did you have another question?
    Mr. Shadegg. No, I am fine.
    Mr. Barton. Well, I have a few wrap-up questions.
    I want to thank the panel. You all have been here since 10, 
and you have been testifying since about 10:45. And so, 
hopefully, in the next 10 minutes we can conclude. And I know 
Mr. Largent has some questions, too; and Mr. Shimkus does.
    So my first question and, again, I will just recognize 
people as they have questions instead of giving us each an X 
amount of minutes.
    Miss Lumpe, I heard you in your oral statement and again in 
reply to a question that the great State of Missouri is not 
interested in trying to go after the widows and the orphans, so 
to speak, that your interest is in getting what is rightfully 
due to the State in terms of those big old bad producers that 
have all that money. But Senator Roberts sent over some case 
histories for me to put into the record; and I am just going to 
ask you about them because, if nothing else comes out of this 
hearing, perhaps we can use your good offices to get some 
justice.
    The first case that Senator Roberts sent over is a Mrs. 
Merland--I want to say Cope, C-o-p-e, Calvin of Arizona. Her 
husband's health has failed--and I believe that her husband has 
passed away. She owes $9,000 in refunds. She hired an attorney, 
went to the FERC. The FERC gave her a hardship waiver after 7 
months of consideration, and the Missouri Public Service 
Commission has appealed that. Are you aware of that particular 
case?
    Ms. Lumpe. I am not aware of the particular one, but I do 
know that we have appealed a number of them. And the reason we 
have is because we are not aware that the FERC got adequate 
data or information to make that determination. That is the 
process that we are asking for in our request.
    Mr. Barton. I am not going to read the inflammatory 
sentence that Senator Roberts put in. But I am going to ask 
that you look at court case number 99-1103. And, again, if 
these documents are correct, this elderly lady only owes 
$9,000; and the FERC did grant her a hardship waiver. And the 
Missouri Public Service Commission, according to Senator 
Robert's office, is appealing that.
    The second case is a Mrs. Bone of Colorado, and her mother 
passed away. So she inherited some royalties from her mother. 
She was asked to pay $12,998. She appealed for a hardship 
waiver, and the FERC again granted the hardship waiver, and the 
Missouri Public Service Commission again is appealing that. Are 
you aware of that case?
    Ms. Lumpe. I am not aware, again, of the specific case. The 
cases that we have appealed have been based on the process that 
we felt that a letter being sent and just asking was not 
sufficient, that there should be some evidence of hardship.
    Mr. Barton. All right. Well, if you will look up the case 
of Bone of Colorado.
    And there is one more. This is a Mr. Freeman, who is still 
alive. In this case, the person who actually had the royalties 
is alive. But he has heart disease. He is 64 years old. He 
owes, according to the documents, approximately $100,000. The 
wells are no longer producing. His only income now is social 
security, and he applied to the FERC for a hardship waiver. 
Actually, Mr. Freeman's partner, a Mr. Lee Kizner, who is dead, 
was the one that was supposed to pay this $100,000.
    And it doesn't say that the FERC has actually given a 
hardship waiver here, but that the Missouri Public Service 
Commission has already intervened and protested Mr. Freeman's 
request to waive the refund obligation. And they want to know--
and this is again according to Senator Roberts--they want proof 
that the royalty owner is actually dead. They want information 
demonstrating that he, Mr. Freeman, attempted to collect the 
refund from the dead royalty owner, including lodging a claim 
for the refund with the deceased's estate, and they want proof 
or documentation that making such a refund payment would cause 
special hardship. So could you check that one, too?
    Ms. Lumpe. Certainly.
    Mr. Barton. Okay.
    Mr. Hall. And their boy is in jail, isn't he?
    Mr. Barton. And I will provide----
    Ms. Lumpe. Mr. Chairman, do you have the numbers?
    Mr. Barton. Yes, ma'am.
    Ms. Lumpe. You gave me the numbers of the one case, but not 
the other two.
    Mr. Barton. I will give you all the documentation that 
Senator Roberts gave me. You seem to be a very honest and 
decent woman, and if you will go back and check these out. If 
they turn out to be as they are stated on the record, at least 
we could get some justice for these three.
    Ms. Lumpe. Right. And, as I said, we are not unsympathetic 
to them. We just felt there should be the process and the 
documentation before it is automatically granted.
    Mr. Barton. My last question before I yield to Mr. Shimkus 
or Mr. Largent, Mr. Krehbiel, you indicated in your answer to 
Mr. Largent that the calculation of this tax was based on a 
reserve, a reserve calculation as well as a production 
calculation. What would be the case if there was a well that 
has not produced but had an established reserve? Would they pay 
a tax in that calendar year even if there was no production 
from the well?
    Mr. Krehbiel. They would pay--I am not an expert in the ad 
valorem tax in Kansas as well, but they would pay a tax 
probably on machinery and equipment.
    Mr. Barton. I am talking about the value of the gas in the 
reservoir. Would they pay on the expected value--again, under 
the NGPA, you had a long-term contract, and you had a maximum 
lawful ceiling price. This was old gas, so if they knew how 
many mcf or billion mcf were in that well they would know the 
value of the reservoir because they had a ceiling price. Would 
they pay a tax?
    Mr. Krehbiel. I think there was an element of valuation 
based upon reserves in place.
    Mr. Barton. It is possible you could pay it--it is 
theoretically possible then----
    Mr. Krehbiel. I think the answer to your question is yes, 
theoretically.
    Mr. Barton. I started to say somebody would have never 
produced gas and then still be liable for this, but if they 
never produced they would have never sold it, so there wouldn't 
be a plaintiff out there wanting to be reimbursed.
    Mr. Krehbiel. Yeah. That is a very unique issue. 
Theoretically, yes.
    Mr. Barton. The gentleman from Oklahoma, Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Smith, what authority is there that oversees this 
process? I mean, does FERC take authority? Who is sending out a 
letter notifying a producer that you owe money? Who does that?
    Mr. Smith. The pipelines have filed reports with us saying 
what they believe the refund obligations are.
    Mr. Largent. So then a letter comes from FERC to one of 
these producers? Santa Fe Minerals would get a letter from FERC 
saying you owe us.
    Mr. Smith. They got both a notification from the pipeline 
which had that producer on their list of people that owed 
refunds, and they got a letter from the staff at the 
Commission.
    Mr. Largent. Okay. And they are ordered to pay X amount of 
dollars to whom?
    Mr. Smith. The refunds are to be paid to the pipeline.
    Mr. Largent. To the pipeline.
    Mr. Smith. Yes.
    Mr. Largent. And then who tells the pipeline what to do 
with this money?
    Mr. Smith. We have told the pipeline what to do with it. 
They need to pass it on to their customers, with the exception 
of the three pipelines I noted before that have settlements 
with their customers that allow the pipelines to retain any 
refund amounts.
    Mr. Barton. Would the gentleman yield on that point?
    Mr. Largent. Yes.
    Mr. Barton. What documentation did the FERC require of the 
pipelines to prove the value of the refunds being requested?
    Mr. Smith. My staff is helping me.
    Mr. Barton. We appreciate that you have a staff that wants 
to help. Hopefully, they actually can help.
    Mr. Smith. I am especially appreciative.
    The initial filing by the pipeline simply listed the 
producers and the pipelines' estimate of the refund liability 
for each producer. The Commission's letter to the producers 
that was based on that list said that if the producer disputes 
the amount that the pipeline has as the refund calculation, 
then they should, in the first instance, see if they can work 
it out with the pipeline, but, if they can't, then raise their 
disputes with the Commission.
    Mr. Barton. But there is no requirement that the pipeline 
or the requester of the refund document the amount before the 
fact.
    Mr. Smith. Right. Only in the case when there is a dispute 
presented to the Commission about the refund amount would we 
get into who has got what evidence of that amount.
    Mr. Largent. Is there documentation that the pipeline 
company is responsible to produce for FERC in terms of the 
distribution of those moneys?
    Mr. Smith. Yes, they file something with the Commission 
called pipeline refund reports.
    Mr. Largent. And what happens to any money that is not 
distributed? In other words, they can't find the ratepayer. 
Where does that money go?
    Mr. Smith. I don't think that issue has been raised with 
the Commission yet.
    Mr. Barton. Could we have the name of the lady in the 
purple who seems to be answering most of these questions? Just 
for the record I think we ought to----
    Mr. Smith. Give her credit.
    Mr. Barton. What is her name and title?
    Mr. Smith. Marilyn Rand.
    Mr. Barton. You are the Director for the Division of 
Pipeline Certificates.
    Ms. Rand. Yes.
    Mr. Largent. We are glad you are here.
    Okay. So we don't know what happens to any excess money? I 
mean, would producers earn interest on that money that is being 
held by the pipelines that could be credited? I mean, it has 
got to go both ways, doesn't it?
    Mr. Smith. I am sorry?
    Mr. Largent. They pay in money. It is not being distributed 
to the ratepayer, who we are so concerned about. It is being 
held in escrow, in essence. Why can't they get interest 
credited for that money?
    Mr. Smith. If the pipeline holds the refund amount that 
they receive from the producer for more than 30 days, then the 
pipeline is liable for interest to its customers.
    Mr. Largent. We are really getting complicated here. I have 
one other question, and that is to Mr. Albright.
    Mr. Albright, you said that when the State of Colorado got 
some of this refund back that they distributed some of it to 
who, $2.5 million?
    Mr. Albright. It is called the Colorado Energy Assistance 
Fund, which is a statutorily created agency to administer to 
low-income consumers for energy.
    Mr. Largent. Okay. Now, in your testimony in the summary it 
says it took 16 years for the customers of these producers to 
vindicate their right to the return of the excessive 
collections with interest using the legal process established 
by Congress in the NGPA. What right does the State of Colorado 
have to divert that money without the consumers' authority to a 
special slush fund for low income?
    Mr. Albright. I think there is somewhat of a misconception 
about which particular individual consumers will receive these 
refunds. The way the regulatory process works in the States--
and I know of no exceptions--there is no way to identify 
individual customers from 1983 to 1988 that were specifically 
overcharged as a result of the Kansas ad valorem tax 
overcharging.
    Mr. Largent. So what are we talking about? Where is the 
money going to go?
    Mr. Albright. It goes to the customer base of those 
utilities.
    Mr. Barton. Would the gentleman yield?
    Mr. Largent. Yes.
    Mr. Barton. What if I could prove that I lived in Colorado 
from 1983 to 1988 and that I was a natural gas consumer and I 
even had records of what I paid to the Colorado Natural Gas 
Company that provided gas to my home? Could I petition for a 
refund with interest in penalties based on documents that I 
lived there for that time period, even though I have now moved 
to Texas and am living on a farm and become a hippie and are 
using solar power and don't want any hydrocarbon energy of any 
kind?
    Mr. Albright. Then you would probably be in Colorado.
    Mr. Barton. That may be true. I mean, what if I could 
actually prove with documents that I was one of these consumers 
that ended up paying the price that included the disputed 
taxes?
    Mr. Albright. Well, you would probably receive a refund 
from the current natural gas service provider where you live in 
Texas. You could petition to Colorado, but I believe the law 
would not be on your side because of the fact that the 
automatic adjustment mechanisms in the tariff provide notice of 
how refunds will be processed, how gas costs and upstream 
pipeline supplier costs are passed through to individual 
customers.
    Mr. Barton. Now, there is no dispute that the ultimate 
payer of the tax was the person or the industry that ultimately 
consumed the gas. The pipelines--again, at that time most of 
the pipelines did take ownership. They actually paid the tax to 
the State of Kansas, as I understand it.
    Mr. Albright. I would take exception to that. Because 
Colorado Interstate Gas Company actually received gas bills 
from the producers from which it purchased gas and reimbursed 
the producers directly. It may have been different for other 
pipelines.
    Mr. Barton. I am not enough of a natural gas expert to know 
exactly how the billing was done. But, I mean, there is not a 
pipeline that is saying that the pipeline themselves paid the 
tax and didn't pass it on.
    Mr. Albright. That is correct. They did pass it on.
    Mr. Barton. They did pass it on. That being the case, if we 
were to move legislation in this subcommittee that is similar 
to the Moran bill, would pipelines take exception if we added 
an amendment that if you can't find the actual consumer who 
paid and purchased and consumed the gas any funds would go to 
some sort of a public benefit fund to be distributed to the 
State similar to what your line has apparently done in 
Colorado?
    Mr. Albright. Well, the way I understood Mr. Moran's bill 
was the reference to ultimate consumer would be the body of 
consumers that were customers of the utilities, the local 
distribution companies of the pipeline. So to the extent Public 
Service Company of Colorado is a customer of the pipeline, the 
bill would require that Colorado Interstate Gas Company, 
Williams Gas Pipelines, Cane Interstate Gas Transmission would 
make those refunds to the Public Service Company of Colorado.
    What happens after that point, I think if the bill is to 
require that the actual consumer that received the bill that 
included some allocated costs of the Kansas ad valorem tax--and 
I would submit that that is an impossibility to do that because 
of the way rates are determined--but if that could be done, the 
cost of tracking each individual customer that was on our 
system--we have 1 million customers on our system--would 
outstrip the entire dollar amount of the refund.
    We have 1 million customers on our system. And on an 
average monthly basis 20,000 of them move addresses. So to be 
able to track those customers that have moved from the service 
area would be a virtual impossibility. But the equities still 
weigh in favor of the consumers receiving these in refunds 
because consumers in Colorado may have moved to Texas.
    Mr. Barton. I understand that. But if you are going to have 
pure equity though, if you can't identify the consumer, if we 
are going to be fair about this, we ought to identify the 
consumer. And if we can't because we are a just society, 
instead of letting the pipelines, who admittedly never paid the 
tax, I mean, they got compensated, why not give to the public 
benefit funds of the State?
    Mr. Albright. Because then refunds would never be made to 
consumers for overcharged gas prices.
    Mr. Barton. But you just admitted it is--I think your exact 
words--it is virtually impossible to identify the consumer, the 
real consumer.
    Mr. Albright. It is physically possible to do, but the 
costs would just be enormous.
    Mr. Hall. Mr. Chairman, would you yield?
    Mr. Barton. I am going to yield back to Mr. Largent, who 
can yield back to you.
    Mr. Hall. When you talk about consumer, are you talking 
about the electric and gas customers?
    Mr. Albright. The natural gas customers, not electric.
    Mr. Hall. Back to just the consumer in general, that would 
have to be a fund like the chairman suggested there----
    Mr. Albright. I am not sure what the chairman was 
suggesting.
    Mr. Hall. [continuing] for my State to be part of those 
consumers, if we are just going to throw back someone that is 
not either a customer of the electric or the gas customer.
    Mr. Albright. Well, it is all done under State authority. 
The State regulatory Commissions provided for the pass-through 
of these costs, and they are regulating the refunds as well.
    Mr. Hall. I will yield back my time.
    Mr. Largent. I want to follow up, just kind of hammer at 
this point.
    Mr. Barton. I think we have Shimkus and Mr. Pickering.
    Mr. Largent. I am going to take 60 seconds or less.
    The point is that this action by FERC is really punitive. I 
mean, we are not trying to remedy a consumer, according to your 
testimony, because we can't identify that consumer--or 
customer. In fact, I would say that if we could put together a 
bill not like Jerry's but just say every person that can 
legitimately make their case that they were a consumer in the 
State of Colorado or Missouri or wherever during these years 
and you can validate that through your property taxes or State 
income tax that you paid or if you got your bills from 1983 to 
1988, whatever, and can show those, we will pay you back, with 
interest. I bet that number would be significantly less than 
the number that is on this, you know, on this information that 
we have, $366 million.
    But that is not what this is about. This is about getting 
some extra money for consumers that were not necessarily harmed 
by this action in the State of Colorado.
    Mr. Albright. Except for the fact that they paid $15 per 
natural gas bill too much.
    Mr. Largent. Who did?
    Mr. Albright. The customers that were overcharged.
    Mr. Barton. If you can identify them, we will pay them. You 
just said you couldn't identify them. You said it costs more 
than it is worth to identify them.
    Mr. Albright. I think the expenses would be more than it is 
worth. I guess we are focusing on the relationship between the 
gas distribution companies and its consumers, whereas the 
matter here is between the pipelines and the customers of the 
pipelines that were actually overcharged. The way that the 
utility then refunds its customers, which in Colorado is 100 
percent, is a matter of State regulation.
    Mr. Largent. It is not 100 percent. You just said they put 
it into a low-income----
    Mr. Albright. But those are our customers. The low- income 
customers are still customers on our system. They just get a 
bigger share.
    Mr. Largent. Well, it couldn't be 100 percent then. If you 
are putting some of it in a special fund, then you did not do 
100 percent. There is no way.
    Mr. Albright. It is not a special--well----
    Mr. Barton. Mr. Pickering hasn't even had a chance to ask 
the first question yet.
    Mr. Pickering, do you have questions? I know Mr. Shimkus 
still has a question.
    Mr. Pickering. Thank you, Mr. Chairman.
    I appreciate you having this hearing. The longer I sit 
here--this is one of those examples that you just grow 
frustrated and outraged at the administrative, the regulatory, 
administrative and legal malfeasance and mal-administration and 
ridiculousness of trying to now rectify past wrong decisions 
over a 15-to-20-year period.
    I speak of someone with great respect for the law and the 
courts. My father is a judge. But this is just beyond the pale 
to me of what we are trying to do, to the harm that it causes 
the independent producer, to the widow, to the student, to the 
sick. I mean, it is just, in my view, ridiculous.
    Ms. Lumpe, how many widows are going to go through a 
traumatic experience? How many are near bankrupt or bankrupt? 
How many universities like Cornell will lose opportunities to 
educate for a perceived benefit of $15 per consumer that you 
can never even find? You just said it is virtually impossible. 
Now where is the proportionality here of weighing the benefits 
to the cost?
    And, Mr. Moran, I want to commend you for your effort here. 
I want to say that he has been diligent and persistent in 
calling every member on the committee. You could not find a 
greater champion to right what has, in my view, been just one 
of the cases that gives government and government confidence 
and integrity a bad name. So I am very thankful that we are 
having this hearing. I hope that we can move legislation 
through the committee.
    You know, I could ask some questions, but I don't think I 
am going to find any more sense to this whole process than 
anybody else has found here.
    Mr. Krehbiel, let me just ask you a few questions. And. 
Again, my home town of Laurel, Mississippi, is one where oil 
and gas and independent producers really contributed to our 
economy and to the founding as a major component of our 
community. So I have great sympathy of what you are dealing 
with and what the whole industry has been dealing with.
    What will--if full refunds with interest are ordered, what 
impact will that decision have on drilling activity in Kansas?
    Mr. Krehbiel. The impact would be incredible. You are 
talking about enough money to fund the drilling budget for the 
entire State of Kansas for the next 3\1/2\ years. You will 
fundamentally cripple an industry that is already fundamentally 
crippled.
    Mr. Pickering. If Kansas producers had known in 1993 they 
couldn't keep reimbursements for Kansas ad valorem taxes, do 
you think they would have paid those reimbursements out to 
other working interest owners and royalty owners?
    Mr. Krehbiel. The oil and gas industry in Kansas has always 
complied with FERC regulations to the best of their knowledge 
and ability. They wouldn't have done anything to not comply 
with Federal law. They wouldn't have distributed those revenues 
if they had any way of knowing.
    Mr. Pickering. Mr. Chairman, just one final question. How 
have the members of KIOGA been affected by FERC's answers 
dealing with the Kansas ad valorem tax issue?
    Mr. Krehbiel. We have got a lot of members totally in 
shock. They are just amazed that this can happen in this 
country. They can't project into the future. They can't set up 
drilling budgets. They have no idea where this thing is going 
to land. They are just sitting there waiting to see, waiting 
for the hammer to fall.
    Mr. Pickering. One final question for Ms. Lumpe.
    You say that you want to process it as a case by case, that 
somebody has to demonstrate, provide demonstrable evidence of 
their hardship. Does that take retaining an attorney, a lawyer 
where you have tremendous legal costs in doing that? Can many 
of these people afford to do that?
    Ms. Lumpe. I don't think it would take an attorney. I think 
what we saw was just a letter coming, saying could I have a 
hardship, and there was no evidence there. I think what we are 
asking is that there be some evidence.
    Mr. Pickering. But how do you collect and present 
evidence--take this widow in Kansas.
    Ms. Lumpe. If the gentlemen said, my only income is social 
security and he has evidence of that, that is certainly enough. 
All widows are not poor. All people are not poor that are here. 
And we think that to get to the true hardship cases, you know, 
is what we are after. And so, because we are looking for the 
consumers of our State, I think that is our job and our 
mission.
    Mr. Pickering. The consumers that you could not find that 
are actually harmed.
    Ms. Lumpe. They are a class of consumers that paid the 
unlawful rates over the----
    Mr. Pickering. Lawful at the time, though, is that not 
correct? It was a regulatory decision that was lawful at the 
time at least.
    Mr. Barton. Would the gentleman yield on that?
    I think the gentlelady from Missouri is technically 
correct, but I would have to go back and look at it. But I am 
trying to remember what maximum lawful ceiling prices for old 
gas out of the Hugoton Field were in 1983. Gordon Gooch, in the 
back of the room, probably knows, but I will pull a number out 
of the air and say it was $1 an mcf and then the severance tax 
and the ad valorem tax on top of that may have added 3 cents, 
maybe 4 cents. I don't know. Somewhere in that ball park.
    The gas was consumed. The homes were heated. The turbines 
were turned. We are talking about even by the gentleman 
representing, you know, some of the larger plaintiffs in this, 
$15 a customer over a period of years. There has been no harm 
done, nobody forced a gun to these people's head to consume and 
burn that natural gas. And the tax portion of it, unless Kansas 
is just a hugely high tax State, was almost negligible to the 
end consumer.
    I yield back.
    Mr. Pickering. Mr. Chairman, I am finished as well and 
agree with your comments and views. And thank you for your 
leadership.
    Mr. Barton. Mr. Shimkus, do you want a final question?
    Mr. Shimkus. Mr. Smith, on the--I mentioned when I was in 
the chair I wanted to quickly cite the hardship applications 
you have mentioned as the figures I have, that there are 130 
requests and that I have 11 hardship applications that have 
been granted relief. Where are we on the additional 100 and 
will they see FERC responding in a timely manner to their 
requests?
    Mr. Smith. Let me just clarify the numbers. About 130 
applications for hardship waiver have been filed. I think the 
Commission has acted on 11. We haven't granted all of them. My 
testimony stated how many were granted or denied or deemed 
unnecessary.
    Mr. Shimkus. I am more concerned about the 119 additional.
    Mr. Smith. In most of those cases, there are two issues 
which need to get resolved before the Commission can act. One 
is simply getting enough information about the application for 
waiver so that we can make a judgment about whether there is or 
isn't hardship. At least some of the submissions we are 
treating as applications for hardship waivers are short letters 
that essentially just ask for the waiver without providing 
enough information to come to a judgment about whether there is 
or isn't hardship, and the Commission staff is trying to gather 
and check that information.
    Second, in some of the cases, the waiver requests raised 
particular issues that are generic, and which are pending 
before the Commission. Some of these issues have recently been 
resolved at the Commission level. So that should permit us to 
move forward and act on the bulk of those pending applications.
    Mr. Shimkus. And we, in essence, have been talking about 
$334 million, and I have a list here that talks about, for 
example, what No. 1 is, Amoco Production Company, that has a 
principal owed of $24 million and $38 million in interest. 
Those interest rates keep accumulating; is that correct?
    Mr. Smith. Yes.
    Mr. Shimkus. So if I have a chart that approximates from 
November 30th, 1997 to, well, just the end of December, 1997, 
obviously the interest rates are much higher now.
    Mr. Smith. I would note that some producers have paid. 
About $95 million of the refund amounts have been paid. 
Obviously those aren't accruing interest. And some producers 
have paid refunds into escrow, so the escrow account itself is 
earning interest.
    Mr. Shimkus. And the last confusion I still have is that 
the debate is on the ceiling set price when the natural gas 
industry was deregulated. And the dispute that we have also is 
whether at times from 1983 to 1988, was the actual additional 
charge to the Kansas ad valorem tax--did it actually go over 
the ceiling price? And there is still no reconciliation on that 
issue.
    Mr. Smith. One of the issues that has been raised before 
the Commission is referred to as the ``head room'' issue. It is 
basically the price that was actually charged below the maximum 
lawful price, so that even if you added----
    Mr. Shimkus. It wouldn't matter.
    Mr. Smith. [continuing] the tax, it wouldn't matter, right.
    Mr. Shimkus. I yield back to the chairman.
    Mr. Barton. Before I recognize Mr. Hall for concluding 
remarks, we are going to work to see if it is possible to get a 
consensus on some version of the Moran bill and try to move it 
in the next month or month and a half.
    Now, that may not be possible.
    Mr. Shimkus. Mr. Chairman, can I interrupt as you are 
talking about that? It is a credible issue that has been raised 
too, and it has created sympathy for relieving the penalty and 
interest. And I know that is what my Congressman from Kansas 
wants. But it does set an interesting precedent. If we agree 
that there was an illegal tax, but it wasn't illegal enough to 
recoup the full benefits of money withheld, we put ourselves in 
an interesting position to say it was illegal enough to take 
the initial principal, but it is not illegal enough to also 
recover lost revenue over years.
    Mr. Barton. Well, the tax was not illegal. No one is saying 
that Kansas illegally levied a tax. The dispute is over whether 
the tax should be included in the maximum lawful ceiling price 
under the NGPA or whether it should be in addition to. And if 
it were in addition to, then it should have been borne by the 
producer, not by the consumer, not by the purchaser, because 
the NGPA didn't allow above the maximum lawful ceiling price. I 
think I am saying that right.
    Mr. Shimkus. But is that bad enough to just ask for the 
principal back, or is it bad enough to ask for principal and 
interest.
    Mr. Barton. Well, we are going to see if we can make some 
people more happy and fewer people less happy than they are 
right now.
    Mr. Hall, to conclude the hearing.
    Mr. Hall. Mr. Chairman, I am back interested in it again. I 
am trying to figure who is stirring the pot.
    Congressman Moran has absolutely touched all the bases. And 
he is not only a good guy; he is highly respected here. And you 
have given him his word that he is going to get a run. I don't 
know what the Senate is doing. You have read me some letters 
there from the Senator. You know, if each resident customer-
consumer is receiving $15, and each commercial resident 
consumer-customer is getting $90, it is nothing to the 
utilities, it is a flow-through for them, as I see it; and the 
argument over interest is still in the Courts, and FERC is 
still litigating the generic waivers. And when you boil it all 
down it looks to me like the help to the customers doesn't seem 
like it is enough to justify the hurt it puts on the producers. 
And I don't think you are going to get lawyers to take any of 
these cases on a contingency basis.
    I am trying to figure where we are coming from. I guess my 
question would be, who is the best constitutional lawyer there? 
Who is the best trial lawyer? Does anybody want to volunteer 
for that?
    Mr. Barton. Well, ask who is a lawyer.
    Mr. Hall. Can I get this lady in purple to----
    Counsel, why wouldn't the defense of de minimis be 
available to somebody here?
    Ms. Stovall. It certainly would in terms of the equity 
issue. We would argue very much, as you balance, that it is de 
minimis, the benefit that the consumers were to receive in 
light of the consequences, and that there isn't a 
constitutional right of the consumers to interest, nor a 
constitutional right to the refund, but merely a statutory 
right to the refund.
    Mr. Hall. Looks like everybody is in the same shape. The 
broke gambler, what he lost hurt him more than what he won 
helped him. I just don't see, other than courtesy to a good 
Member of Congress in giving him a hearing, where we are going 
with this.
    Mr. Barton. Would the gentleman yield?
    Mr. Hall. Sure.
    Mr. Barton. Unfortunately, we had probably half the 
Republican members here; we only had, I believe, two Democrat 
members. But if we had had enough membership here to see what 
the consensus of the subcommittee--I want to move a version of 
the Moran bill.
    Mr. Hall. You had the very best ones here.
    Mr. Barton. I didn't talk about the quality, I am talking 
about the quantity.
    So if we can see that there is support for either the Moran 
bill or a bill similar to it, that it doesn't just absolutely 
cause heartburn to the great State of Missouri and the great 
State of Colorado and some of the other attorneys general and 
Governors that have sent letters on this issue, we will try to 
find equity and justice and move a bill that again is not 
identical to the Moran bill, but something that is similar to 
it.
    I would say the chief addition would be the addition of a 
public benefits fund disbursement requirement, so that if you 
can't identify the consumer that actually paid the tax, that 
money would go to the State to use in some sort of low-income 
energy assistance or similar fashion.
    Mr. Hall. I yield back my time. I thank the Chair.
    Mr. Barton. I want to thank this panel. There may be 
additional questions for the record.
    We thank you for your attendance and thank the audience for 
their observation, and we are adjourned.
    [Whereupon, at 1:18 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                 Missouri Public Service Commission
                                   Jefferson City, Missouri
                                                       July 1, 1999
The Honorable Joe Barton, Chairman
Subcommittee on Energy and Power
Committee on Commerce
Room 2125, Rayburn House Office Building
Washington, DC 20515-6115

RE: H.R. 1117, Kansas Ad Valorem Tax Refunds

    Dear Chairman Barton: This letter responds to various questions 
asked by members of the subcommittee during my remarks at the public 
hearing on Kansas Ad Valorem Tax Refunds on June 8, 1999. The specific 
areas of inquiry covered by this response are the following:

1) whether enactment of H.R. 1117 would violate the ``takings clause'' 
        of the Constitution;
2) whether the refunds per customer are insignificant; and
3) whether the Missouri PSC has taken positions at the FERC opposing 
        the grant of waivers of the ad valorem tax refund obligation in 
        cases of hardship.
    1. The Fifth Amendment, made applicable to the states through the 
Fourteenth Amendment, provides that ``private property'' shall not ``be 
taken for public use, without just compensation.'' U.S. Const., Amend. 
V. In order to state a claim under the ``Takings Clause,'' a plaintiff 
must first demonstrate that he possesses a ``property interest'' that 
is constitutionally protected. See, Ruckelshaus v. Monsato Co., 467 
U.S. 986, 1000-01, 104 S. Ct. 2862 (1984). Thus, the fundamental 
question presented by the proposed legislation is whether the pipeline 
customers have a property interest in the accumulated interest 
associated with the court-ordered refund.
    Controlling authority is found in a 1980 U.S. Supreme Court case, 
Webb's Fabulous Pharmacies v. Beckwith, 449 U.S. 155, 101 S. Ct. 446 
(1980). In Webb's, the Florida Supreme Court had interpreted a statute 
in a manner that allowed clerks of county courts to keep the interest 
on monies deposited in interpleader cases. Noting that the principal 
sums deposited in interpleader funds were plainly private property, 449 
U.S. at 162, 101 S. Ct. at 451, as were ``[t]he earnings of the fund,'' 
449 U.S. at 163, 101 S. Ct. at 452, the Court ruled that the Florida 
statute authorized takings in violation of the Fifth and Fourteenth 
Amendments, and was therefore unconstitutional.
    In 1998, the U.S. Supreme Court again revisited the question of 
whether the interest generated by private funds is a property interest 
cognizable under the Takings Clause. See, Phillips v. Washington Legal 
Foundation, 118 S. Ct. 1925, 1928 (1998) (holding that interest earned 
on client funds in IOLTA accounts is the private property of the 
client.) Employing the ``interest follows principal'' rule,\1\ the 
Court reaffirmed its earlier position in Webb's, noting that:
---------------------------------------------------------------------------
    \1\ The Court noted that most states--Kansas and Missouri 
included--had similar common law understandings regarding the property 
rights associated with interest.
---------------------------------------------------------------------------
        a State by ipse dixit, may not transform private property into 
        public property without compensation simply by legislatively 
        abrogating the traditional rule that `earnings of a fund are 
        incidents of ownership of the fund itself and are property just 
        as the fund itself is property.' In other words, at least as to 
        confiscatory regulations (as opposed to those regulating the 
        use of property), a State may not sidestep the Takings Clause 
        by disavowing traditional property interests long recognized 
        under state law.
Id. at 1931 (citations omitted).
    Finally, in Blomberg v. Pinellas County, 836 F. Supp. 839 (M.D.Fla. 
1993), a case somewhat analogous to the current situation, a Florida 
District Court was asked to address whether a water utility customer 
who pays a deposit to the utility is entitled to the interest that 
accumulates on the deposit. Following Webb's, the court ruled that 
interest on the deposited funds was the customer's private property and 
that ``an unconstitutional taking occurred when the Defendant failed to 
retum interest to utility customers.'' Id. at 846.
    In the case at hand, there is no dispute as to whether the ad 
valorem tax refund principal is the private property of pipeline 
customers. The dispute relates to the interest that has accrued on 
those funds since 1983. Under Webb's and its progeny, because the 
refund principal is the customer's private property, and interest 
follows the principal, the interest is also private property and 
therefore subject to traditional Takings clause protections. Thus, 
Congressional acts that redirect or otherwise nullify the interest 
payments to pipeline customers would likely run afoul of Webb's, and 
consequently, be found to be unconstitutional Takings.
    2. Questions were raised and comments were made regarding the 
effect of ad valorem tax refunds on a typical natural gas customer. 
Contrary to others' statements that these refunds would ``end up as a 
one-time deduction of a few cents off'' a customer's gas bill, the 
impact of the ad valorem tax refunds on Missouri consumers is 
significant. Based on calculations by the staff of the Missouri PSC, if 
all owed ad valorem tax refunds were paid, each Missouri Gas Energy 
residential gas customer would receive a $60-65 credit. This is 
approximately 9.5% of the average customer's annual gas bill.
    3. Questions were raised concerning the position taken by the 
Missouri PSC in response to various petitions for adjustment of the 
obligation to make refunds of ad valorem taxes.
    In the case of M.A. Calvin, Docket No. SA98-9-000, the Missouri PSC 
initially protested the petition for adjustment of the obligation to 
make ad valorem tax refunds on grounds that the petitioner failed to 
document financial hardship. In addition, the Missouri PSC contended 
that M.A. Calvin was not a first seller, but instead was a working 
interest owner. In this respect, it is the Missouri PSC's position that 
the first seller/operator, CLX Energy, Inc., is responsible for the ad 
valorem tax refunds attributable to all working interests in the well. 
On November 27, 1998, the Federal Energy Regulatory Commission 
(``FERC'') granted the adjustment requested by M.A. Calvin. The Order 
denying Missouri PSC's petition for rehearing was issued on January 13, 
1999. On March 12, 1999, the Missouri PSC filed its Petition for review 
in the United States Court of Appeals in Case No. 99-1103.
    The Missouri PSC notes that Commissioner Hebert's concurring 
statement in the October 28, 1998 Letter Order (Attachment A) 
highlights the Missouri PSC's generic concern over the lack of 
information regarding the petitioner's financial status. 
Notwithstanding this concern, the Missouri PSC did not challenge the 
FERC's finding of hardship. The sole issue raised in the Missouri PSC's 
appeal is whether FERC erred by imposing a refund obligation on each 
individual interest owner rather than on the first seller/operator of 
the well. FERC's decision to impose a refund obligation on each 
interest owner departs from a longstanding practice, affirmed by the 
Court, of treating only the first seller/operator as the sole 
jurisdictional seller of gas from a well with multiple interest owners. 
Sun Oil Company v. Federal Power Commission, 256 F.2d 233 (D.C. Cir. 
1958). Missouri PSC's position if adopted, would reduce the 
administrative burdens on small interest owners, pipelines, the 
Missouri PSC and the FERC.
    In the case of Sally L. Bone, Docket No. SA98-21-000, the Missouri 
PSC protested the petition for adjustment from the obligation to make 
ad valorem tax refunds because the petitioner failed to provide 
documentation that she was financially unable to pay the refunds 
attributable to her ownership interest. In addition, the Missouri PSC 
protested the failure of petitioner to document the uncollectibility of 
refunds attributable to her other interest owner. On November 25, 1998, 
FERC granted the adjustment and the Missouri PSC did not appeal this 
decision.
    In the case of Continental Energy, Docket No. SA98-101-000, the 
Missouri PSC protested the petition by Continental Energy for waiver of 
the ad valorem tax refund obligation because the petitioner had failed 
to document its claim of hardship and uncollectibility of refunds 
attributable to royalty interests. The Missouri PSC would not oppose 
the granting of this adjustment if adequate evidence of petitioner's 
financial hardship and inability to collect refunds from royalty owners 
is provided.
    I hope this letter is responsive to the questions raised at the 
hearing. Should you need further information or assistance, please do 
not hesitate to contact me or my staff.
            Respectfully submitted,
                                               Sheila Lumpe
                                                              Chair
Attachment
Copy to Members of the Subcommittee on Energy and Power

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[GRAPHIC] [TIFF OMITTED] HR038.047

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