Watching GovernmentKansas tax headache

Sept. 27, 1999
The House Commerce Committee is expected to mark up legislation this fall to rescue Kansas gas producers from a staggering tax bill.

The House Commerce Committee is expected to mark up legislation this fall to rescue Kansas gas producers from a staggering tax bill.

Whether the legislation will pass is problematic.

The issue stems from Federal Energy Regulatory Commission decisions interpreting the 1978 Natural Gas Policy Act, which allowed producers and royalty owners to pass through state production or severance taxes but not property taxes.

FERC determined Kansas's ad valorem tax was a severance tax on gas production and allowed it to be added to the price of the gas.

A lawsuit was filed, and a federal appeals court remanded the issue to FERC for clarification. FERC then reversed itself and said producers must refund to consumers the Kansas ad valorem taxes and interest since June 1988.

Producers sued to overturn FERC's decision and lost. Plus, the court determined that producers were liable for refunds dating from October 1983.

FERC then ruled that producers must refund not only the tax during October 1983-June 1988 but also interest.

The total bill is estimated at $363 million, two thirds of which is interest. Consumers in 23 states could get refunds, but most of the money will be distributed in Kansas, Missouri, Minnesota, and Nebraska.

Legislation

Having exhausted their legal and regulatory remedies, Kansas producers have asked Congress for relief.

Rep. Jerry Moran (R-Kan.) has filed a bill that would allow producers to repay only the severance tax and not interest or penalties.

Two hearings have been held on Moran's bill, and markups are expected this month.

Sen. Pat Roberts (R-Kan.) attached a "fix" to a spending bill last spring in the Senate, but the provision was dropped during a House-Senate conference committee meeting.

Pipelines, local distribution companies, and consumer groups oppose the Moran bill. They argue that any overcharged consumers are entitled to a refund, plus interest.

And they said producers were put on notice in 1983 that they could be liable for repayment.

Producers counter it's unlikely at this late date that most of the consumers who paid the higher prices will be the ones receiving the rebate. They said two of eight gas pipelines involved already have petitioned regulatory agencies to let them keep the refund themselves.

Producers crunched

Rep. Moran represents a western Kansas district that includes the huge Hugoton field.

He argues that producers were innocent parties caught in the middle simply because they followed regulations.

"FERC ruled on the issue three separate times in 1983, 1986, and 1987. Each time, FERC ruled that the taxes were correctly applied."

Moran said, "A 15-year reach-back is outrageous. To reverse a decision and then go back 15 years and force the payments of the refunds, with interest, isn't just unfair. It's unconscionable."

The congressman said consumers would benefit little: the average household would get about $15 rebated.

But he said small producers and royalty owners could be hurt a lot, and some producers would be liable for several hundred thousand dollars.