Appendix — Pennzoil Co. v. Associated Gas Distributors
Supreme Court brief1985
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85-139 |. FiteD
1985
No. 85- SOL ed
! CLBRK
IN THE
Supreme Court of the United States
OCTOBER TERM, 1985
!
PENNZOIL COMPANY, et al.
Petitioners,
Vv.
ASSOCIATED GAS DISTRIBUTORS, et al.
Respondents.
APPENDICES TO PETITION FOR A WRIT OF
CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
AND LIST OF PARENT COMPANIES, SUBSIDIARIES,
AND AFFILIATES REQUIRED BY RULE 28.1
CHARLES ALAN WRIGHT
727 East 26th Street
Austin, Texas 78705
(512) 471-5151
R. GORDON GOOCH
CHARLES M. DARLING, IV
THOMAS J. EASTMENT
BAKER & BOTTS
1701 Pennsylvania Ave., N.W.
Washington, D.C. 20006
(202) 457-5500
[ Additional Of Counsel Listed Inside]
BS RRR PMN RL. 7 RRO ENP TREE TS SEE REET. 8 ROSSI ES ATE ATED "REN AEE NESE EERO ERSTAEE!
WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001
AMOCO PRODUCTION COMPANY
William T. Benham
200 East Randolph Drive
Chicago, Illinois 60601
ARCO OIL AND GAS COMPANY
DIVISION OF ATLANTIC
RICHFIELD COMPANY
Michael Maloney
P.O. Box 2819
Dallas, Texas 75221
CHAMPLIN PETROLEUM COMPANY
B.J. Zimmerman
Kerry R. Brittain
Constance D. Coleman
801 Cherry Street, M.S. 4010
P.O. Box 7
Forth Worth, Texas 76101
CHEVRON U.S.A. INC.
James B. Atkin
Pillsbury, Madison & Sutro
1050 17th Street, N.W.
Suite 900
Washington, D.C. 20036
CITIES SERVICE OIL AND GAS
CORPORATION
Carmen Chidester Farrell
P.O. Box 300
Tulsa, Oklahoma 74102
Conoco INC.
Ernest J. Altgelt, III
Carolyn S. Hazel
William G. Robb
P.O. Box 2197
McLean Building
Houston, Texas 77252
EXXON COMPANY, U.S.A.
Douglas W. Rasch
P.O. Box 2180
Houston, Texas 77001
GULF OIL COMPANY
Anthony V. Sorrentino
David R. Stevenson
P.O. Box 3725
Houston, Texas 77253
MOBIL OIL CORPORATION
MOBIL OIL EXPLORATION &
PRODUCING SOUTHEAST INC.
MOBIL PRODUCING TEXAS &
NEW MEXxiIco INC.
THE SUPERIOR OIL COMPANY
Robert D. Haworth
Robert A. Luettgen
Jay G. Martin
Nine Greenway Plaza
Suite 2700
Houston, Texas 77046
Carroll L. Gilliam
J. Paul Douglas
Kevin M. Sweeney
Grove, Jaskiewicz, Gilliam
and Cobert
1730 M Street, N.W.
Washington, D.C. 20036
MONSANTO OIL COMPANY
Walter L. Brignon
Kenneth R. Satterly
5051 Westheimer
1300 Post Oak Tower
Houston, Texas 77056
PENNZOIL COMPANY
John M. Young
John B. Chapman
Pennzoil Company
P.O. Box 2967
Houston, Texas 77001
PHILLIPS PETROLEUM COMPANY
PHILLIPS OIL COMPANY
C.J. Roberts
Larry Pain
Jennifer A. Cates
1258 Adams Building
Bartlesville, Oklahoma 74004
Phillips Oil Company
PLACID OIL COMPANY
Ronald D. Hurst
3900 Thanksgiving Tower
Dallas, Texas 75201
SHELL OFFSHORE INC.
SHELL WESTERN E&P INC.
Thomas G. Johnson
Eugene V. Callaway
One Shell Plaza
P.O. Box 2463
Houston, Texas 77001
SUN EXPLORATION AND
PRODUCTION COMPANY
Charles L. Spann
P.O. Box 2880
Dallas, Texas 75221-2880
TENNECO OIL COMPANY
HousTON OIL & MINERALS
CORPORATION
Glen E. Taylor
Phyllis G. Rainey
P.O. Box 2511
Houston, Texas 77001
TEXACO, INC.
Karen A. Berndt
Ralph J. Pearson, Jr.
P.O. Box 52332
Houston, Texas 77052
UNION OIL COMPANY OF
CALIFORNIA
Lois Ellen Gold
Albert Sylvia III
P.O. Box 7600
Los Angeles, California
90051
TABLE OF CONTENTS
DESCRIPTION Page
APPENDIX A—Opinion of the United States Court of
Appeals for the District of Columbia
Circuit in Interstate Natural Gas
Association of America V. Federal En-
ergy Regulatory Commission, Nos. 81-
1690, et al., 756 F.2d 166 (March 5,
RES Sul Eats en ec la
APPENDIX B—Orders of the Federal Energy Regula-
tory Commission issued in Refunds
Resulting From Btu Measurement Ad-
justments, Docket No. RM84-6 _........... 16a
Order No. 399, “Final Rule Under
And Order Denying Rehearing Of In-
terim Rule,” 49 Fed. Reg. 37735
Nee onscemane 16a
Order No. 399-A, “Order Granting In
Part and Denying In Part Rehearing,”
49 Fed. Reg. 46353 (Nov. 26, 1984)... 8la
Erratum Notice (Nov. 30, 1984) ......... 126a
“Order Granting Rehearing For The
Purpose Of Further Consideration”
NN eee ckapineoeiuace 127a
APPENDIX C—Judgment and Orders on Rehearing
Of the United States Court of Appeals
for the District of Columbia Circuit in
Interstate Natural Gas Association of
America, et al. v. Federal Energy Reg-
ulatory Commission, Nos. 81-1690,
i seencenen 130a
Judgment (March 5, 1985) ................ 130a
Order Denying Rehearing (May 6,
ah 132a
Order Denying Suggestions For Re
hearing En Banc (May 13, 1985) ..... 136a
* Circuit Judge Scalia concurred originally, but, on rehearing,
withdrew his concurrence and file’ a dissent. Petitioners have
printed both of Judge Scalia’s opinions.
ii
TABLE OF CONTENTS—Continued
DESCRIPTION
APPENDIX D—Orders of the United States Court of
Appeals for the Fifth Circuit in Mobil
Oil Exploration & Producing South-
east Inc. v. FERC, No. 84-4775 ..........
Memorandum To Counsel or Parties
Listed Below (Jan. 16, 1985) _.............
Order (March 27, 1985) _........0000.0000...
Order (March 27, 1985) .......................
Order (March 27, 1985) ..............
APPENDIX E—Statutory Provisions _...........-..0-.w...
Natural Gas Policy Act of 1978, 15
U.S.C. §§ 3301-3482 (1982) _...........
§§ 506(a)-(b), 15 U.S.C. §§ 3416
Sn
pg eae
All Writs Act, 28 U.S.C. § 1651
RET a eee
28 U.S.C. § 2112 (1982) ...................
Federal Power Act, 16 U.S.C. § 791,
I I ach
§§ 318(a)-(b), 15 U.S.C. §§ 8251
IE shtchilanciacharhiveathcetihains ewisiissicienns
Natural Gas Act, 15 U.S.C. § 717, et
es SP cr a
§§ 19(a)-(b), 15 U.S.C. §§ 717r(a)-
| eee Oe eee ne
APPENDIX F—List of Parent Companies, Subsidi-
aries, and Affiliates Required By Rule
A sci bean sivcepaish hcaaaliceies occeadhcaiatins ty ee.
Page
la
APPENDIX A
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
No. 81-1690
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA,
PETITIONER
Vv.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT
MOBIL OIL CORPORATION, ET AL.,
GENERAL AMERICAN OIL COMPANY OF TEXAS,
PHILLIPS PETROLEUM COMPANY,
PENNZOIL COMPANY,
MISSISSIPPI RIVER TRANSMISSION CORP.,
SHELL OIL COMPANY,
EXXON CORPORATION,
LACLEDE GAS COMPANY,
GETTY OIL COMPANY,
LOUISIANA LAND & EXPLORATION COMPANY,
ASSOCIATED GAS DISTRIBUTORS,
NORTHERN NATURAL GAS COMPANY,
TEXAS GAS TRANSMISSION CORPORATION,
TEXACO, INC.,
TENNECO OIL COMPANY,
HOUSTON OIL AND MINERALS CORPORATION,
GULF OIL CORPORATION,
PLACID OIL COMPANY,
AMINOIL, USA, INC., ET AL., INTERVENORS
Za
No. 81-1680
MICHIGAN WISCONSIN PIPELINE COMPANY, PETITIONER
Vv.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT
MOBIL OIL CORPORATION, ET AL.,
AMOCO PRODUCTION COMPANY,
GENERAL AMERICAN OIL COMPANY OF TEXAS,
PHILLIPS PETROLEUM, COMPANY,
PENNZOIL COMPANY,
EXXON CORPORATION,
SHELL OIL COMPANY,
TENNECO OIL COMPANY,
UNION OIL COMPANY OF CALIFORNIA,
LOUISIANA LAND & EXPLORATION COMPANY,
GETTY OIL COMPANY,
ASSOCIATED GAS DISTRIBUTORS,
LACLEDE GAS COMPANY,
SuN OIL COMPANY,
Arco OIL & GAS COMPANY,
PLACID OIL COMPANY,
TEXACO, INC.
GULF OIL CORPORATION, INTERVENORS
No. 81-1691
TRANSCONTINENTAL GAS PIPE LINE CORPORATION,
PETITIONER
Vv.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT
MOBIL OIL CORPORATION,
GENERAL AMERICAN OIL COMPANY OF TEXAS,
PHILLIPS PETROLEUM COMPANY,
PENNZOIL COMPANY,
SHELL OIL COMPANY,
3a
ASSOCIATED GAS DISTRIBUTORS,
GETTY OIL COMPANY,
LOUISIANA LAND & EXPLORATION COMPANY,
TEXACO, INC.,
EXXON CORPORATION,
SUN OIL COMPANY,
TENNECO OIL COMPANY,
HOUSTON OIL AND MINERALS CORPORATION,
GULF OIL CORPORATION,
PLACID OIL COMPANY, INTERVENORS
No. 81-1692
NATURAL GAS PIPELINE COMPANY OF AMERICA,
PETITIONER
V.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT
MOBIL OIL. CORPORATION, ET AL.,
GENERAL AMERICAN OIL COMPANY OF TEXAS,
PHILLIPS PETROLEUM COMPANY,
PENNZOIL COMPANY,
SHELL OIL COMPANY,
LACLEDE GAS COMPANY,
ASSOCIATED GAS DISTRIBUTORS,
GETTY OIL COMPANY,
LOUISIANA LAND & EXPLORATION COMPANY,
TEXACO, INC.,
SUN OIL COMPANY,
CHEVRON, USA,
EXXON CORPORATION,
TENNECO OIL COMPANY,
HOUSTON OIL AND MINERALS CORPORATION,
GULF OIL CORPORATION,
PLACID OIL COMPANY, INTERVENORS
4a
____No. 81-1696
LONE STAR GAS COMPANY, PETITIONER
Vv.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT
GENERAL AMERICAN OIL COMPANY OF TEXAS,
PHILLIPS PETROLEUM COMPANY,
PENNZOIL COMPANY,
SHELL OIL COMPANY,
LACLEDE GAS COMPANY,
LOUISIANA LAND & EXPLORATION COMPANY,
GETTY OIL COMPANY,
ASSOCIATED GAS DISTRIBUTORS,
VALERO TRANSMISSION COMPANY,
TEXACO, INC.,
EXXON CORPORATION,
SuN OIL COMPANY,
TENNECO OIL COMPANY,
HOUSTON OIL AND MINERALS CORPORATION,
GULF OIL CORPORATION,
PLACID OIL COMPANY,
PANHANDLE EASTERN PIPE LINE Co., ET AL., INTERVENORS
No. 81-1802
LACLEDE GAS COMPANY, PETITIONER
Vv.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT
No. 82-1004
LONE STAR GAS COMPANY, PETITIONER
Vv.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT
EXXON CORPORATION,
Conoco INC.,
5a
GENERAL AMERICAN OIL COMPANY OF TEXAS,
PENNZOIL COMPANY,
TENNECO OIL COMPANY,
UNION OIL Co. OF CALIFORNIA,
GETTY OIL COMPANY,
AMINOIL USA, INC.,
GULF OIL CORPORATION,
‘Texaco, INC.,
MOBIL OIL CORPORATION, ET AL.,
HOUSTON OIL AND MINERALS CORPORATION,
SHELL OIL COMPANY,
ATLANTIC RICHFIELD COMPANY,
SUN EXPLORATION AND PRODUCTION CO., INTERVENORS
No. 82-1177
ASSOCIATED GAS DISTRIBUTORS, PETITIONER
Vv.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT
ON MOTION FOR ORDER DIRECTING
COMPLIANCE WITH MANDATE
Argued January 4, 1985
Decided March 5, 1985
Frederick Moring for petitioner, Associated Gas Dis-
tributors, on the Motion for Order Directing Compliance
with Mandate.
Jerome M. Feit, Solicitor, Federal Energy Regulatory
Commission, with whom Joel M. Cockrell, Attorney, Fed-
eral Energy Regulatory Commission, was on the Response
to the Motion for Order Directing Compliance with the
Mandate.
6a
John H. Cheatham, III for petitioner, Interstate Natu-
ral Gas Association, was on Response to the Motion for
Order Directing Compliance with the Mandate.
Kenneth J. Neises for petitioner, Laclede Gas Company,
was on the Response to the Motion for Order Directing
Compliance with Mandate.
J. Paul Douglas, Carroll L. Gilliam and Robert D.
Haworth for intervenors, Producers, were on the Re-
sponse to the Motion for Order Directing Compliance with
Mandate.
L. Charles Landgraf and Raymond N. Shibley for in-
tervenors, Panhandle Eastern Pipe Line Company, et al.,
were on the Response to the Motion for Order Directing
Compliance with Mandate.
Glen S. Howard ard Edward J. Grenier, Jr. for inter-
venors, Process Gas Consumers Group, et al., were on the
Response to the Motion for Order Directing Compliance
with Mandate.
Robert F. Shapiro and Rigdon H. Boykin for inter-
venor, American Paper Institute, Inc., were on the Re-
sponse to the Motion for Order Directing Compliance with
Mandate.
Before: ROBINSON, Chief Judge, MIKVA and SCALIA,
Circuit Judges.
Opinion for the Court Per Curiam.
Concurring Opinion filed by Circuit Judge SCALIA.
PER CURIAM: On August 9, 1983, this court issued its
opinion in Interstate Natural Gas Association of America
v. FERC, 716 F.2d 1 (D.C. Cir), cert. denied, 104
S. Ct. 1615, 1616 (1983) (Interstate). We held that un-
der the Natural Gas Policy Act of 1978, 15 U.S.C. § 3301,
et seq. (1982), the Federal Energy Regulatory Commis-
sion’s “dry” method of measurement of the Btu con-
tent of natural gas for wellhead pricing purposes was
Ta
improper and resulted in prices in excess of those per-
mitted under the statute. We instructed FERC to vacate
its Order designating the “dry” method. Two conse-
quences of our decision were inexorable: implement the
proper pricing method for future pricing decisions, and
remedy the effects of past use of the improper pricing
method at the earliest possible moment.
The Interstate parties are before us again, in response
to the motion of petitioner Associated Gas Distributors to
enforce our mandate in Jnterstate. For the reasons stated
below, we direct FERC to implement the refund proce-
dures set forth in Order No. 399.
I.
Following the issuance of our mandate, FERC moved
to comply with its terms. FERC issued a rule requiring
wet pricing henceforth, 49 Fed. Reg. 3072 (1984). In
further implementation of our holding in Interstate,
FERC issued Order No. 399 which directed producers to
refund the excessive costs arising from use of the im-
proper “dry” method of calculation:
The Federal Energy Regulatory Commission (Com-
mission) is amending and finalizing its regulations
that establish refund procedures for overcharges re-
sulting from adjustments to the calculation of energy
content of natural ‘gas . . . sold pursuant to the
Natural Gas Policy Act of 1978. In so doing, the
Commission is implementing [this court’s] decision
in Interstate Natural Gas Association of America v.
Federal Energy Regulatory Commission.
49 Fed. Reg. 37735 (1984) (footnote and citation omit-
ted).
Order No. 399, issued pursuant to the requisite notice
and comment, established a system of refunds that ful-
filled the premises of our decision. Under the Order, pro-
ducers of natural gas were to refund to pipelines the
8a
overcharges made under the improper “dry” method.
These refunds were to be paid over by the pipelines to
natural gas customers who had, in the first instance, paid
these excessive charges. Under the Order, “large pro-
ducers” were to have refunded their overcharges on
November 5, 1984, while “small producers” were sched-
uled to issue their refunds on May 3, 1985. To date, no
refunds have been made.
FERC explicitly prohibited producers from offsetting
their refund obligations against any monies owed them
by the pipelines. Order No. 399, 49 Fed. Reg. 37738-39.
This prohibition had particular reference to claims the
producers had made for additional monies due them un-
der Section 110 of the Natural Gas Policy Act. FERC
has issued Order No. 94-A allowing producers to collect
these “Section 110 costs” from pipelines. 48 Fed. Reg.
5152 (1983). Order No. 94-A is now under review in the
United States Court of Appeals for the Fifth Circuit.
Texos Eastern Transmission Corp. v. FERC, No. 83-4390
(5th Cir. filed 1983).
In rejecting the use of offsets, FERC recognized not
only that many of the Section 110 costs owed had not
been paid, but also that tying these unrelated and dis-
puted costs to refund of the improper “dry charges
would delay and disrupt the implementation of our deci-
sion. FERC stated in Order 399:
The Commission also believes that permitting offsets
of section 110 costs and Btu refunds would compli-
cate an already difficult process and would make
Commission monitoring of Btu refunds more diffi-
cult. In addition, the Commission is concerned that
permitting pipelines and firstsellers to offset section
110 costs and Btu refunds could prevent the Btu
refunds from reaching as many of the customers
actually overcharged as possible. Considering that
the section 110 orders are also subject to judicial
review, the Commission believes it is more appro-
9a
priate to segregate the collection of section 110 costs
from the Btu refunds.
49 Fed. Reg. 37739.
Two months after issuing Order No. 399, FERC
abruptly reversed its postion on offsets, and, in Order
No. 399-A, 49 Fed. Reg. 46353 (1984), FERC, without
addressing the weighty rationale behind its earlier Order,
authorized producers to offset their refund obligations by
deducting monies due them under Section 110.
II.
Associated Gas Distributors has moved this court for
an order commanding FERC to comply with our man-
date by directing producers to make appropriate refunds
to pipelines immediately, as set forth in Order No. 399.
A petition for review of Orders No. 399 and 399-A is
currently pending in the Fifth Circuit. See Mobil Ou
Exploration & Producing Southeast, Inc. v. FERC, No.
84-4775 (5th Cir. filed Nov. 20, 1984). The Fifth Cir-
cuit, however, has issued an order delaying filing of the
administrative record in Mobil until after this court is-
sues its ruling in the present case. Accordingly, juris-
diction in the instant matter properly lies in this court.
See 15 U.S.C. § 3416(a) (4).
The availability of mandamus to confine FERC to the
terms of this court’s mandate is fully supported by prece-
dent. See, e.g., Briggs v. Pennsylvania R.R., 334 US.
304, 306 (1948); Yablonski v. UMW, 454 F.2d 1036,
1038-39 (D.C. Cir. 1971), cert. denied, 406 U.S. 906
(1972). FERC protests, however, that our mandate did
not reach so far as to preclude the offset authorized by
Order No. 399-A. We need not enter the debate over the
propriety of resort to mandamus in this case, because, in
any event, Associated Gas Distributors’ motion to enforce
the mandate may be treated as a petition to review that
order.
10a
Federal appellate courts have broadly recognized that
the filing of a paper substantially equivalent to one that
formally inaugurates the normal review process may well
suffice for that purpose. Thus the need for a notice of
appeal may be satisfied by any of a variable host of fil-
ings evincing unequivocably an intention to appeal. See,
e.g., Belton v. United States, 259 F.2d 811, 814 (D.C.
Cir. 1958) (en banc) (letter requesting leave to appeal
in forma pauperis) (citing cases); Riffle v. United
States, 299 F.2d 802 (5th Cir. 1962) (letter to judge of
court of appeals). The reason is that the content re-
quirements of a notice of appeal, see Fed. R. App. P.
3(c), may easily be met by a document of similar im-
port, and the interests of justice may demand its accept-
ance as an effective substitute. See 6 C. Wright, A.
Miller, E. Cooper & FE. Gressman, Federal Practice
§ 3949 at 356-57. Indispensably, any such filing must
take place within the period allowed for initiation of an
appeal. Alley v. Dodge, 501 F.2d 880, 881-82 (D.C. Cir.
1974) ; see also Johnson v. United States, 405 F.2d 1072,
1073 n.6 (D.C. Cir. 1981).
These considerations exert equal force in the situation
before us. A petition for review need only “specify the
parties seeking review and designate the respondent and
the order or part thereof to be reviewed,” Fed. R. App.
P. 15(a), and undeniably Associated Gas Distributors’
motion did that. The motion, filed the day following is-
suance of Order No. 399-A, was well within the time
petitions for review are indulged, and the relief sought
is as much obtainable on direct review of the agency’s
action as it is in a mandamus proceeding. Indeed, pre-
cisely because direct review and mandamus may provide
identical relief, these two judicial actions may be sought
in the alternative. See, e.g., United States v. Green, 499
F.2d 538, 539-40 & nn.4, 5 (D.C. Cir. 1974); Chase v.
Robson, 435 F.2d 1059, 1060, 1062 (7th Cir. 1970). We
lla
have heretofore held that a petition for mandamus can
do service as a petition for review. National Organiza-
tion for Reform of Marijuana Laws v. Ingersoli, 497
F.2d 654, 656 n.8 (D.C. Cir. 1974). Similarly, petitions
for mandamus have been treated as notices of appeal,
United States v. Green, 499 F.2d at 540 n.5; Jordan v.
United States District Court, 233 F.2d 362, 365, vacated
on other grounds, 352 U.S. 904 (1956), and vice versa,
Dellinger v. Mitchell, 442 F.2d 782, 789 (D.C. Cir.
1971); Coastal Steel Corp. v. Tilghman Wheelabrator
Ltd., 709 F.2d 190, 197 (3d Cir.), cert. denied, US.
(1983). Because the parties to the instant case
have amply addressed the merits, no one will be preju-
diced by considering Associated Gas Distributors’ motion
to enforce the mandate as a petition for review.
ITI.
Turning then to the substance of the dispute before
us, we conclude that the offset provision contained in
Order No. 399-A must be set aside. As stated above,
FERC issued Order No. 399, in which offsets were ex-
plicitly prohibited. Shortly thereafter, FERC issued
Order No. 399-A, in which offsets were permitted. While
an agency may change its course, it can do so only with
a full and complete explanation that would withstand
judicial review. FERC’s Order No. 399-A does not meet
that requirement. Without such an explanation, the
agency’s decision may be arbitrary and capricious. Dun-
lop v. Bachowski, 421 U.S. 560, 577 (1975). More fun-
damentally, Order No. 399-A defies the teaching of the
Supreme Court in FPC v. Tennessee Gas Transmission
Co., 871 U.S. 145 (1962) ‘Tennessee Gas). In that case,
the Court held that refunds must be implemented expe
ditiously :
[I]t is the duty of the Commission . . ., where
refunds are due, to direct their payment at the
earliest possible moment consistent with due process.
12a
Id. at 155. The rationale for prompt ordering of refunds
is clear: “to afford consumers a complete, permanent and
effective bond of protection from excessive rates and
charges.” Atlantic Refining Co. v. Public Service Com-
mission, 360 U.S. 378, 388 (1959). The Court in Tennes-
see Gas required immediate refunds even though delaying
refunds would have allowed a more accurate allocation of
the burden of payment to the gas pipeline, and the im-
mediate payment ordered might have resulted in some
loss to the pipeline due to the indccurate allocation.
FERC’s prohibition of offsets was well-considered. The
controversy over production-related costs to be recouped
by producers under Section 110 constitutes unsettled liti-
gation wholly separate from the instant case. As such,
permitting producers to offset their refund obligations
would bring delay and confusion into an already complex
area. Moreover, the principles of law and the customers
involved in the refund arrangement are far from identi-
cal to those implicated in the Section 110 costs proceed-
ings. By prohibiting offsets, FERC designed the system
most likely to assure that customers will receive refunds
due them. Involving disparate issues in a matter on ap-
peal to another court can only complicate, delay, and
obfuscate the refunds at issue here.
The law requires the ordering of refunds at the earliest
possible moment. That moment has come and gone. The
offset scheme embodied in Order No. 399-A will only fur-
ther delay refund of the overcharges, circumventing our
mandate in Interstate and the clear instruction of the
Supreme Court in Tennessee Gas. We accordingly grant
the relief sought by petitioner A sociated Gas Distribu-
tors. We hereby direct FERC to vacate the offset portion
of Order No. 399-A, for the reasons set forth in its own
Order No. 399.
It is so ordered.
13a
SCALIA, Circuit Judge, concurring: Prior to our deci-
sion regarding the unlawfulness of “dry-gas” pricing in
Interstate Natural Gas Ass’n of America v. FERC, 716
F.2d 1 (D.C. Cir. 1988), cert. denied, 104 S. Ct. 1615
(1984) (“INGAA”), the Commission had promulgated
regulations allowing gas producers to collect from pipe-
lines certain delivery and compression costs relating to
previously sold gas—so-called “Section 110 costs,” see
15 U.S.C. § 3320(a) (2) (1982). 18 C.F.R. § 271.1104
(1984). When Order No. 399-A was issued, many of
those costs had still not been paid, and seemed unlikely
to be paid within the time period prescribed by regula-
tion. See C.F.R. § 274.1104(e) (3). The Commission
feared that customers who had used the gas to which
the Section 110 costs pertained might switch pipelines
before the costs were paid and reflected in rates, saddling
“captive” future customers with the full burden of their
pipelines’ obligations. This was of special concern in light
of other Commission rulings enabling customers to change
pipelines more readily. See Elimination of Variable Costs
from Certain Natural Gas Pipeline Minimum Commodity
Bill Provisions, 49 Fed. Reg. 22,778 (1984) (to be codi-
fied at 18 C.F.R. § 154.111). Additionally, decontrol of
wellhead prices for large quantities of flowing gas was
then pending. See 15 U.S.C. § 3331 (1982). Since a
major purpose of decontrol was to rectify the supply-
demand imbalance in the interstate gas market, the Com-
mission wanted post-1984 prices of new gas to reflect
wellhead costs, not to be distorted by Section 110 costs
incurred prior to decontrol.
These concerns led the Commission in Order No. 399-A
to require undisputed Sect:or 110 costs owed by the pipe-
lines to the producers to be offset against the dry-gas
refund obligations owed by the producers to the pipelines.
Because the time periods covered by the refund and Sec-
tion 110 proceedings overlap substantially, 49 Fed. Reg.
46,353, 46,356-57 (1984) (to be codified at 18 C.F.R.
§ 154.38), an offset mechanism promotes “intergenera-
14a
tional equity,” id. at 46,357, by allocating effective liabil-
ity for Section 110 costs to the consumers who benefitted
from the producers’ activities. See id. at 46,356 (offset-
ting Section 110 costs against refunds “come[s] closer to
matching the customers who are entitled to Btu refunds
with the customers who received the benefits or caused
the incurrence of section 110 costs”). The offset proce-
dure also enables “gas producers . . . to settle their long-
past due accounts for section 110 services rendered and
their liability for Btu refunds without disrupting current
or future natual gas prices,” id. at 46,357, and allows
pipelines to “enter the era of decontrol and enhanced
competition without the burden of attempting to pass
through producers’ bills for services rendered years ago.”
Id.
In seems to me that the prescription of the Supreme
Court and of this court that refunds, when due, be made
“fat the earliest possible moment consistent with due
process” does not exclude such delay as may be needed to
make sure that the refund goes to those customers who,
taking all appropriate factors into account, are entitled
to it. As described above, the whole purpose of the
agency’s action in this case was to insure that those who
received unjust enrichment as a result of wrongful fail-
ure to assess Section 110 costs do not receive refunds
which, on a net basis, they are not entitled to. Moreover,
even giving a more stringent interpretation to what “the
earliest possible moment consistent with due process”
might be, it does not seem to me that this court can
properly say that in fact a refund has not been made.
Whether the Section 110 debt is being contested in court
or not, if it is in fact owed the set-off constitutes im-
mediate payment. Here the Commission has found it to
be owed (the pending proceedings in the Fifth Circuit
do not suspend that determination, see 15 U.S.C. § 3416
(a) (5) (1982) ), and we have no basis for proceeding on
any other assumption, in disregard of a valid Commis-
sion order.
15a
I nonetheless concur in the judgment because I believe
that the agency’s action, however well intentioned, consti-
tutes an attempt to increase rates retroactively. It is well
established that even when past rates were fixed at un-
lawfully low levels, the Commission cannot provide for
recoupment. See FPC v. Tennessee Gas Co., 371 U.S. 145,
152-53 (1962); Public Service Co. of New Hampshire v.
FERC, 600 F.2d 944, 957-61 (D.C. Cir.), cert. denied,
444 U.S. 990 (1979). The rule is important in order to
enable distributors to determine their prices for resale—
prices which they may not be able to revise retroactively.
Just as a refund is no less a refund by virtue of the fact
that it is effected through an offset, so a retroactive rate
increase is no less a retroactive rate increase when it is
achieved in that fashion. See Belco Petroleum Corp. v.
FERC, 589 F.2d 680, 687 (D.C. Cir. 1978). I would
reverse the Commission’s action on these grounds.
l6a
APPENDIX B
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
[18 C.F.R. Part 154]
Before Commissioners: Raymond J. O’Connor, Chairman;
Georgiana Sheldon, A. G. Sousa,
Oliver G. Richard III and
Charles G. Stalon.
Docket Nos. RM84-6-000,
RM84-6-001, and
RM84-6-002
REFUNDS RESULTING FROM BTU
MEASUREMENT ADJUSTMENTS
ORDER NO. 399
FINAL RULE AND ORDER DENYING
REHEARING OF INTERIM RULE
(Issued September 20, 1984)
I. INTRODUCTION
The Federal Energy Regulatory Commission (Commis-
sion) is amending and finalizing its regulations that es-
tablish refund procedures for overcharges resulting from
adjustments to the ealculation of the energy content of
natural gas (measured in terms of British thermal units
(Btu’s) )? sold pursuant to the Natural Gas Policy Act
of 1978. In so doing, the Commission is implementing the
decision in Jnterstate Natural Gas Association of Amer-
ica v. Federal Energy Regulatory Commission (INGAA).*
1Each Btv represents the amount of energy needed to raise
the temperature of one pound of water one degree Fahrenheit.
2716 F.2d 1 (D.C. Cir. 1983), cert. denied, 104 S. Ct. 1616
(1984).
—— ee ee aaa ee aw
17a
As a result of the INGAA decision, the Commission
issued an interim rule on May 3, 1984, requiring refunds
of Btu overcharges.* Briefly stated, the interim rule re-
quires first sellers to refund the Btu measurement over-
charges by November 5, 1984, or in the case of small
first sellers, by May 3, 1985. First sellers amu pipelines
may choose whether the refund should be paid in a lump-
sum cash payment or in billing adjustments over the re-
fund period. In either case, the refund obligation is sub-
ject. to the Commission’s interest regulations in §§ 154.67
(c) and 154.102(c) and (d). Interstate pipelines must
then pass the refunds through in a lump-sum cash pay-
ment to those customers actually overcharged. The in-
terim rule also requires both intrastate and interstate
pipelines to file refund reports with the Commission de-
scribing those refunds received and those refunds still
outstanding.
This final rule adopts the requirements of the interim
rule with major clarifications or modifications in five
areas. First, the rule prohibits offsets of the Btu meas-
urement overcharges (Btu refunds) and production-re-
lated costs permitted under section 110 of the Natural
Gas Policy Act of 1978 (NGPA). Second, first sellers
may defer payment of Btu refund amounts attributable
to royalty interest owners until the first seller receives
payment from the royalty interest owner, or November
5, 1986, whichever occurs first. First sellers that defer
payment of that portion of the Btu refund attributable
to royalty interest owners must notify the pipelines of
the deferral before the end of the applicable 6- or 12-
month refund period. Third, additional reports will be
required from intrastate and interstate pipelines in or-
der to monitor these deferred refund amounts. Fourth,
the interest owed on Btu refund amounts that were
placed in escrow is limited to that interest which accrued
3 Refunds Resulting from Btu Measurement Adjustments, 49
Fed. Reg. 19,298 (May 7, 1984).
18a
in the escrow account on the amount required to be re-
funded. Finally, a small first seller must notify pipelines
if that first seller is going to use the 12-month refund
period.
Il. BACKGROUND
In INGAA, the court vacated the Commission’s regula-
tions that prescribed the method used to calculate the
energy content of natural gas for purposes of applying
the maximum lawful prices under the NGPA.‘ Those
regulations provided that the Btu content of a given
volume of natural gas is determined by assuming that
the volume of natural gas was under standard test con-
ditions when delivered to a pipeline. Once the Btu con-
tent of the natural gas was determined assuming stand-
ard test conditions, an adjustme»t was permitted to re-
flect the number of Btu’s actually delivered to the pipe-
line system (dry rule).°
In vacating these rules, the court held that the Com-
mission’s dry rule was fundamentally at odds with the
Congressional intent under the NGPA. Specifically, when
the NGPA was passed in 1978, it established maximum
lawful prices for several categori-s of natural gas and
incorporated in sections 104 and 106(a) of that act area
rates that the Commission had established under the
Natural Gas Act (NGA). Pursuant to the Commission’s
4 These regulations were adopted in Order Nos. 93 and 93-A.
Rules Generally Applicable to Regulated Sales of Natural Gas, 45
Fed. Reg. 49,077 (July 23, 1980) (Order No. 93); Order Denying
Rehearing and Clarifying Order No. 93, 46 Fed. Reg. 24,537 (May
1, 1981) (Order No. 93-A).
5 An adjustment was permitted because 1) the gas delivered
to a pipeline is seldom saturated with water vapor, as required
under standard test conditions; and 2) water vapor contains no
valuable heat energy, and its presence in an given volume of natural
gas would reduce the Btu content of the gas by displacing energy-
producing hydrocarbons. See 18 C.F.R. § 270.204 (1983).
rr
19a
NGA regulations (wet rule), the Btu content of a given
volume of gas was measured under standard test condi-
tions (saturated) instead of actual delivery conditions.
Although this derivation of Btu content tended to over-
state the water vapor content which, in turn, caused an
understatement in the number of Btu’s assumed to be in
a giveh volume of natural gas delivered to a pipeline, it
enjoyed widespread industry acceptance and consistent
Commission implementation.® Hence, the court reasoned
that the wet rule was the only method Congress knew for
measuring Btu content; and, therefore, it held that Con-
gress incorporated the Btu measurement technique used
under the NGA, i.e., the wet rule, into the pricing struc-
ture of the NGPA.
The Commission issued a Notice of Inquiry in this
docket on January 19, 1984." The interim rule was is-
sued on May 3, 1984, and a public hearing was held on
May 24, 1984. The Commission received two petitions
for rehearing of the interim rule and it granted rehear-
ing solely for the purpose of further consideration of
those petitions.s In response io its request for comments
in the interim rule, the Commission received seventy
written comments.
Numerous commenters generally support the interim
rule and urge that it be adopted as the final rule. One
commenter urges the Commission to reconsider all of its
options to be sure that a refund rule is necessary. Other
commenters complain that it will be impossible to comply
® Prices were established under the NGA in dollars per thousand
cubic feet ($$/Mcf). The Commission then permitted adjustments
to the area or national rate for the Btu content of gas measured
under the wet rule.
7 Refunds Resulting From Btu Measurement Adjustments, 49
Fed. Reg. 3198 (Jan. 26, 1984).
8 Refunds Resulting From Btu Measurement Adjustments; Order
Granting Rehearing for the Purpose of Further Consideration, 49
Fed. Reg. 27,935 (July 9, 1984).
20a
at reasonable cost with the interim rule’s collection and
reporting timetable and that the problems created by the
interim rule are insurmountable for small producers.
Finally, one commenter states that the realities of the
natural gas industry and fundamental fairness warrant
changes in the rule.
When the Commission promulgated the dry rule, it
believed that the dry rule was an appropriate method
permitted by Congress for measuring the Btu content
of natural gas under the NGPA. The court in INGAA
disagreed. We are now left with the task of implement-
ing the court’s decision. After careful consideration of
the written comments, the views and arguments expressed
at the public hearing on May 24, 1984, and the decision
in the INGAA case, the Commission believes that the
interim rule, as modified by this rule, fairly balances the
interests of sellers, purchasers, and consumers of natural
gas.
III. PRODUCER REFUNDS TO PIPELINE
The INGAA decision held that the maximum lawful
prices under the NGPA must be calculated using the wet
rule. The Commission decided in the interim rule that
any person who received a price for the first sale of gas
in excess of the NGPA ceiling prices calculated using the
wet rule must refund the overcharges. Specifically, any
first seller that collected revenues in excess of the product
of (a) the applicable maximum lawful price established
by the NGPA, and (b) the quantity of MMBtu’s (million
Btu’s) determined on the basis of the wet rule (7.e., un-
der standard test conditions), must refund any such ex-
cess revenues.’ To the extent that revenues collected for
gas sold in a first sale under the NGPA are less than or
equal to the level of revenues thus calculated, and are
® Section 270.101(e) imposes a general refund obligation on any
person that receives a price in excess of the maximum lawful price
under the NGPA. 18 C.F.R. §270.101(e) (1983).
eae
2la
contractually authorized, no excess revenues would have
been collected, and no refunds are due.’®
Commenters argue that the Commission has the dis-
cretion not to order refunds because refunds are not
explicitly required by either the NGPA or JINGAA. These
commenters assert that the Commission must weigh egq-
uity and the public interest in its retroactive application
of the INGAA decision and they argue that these con-
siderations render full refunds inappropriate for several
reasons. First, commenters argue that sellers made count-
less investment decisions in good faith reliance on the
Commission’s rules adopted in Order Nos. 93 and 93-A.
Second, the status quo cannot be restored since insuffi-
cient records are available to determine refund liabilities
because the records were destroyed, were never kept, or
are unorganized. Third, individual consumers will not
receive the benefit of the refunds because restitution is
not possible. Fourth, the administrative cost of recoup-
ing the refunds will be burdensome on first sellers and
pipelines. Finally, refunds will discourage new drilling
and production and further depress the natural gas pro-
duction market. In addition, one commenter states that
10 For purposes of determining the maximum permissible level of
revenues for sales of natural gas subject to section 105(b) (1) of
the NGPA, the terms of the contract control, unless those terms
result in revenues in excess of the level of revenues that would have
been coliected based on the product of (a) the NGPA section 102
price, and (b) the quantity of MMBtu’s determined on the basis of
the wet rule (i.e. under standard test conditions). In any instance
where revenues were collected in excess of the level of revenues
determined by the product of (a) and (b), those excess revenues
must be refunded. In those instances where the level of revenues
collected was less than or equal to the level of revenues determined
by the product of (a) and (b), and are contractually authorized,
no excess revenues would have been collected, and no refunds are
due. In some instances, no refund may be due under this rule but
a party may believe a refund is due under the contract. The Com-
mission believes that these disputes are a matter of State law
to be resolved in State court.
22a
there is a serious question whether the Commission has
the power to order these refunds because first sellers re-
lied on the Commission’s rules.
The Commission disagrees with these comments. Un-
der the INGAA decision, the NGPA, and the Commis-
sion’s implementing NGPA regulations, the Commission
believes that it is legally required to order refunds in
this situation. Specifically, the NGPA establishes ceiling
prices and makes it unlawful for a first seller to receive
a price in excess of the maximum lawful price. If the
Commission did not make the measurement rule retroac-
tive and did not require refunds, it would effectively be
establishing a ceiling price higher than the maximum
lawful prices prescribed in the NGPA. Since the NGPA
does not contain any provision allowing the Commission
to change the maximum lawful prices except in very
limited circumstances,!! it cannot waive the refund ob-
ligation. While the Commission recognizes that there are
administrative costs associated with the refund process
and that perfect restitution to overcharged customers
may not be possible, it believes that the overriding legal
considerations require the Commission to establish a re-
fund mechanism that attempts to substantially refund
overcharges to consumers.
Commenters assert that the de minimis principle for
pipeline refunds in them interim rule should be expanded
and applied to first sellers and royalty interest owners so
11 The Commission does have the authority to establish a higher
just and reasonable rate—in other words, a new maximum lawful
price—for gas sold under NGPA sections 104, 106, and 109. In
addition, the Commission has the authority under NGPA section
107(c) (5) to establish a special price necessary to provide reason-
able incentives for producing high-cost gas. However, in order to
use these sections as a means of not requiring refunds, the Com-
mission must meet the statutory requirement of demonstrating
that the new price is just and reasonable, in the case of sections
104, 106, and 109, or necessary to provide incentives under section
107 (c) (5).
Ab RA nT Te ene AD Ne weit etm!
23a
as to waive the refund obligation for de minimis Btu re-
fund amounts. These commenters suggest de minimis
amounts of $500 and $2,000 per individual royalty in-
terest owner to significantly reduce the inequities of any
refund obligation. Although the Commission is sympa-
thetic to these requests, the Commission believes, for the
reasons discussed above, that the NGPA does not provide
any legal mechanism for the Commission to waive the
refund requirement.
A. Refund Period
The interim rule established two refund periods. Spe-
cifically, a 12-month refund period was established for
those first sellers who sold a total of ten million Mcf (10
Bcf) or less of gas in both the intrastate and interstate
markets in 1983 (small first sellers), and a 6-month re-
fund period was established for all other first sellers.
While many commenters support the 6-month and 12-
month refund periods, other commenters argue that these
periods were too long. In contrast, some commenters ar-
gue that these refund periods are too short to generate
refund calculations or to permit verification of the re-
fund obligation and that these refund periods will cause
cash flow problems. Commenters also suggest alternative
refund periods, such as, expanding the deadlines to two
years for all producers, but requiring the payment of
estimated refunds within 6 months and final adjustments
within 24 months.
The Commission has carefully balanced the need to
refund overcharges to consumers as expeditiously as pos-
sible against the administrative burdens and potential
cash flow problems associated with the refund process.
The Commission believes that the 6-month and 12-month
refund schedule is an appropriate compromise between
these competing interests. First, the natural gas indus-
try has been aware of the pending decision in INGAA,
and certainly has had the opportunity to prepare for this
24a
contingency, for some time. For example, some first
sellers and their purchasers escrowed these funds pend-
ing review by the U.S. Court of Appeals and the Supreme
Court. Second, the refund periods provide the first seller
and the pipeline sufficient time to agree on a repayment
schedule and to make the payment, if a schedule has not
already been worked out.
With respect to “large” first sellers, such sellers gen-
erally should have sufficient cash flow from all opera-
tions to pay their refund liability within six months,
and should generally be able to borrow funds to the ex-
tent their operations do not generate sufficient cash flow.
However, in order to accommodate problems unique to
many “small” first sellers, an extended 12-month refund
period was provided for first sellers who sold a total of
ten million Mcf (10 Bcf) or less of gas in both the intra-
state and interstate markets in 1983. The Commission
believes that, on balance, these considerations justify the
6-month and 12-month refund periods.
With respect to the definition of small first seller, sev-
eral commenters support using the test used under the
NGA as opposed to the one defined in the interim rule.
They argue that the NGA test is well established, is
easy to monitor, and would reduce the administrative
burden on pipelines and producers. Another commenter
notes that, under the interim rule definition, fewer first
sellers will qualify for the 12-month refund period than
under the NGA definition because the interim rule defini-
tion includes sales made in both interstate and intrastate
markets. This commenter suggests raising the threshold
to 12.5 Bef to compensate for the inclusion of intrastate
sales in the definition.
The Commission notes that the NGA definition of small
producer and the definition used in the interim rule are
intended to serve different purposes. The NGA definition
of small producer is used to waive filing requirements
under the Commission’s NGA regulations. In contrast,
OD erehieents eee ile v0
25a
the definition of small first seller in the interim rule is
used to determine those first sellers that are most likely
to have cash flow problems if required to meet a 6-month
refund deadline. This definition, unlike the NGA defini-
tion, also includes sales in the intrastate market because
the Btu refund obligation applies to intrastate as well
as interstate sales. Since the NGA definition and the
interim rule definition are intended to serve different
purposes, the interim rule definition applies to a different ©
group of sellers, i.e., first sellers who sold a total of ten
million Mecf (10 Bef) or less of gas in both the intrastate
and interstate markets in 1983.'2 The commenters do not
offer any compelling reasons why the interim rule defini-
tion would not serve those purposes.
Commenters suggest that the Commission permit pipe-
lines to assume a seller is large, unless the first seller
notifies the pipeline otherwise. The Commission has
adopted this suggestion because it will facilitate the re-
fund process and help pipelines complete their refund
reports without imposing an undue burden on small
first sellers. Hence, the rule requires small first sellers
who are not making refunds within the 6-month refund
period to notify pipelines in writing of their small first
seller status by November 5, 1984.
B. Method of Payment
Under the interim rule, first sellers are required to
make lump-sum cash payments of the overcharged
amounts, unless both the first seller and the pipeline
12 For the purpose of determining eligibility as a small first
seller, a first seller need not include sales made as a royalty interest
owner or by affiliated entities.
The Commission is concerned that an operator may not qualify
as a small first seller for refund purposes, but that one or more of
the sellers that designated that operator may have qualified as a
smail first seller as defined in this rule. In this situation, the
operator may wait until May 3, 1985, to pay that portion of the
Btu refund attributable to those small sellers, but the operator
must notify pipelines of this deferral by November 5, 1984.
26a
agree to payment through billing adjustments. This ap-
proach was taken because both repayment methods have
merit and it permits pipelines and first sellers a degree
of flexibility in deciding the most advantageous method
to refund the Btu overcharges.
One commenter argues that first sellers do not need
flexibility because first sellers have had long term use
of the money, and have been aware of the pending refund
obligation for some time. In addition, another commenter
argues that the Commission should permit pipelines flex-
ibility to withhold payments they owe first sellers in or-
der to retire the refund obligation, because a right to
withhold guarantees that all refunds are paid.
Although the Commission is aware that first sellers
have had long term use of the refund money and that
first sellers have been aware of a potential refund obliga-
tion for some time, it believes that first sellers should
have sufficient flexibility to prevent excessive cash flow
problems. Similarly, the Commission will not permit
pipelines unilaterally to decide to withhold payments be-
cause this procedure may unnecessarily cause first sellers
to experience severe cash flow problems. Hence, this rule
permits the parties to determine which of these methods
of payment is best suited to their financial situations.
C. Section 110 Offsets
Since 1988, the Commission has permitted first sellers
to retroactively collect production-related costs authorized
by contract under section 110 of the NGPA (section 110
costs).'* Since the Btu refund period and the surcharge
13 See Regulations Implementing Section 110 of the Natura! Gas
Policy Act of 1978 and Establishing Policy Under the Natural
Gas Act, 48 Fed. Reg. 5152 (Feb. 3, 1983) (Order No. 94-A)
(Final Rule and Order on Rehearing of Order No. 94); 48 Fed.
Reg. 24,089 (May 31, 1983) (Order No. 94-C); (Order Denying
Rehearing and Denying Petitions for Stay); 49 Fed. Reg. 565
Rasiaeisi™ | eS NORi vA MAA.
27a
period for section 110 costs are approximately the same,
some commenters propose that the Commission should re-
quire, or alternatively, permit, first sellers and pipelines
to offset Btu refunds and section 110 costs.
Seven commenters oppose the allowance of offsets and
nine commenters favor it. In addition, one commenter
argues that first sellers have a right to offset section 110
costs and Btu refunds. Those commenters favoring off-
sets argue that it will prevent financial difficulties, that
it provides an excellent match between those overcharged
for Btu refund amounts and those responsible for the
section 110 costs, and that section 110 costs and Btu re-
funds accrued over the same time period. Those com-
menters opposing offsets argue that the Btu refund ques-
tion is final while the secticy 110 cost issue is in litiga-
tion, that the time periods uffected by these orders are
different, and that section 110 costs are decided on a case-
by-case basis.
The Commission intended the procedures for collecting
section 110 costs to be self-implementing. In contrast,
the Commission has decided that specific refund proce-
dures are necessary for Btu refunds and that this refund
procedure should be closely monitored. Because of the
strict timetables and other requirements established for
the payment of Btu refunds, the Commission is concerned
that offsets could undermine contract disputes as to
whether a pipeline owes section 110 costs to a first seller.
The Commission also believes that permitting offsets of
(Jan. 5, 1984) (Order No. 94-E) (Clarification of Order No. 94).
See also, Delivery Allowances Under Section 110 of the Natural Gas
Policy Act of 1978, and Compression Allowances Under Section 110
of the Natural Gas Policy Act of 1978, 48 Fed. Reg. 5180 (Feb. 3,
1983) (Interim Rule) ; 48 Fed. Reg. 44,495 (Sept. 29, 1983) (Order
No. 334, Final Rule and Order Granting in Part and Denying in
Part Rehearing of Interim Rule); 49 Fed. Reg. 56 (Jan. 3, 1984)
(Order No. 334-A, Order Denying Application for Rehearing Of
Order No. 334 and Denying Requests for Stay of Order No. 334).
284
section 110 costs and Btu refunds would complicate an
already difficult process and would make Commission
monitoring of Btu refunds more difficult. In addition, the
Commission is concerned that permitting pipelines and
first sellers to offset section 110 costs and Btu refunds
could prevent the Btu refunds from reaching as many of
the customers actually overcharged as possible. Consid-
ering that the section 110 orders are also subject to judi-
cial review, the Commission believes it is more appro-
priate to segregate the collection of section 110 costs
from the Btu refunds. For these reasons, the Commission
is prohibiting the offset of section 110 costs and Btu
refunds.
D. Interest
The interim rule adopted the Commission’s refund
policy, codified in § 270.101(e) (general refund obliga-
tion) that requires the first seller to calculate the refund
plus interest under § 154.102(c) of its regulations. The
interim rule also continued a longstanding Commission
policy of waiving the interest payment for that portion
of a refund attributable to payment of royalties or taxes
to Federal or State governmental authorities unless those
governmental authorities make interest payments on
those refunds.’* In addition, a first seller’s refund obliga-
tion is not satisfied until the interes. obligation is satis-
fied. :
Commenters argue that the Comniission should waive
the entire interest requirement because first sellers were
not unjustly enriched, and the overcharged amounts were
14 See 18 C.F.R. § 273.302(e) (2) (i) (1983); and 49 Fed.
Reg. 19,293, 19,299 (May 7, 1984) (to be codified at 18 C.F.R.
§ 154.102 (d)).
In the interim rule, the Commission amended § 154.102 to in-
clude a new paragraph (d) that was inadvertently removed by
Order No. 47. See 49 Fed. Reg. 19,298, 19,295 n.10 (May 7, 1984).
The Commission is finalizing this amendment.
a a eee Oe ee An
29a
reinvested in exploration, drilling, and production. These
commenters characterize the interest obligation as a tre-
mendous burden and they state that the interest obliga-
tion will drive companies out of business. Other com-
menters argue that the rate of interest is too high, and
one commenter suggests using the interest rate on 90-day
treasury notes.
The Commission is not persuaded that a valid reason
exists for waiving the interest requirement entirely or
generally revising the interest rates. In addition, the
Commission believes that fairness to consumers and pipe-
lines dictates that first sellers pay interest on the Btu
refund amounts at the rate established in the interim
rule. As stated in the interim rule, interest charges re-
flect a reimbursement to the rightful owner of the value
of the use of funds held by first sellers. The Commis-
sion’s existing regulations for calculating interest are
used because the Commission believes that these regula-
tions have already balanced the interests of sellers and
purchasers.*®
Some commenters suggest that the Commission limit
the interest on Btu refund amounts which were paid into
escrow to the interest that accrued in the escrow account,
because money held in escrow earned a rate of return
different from the prime rate. The Commission agrees
that the only interest which should be refunded on
escrowed amounts should be the accrued interest in the
escrow account, since first sellers did not have use of this
money and since an escrow procedure protects the in-
terests of both the consumer and the seller. The Commis-
sion believes these are valid reasons for limiting the
interest obligation for money paid into escrow to that
interest which accrued in the escrow account on the
15 A table showing the interest rates applicable to the Btu refund
is available from the Commission’s Division of Public Information,
Rm. 1000, 825 North Capitol Street, N.E., Washington, D.C. 20426,
(202) 357-8118. (Ask for “Btu Refund Interest Rate Table’).
30a
amount required to be refunded. Moreover, this proce-
dure is consistent with § 273.302(e) (2) (ii) of our regu-
lations for interim collections of maximum lawful prices
by first sellers pending NGPA well category determina-
tions.’*®
Commenters request clarification on the date interest
begins to accrue. Under this rule, interest begins to
accrue on the date that the overcharged amount was
received by the first seller, except for Btu payments that
were paid into escrow and for refunds attributable to
payment of royalties or taxes to Federal or State govern-
mental authorities. In the latter situation, interest begins
to accrue on the date that the first seller receives the
refund from the governmental royalty interest owner.
E. Refunds for Section 107(c)(5) Gas
Under NGPA section 107(b), the Commission has the
authority to prescribe a higher incentive price for any
first sale of high-cost gas to the extent a higher price is
necessary to provide reasonable incentives to produce that
gas. The Commission has issued such regulations for
high-cost tight formation gas,'’ and production enhance-
ment gas.'®
In the interim rule, the Commission declined to make
the necessary section 107(c) (5) finding for raising the
ceiling price for such gas to compensate for Btu over-
charges. Commenters state that the section 107(c) (5)
price should not be reduced because of INGAA. They
argue that the Commission chose the section 103 price as
16 18 C.F.R. § 273.302 (e) (2) (ii) (1988).
17 Regulations Covering High-Cost Natural Gas Produced From
Tight Formations, 45 Fed. Reg. 56,034 (Aug. 22, 1980).
18 High-Cost Natural Gas: Production Enhancement Procedures,
45 Fed. Reg. 77,421 (Nov. 24, 1980); 48 Fed. Reg. 45,097 (Oct. 3,
1983) (Order Granting Rehearing in Part and Denying Rehearing
in Part).
Te ly Sa tn ay A to “
3la
a convenient marker for settting the price for section
107(c) (5) gas and is not bound to that price.
The Commission believes it has the authority to estab-
lish a maximum lawful price for section 107(c) (5) gas
based on the Btu content of the gas as delivered provided
the statutory finding in section 107(b) is met. However,
in establishing incentive prices, the Commission deter-
mined that the incentive ceiling price for tight formation
gas is the lesser of the negotiated contract price or 200
percent of the section 103 price and that the incentive
ceiling price for production enhancement gas is the lesser
of the renegotiated price or the section 109 price. Since
the section 107 prices were based on sections 103 and
109, the rules applicable to those sections should apply
to the section 107 rates that are pegged to those other
ceiling rates. Commenters do not offer any compelling
reasons to justify a higher ceiling price for section 107
(c) (5) gas or any factual data to support the statutory
requirements in section 107(b). Accordingly, if a first
seller has collected these maximum lawful prices based
on the dry rule, refunds are due. Of course, if the con-
tract price is less than the ceiling price, then the contract
price is not changed by this rule. To the extent that
contract-related rates are set on a dry basis, they must
be converted to a wet basis solely for purposes of making
the comparison to ensure that the ceiling rate is not
breached.
F. Generation of Refund Information
Commenters argue that the rule should require pipe-
lines to supply first sellers a full and complete data sheet
of the information necessary to determine the Btu refund
amounts. Commenters note that most first sellers cannot
calculate the Btu refunds without information from the
pipelines, and they argue that purchasers are in the best
position to supply that information. One commenter notes
that without an information exchange, the computation
32a
and verification of refunds will be a difficult and burden-
some task that will cause considerable delay and make
the 6-month deadline unrealistic. Other commenters op-
pose a standard form mandated by the Commission
because any data exchange should be left to the parties.
One commenter argues that the rule should require
that the amount of Btu overcharge be determined by the
party responsible for submitting the invoices that included
Btu adjustments. In addition, one commenter argues
that purchasers should be required to provide the neces-
sary information in sufficient time to meet deadlines.
One pipeline states it will invoice its producers, but
argues that first sellers must continue to bear the legal
obligation to assure that the calculations are accurate
and refunds properly paid. Another pipeline states that
it will cooperate with first sellers to determine the correct
refund amounts owed plus interest.
The Commission realizes that pipelines typicaily do the
paperwork necessary to prepare the invoices for the gas
taken from first sellers. However, we believe that the
parties are in the best position to decide who should
determine the amounts owed because, in some instances,
pipelines require the first seller to do the paperwork to
invoice for the gas taken; and in other instances, the
first seller may not have sufficient information to calcu-
late the refund obiigation without additional information
from the pipeline. The Commission also believes that
pipelines and first sellers should cooperate. Specifically,
first sellers are liable for the refunds, but pipelines have
an obligation under the NGA as part of prudent manage-
ment to ensure that first sellers pay these refunds,
promptly and properly.
G. Refund Payments by Royalty Owners
Many first sellers of natural gas have a contractual
agreement with a landowner to pay that owner a royalty
payment based on a certain percentage of the proceeds
ee ee
tt ee a
38a
the first seller receives for the natural gas. The interim
rule provided that a seller incurs a refund liability for
all the proceeds received in a first sale, and that he must
refund the entire overpayment, including that percentagé
originally paid to the royalty owner. However, in those
cases where several sellers have designated an operator
to both collect revenues and disburse payments covering
working interests and royalty interests, the interim rule
designates the operator as the one responsible for repay-
ment of the entire refund.
Seme commenters argue that operators should not be
responsible for refunds attributable to royalty interest
owners. Other commenters argue that it is unclear
whether royalty interest owners must pay this refund.
One commenter asserts that the refund obligation should
be placed on the royalty interest owners where it belongs.
Commenters also complain that collecting refunds from
royalty interest owners will be impossible because royalty
interest owners may have become judgment-proof, the
well may have changed ownership, or the well may have
been plugged. Other commenters suggest that first sellers
and operators should be required to collect refunds on a
“vest-efforts” basis, and that operators should not be
responsible for refunds if the royalty interest owner is
unable to pay, if the refund is uncollectible by law, or if
the refund is not otherwise collectible from a royalty
interest owner.
Two commenters complain that while the amount they
are owed by royalty interest owners is large, the cost of
collection may exceed this amount. Another commenter
argues that operators she'd be permitted an offset for
the costs of collection. Fis. .y, commenters note that one
State, Wyoming, is refusing to make any refunds of over-
payments of royalties; and that the Department cof In-
terior has time-consuming procedures and may refuse to
pay portions of the overpayment of royalties. These com-
menters argue that the rule should exempt or defer re-
34a
fund amounts attributable to States and the Department
of Interior until they pay the royalty amounts they owe.
The Commission recognizes the problems that first
sellers may have in recovering money from royalty in-
terest owners. However, receipt of a first sale price in
excess of the statutorily-set maximum lawful price is a
violation of the NGPA, and the Commission has no au-
thority to adjust these ceilings, except in certain limited
circumstances not applicable here.’® Numerous first sel-
lers collected first sale prices in excess of the maximum
lawful prices under the NGPA, since they priced gas
based on the Btu content of the gas delivered to the pipe-
line. Therefore, these sellers incurred a refund liability,
and it is their responsibility to refund the entire over-
payment, including that percentage paid to royalty in-
terest owners. Some sellers may have placed the Btu
overcharge amounts in escrow pending a decision in
INGAA, and do not face the task of securing refunds
from royalty interest owners. For other sellers who
failed to forsee this contingency, the Commission believes
that securing refunds is a part of doing business. In
addition, the Commission does not have jurisdiction over
royalty interest owners, and, therefore, it cannot order
royalty interest owners to make refunds.” Hence, the
Commission is not changing the requirement that first
sellers are responsible for the entire Btu refund.*' How-
ever, the Commission is aware that operators change and
working interests in wells are assigned to others. There-
fore, the Commission is clarifying that an operator is
19 See n.11, supra.
20 See Mobil Oil Corp. v. FPC, 463 F.2d 256 (D.C. Cir. 1972),
cert. denied, 406 U.S. 976 (1972), reh’g denied, 409 U.S. 902 (1972),
and reh’g denied, 409 U.S. 903 (1972).
21In addition, the Commission has also held single parties re-
sponsible for all refunds in other circumstances under the NGA.
See Tenneco Oil Company v. FPC, 442 F.2d 489 (5th Cir. 1971);
and Sauder v. DOE, 648 F.2d 1341 (Temp. Emer. Ct. App. 1981).
responsible for refunds only during that period of time
he operated a well and a first seller is responsible for
refunds only during that period of time he owned an in-
terest in a well, except as provided otherwise by contract,
deed, or lease.
While the Commission is not relieving first sellers of
their responsibility for the entire Btu refund, the Com-
mission is concerned that first sellers may have difficulty
making timely collection of that portion of the Btu re-
fund amounts attributable to some royalty interest own-
ers, including some States and the Department of In-
terior. In order to permit first sellers sufficient time to
collect these monies, the Commission is permitting first
sellers to defer that portion of the Btu refund attribut-
able to royalty interest owners until the first seller re-
ceives payment from the royalty interest owner or No-
vember 5, 1986, whichever occurs first. However, the
Commission stresses that first sellers should make every
effort to collect and pay the entire Btu refund within the
appropriate 6- or 12-month time limits. The Commission
expects that the Department of Interior will make most
of the refunds it owes in a timely manner, especially
those refund amounts attributable to the period after
November 9, 1981.°° Those first sellers who defer the
royalty interest owner portion of the Btu refund must
notify pipelines of the deferral before the end of the
applicable 6- or 12-month refund period.
The Commission realizes that a few first sellers who
are diligently seeking refunds from royalty interest own-
ers will be unable to meet the November 5, 1986, time
limit. In these situations, a first seller may always seek
a further deferral of the refund under section 502(c) of
2 be SX hianlath tahoe Senso en es cn
22 See Refund Procedures and Order to Pay Royalties, 49 Fed.
: Reg. 31,779 (Aug. 8, 1984). See also 88 Int. Dec. 1090 (1981).
Commission staff will also initiate talks with the Department of
Interior to help facilitate payment of the refunds owed by the In-
terior Department.
ial inaiiiiaeiaeieneallll
36a
the NGPA. However, the Commission is not inclined to
grant such applications unless the circumstances and in-
equities require it. In any event, the first seller must pay
interest under the provisions of this rule until the entire
Btu refund is paid to the purchaser.
H. Refund Reports by Interstate and Intrastate Pipe-
lines
The interim rule requires, interstate and intrastate
pipelines that are purchasers in a first sale to file two
refund reports. These reports describe the status of the
first seller’s refund obligation by detailing 1) those first
sellers that have mace refunds and the amount of re-
funds received, and 2) those first sellers that have not
made refunds, the amount owed, and the reasons for non-
payment. The first report would be filed by December
18, 1984, which is 45 days after the last day of the six-
month first seller refund period. The second report would
be filed by July 3, 1985, which is 60 days after the last
day of the 12-month refund period. Because the State
regulatory agencies will be interested in monitoring the
refund process, the interim rule requires intrastate pipe-
lires to file a copy of their report with the State agency
having jurisdiction over intrastate sales. The interim
rule requests comments on the reporting requirements
imposed on intrastate pipelines.
Most commenters addressing the intrastate reporting
requirements support these requirements because they
properly balance the interests of the States, participants
and the public. Due to the magnitude of the refunds,
the complexity associated with monitoring them, and the
long term nature of the overcharges, the Commission is
adopting the interim rule reporting requirements for in-
terstate and intrastate pipelines already discussed with
the modifications discussed below.** Specifically, the Com-
23 The authority to require these reports is encompassed within
the Commission’s general authority in section 501(a) of the NGPA
37a
mission recognizes that it would be administratively in-
feasible to monitor refunds from all natural gas first
sellers without the aid of refund reports from interstate
and intrastate pipelines. In addition, the Commission in-
tends to institute a comprehensive audit program for all
refunds that are still unpaid at the end of the appropri-
ate refund period.
The interim rule also requests comments on the Com-
mission’s decision not to require refund reports from all
first sale purchasers. Commenters argue that reporting
requirements should not be expanded to Hinshaw pipe-
lines or local distribution companies (LDCs). They state
that most State commissions already have strict require-
ments for refunds by LDCs and that the Commission
lacks jurisdiction over LDCs to order refund reports. In
addition, these commenters assert that refund reports by
Hinshaw pipelines and LDCs wouid impose unnecessary
costs and serve no valid purpose, since pipeline reports
and Commission audits are sufficient to monitor compli-
ance; and that refund reports would place duplicative and
perhaps conflicting demands on LDCs. In contrast, other
commenters argue that the final rule should require re-
fund reports from all first sale purchasers in order to
monitor the flow of refund monies.
The Commission does not believe that reports from
every first sale purchaser are necessary to properly moni-
tor this refund process. In addition to those reasons
stated by the commenters, the Commission believes that
refund reports from all first sale purchasers are unneces-
sary because sales of natural gas which are not made to
interstate aud intrastate pipelines comprise a small pro-
portion of the total sales made in the natural gas market.
“to perform any and all acts * * * as it may find necessary or
appropriate to carry out its functions” under the NGPA, which
functions include ensuring that the maximum lawful »rices are not
exceeded in any first sale transaction.
38a
\
One commenter argues that the refund reports should
be expanded to include a statement of the total amount
due from each first seller with amounts broken down by
principal and interest. The Commission believes that the
refund reports should separately state principal and in-
terest and that this information is necessary to properly
monitor the refund process. Consequently, the reporting
requirements are modified to require that refund reports
show the amounts of principal and interest received.
As discussed previously, this rule extends the period
during which sellers may pay refunds from royalty in-
terest owners. In view of this extension, an additional
report will be necessary at the end of that two-year de-
ferral period in order to facilitate the monitoring by the
Commission of the refund process. Hence, intrastate and
interstate pipelines must file a third and final refund
report by January 5, 1987, detailing 1) those first sellers
from whom refunds have been received since May 3,
1985, and 2) those first sellers from whom refunds have
not been recovered and the reason for the nonpayment.”
One commenter argues that any reports by intrastate
pipelines should be made only to the appropriate State
regulatory agency and not the Commission. Other com-
menters suggest removing the requirement to give rea-
sons for nonpayment by producers, since the pipeline may
not know and finding out will be burdensome and point-
less. These arguments are rejected because the Commis-
sion needs refund reports from intrastate pipelines to en-
sure that first sellers comply with this rule. Similarly,
the Commission requires pipelines to provide the reasons
for nonpayment by a first seller because that information
is necessary to monitor Btu refunds and pipelines are in
24 This report will be due 60 days after November 5, 1986, or
January 5, 1987. But, the second report will be due by June 17,
1985, which is 45 days, instead of 60 days, from May 3, 1985,
because the second report is no longer the final refund report.
Ss =
eae
Ne ee aE
39a
the best position to obtain that information from the
first seller.
IV. PIPELINE REFUNDS TO CUSTOMERS
Under the NGA, the Commission has jurisdiction over
the rates that interstate pipelines charge to their cus-
tomers. This rule expands and clarifies the regulations
promulgated by the interim rule to pass through any re-
funds pipelines receive from first sellers and other pipe-
lines.
A. Refund Period and Method of Payment for Inter-
state Pipelines
The interim rule notes that each pipeline has a mecha-
nism in its purchase gas adjustment clause (PGA) to
pass through refunds received from first sellers by re-
ducing the pipeline’s unrecovered purchased gas costs,
which costs would normally be recovered from the pipe-
line’s customers over the next 6-month period. But, be-
cause the Btu refund was accrued over a 5-year period
and because the refund amounts are large, the interim
rule requires interstate pipelines to make lump-sum cash
payments to those customers actually overcharged from
December 1, 1978, instead of adjusting their current
rates.
Commenters argue that, in addition to those reasons
stated in the interim rule, the Commission should use the
PGA mechanism for several reasons. First, the PGA
mechanism permits pipelines to retain markets by reduc-
ing current costs. Second, it reduces accounting and ad-
ministrative burdens, since pipelines need not establish
new procedures to verify, allocate and distribute the Btu
refunds. In contrast, other commenters argue that pass-
ing the refunds through the PGA mechanism will distort
the current and future costs of gas, will cause serious
inequities (especially to past customers who do not cur-
rently purchase gas), and will delay signals to producers
40a
that the market cannot bear the nigh gas prices already
being charged.
Similarly, some commenters support the lump-sum re-
fund mechanism based on historical purchases. They ar-
gue that lump-sum refunds avoid allocation problems,
prevent unfairness, are more accurate, avoid market dis-
tortions and provide State commissions with maximum
flexibility. Other commenters describe the lump-sum
method as fair, equitable and reasonable. In addition,
one commenter notes that the lump-sum mechanism will
benefit those customers whose conservation efforts de-
creased their use of gas.
The Commission believes that the use of the PGA
mechanism to pass through these refunds could result
in inequities. For example, customers which do not now
purchase gas from 4n interstate pipeline would not re-
ceive a refund with a PGA pass-through, and it would be
unfair if the customers actually overcharged did not re-
ceive a refund in the same proportion to their over-
charges, given the magnitude and long-term nature of
the overcharges.
In contrast, the Commission believes that the lump-
sum mechanism is a fair and equitable procedure. Spe-
cifically, the lump-sum mechanism ensures that refunds
will be made to those customers who overpaid the pipe-
lines, and this mechanism will return the refunds to the
ultimate consumer more quickly. Finally, the Commis-
sion recognizes that the Btu refund may temporarily
disrupt the current gas market. But, the Commission
believes that a lump-sum cash payment requirement will
disrupt the current natural gas market less than the use
of the PGA mechanism, since a lump-sum cash payment
is made to those overcharged and does not adjust current
prices. For these reasons and for the reasons stated in
the interim rule, this rule requires interstate pipelines
to make lump-sum cash payments to those customers
actually overcharged from December 1, 1978.
4la
The interim rule also requires interstate pipelines to
pay Btu refunds to those customers actually overcharged
within 15 days of receipt of the refunds from a first
seller, or pay interest from the first day the refund was
received from the first seller until paid. In order to
reduce the administrative burden on pipelines, the interim
rule permits pipelines to defer lump-sum payment to its
customers until it has accumulated refunds equivalent to
one mill per Mcf or Dkt for the pipeline’s 1983 annual
sales. In no event could the pipeline defer payment for
more than 120 days or 30 days after the last refund
period. If the pipeline defers payment more than 15 days,
the pipeline is liable for interest from the date it receives
the refunds from the first seller until the pipeline paid
its jurisdictional customers.
The interim rule also notes that, to the extent a pipe-
line’s refunds are de minimis, it may request a waiver
of the lump-sum payment requirement. In addition, if a
pipeline has already paid the first seller the Order No. 93
costs, but has not yet amortized those paid costs, then the
interim rule permits the pipeline to offset these un-
amortized amounts against the jurisdictional portion of
the refunds received. Because of the magnitude of the
refunds, and for the reasons discussed below, the Com-
mission is adopting these requirements with minor modifi-
cation.
The Commission notes that pipelines were apparently
confused about how to allocate refunds to their customers
actually overcharged. Specifically, two commenters argue
that pipelines must allocate refunds based on the histori-
cal sales made by a pipeline during the period of Order
No. 93 overpayments. One commenter will base a cus-
tomer’s refund on the customer’s pro rata portion of
total purchases during the PGA periods in which Order
No. 93 amounts were collected.2*> Another commenter asks
25 Texas Eastern Transmission Corporation (Texas Eastern)
requested clarification, or in the alternative, rehearing of the
42a
whether each customer’s share of refunds may be based
on sales during a representative period compared to total
sales during that period. Similarly, commenters are ap-
parently confused on the method for processing refunds
received from other pipelines. Specifically, three com-
menters state that the Commission should clarify or
prescribe standards for processing refunds received from
other pipelines.
Some commenters argue that the Commission intended
for pipelines to refund amounts received from other pipe-
lines in lump sums within 15 days of receipt. One com-
menter suggests arriving at this result by defining funds
received from downstream pipelines from another pipeline
as within the definition of Btu refunds. Another com-
menter argues that second pipelines are not exempt from
lump-sum refunds because the administrative burden is
no greater than for first seller refunds. Another com-
menter asserts that the interim rule is silent on the
proper manner to handle refunds received from other
pipelines and argues that the PG» mechanism is the best
method because it avoids the administrative hardship of
continuous lump-sum refunds. In contrast, one commenter
argues that using the PGA mechanism for refunds re-
ceived from other pipelines is contrary to the Commis-
sion’s goal of distributing refunds to those customers
actually overcharged.
interim rule (Docket No. RM84-6-002). Specifically, Texas Eastern
asked whether the interim rule permits pipelines to spread the Btu
refunds among customers based on each customer’s pro rata share
of purchases, for the period that significant amounts of Order No.
93-A dollars were included in the PGA. If the interim rule did not
permit this approach, Texas Eastern requested that the Commis-
sion grant rehearing and issue rules in conformity with Texas
Eastern’s interpretation of the interim rule. Since Texas Eastern’s
interpretation is a permissible procedure for determining the re-
funds owed to its jurisdictional customers, the Commission is not
treating its filing as a rehearing request. The specifics of Texas
Eastern’s proposed refund plan which was filed by Texas Eastern
in Docket No. RP84-89-000 will be addressed by a separate order
to be issued by the Commission in Docket No. RP84-89-000.
| ne
43a
The Commission believes that a pipeline and its juris-
dictional customers are in the best position to work out a
procedure that 1) determines the portion of the aggregate
amount of Btu refunds which are due a pipeline’s juris-
dictional customers actually overcharged based on the
proportion of the total Btu refunds originally paid by
those jurisdictional customers; and 2) refunds this
amount to each jurisdictional customer in the same
proportion that each jurisdictional customer originally
paid the Btu refund amounts. For example, it may be
appropriate for a pipeline to allocate the aggregate of all
Btu refunds received from both first sellers and other
pipelines based on each customer’s purchases during the
PGA periods in which Order No. 93 amounts were col-
lected compared to the total sales during that period.
Pipelines would then pay this refund to those customers
in a lump-sum cash payment. In any event, pipelines are
to process Btu refunds received from other pipelines in
the same manner as Btu refunds received from first
sellers because this procedure will return the Btu refund
amounts to those customers actually overcharged.
Pipelines characterize the 15-day refund period as
burdensome, unrealistically brief, impractical, intolerable,
and an unreasonable burden. Other commenters argue
that 15 days is insufficient time to verify, allocate and
distribute the refunds. Commenters suggest several alter-
native payment schedules that provided longer refund
periods. These scheclules ranged from 20 days to 12
months.
The Commission is not persuaded by these comments.
Fifteen days should be sufficient time to determine *he
proportion of the aggregate amount of the Btu refunds
which are due the pipeline’s jurisdictional customers actu-
ally overcharged based on the proportion of the total
Btu refunds originally paid by those jurisdictional cus-
tomers and to pay the necessary refund amount. Pipe-
lines that meet this 15-day refund period will have use
44a
of this money without reimbursing the rightful owner of
the value of the use of these funds. Alternatively, pipe-
lines may always take longer than the 15-day refund
period (subject to a maximum 120-day holding period),
but they must pay interest from the date of receipt until
payment is made to its jurisdictional customers. The
Commission believes the requirement that pipelines pay
interest from the date of receipt until payment is made,
if payment is not made within 15 days, fairly balances
the competing interests of consumers and pipelines.
One commenter suggests that the rule permit pipelines
to flow through the principle amount of any de minimis
refunds without interest because the interest calculations
are so complex. This rule does not adopt this suggestion.
The Commission believes that it would be unfair to con-
sumers to waive interest on de minimis amounts, since
the Commission does not believe that these interest calcu-
lations will be overly burdensome on the pipelines.
Finally, while the Commission does not intend to treat
pipelines as guarantors of refunds, the Commission urges
the interstate pipelines to actively pursue any refunds
owed by first sellers. The Commission believes that these
pipelines have an obligation under the Natural Gas Act
as part of prudent management to ensure that these
refunds are paid promptly and properly.
B. Refund Reports
In addition to those refund reports described earlier,
the interim rule requires interstate pipelines to file two
additional reports describing the refund payments made
to interstate pipeline cust.mers by detailing 1) the actual
amounts received, and 2) the total amount the interstate
pipeline paid its customers and the basis used to appor-
tion the Btu refund amount among those customers.
These reports are due December 18, 1984, and July 3,
1985. These reporting requirements are necessary to en-
45a
sure that all interstate pipeline customers have received
their refunds. In addition, these reports will assist the
Commission as well as the interstate pipeline customers
in reviewing the refund payments.*®
Commenters argue that the final rule should require
refund reports from every person purchasing gas for re-
sale in order to monitor the flow of refund monies and to
assure that refunds have been properly and fairly allo-
cated. In contrast, other commenters argue that report-
ing requirements should not be expanded to LDCs. In
addition, one commenter argues that refund reports con-
cerning customers should show the total amount paid
each of the pipeline’s customers and the interest due each
of the customers as of the date of the report.
The Commission believes it can monitor the flow of
Btu refunds without requiring reports from every person
purchasing gas fer resale. In addition, the Commission
believes that the States are in a better position to moni-
tor the LDCs. Hence, the Commission is adopting the
interim rule reporting requirements with two modifica-
tions. First, the reporting requirements are modified to
require that refund reports show the amounts of principal
and interest paid. Second, the Commission is requiring
an additional refund report from interstate pipelines
because first sellers may defer payment of the Btu refund
amounts attributable to royalty interest owners. This
report is necessary to monitor the refund process to its
completion. Thus, interstate pipelines must file refund
reports by December 18, 1984, June 17, 1985, and Janu-
ary 5, 1987, detailing 1) the actual Btu refund amounts
received by the pipeline and 2) the total Btu refund
amounts that the interstate pipeline paid its jurisdic-
tional customers and the basis used to apportion the
*¢ The authority to require these reports is section 501(a) of
the NGPA. See n.28, supra.
46a
refund amounts among those customers.*7 The Commis-
sion believes that this approach provides the Commission
sufficient information to track the refund process without
unduly interfering with the traditional jurisdiction of the
States over retail sales of natural gas.
V. Refunds at the State Level
Although the Commission stresses its intention that re-
funds should reach the ultimate consumer, the ‘nterim
rule only requires refunds as far as intrastate pipelines
and interstate pipeline’s jurisdictional customers.”
One commenter argues that the Commission has the
authority and should exercise that authority to return
refunds, subject to a rule of reason, to the consumers
actually overcharged in the same proportion that those
customers were overcharged. Another commenter argues
that the absence of State rate regulation over the inter-
state pipelines’ direct sale transactions underscores the
need for the Commission to ensure that refunds are paid
to direct sale end-users. Other commenters argue that,
if States are allowed to determine the methods, proce-
dures, and timing of refunds, there are no assurances
that the ultimate consumer will benefit. Alternatively,
27 The last report is due 60 days after November 5, 1986. The
second report is due by June 17, 1985, which is 45 days, instead
of 60 days, from May 3, 1985, because the second report is no
lenger the final report.
*8 The Process Gas Consumers Group, the American Iron and
Steel Institute, the Council of Industrial Boiler Owners, The Brick
Institute of America, and Kimberly-Clark Corporation (Docket
No. RM84-6-001) requested rehearing. Specifically, they requested
that the Commission modify the interim rule, pursuant to the au-
thority delegated in NGPA sections 501 and 504, to require that
all Btu adjustment refunds be flowed through to end-users in the
same proportion that such users were originally overcharged due
to the impiementation of the “dry” rule. The Commission denies
their petition for rehearing for those reasons discussed in the text
that follows.
eo centile
ee ee ee ee eed
ut the bb.
DS: a pNirteh es APRA, PARC AC a ir iil ICD, 60 0 Nib se ee
47a
commenters suggest that the Commission strongly advise
the States or provide guidance to the States on how intra-
state pipelines and LDCs should refund overcharges to
the ultimate consumer. In contrast, commenters argue
that the Commission lacks jurisdiction to order refunds
by LDCs. Other commenters argue that refunds by
LDCs are best left to State agencies.
While the Commission stresses that these Btu refunds
should be passed through to the ultimate consumer, it has
decided against establishing specific refund procedures
for LDCs to flow through these refunds. States are better
attuned to the needs of its consumers and to local market
conditions, and are better equipped to establish and moni-
tor the local refund procedures necessary for the different
problems facing a particular State. In addition, establish-
ing specific procedures to flow through refunds at the
State level would unnecessarily and unreasonably inter-
fere with the traditional jurisdiction of State commis-
sions over retail sales of natural gas, while imposing
significant administrative burdens on this Commission.
The Commission has also decided not to establish refund
procedures for refunding monies to an interstate pipe-
lines’ direct sale customers because it believes that these
customers have sufficient direct contact with the pipeline
to negotiate a refund schedule.
VI. MISCELLANEOUS
A. Section 502(c) Adjustments
Commenters note that while relief from provisions of
this refund order is available under section 502(c) of the
NGPA, the Commission should not view the theoretical
possibility of this relief as a remedy for any special hard-
ships or inequities which could result from this refund
order, but rather, should amend the interim rule to
remove such hardships or inequities.
The Commission has sought to implement a refund
mechanism that will minimize hardships and inequities.
48a
However, it recognizes that, given the amount of refunds
and the extensive number of buyers and sellers involved
in the refund process, hardships or inequities may occur.
The Commission believes that section 502(c) will provide
an appropriate mechanism to remedy any hardships and
inequities, which may occur, on a case-by-case basis. Al-
though the Commission may not use section 502(c) to
change statutory requirements, such as the maximum
lawful prices under the NGPA or to reduce the Btu
refund amount owed, parties may seek relief under sec-
tion 502(c) from provisions of these refund procedures
which they believe cause special hardships, inequities, or
an unfair distribution of burdens. However, the Commis-
sion expects few applications of this type and is not
inclined to grant them unless the applicant’s claim for
relief is supported by compelling reasons.
B. Identity of First Seller
One commenter suggests that whenever there are two
consecutive “first sales’ or an accounting for gas for
payment purposes after processing, any Btu refunds
should be based on the second “first sale.” Specifically,
the one delivering the residue gas at the tailgate of the
plant to the pipeline-purchaser should be responsible for
the refunds because of the difficulty of tracing revenues
from the wellhead. Another commenter asserts that the
rule should be clarified to apply to every kind of “first
sale.”
The Commission recognizes that in some instances there
may be a string of consecutive first sales because of
gathering, processing, and transportation agreements. In
these situations, the Commission has decided that the
refund obligation applies to every kind of first sale, as a
first sale is defined under the NGPA,” since the Com-
mission has jurisdiction over all first sellers and it would
be unfair to hold one first seller responsible for the re-
2° See section 2(21) of the NGPA, 15 U.S.C. § 3301(21) (1982).
49a
fund from a string of first sales. Hence, if the seller in
a first sale receives revenues in excess of the product of
the applicable maximum lawful price under the NGPA
and the quantity of MMBtu’s determined on the basis of
the wet rule, a refund is owed.
VII. PAPERWORK REDUCTION ACT
The refund reports required under Ordering Para-
graph Nos. E, F, and G and §§ 154.38(h) (3) (vi), (vii),
and (viii) are information collection requirements that
are being submitted to the Office of Management and
Budget (OMB) for its approval under the Paperwork
Reduction Act, 44 U.S.C. §§ 3501-3520 (1982) and OMB’s
regulations, 5 C.F.R. Part 1320 (1984). Comments on
these provisions should be sent to the Office of Informa-
tion and Regulatory Affairs of OMB (Attention: Desk
Officer for the Federal Energy Regulatory Commission).
Interested persons can obtain information on the infor-
‘mation collection provisions by contacting the Federal
Energy Regulatory Commission, 825 North Capitol Street,
N.E., Washington, D.C. 20426 (Attention: Joseph Hart-
soe, (202) 357-8033).
VIll. EFFECTIVE DATE
The Commission incorporates the reasoning and find-
ings in the interim rule that good cause exists under the
Administrative Procedure Act (APA), 5 U.S.C. § 553 (b)
(1982), for finding that a notice of proposed rulemaking
is unnecessary, impracticable and contrary to the public
interest. Because this rule adopts and modifies the in-
terim rule and the interim rule is already in effect, the
Commission is concerned that, if this final rule were not
effective upon issuance, first sellers and pipelines might
apply the interim rule in a manner inconsistent with this
final rule before this rule becomes effective. Therefore,
the Commission finds that good cause exists under the
APA, 5 U.S.C. § 553(d) (1982), to make this rule effec-
tive upon issuance, except for the requirements to file
6-month, 12-month, and 30-month refund reports. These
50a
refund reports are information collection requirements
under the Paperwork Reduction Act and are subject to
OMB approval. Accordingly, the refund report require-
ments (set forth in Ordering Paragraph Nos. E, F, and
G and §§ 154.38(h) (3) (vi), (vii), and (viii) of this
rule) will become effective December 1, 1984. If OMB’s
approval and control number have not been received by
this effective date, the Commission will issue a notice
temporarily suspending the effective date of the refund
reporting requirements.
IN CONSIDERATION OF THE FOREGOING, THE
COMMISSION ORDERS:
(A) Any first seller that collected revenues in excess
of the product of (a) the applicable maximum lawful
price established by the NGPA, and (b) the quantities of
MMBtu’s determined on the basis of § 270.204, shall re-
fund any such excess revenues. This refund shall be paid
in full by November 5, 1984, unless the first seller is a
small first seller, i.e., a first seller that sold a total of
ten mill Mef or less of gas, in both the interstate and
intrastate markets, during 1983. A small first seller shall
pay the refunds in full by May 3, 1985, but must notify
in writing any pipeline to which he owes refunds that he
is a small first seller by November 5, 1984, to qualify for
this extension. To the extent that revenues for gas sold
in a first sale under the NGPA are less than or equal to
the level of revenues based on the product of (a) and
(b), and are contractually authorized, no refunds are
due.
(B) First sellers may defer payment of that portion of
the Btu refund attributable to royalty interest owners
until the first seller receives payment from the royalty
interest owner or November 5, 1986, whichever occurs
first. Those first sellers that defer payment of that por-
tion of the Btu refund attributable to royalty interest
owners must notify pipelines that some royalty payments
are deferred before the end of the applicable 6- or 12-
month refund period.
5lia
(C) The parties to the first sale transaction may choose
the method of payment of this refund except that pipe-
lines and first sellers may not offset Btu refunds and
production-related costs permitted under section 110 of
the NGPA. Those pipelines that have already begun to
collect refunds by using billing adjustments without the
consent of the seller can continue this method of payment
only if the seller agrees. If the parties cannot agree,
payment shall be made in a lump-sum cash payment.
(D) Interest shall be caleu‘ated in accordance with
§§ 154.102(c) and (d) of the Commission’s regulations
for refunds except that the interest obligation for money
paid into escrow is that interest which accrued in the
escrow account on the amount required to be refunded.
(E) By December 18, 1984, intrastate and interstate
pipelines shall file a refund report with the Commission
detailing (1) those first sellers that have made refunds,
anc the refund amounts that have been received by the
pipeline by separately stating the principal and interest
received from each first seller; and (2) those first sellers
that have not make refunds, and the refund amounts
that have not been received by the pipeline by separately
stating the principal and interest due from each first
seller, and the reasons for such nonreceipt. Of those
first sellers who are small first sellers, as defined in this
order, only those who have paid the refund amounts in
full need to be identified. Intrastate pipelines shall also
file a copy of the report with the State regulatory agency
having jurisdiction over such pipeline.
(F) By June 17, 1985, intrastate and interstate pipe-
lines shall file a refund report with the Commission
detailing (1) those small first sellers not previously iden-
tified that have made refunds, and the refund amounts
that have been received by the pipeline by separately
stating the principal and interest received from each
small first seller, and (2) those small first sellers that
have not made refunds, and the refund amounts that
have not been received by the pipeline by separately
52a
stating the principal and interest due from each small
first seller, and the reasons for such nonreceipt. Addi-
tionally, any payments received since the date of the
pipeline’s last report from other than small first sellers
shall be included in this report by providing the informa-
tion required in paragraph (E) above. Intrastate pipe-
lines shall also file a copy of this report with the State
regulatory agency having jurisdiction over such pipeline.
(G) By January 5, 1987, intrastate and interstate pipe-
lines shall file a refund report with the Commission detail-
ing 1) those first sellers that have made refunds after
May 3, 1985, and the refund amounts received by the
pipeline by separately stating the principal and interest
received from each first sellers, and 2) those first sellers
that have not made refunds, the refund amounts that
have not been received by the pipeline by separately
stating the principal and interest due from each first
seller, and the reason for such nonreceipt. In addition,
intrastate pipelines shall file a copy of this report with
the State regulatory agency having jurisdiction over such
pipeline.
List of Subjects
18 C.F.R. Part 154
Natural gas
(H) the regulations in Part 154, Subchapter E, Chap-
ter I, Title 18, Code of Federal Regulations are amended
as set forth below.
By the Commission.
Commissioner Richard dissented in part, with a separate
statement to be issued later.
/s/ Kenneth F. Plumb
KENNETH F. PLUMB
Secretary
[SEAL]
53a
1. The authority citation for Part 154 is revised to read
as follows:
Authority: Department of Energy Organization Act, 42
U.S.C. §§ 7101-7352 (1982); Executive Order 12,009, 3
C.F.R. 142 (1978); Administrative Procedure Act, 5
U.S.C. §§ 551-557 (1982); Natural Gas Act, 15 U.S.C.
$$ 717-717w (1982); Federal Power Act, 16 U.S.C.
$§ 79la-828e (1982); Natural Gas Policy Act, 15 U.S.C.
§§ 3301-3432 (1982); Public Utility Regulatory Policies
Act, 16 U.S.C. §§ 2601-2645 (1982); Interstate Com-
merce Act, 49 U.S.C. §§ 1-27 (1976).
2. Section 154.88(h) is revised to read as follows:
§ 154.38 Composition of rate schedule.
* * * *
(h) Pipeline recovery of the Btu Measurement Adjust-
ments.
(1) A pipeline which receives Btu refunds shall make
refunds in accordance with the provisions of this para-
graph, notwithstanding any pipeline tariff provisions to
the contrary.
(2) For the purposes of this paragraph, “Btu refunds”
means those monies held in escrow accounts and those
monies received by the pipeline which are attributable to
refunds and interest accrued thereon due in accordance
with the August 9, 1983, Court of Appeals decision in
Interstate Natural Gas Association of America v. Fed-
eral Energy Regulatory Commission, 716 F.2d 1 (D.C.
Cir. 1983), cert. denied, 104 S. Ct. 1616 (1984).
(3) A pipeline subject to paragraph (h) (1) shall
refund Btu refunds to those jurisdictional customers
actually overcharged from December 1, 1978, in ac-
cordance with the following:
(i) The pipeline shall first determine the portion of
the aggregate amount of the Btu refunds which are due
54a
its jurisdictional customers actually overcharged based
on the proportion of the total Btu refunds originally paid
by those jurisdictional customers;
(ii! The pipeline shall then refund the amount deter-
mined in paragraph (h) (3) (i) to each jurisdictional
customer actually overcharged in the same proportion
that each jurisdictional customer originally paid the Btu
refund amounts;
(iii) This refund shall be made in a lump-sum pay-
ment to each jurisdictional customer;
(iv) Interest shall be computed in accordance with
§ 154.67(c) of the Commission’s regulations from the date
of receipt from a first seller or supplying pipeline to the
date the amount is disbursed to its jurisdictional custom-
ers, if a pipeline fails to refund the jurisdictional portion
of the Btu refunds within 15 days after receipt from a
first seller or suppiying pipeline;
(v) The pipeline may defer the payment of the juris-
dictional portion of any Btu refunds refunded to it until
it has accumulated such Btu refunds which cumulatively
equal one null per Mef (or Dkt) for the pipeline’s annual
sales during calendar year 1983, at. which point the pipe-
line shall refund the jurisdictional portion of all Btu
refinds received in accordance with paragraphs (h) (3)
(i), (ii), and (iii) of this section. However, in no event
may the pipeline hold such Btu refunds for a period
greater than the earlier of 120 days from the date of
receipt or 30 days after November 5, 1986. Such de
ferral shall be subject to the interest requirement in
paragraph (h) (3) (iv) of this section;
(vi) The pipeline shall submit to the Commission no
later than December 18, 1984, a refund report showing,
for each source from which Btu refunds are obtained, the
following information:
pee we OD eo Pe ed A ele cis
55a
(A) The total amount of the Btu refunds the pipeline
received ;
(B) The total amount of interest the pipeline received;
(C) the date(s) the pipeline received the refund (s) ;
(D) The total amount the pipeline paid to each of its
jurisdictional customers;
(E) The total amount of interest the pipeline paid to
each of its jurisdictional customers;
(F) The date(s) of the payment(s) ;
(G) The basis used to determine the payment(s) for
each of the pipeline’s jurisdictional customers.
(vii) The pipeline shall submit, no later than June 17,
1985, a refund report describing, for each source from
which Btu refunds are obtained, those refunds received
or paid (including deferred amounts paid) since filing
the report under paragraph (h) (8) (vi) of this section.
For those refunds subject to this paragraph, this report
should show all the information enumerated in para-
graph (h) (8) (vi).
(viii) The pipeline shall submit, no later than January
5, 1987, a final refund report describing, for each source
from which Btu refunds are obtained, those refunds re-
ceived or paid (including deferred amounts paid) since
filing the reports under paragraphs (h) (3) (vi) and (vii)
of this section. For those refunds subject to this para-
graph, this report should show all the information enu-
merated in paragraph (h) (3) (vi).
8. Section 154.102 is amended to make the amendment
in the interim rule final by adding a new paragraph (d)
to read as follows:
56a
$ 154.102 Suspended changes in rate schedules; motions
to make effective at end of period of suspen-
sion; procedure.
* * * *
(d) No interest is required to be paid on any portion
of a refund which represents payments of royalties or
taxes to Federal or State governmental authorities, ex-
cept to the extent that such authorities pay interest to
the first seller when refunding overpayments of royalties
or taxes.
57a
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
October 22, 1984
Docket Nos. RM84-6-000,
RM84-6-001, and
RM84-6-002
REFUNDS RESULTING FRoM BTU
MEASUREMENT ADJUSTMENTS
TO ALL PARTIES:
Attached is Commissioner Richard’s statement to Or-
der No. 399 issued September 20, 1984, in the above
referenced proceeding.
/s/ Kenneth F. Plumb
KENNETH F. PLUMB,
Secretary.
58a
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
[18 C.F.R. Part 1534]
Docket Nos. RM84-6-000,
RM84-6-001, and
RM84-6-002
REFUNDS RESULTING FROM BTU
MEASUREMENT ADJUSTMENTS
(Issued October 22, 1984)
RICHARD, Commissioner, dissenting in part:
I agree with the Commission majority on this point:
refunds are due. I strongly disagree, however, with the
Commission’s position that it has no option but to insure
that every dollar paid under Order No. 93 and 93-A be
returned to the consumer, even if those dollars must be
subsidized by producers who never had their use. I also
disagree with the refusal to offset section 110 allowances
that are due and payable under Order No. 94, et al.
In Interstate Natural Gas Association of America v.
Federal Energy Regulatory Commission, 716 F. 2d 1
(D.C. Cir. 1983), cert. denied, 104 S. Ct. 1616 (1984)
(INGAA), the United States Court of Appeals for the
District of Columbia Circuit vacated the Commission’s
regulations adopted in Order Nos. 93 and 93-A. The
Court’s opinion was silent, however, as to the question of
refunds.
In considering the question of mandatory refunds, the
Commission in its Final Rule refers to the maximum
lawful ceiling prices established by the NGPA and to the
provision in § 504(a) of the NGPA which makes it un-
lawful for any person to sell natural gas at a first sale
ee ee ee ee ee ee eer rer rh eee eee eee
59a
price in excess of any applicable maximum lawful price
(MPL). The Commission reasons that:
If the Commission did not make the measurement
rule retroactive and did not require refunds, it
would effectively be establishing a ceiling price higher
than the maximum lawful prices prescribed in the
NGPA. Since the NGPA does not contain any pro-
vision allowing the Commission to change the maxi-
mum lawful prices, except in very limited circum-
stances, it cannot waive the refund obligation.’
I have several problems with the Commission’s analysis.
First of all, § 504 of the NGPA gives the Commission
permissive authority to pursue certain civil and criminal
actions against people who are in violation, or about to be
in violation, of the Natural Gas Policy Act. The Commis-
sion is allowed to pursue, in a civil action, injunctive or
other equitable relief; it is given permission to transmit
evidence to the Attorney General for consideration of
criminal action; and, finally, the Commission is given
the option of imposing a penalty of not more than $5,000
per violation on anyone who knowingly violates any pro-
vision of the Natural Gas Policy Act.? It would seem
that the edict in § 504(a) declaring a first sale in excess
of the maximum lawful price unlawful is a vehicle for
establishing an array of remedies which the Commission
is then allowed to pursue if it chooses. The Commission
seems to interpret this section as a demand for strict
compliance without any discretion at all. I disagree.
The argument that the Commission’s failure to recover
all of the principal dollars involved in this refund obliga-
tion constitutes a de facto sanction of prices in excess of
the NGPA maximum lawful price entails a leap of logic
that is not dictated by the statute. It is misguided to
128 FERC { 61,379.
2 § 504, Natural Gas Policy Act of 1978.
60a
assume that, should the Commission be unable to enforce
the collection of every cent exchanged under the BTU
Rule, the Commission is actively or implicitly sanction-
ing prices in excess of the MLP. Certainly, for purposes
of resolving contract disputes over price, no party should
expect to argue successfully that the Commission had
raised the statutory ceiling prices applicable over this
period of time. In fact, by virtue of ordering refunds at
all, the Commission recognizes that collections under the
vacated rule were in excess of the maximum lawful price.
The Commission should order refunds. However, I
believe we should consider the policy implications of our
decision in the context of other Commission final rules
with an eye toward easing the transition iniw the more
decontrolled environment after January 1, 1985.
Although admonished at our meeting that the Consumer
Federal of America v. FPC,* arose under the Natural
Gas Act, the Court’s language on the subject of refunds
does give, I feel, this Commission guidance as to our
policy parameters on refunds.
We express no opinion on the refund issue, beyond
saying that, in our view, it involves complex and
difficult questions which must be presented to and
addressed by the Commission in the first instance.
In matters of prospective and retroactive effect,
there are large questions of equity and public in-
terest—both for agencies and for courts. While full
refund under an invalid order is a sound basic rule,
it may be offset, at least in part, by the lack of a
mechanism to restore the full status quo ante, the
fact that consumers may have had the benefit of some
increase ‘i supply that would not have been forth-
coming under Section 7 procedures, albeit purchased
at an excessive price ....‘ [Emphasis added.]
8515 F.2d 347 (D.C. Cir. 1975).
4 Id. at 359.
6la
Unlike the majority however, I would suggest alterna-
tive ways to deal with the refunds that I believe would
better balance our total resvonsibility under both the
Natural Gas Act and the Natural Gas Policy Act’s
strictures of providing consumers the least cost reliable
supply.
OFFSETS WITH ORDER 94 COSTS
Several commentors proposed that the Commission per-
mit producers to be able to require an offset of any BTU
refunds against monies owed them for production-related
cost reimbursements pursuant to Order No. 94, et al.®
Commentors argue that such an offset would mitigate
against many of the financial difficulties imposed upon
producers by the refund rule.°
I believe from a policy perspective the recommendation
is a good one. In fact, production-related costs were col-
lected during roughly the same time period. In many
cases, there is a symmetry of parties with regard to pay-
ments owing under Order Nos. 93 and 93-A and Order
Nos. 94, et al. It would seem that where such symmetry *
exists, and the pipeline and producer can agree, an offset
would be an equitable and efficient means of effecting
the exchange of money owed. Because of the short lengths
of the refund periods and the long period of time over
which these payments were made, it would behoove the
Commission to recognize *® that, from an equity perspec-
tive, an offset would give producers a chance to offset
lawfully owed money with a lawfully compelled refund.
5 See e.g. Comments of Indicated Producers, Pennsylvania Nat-
ural Gas Associates, and Tennessee Gas Pipeline. All comments are
to the Interim Rule.
®See e.g. Comments of Panhandle Eastern/Trunkline and
TIPRO.
T See e.g. Comments of Panhandle Eastern, Trunkline, and Ten-
nessee Gas Pipeline.
8 Production-related costs were finally allowed by this Commission
five years after passage of the NGPA.
62a
Although offsets other than Order No. 94 amounts were
suggested,® I would recommend at a minimum only these
costs because their size and existence are relatively easy
to ascertain.
Would pipelines with Btu refunds bargain less aggres-
sively with producers trying to collect production-related
costs if offsets are allowed? I think they would be foolish
to do so from a competitive and a regulatory perspective.
The Commission in implementing its statutory duty
under Section 110 carefully, through a series of orders,
allowed only certain cost-justified amounts to be collected
from pipelines and their customers.
Essentially, the Order 94 series requires that, before
a producer may collect production-related costs, express
contractual authority must be present. This assumes the
activity is in fact being performed and that only amounts
necessary to recover the costs are collected. In the case
of compression and gathering amounts, to insure the
statutory requirement is met, the Commission developed
limits on the amounts producers can charge based on
studies of these costs.’
In its Interim Regulations, the Commission ordered
that individual application be made for production-related
costs. To remove this burden and to remove unwarranted
delay in sellers receiving adjustments under Section 110,
the Commission allowed a self-implementing scheme.
However, to protect purchasers and “mindful of the
potential for abuse inherent in any self-implementing
regulatory scheme,” the Commission warned that field
audits will ensure sellers adhere to the rules."
® See Comments by TIPRO, pages 3-5 “. . . existing contract or
existing state law governing such contract, permits... the offset.”
10 Order No. 94-A.
11Jd. at 44. The Commission, to avoid any misunderstanding
as to its enforcement authority, stressed that the collection of an
idilbinciide<tattbinen shite Biss
63a
Also, the Commission imposed a genera! record reten-
tion requirement on sellers to identify the amount col-
lected and demonstrate the basis of the collection. Sell-
ers must provide gas purchasers with a description of
the charges a reasonable amount of time before charging
for the production-related services so that they may de-
termine whether these charges are consistent with our
regulations and are contractually authorized.
The Rule was specific. “A typical transaction under
the rule will consist of: The parties’ determination of
express contractual authorization, performance of the
service, submission of a description of charges, billing
for the charges, and collection of payments.” If the
purchaser disputes the charges, he may ask the seller to
validate the proposed charges before making payment.”
The written description must show by well or by com-
pletion location the adjustment by amount and type of
production related service.”
The Commission noted that an interstate pipeline must
be able to explain and justify its section 110 payments.*®
amount not so authorized would be a statutory pricing violation
with potential civil and criminal penalties under Sections 504(b)
(6). See also Order No. 94-A at 98-99.
The Commission also established a ‘Production-Related Costs
Board that focused primarily on the obligation of sellers to justify
any Section 110 allowance in response to staff audits... .” A pro-
cedure is also set up to resolve disputes on the amount of refunds
that may be due if the seller collected unauthorized amounts. A
complaint filed pursuant to § 385.206 can activate the Board if an
allowance is thought to be charged, collected or otherwise not paid
in vielation 18 C.F.R. § 271.1104. Any person or party can so file.
The Commission may refer to the Board allowances raised by a
prutestor to a PGA proceeding. See generally Federal Stat. & Reg.
Preambles at 30,663-664.
12 Td. at 54-55.
18 Td. at 56.
14 Section 271.1104 (f).
15 Order No. 94-A at 58.
64a
“To prevent any large scale economic dislocations that
may result from any one seller or group of sellers at-
tempting to recover the allowances for prior costs in one
lump sum or a few large payments,” Order 94-A pro-
vided that the amounts be collected over the time the
Rehearing Order became effective (March 7, 1983) and
ending December, 1984.1° This period was selected be-
cause of the impending NGPA decontrol of certain cate-
gories of natural gas on January 1, 1985. Since on
January 24, 1983, the impact of decontrol on the collec-
tion of generic allowances was uncertain, the collections
were to be made “under a schedule of payments that
ensure[d], as nearly as possible, that the amounts would
be paid in equal installments.” *”
It is clear from the public hearing that these transac-
tions between all pipelines and all eligible producers were
not on schedule by at least the time of our final rule.**
16 Td. at 92.
17 Id. at 92-93.
18 Tr. 46, 86, 92, 117-119, 125-126. With the refund obligation
and no offset, one commentator, Union Oil of California noted:
[T]he producer is being forced to pay both Btu refunds plus
interest and absorb pipeline nonpayment of production related
costs plus interest. In essence, the producer must shoulder
two debts and pay twice.
at 5.
Producers have the option of pursuing their contract rights at
law in order to collect the costs owed t them and/or to engage in
settlement negotiations with the pipelines over the issue of what
costs are owed. Arguments are raised that, because of current
market conditions, any amounts resulting from such negotiations
or litigation resulting in production-reiated costs being paid to
the producer would likely be paid by pipeline shareholders rather
than consumers. Specifically, the argument is that the marketplace
would not bear the increase in price at the burner tip which would
result from the inclusion of these costs. If that were the case, the
65a
The reason for tardiness is unclear but it is reasonable
to assume that some pipelines are carefully reviewing
the claimed costs (as they should). I appreciate that no
pipeline shareholders would have to pay the costs themselves or lose
markets.
If the Commission, on the other hand, allows Btu refunds to be
offset by production-related costs, it is not the shareholders who
would bear the costs but rather the consumers. As a matter of
equity, then, the question is whether the offset procedure would
work to the detriment of consumers. In response, it is important
to note that the production-related costs here are costs which have
actually been incurred for past periods and which, under the con-
tracts, are owed to producers. Consumers have had the benefit of
the services that caused the costs, and, where contractual authority
exists, and subject to our other conditions, consumers owe the costs.
If those costs are paid by the customers through an offset, they
are not being penalized by the procedure—rather, they are paying
what they rightfully owe in an efficient way (which, incidentally,
will have little effect on the price of gas for which they are cur-
rently paying).
To the extent market restraints exist and shareholders must
subsidize production related costs which occur either outside of
or over and above the offset, consumers have only rightfully been
compensated for their pipelines’ unfortunate market position.
Either way, it would seem that the rights of the consumers are
being carefully protected.
In addition, when addressing issues concerning market respon-
sive prices, it is important to note that the “market price’ ought
to reflect in a relatively pure sense what the cost of gas is. The
elimination of variable costs from minimum bills is an attempt
to expose, (in all of its nakedness) the cost of gas on each pipe-
line system. Many adjustments to the actual wellhead cost of gas
get included in PGAs and, therefore, the “cost of gas” represented
in a PGA filing may not reflect the average cost of gas at the well-
head in a pure sense. Current production related costs, are appro-
priate in that they do reflect the current actual cost of gas. Faced
with impending partial wellhead deregulation, it may well behoove
the Commission to examine the PGA mechanism as we did with
the Minimum Bill Rule, and its permissible components of gas costs
to determine whether artifacts of the current procedure confuse
wellhead price signals.
66a
one in business (especially with able counsel representing
local distribution companies and with state commissions’
counsel and us carefully reviewing the costs,) would pay
any unauthorized amounts. As discussed, our rules care-
fully circumscribe the ability to do this. In the same
vein able counsel representing producer interests don’t
want to pay above legally correct refund amounts.
The Commission has set the parameters of the amounts
on both. It surely would be more in the public interest
to allow both parties with differing economic interests to
settle out these respective amounts (Btu refunds and 94
costs) as much as possible prior to January 1, 1985. The
pipelines interest would be to seek the largest Btu refund
and the lowest production-related cost exposure. (The
offset would probably do away with much of the neces-
sity for extended periods of refund.) Purchasers would
pay no more than the MLP since the offset will not reduce
the net refund obligation imposed on producers since
purchasers will still receive the full refund with interest
to which they are entitled less amounts owed by the
purchasers to producers.’®
Our monitoring of both should not be impeded. In
fact, I think it would help. As the Indicated Producers
note:
Any offset would require the producers and pipelines
to separately calculate the amount of Btu refunds
and the amount of production related expenses
owed.”
For the same reasons why all parties, including us,
want a clear identification of claimed production allow-
ances, the producers in dealing with refunds should have
the same authority. Producers need to be able to ex-
amine invoices for gas delivered and billed in order to be
19 Comments, Pennsylvania Natural Gas Associates, at 5.
20 Supplemental Comments at 8.
a ee ee Ce ee ee ee
67a
able to reach an agreement with their pipelines about the
exact dollar amount owed under the refund rule.” The
evidence from the comments suggests that the practice of
invoicing is not uniform across the industry. While it
is most common for pipelines to supply the invoice, it is
also the case that, on occasion, producers are responsible
for providing the invoice. It would seem reasonable that
the Commission require the party which has been his-
torically responsible for billing to provide invoices for
the purpose of documenting the exact amount of the
rofund owed.
The Commission concerned with this same problem in
the Order 94 series, noted:
. . . that inclusion in the description of charges of
the amount per MMBtu to be charged, the specified
service for which the charge is to be made, and the
contractual provisions expressly authorizing the
charges should give the purchaser sufficient informa-
tion to review the anticipated charge.”
I agree with the Associated Distributors Group that
the use of a lump sum refund rather than the PGA flow
through mechanism would “strik[e] a balance between
administrative simplicity on one hand and the more im-
portant considerations of refunding overcharges to those
who actually paid them, avoiding disruption of inter-
pipeline market competition. . . .” ** I disagree, however,
21 Some pipelines have been laudable in this respect. See form
sent to Producers by Natural Gas Pipeline contained in their
comments.
22 Order No. 94-C. Jd. at 59.
23 Comments at 1. Although the Commission has decided not to
enforce this procedure at the state level and defer to those Com-
missions’ expertise, the AGD arguments to return the amounts to
those actually charged should be equally applicable at the State
level. See Comments of Process Gas Consumers Group at 16-26.
For their own administrative convenience purposes the State Com-
68a
that the persons responsible for the production-related
costs should not also bear responsibility for them at this
time.
Flowing through all production related costs via future
PGAs, absent an offset with Btu refunds, ' te to
Panhandle/Trunkline raises:
. the same question as to present customers that
caused the Commission to conclude: those customers
should not receive the Btu overcharge refunds: cur-
rent customers are not responsible for the past pur-
chases on which the retroactive allowances are based.
Requiring current rates to reflect the entire cost
of the retroactive allowances would also create a
massive disruption of the current natural gas
market. In the Interim Rule, the Commission justi-
fied its decision to require direct pipeline refunds to
past customers in part to avoid disrupting the cur-
mission might consider the procedure PGC recommends for the
distribution of whatever } ol of refunds are received.
The use of the PGA to flow through refunds are certainly not
inherently evil. But they can be used to send wrong signals as to
purchased gas prices if used improperly.
“The Tennessee refund to Midwestern should be flowed through
in accordance with Midwestern’s tariff—in its PGA filing due to be
effective January 1, 1985—and used to buffer the impact of pro-
jected increased gas costs on Midwestern’s customers ... .” Mo-
tion to Intervene and Protest of Northern Illinois Gas Company,
Docket No. TA84-2-5-000. In the matter of Midwestern Gas Trans-
mission Co. at 5. See also Motion to Intervene by Natural Gas
Pipeline Company of America in the same proceeding (arguing for
lump sum refund). Natural’s pleading correctly pointed out:
. competing pipelines are placed at a competitive disad-
vantage through manipulative rate-making, a factor which
should not play a role in the gas-to-gas competition the Com-
mission seeks to promote as indicated in the [Minimum Bill
Rule, now final].” at 6.
See also Notice of Inquiry in Docket No. RM84-12-000, “Revisions
teu PGA Regulations”, at 11-13.
69a
rent market which the Commission feared could
result from crediting refunds to current gas costs.
Certainly, the opposite, but adverse impact of impos-
ing the full burden of retroactive allowances on
current pipeline ratepayers, while assigning the cor-
responding Btu refunds to past customers, would be
far more disruptive.**
SUBSTANTIAL COMPLIANCE
After the offsets are made I think the Commission
should have recognized in its order that only substantial
compliance as to some refunds may be possible.
The Final Rule holds the first seller liable for all re-
funds. However, certain first sellers and royalty owners
may be bankrupt, dead, etc., and the refunds they owe
may not practically be recoverable from those persons.
Since the Final Rule does place the ultimate liability for
refunds which cannot be collected on the first seller (pipe-
lines are not guarantors and our jurisdiction does not
reach royalty owners), the Commission, as a_ policy
matter, must consider whether, under carefully circum-
scribed circumstances, refunds should be excused.”
In the case at hand, there is absolutely no culpability
present on the part of any party. All parties acted pur-
suant to a final Commission rule. Although first sellers
may have relied upon the receipt of payments under the
orders when making their investment decisions for the
future, the maximum lawful price argument is accurate
24 Comments of Panhandle/Trunkline.
25 Indeed, in the Final Rule, the Commission is silent as to the
question of liability when an operator is dead, bankrupt or other-
wise impossible to locate or collect from. The Commission does not
require the pipeline, in such a case, to pursue the operator. Unless
the Commission intends to pursue this operator itself, the associ-
ated refund will not be collected and the Commission is in a sub-
stantial compliance posture with respect to effecting refunds.
70a
and dictates that consumers should receive refunds. How-
ever, in this case, the right to refunds (absent the netting
out of due and payable costs discussed supra) should
not extend so far as to justify the imposition of extraor-
dinary burdens of collection or reimbursement on the
first seller under all circumstances. The extent of ordered
refunds should be balanced against the costs of making
the refunds; and the refund process should be accom-
plished with at the least, a manageable amount of trauma
to the industry.
Therefore, it seems to me, the Commission should face
the question whether, as a matter of equity, some portion
of the refunds that is uncollectible should be excused up
front, and if so, how that portion should be defined.
The following diagram reflects my understanding of
the components of the refund corpus:
Working
Se ee ae ee en ne ee a OE interest
| money not
Payments in Escrow recoverable
|
|
Total
Working
4 Interest
87.5%
'
| Federal ana - Total Royalty
| State Royalty Payments
= / Payments 12.58
Non-escrowed
Payments
Royalty Payments Koyalty Payments not
recoverable through recoverable through
billing adjustments billing adjustments
(or royalty owner (or royalty owner
agreements) agreements)
Some portion of the Order Nos. 93 and 93-A payments
was placed into escrow. The Commission does not know
the aggregate amount of the refunds which was placed
into escrow accounts. These amounts, however, are fully
recoverable.
Of the remaining non-escrowed dollars to be refunded,
roughly 87.5 percent are working interest dollars. Those
dollars came to rest in the hands of the working interest
owners and presumably have been used by the working
abe
Tla
interest owners for the amount of time held. To that
extent, it seems reasonable that generally working interest
owners should be held liable for the refund of working
interest dollars.
The Final Rule holds the operator ultimately liable for
all refunds (both working interest and royalty) due
during the time of his operation where he was responsible
for collecting and disbursing revenues. (Operators do not
necessarily own a working interest in the wells they op-
erate.) The Commission agreed that, to the extent, op-
erators change and working interests are assigned to
others, the operator is only responsible for refunds during
his operation period, except as provided otherwise by
contract, deed or lease.*° Whether some of these amounts
are uncollectible regarding the following discussion and
should fall under an exception proceeding is not as clear.
For example, except for the refunds a. ributable to
any working interest owned by the operator, tne operator
never had the use of the money. If working interest
owners and royalty owns are still participating in a
well, the operator may be able to collect the money rela-
tively easily through billing adjustments. But, if the
working interest owners are difficult or impossible to
locate, the operator must pay that portion of the refund
and any costs associated with attempting to collect it
out of his own pocket.
The remaining 12.5 percent of non-escrowed payments
represents money paid to royalty owners under contracts.
*6 The final Rule does not address the issue of split stream
liability. Presumably, and rightfully, the operator’s liability ought
to extend only to the refunds attached to the portion of the well he
is responsible for marketing, i.e., a first sale under his contract
with interest owners. Therefore, if a portion of the stream is sold
to a buyer under a separate contract under which the operator is
not assigned marketing responsibilities, the operator would not
be liable for The Commission’s refunds owned on that portion of
the stream.
72a
First sellers never had the use of this money. First
sellers simply, under the contracts with royalty owners,
disbursed these dollars on a periodic basis. There are
perhaps two-million royalty owners in this country.”
It is likely that many of these royalty owners will be
very difficult or impossible to locate due to death, bank-
ruptcy, changes of title, well depletions, ete. Evidence
was presented this concern is not theoretical.”
27 Tr. at 75.
28 Comments of Clayton W. Williams Jr., Co., note the complexity:
[S]ince the passage of the NGPA there have been changes in
the ownership interests and royalty interests for untold thou-
sands of wells. These changes have occurred as a result of sales,
assignments, bankruptcies, and many other reasons. For ex-
ample, Williams sold 148 wells in 1982. Of these 148 wells, [it]
operated 112 and owned an interest in the remaining 36. When
sold, there were 2,295 royalty interest owners . . . it no longer
receives the revenues from these wells, [and has] no practical
method of recovering the alleged overpayments from these 2,295
interest owners. |It] cannot deduct or withhold payment from
royalty payments since [it] no longer receives the revenue from
the wells ... [and] would have to rely on the voluntary payment
by these interest owners or resort to litigation in an effort to
recoup these monies. Further, it is not clear whether royalty
owners would even be obligated to make refund payments, or
pay interest on such refunds, under existing state laws. To
now require Williams to refund this money to the purchasers
with little or no opportunity to recoup same from the royalty
owners would be unfair and unjust.
To illustrate the complexity of the data gathering problem,
Williams currently [sic] administers 269 wells for which it
makes full distribution of proceeds. [It} is averaging ten
changes in royalty interest owners per week due to deaths,
assignments, property sales, etc.
Further, in the Austin Chalk area alone, from November
1979 to the present, Williams, as operator, drilled a total of 265
wells. Of these 265 wells, 112 were sold. Of the remaining 153
wells, 97 are still producing and 56 have been plugged and aban-
doned. Williams has also participated as a joint adventurer
in an additional 184 wells in the area. Of these 184 wells, 36
were sold, 27 have been plugged and abandoned, leaving 121
a
73a
The Commission’s jurisdiction begins at the first seller
under the Natural Gas Policy Act. The Commission has
no jurisdiction over royalty owners. Since the Commis-
sion interprets its duty to enforce the maximum lawful
ceiling prices under the NGPA as absolute, the Commis-
sion perceives that it must hold someone responsible for
all of the dollars paid under Order Nos. 93 and 93-A.
The Commission, accordingly, finds it necessary to re-
quire first sellers to refund not only the working interest
money which they used but also all of the doilars which
they paid to royalty interest owners over the period of
time in question. The Commission, I feel, should heed
first sellers’ concerns that they may be unable to collect
money from royalty owners or that the costs of collection
may far outweigh the refund sought.
Although the Commission has rightfully ordered that
refunds be made, the strict legal view taken here, that
it must force liability for all refunds on parties within
the bounds of its jurisdiction does not match the reality
that not all the dollars remained in the hands of parties
within our jurisdictional bounds. The unlawful benefit
has come to rest in the hands of an entity which is non-
jurisdictional.
The Commission should enforce recovery of dollars held
by first sellers and simply recognize that dollars paid to
royalty owners are owed to consumers. The Commission
could impose an obligation on first sellers to recover dol-
lars paid to royalty owners where the collection process
is facilitated by the opportunity to make billing adjust-
currently producing. Therefore, out of a total of 449 wells
operated by or participated in by Williams, 231 have been
sold or plugged and abandoned, thereby preventing Williams
from having an effective means of recoupment for any over-
payments to other interest owners in these wells. These sold
and plugged and abandoned wells account for 51.5 percent of
the total wells in which Williams had an interest.
at 4 and 5.
74a
ments to future royalty payments. Of the 12.5 percent of
non-escrowed Btu payments which were paid to royalty
owners under contracts, some amount, presumably larger
than half, is comprised of gas that is currently flowing
and is associated with a contract such that the producer-
operator may easily and lawfully recover the refund
principal and interest by this method.
Absent this type of billing adjustments, we should pro-
vide a mechanism for first sellers who can’t collect pay-
ments. The first seller in charging the Btu adjusted
amount, acted pursuant to a Final Rule of this Commis-
sion. Monies paid to the royalty owners presumably were
so paid under contracts in existence prior to the effective
date of the rule. Those contracts do not for the most
part allow producers discretion as to the amount and
timing of royalty payments. Most often, the withholding
of some portion of a royalty payment subjects the pro-
ducer or operator to cancellation of the lease by the
royalty owner. It seems reasonable then to assume that
producers or operators may not even have had the option
of unilaterally placing funds in escrow. At any rate, the
payments were flowed through to royalty owners, placing
the producer or operator in the role of a mere conduit.
I feel that we do not have an issue of culpability here
which would justify imposing the onerous and essentially
punitive burden of pursuing lengthy and costly remedies
on the producer or operator if the amounts are not re-
coverable through agreement or billing adjustment.
The majority on this issue in support of its decision
to “not chang[e] the requirement that first sellers are
responsible for the entire Btu refund” cite two Court of
Appeals cases for the proposition that “the Commission
has also held single parties responsible for all refunds in
other circumstances under the NGA,” * Tenneco Oil Com-
pany v. FPC, 442 F.2d 489 (5th Cir. 1971); and Sauder
v. DOE, 648 F.2d 1341 (Temp. Emer. Ct. of App. 1981).
2° Order No. 399, at 25.
75a
The Sauder case was not a Commission case under the
NGA. In fact, the case represented one where a sole op-
erator of an oil lease had been the animating force be-
hind the continued production of an oil pool that had
certified to an oil company buyer that the subject well
was a stripper oil well subject to price control exemp-
tions. The DOE issued a Notice of Probable Violation
that he had overcharged the buyer; and later a remedial
order that he had violated price controls and existing
reguiations.
No charge of violating or misinterpreting pricing reg-
ulations by producers are present here. Instead it was
our final Btu rule that was later determined to be in-
valid.
As to restitution, the Court noted:
Significantly, it was Sauder who certified . . . that
the output of the leases was stripper well oil subject
to the exemption. It can fairly be said that it was
he who caused the overcharges. In these circum-
stances, we think that it is within the authority and
discretion of the agency to hold the owner-operator
of a lease liable for the full amount of the over-
charge.”
Id. at 1348-49.
The Court in the Tennessee case noted the certificate
holder should bear the refund responsibility, by fixing
financial responsibility on some party, it made adminis-
trative sense. They noted the risk must fall on someone."
I agree.
I also agree with the discussion by the Federal Power
Commission in the Sinclair Oil case that all producers
3% Sauder v. DOE, 698 F.2d 1341, 1347-48 (Temp. Emer. Ct. of
Appeals 1981).
31 Tennessee Oil Company v. FPC, 442 F.2d 489, 497 (5th Cir.
1971).
76a
should be on notice in temporary certificates, absent no-
tice to the contrary, that when refunds are ordered the
holder of the certificate will be fully responsible and thus
he should make “necessary arrangements for equitable
sharing of responsibilities with other working interest
holders. If he fails to do so, this will not constitute a
ground for releasing him from full responsibility.” *
[Emphasis supplied.] Sinclair was quoted and discussed
at length by the Court in Tennessee.”
In the Tennessee case, however, the Court also noted
the Commission’s clear understanding that the certificate
holder retained a right of recoupment against the co-
owners who as a matter of equity should be primarily re-
sponsible for refunds of the excess amounts actually re-
ceived by them.* On rehearing in Sinclair, the Commis-
sion noted that in the event of hardship the ‘co-owner
may apply for an order permitting payment... of all
or part of its shore of the gas being produced to Sinclair
until the co-owner’s refund obligation has been satis-
fied.” * 40 FPC 1279, 1280.
The Court also noted an exception to this obligation in
“the situation which arises when the certificate holder
has so many co-owners that the liability of eech for re-
funds is so small that the cost of recoupment would
exceed the amount due from the co-owners.” *
I agree that someone should be held responsible. I also
believe in the principles of the Tennessee case that the
32 Sinclair Oil and Gas Company, et al., Opinion No. 545, 40 FPC
410, 419 (September 10, 1968).
33 Tennessee Oil Company v. F PC, 442 F.2d 489, 494-6 (5th Cir.
1971).
%4 Td. at 495.
35 Sinclair Oil and Gas Company, et al., Opinion No. 595-A, 40
FPC 1279, 1281 (November 8, 1968).
36 Tennessee Oil Company v. F PC, 442 F.2d 489, 495.
77a
first seller make some actual attempt to find those per-
sons from whom it seeks recoupment; abstract hardships
or theoretical inequities are insufficient to escape liability
before waiver. I would combine this principle with a
de minimus rule and some advance waiver of refund li-
ability under NGPA § 502(c) to those first sellers who
are unable reasonably to recoup funds.
The Final Rule allows first sellers to defer royalty
payments for two years pending collection. At the end
of the two-year period, the first seller may ask for a
further extension of time in the form of a § 502(c) ad-
justment. In my opinion, this is an unacceptable process
for a number of reasons. First of all, under the Com-
mission’s strict interpretation of its duty to enforce the
maximum lawful price, it may not, even at the end of
two years or some longer period of time, waive the ob-
ligation to repay principal on the royalty payments. The
first seller remains liable. During the deferral period,
interest under the Rule continues to accrue at the prime
rate. The debt remains a part of the first seller’s overall
financial profile and will obviously affect his future fi-
nancial arrangements. The Rule encourages first sellers
to expend funds pursuing whatever litigation or collec-
tion options he may have. As indicated earlier, this is
not necessarily a cost-effective method of effecting re-
funds.**7 The money that the producers expend pursuing
these royalty owners may well better benefit the con-
sumer were it placed in the production stream. It would
seem reasonable to take a much more upfront approach
toward the responsibilities of first sellers for refunds un-
der the Rule.
I would like to offer a proposal which, I believe, based
on the comments in the record, reasonably balances the
87 Incidentally, the § 502(c) application fee, as set by this Com-
mission, is $6,000. We would be asking the producer to spend
$6,000 in order to apply for an extension of time to make a pay-
ment which is ultimately never recoverable.
78a
equities. First of all, I would net out refunds and Order
94 costs as discussed supra. Second, first sellers would
be liable only for working interest dollars and for roy-
alty payments which are currently tied to an ongoing
relationship between the first sellers and the royalty
owner and working interest owners such that the
amounts due can be recovered through future billing
adjustments.** The money collected through billing ad-
justments would be escrowed and given to the pipeline
at a specified time in a lump sum at the interest col-
lected by the escrow account.”
38 If a working interest owner is not marketing his gas through
an operator pursuant to a contract, then the working interest owner
would himself be a first seller.
39 Some portion of the 12.5 percent non-escrowed royalty pay-
ments was paid to state and Federal royalty owners. State and
Federal royalty payments should be passed on by producers when
the Government at issue returns the money paid to them along with
the interest rate, if any, paid by the Government entity. Producers
cannot lawfully retain portions of royalties paid to the Federal
Government. One state, Wyoming, has already indicated that it will
not return any overpayments, and that it will cancel the lease of
anyone who withholds portions of future royalty payments. (Com-
ments by Wexpro Company note at 3.)
It’s interesting what data another government agency requires
as to verification—much more than what producers requested they
receive from pipelines. According tc Wexpro:
The procedures involve a two-step process of (1) verification
of the validity of the refund claim, and (2) subsequent actual
adjustment of refund amounts from future revenue settlements.
The Mineral Management Service is requiring producers
to provide the following supports: Schedule by production
month of original royalty paid to Minerals Management Serv-
ice, royalty which should have been paid and overpayment
amount; Schedule by production month showing lease and well
name, original calculation of royalties attributable to Minerals
Management Service including adjustments and corrections,
and the calculation of the correct royalty. In addition to the
foregoing, the schedules should provide the following informa-
tion: Category of gas/N.G.P.A. Section, gas volumes and
pressure base, B.T.U. for reported pressure base, water vapor
79a
In the event that a first seller is unable to recover
royalty payments through a billing adjustment, the first
seller would be required to file with the Commission an
affidavit stating the name of the royalty owner, the
amount of money owed by the royalty owner, and the
reason why the money cannot be recovered. Absent pro-
test, the Commission would grant waiver of the principal
and interest obligation described in the affadavit in the
event that the royalty owner is dead, bankrupt or in-
volved in bankruptcy proceedings, the well on which the
royalties were collected is dry and no other flowing well
exists under contract between the two parties against
which the refunds may be collected, or some other cir-
cumstances exists which would render the collection im-
possible absent costly proceedings.
My proposed changes are close calls. I recognize that
arguments can be made on both sides and my colleagues
are exercising their sincere judgment as to the Final
Rule.
content used in calculation, calculation of gas prices, royalty
value of gas, royalty rate, royalty paid/due Minerals Manage-
ment Service, date royalty paid, net royalty overpayment.
The adjustment process will be so time consuming as to
create cash flow problems for the producer complying with
the interim rule. (The MMS implies that refunds will be
considered only if such refunds were previously reimbursed
to the pipeline purchasers.) After the required documenta-
tion is submitted, the Service will review the data and, if ap-
proved, the producer will be required to resubmit the informa-
tion on Form 2014 for the period covered by the period.
Producers note they are being placed in the role of an in-
voluntary banker over an agency over which they have no
control and with absolutely no authority to determine or dictate
the repayment terms of their loan. (Tr. at 121). We should
require, with our help, due diligence in collecting these amounts
without the incurrence of accruing interest. The Commission
Staff is to communicate with the Interior Department on this
issue.
80a
However, in closing, I note we should order refunds
but be mindful that:
[I]t should be clear that operators will bear a
hugely disproportionate share of the refund burden,
unless one is naive enough to think that, for exam-
ple, Mr. Royalty in Florida is going to pay a bill
for $34 that he receives from some oil company in
Texas relating to a well that was plugged two years
ago. How to then funnel this money through the
labyrinth of the pipeline companies and into the
hands of each ultimate gas consumer in just the
right proportion is a task at which all but the har-
diest bureaucrat would blanch in horror... .
It is our hope (which springs eternal) that the
Commission will note the manifest practical difficul-
ties and equities with a retroactive refund rule and
take this opportunity to demonstrate that at least
one governmental body is able to weigh a marginal
social benefit against an economic and regulatory
nightmare and make the right decision.”
I believe the right decision can be one that results in
substantial compliance of refunds returned, in this cass
with an offsetting of rightfully owed Order 94 costs.
Thus, this and other measures taken and to be taken
will aid us in assuring a correct answer to what every-
one agrees will be the great social question of 1985—will
decontrol under the NGPA work? I think it will—with
enlightened regulation.
/s/ Oliver G. Richard III
OLIVER G. RICHARD III
Commissioner
# Comment, Sage Energy Company at 2-3.
8la
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
[18 C.F.R. Part 154]
Before Commissioners: Raymond J. O’Connor, Chairman;
Georgiana Sheldon, A.G. Sousa,
Oliver G. Richard III and
Charles G. Stalon.
Docket Nos. RM84-6-003
through RM84-6-014
REFUND RESULTING From Btu
MEASUREMENT ADJUSTMENT
ORDER NO. 399-A
ORDER GRANTING IN PART AND
DENYING IN PART REHEARING
(Issued November 20, 1984)
I. INTRODUCTION
The Federal Energy Regulatory Commission (Commis-
sion) is granting rehearing of Order No. 399,! which im-
plemented Interstate Natural Gas Association <* America
v. Federal Energy Regulatory Commission (INGAA).2
The Commission received eleven petitions for rehearing.’
149 Fed. Reg. 37,735 (Sept. 26, 1984) (issued Sept. 20, 1984).
2716 F.2d 1 (D.C. Cir. 1983), cert. denied, 104 S. Ct. 1616 (1984).
% Petitions were filed by the Producers (Mobil Oil Corp., et al.),
Consolidated Gas Transmission Corp., Kerr-McGee Corp., Pan-
handle Eastern Pipeline Co. and Trunkline Gas Co. (filing jointly),
Mesa Petroleum Co., Pogo Producing Co., Tennessee Gas Pipeline
Co. (a division of Tenneco, Inc.), Southern California Gas Co. and
Pacific Lighting Gas Supply Co. (filing jointly), Pitts Oil Co., Sage
Energy Co. and Clayton W. Williams, Jr., Co. (filing jointly),
Mississippi Chemical Corp., and Inland Ocean, Inc.
82a
For the reasons discussed below, the Commission is
granting rehearing to require offsets of the refund
armounts and costs permitted under section 110 of the
Natural Gas Policy Act of 1978 (NGPA) and to allow
first sellers to request a waiver of a portion of the re-
fund corpus, in certain circumstances, if that corpus
is uncollectible from certain parties. The Commission is
denying rehearing in all other respects.
II. BACKGROUND
On September 20, 1984, the Commission issued Order
No. 399 (the Btu refund rule) which implemented the
decision of the United States Court of Appeals for the
District of Columbia Circuit in INGAA.* Order No. 399
requires all first sellers to make the refunds resulting
from the court-ordered adjustment in the method used
to measure the energy content of natural gas (i.e.,
British thermal unit or Btu). First sellers and pipelines
are, under Order No. 399, permitted to choose the method
for payment of the refund. However, Order No. 399 pro-
hibits offsets of this refund by production-related costs
permitted under section 110 of the Natural Gas Policy
Act (NGPA). In addition, the rule requires pipelines to
pass through refunds in a lump-sum cash payment to
those customers actually overcharged. It also requires
pipelines to file refund reports with the Commission de-
scribing those refunds received and those refunds still
outstanding.
Eleven petitioners request rehearing of Order No. 399.
On October 24, 1984, the Commission granted rehearing
for the limited purpose of further consideration.® In
*In INGAA, the court concluded that charges for gas must be
determined by measurement of Btu’s under wet conditions rather
than the “as delivered” basis as promulgated by the Commission.
See Order Denying Rehearing and Clarifying Order No. 93, 46
Fed. Reg. 24,537 (May 1, 1981) (Order No. 93-A).
549 Fed. Reg. 43,543 (Oct. 30, 1984).
83a
addition, the deadline for refunds by large first sellers
was extended from November 5, 1984, until ten days
after the issuance of the rehearing order. The deadline
for small first sellers remains May 3, 1985.
Petitioners argue that the Commission erred in pro-
hibiting offsets of the Btu refund amounts by production-
related costs authorized by contract under section 110 of
the NGPA (section 110 costs). For the reasons dis-
cussed below, the Commission is granting rehearing on
this issue and is modifying the refund procedures to re-
quire a limited offset of prior-incurred section 110 costs
and Biu refunds. The Commission also finds that it has
the discretion to waive a portion of the refund that is
uncollectible in certain circumstances. In addition, the
Commission also concludes that section 110 allowances
must be measured under the wet rule. Clarification is
also provided to require that an operator designated by a
large first seller must pay that large first seller’s portion
of the refund by the first refund deadline.
Petitioners also raise several substantive issues con-
-erning the refund procedures and whether refunds are
required. After careful consideration of these issues, the
Commission finds that the petitioners’ arguments are
without merit. Although the petitioners restate com-
ments and arguments already considered and addressed
in the final rule, the Commission believes that further
explanation of the reasons for its decision will be bene-
ficial.
III. DISCUSSION
A. Refunds are Due
Pitts Oil Company, Sage Energy Company and Clayton
W. Williams, Jr., Company assert that the Commission
erred in its conclusion that refunds are legally required
and that, because of this error, the Commission failed to
consider the equitable considerations that weigh against
requiring refunds. The Commission disagrees.
84a
In Order No. 399, the Commission ordered refunds un-
der the INGAA decision. To do otherwise may have
effectively sanctioned ceiling prices higher than the maxi-
mum lawful prices prescribed by the NGPA.
In Consumers Federation of America v. FPC,° the
court offered guidance to the Commission in evaluating
the complex and difficult questions associated with a re-
fund process under the Natural Gas Act:
In matters of prospective and retroactive effect,
there are large questions of equity and public in-
terest—both for agencies and for courts. While full
refund under an invalid order is a sound basic rule,
it may be offset, at least in part, by the lack of a
mechanism to restore the full status quo ante...
[and] the fact that consumers may have had the
benefit of some increase in supply that would not
have [otherwise] been forthcoming... .’
That guidance is applicable here.
There are substantial equitable considerations that
support a discretionary order of refunds. First, because
the Commission promulgated the dry rule, revenues that
first sellers collected for their gas exceeded the revenues
that they would have received if those revenues had been
calculated using the wet rule. Those excess revenues
were paid by consumers through higher gas prices at the
retail level. Consequently, the Commission believes that
fairness and equity require that consumers benefit
through a refund of those overcharges. Second, the Com-
mission’s order promulgating the dry rule was strongly
contested from the day it was first explicitly announced.
First sellers who relied on that interpretation knew (or
should have known) that their entitlement to the finan-
cial benefits from the application of the dry rule would
6515 F.2d 347 (D.C. Cir. 1975).
7515 F.2d at 359 (emphasis supplied).
85a
be contingent upon a favorable adjudication by the
courts. Many first sellers participated extensively in the
litigation that ultimately resulted in the dry rule being
struck down. The Commission defended its adoption of
the dry rule vigorously. The Commission’s position, as
well as that of first seller
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