Colorado Interstate Gas Co. v. F.E.R.C., 87-1141
| Decision Date | 28 June 1988 |
| Docket Number | No. 87-1141,87-1141 |
| Citation | 850 F.2d 769 |
| Parties | COLORADO INTERSTATE GAS COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Mobil Oil Corp., Northern Natural Gas Co., Ashland Exploration, Inc., Pennzoil Co., Phillips Petroleum Co., et al., Tenneco Oil Co., Champlin Petroleum Co., Panhandle Eastern Pipe Line Co., Truckline Gas Co., Texaco, Inc. and Texaco Producing, Inc., Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Donald C. Shepler, Salt Lake City, Utah, with whom Daniel F. Collins, Washington, D.C., was on the brief, for petitioner.
Dwight C. Alpern, Atty., F.E.R.C., with whom Catherine C. Cook, Gen. Counsel, F.E.R.C. and Jerome M. Feit, Sol., F.E.R.C., Washington, D.C., were on the brief for respondent. John Conway, Atty., F.E.R.C., Washington, D.C., also entered an appearance for respondent.
Edgar K. Parks and Jay G. Martin, Houston, Tex., were on the brief for intervenor Mobil Oil Corp. and Mobil Producing Texas & New Mexico, Inc.
George J. Meiburger, Frank X. Kelly and Steve Stojic, Washington, D.C., were on the brief for intervenor Northern Natural Gas Co.
Thomas J. Eastment and Stephen L. Teichler, Washington, D.C., entered appearances for intervenors Ashland Exploration, Inc. and Pennzoil Co.
Jennifer A. Cates, Charles L. Pain and John L. Williford, Bartlesville, Okl., entered appearances for intervenor, Phillips Petroleum Co., et al.
F. Nan Wagoner and Phyllis G. Rainey, Houston, Tex., entered appearances for intervenor Tenneco Oil Co.
Kerry R. Brittain, Fort Worth, Tex., entered an appearance for intervenor Champlin Petroleum Co.
Raymond N. Shibley and Brian D. O'Neill, Washington, D.C., entered appearances for intervenor Panhandle Eastern Pipe Line Co. and Trunkline Gas Co.
John P. Beall, Houston, Tex., entered an appearance for intervenor, Texaco, Inc. and Texaco Producing, Inc.
Before RUTH BADER GINSBURG, BUCKLEY and WILLIAMS, Circuit Judges.
Opinion for the Court filed by Circuit Judge WILLIAMS.
The National Gas Policy Act of 1978 (the "NGPA" or the "Act"), 15 U.S.C. Secs. 3301 et seq. (1982), sets ceiling prices for certain sales of natural gas. Under Sec. 110, producers may raise their prices above these ceilings "to the extent necessary to recover ... [s]tate severance taxes." 15 U.S.C. Sec. 3320(a) (1982). Such taxes are in turn defined as "any severance, production, or similar tax, fee, or other levy imposed on the production of natural gas." Id. Sec. 3320(c). The Federal Energy Regulatory Commission has classified Kansas's ad valorem property tax as a severance tax under Sec. 110. Colorado Interstate Gas Company and Northern Natural Gas Company, 1 interstate pipelines that buy price-regulated natural gas, object to this classification.
The Commission has stated by way of explanation that the tax is "based on production factors." Northern Natural Gas Co., 38 FERC p 61,062 (1987), at 61,176. This is undoubtedly so: past production is used to estimate the net present value of future production from a gas-producing property, and thus the property's taxable value. But that link is not necessarily enough. The capital value of any property is in essence the net present discounted value of its anticipated income stream; this is true even for a shirt, which generates a stream of (non-pecuniary) income in the form of satisfaction as it is worn. We conclude that the Commission's treatment of the issue fell short of reasoned decision-making. It failed to offer any principle for determining what relation to production is enough for a tax to qualify under Sec. 110. That failure is underscored by its inability to supply a persuasive explanation for simultaneously denying severance tax treatment for Texas's seemingly indistinguishable tax.
The Commission's predecessor, the Federal Power Commission (here also referred to as the Commission), first had occasion to give separate treatment to state severance taxes when, in setting producer rates under the Natural Gas Act of 1938, 15 U.S.C. Secs. 717 et seq. (1982), it abandoned the evidently impossible task of setting them individually for each producer and started to set them for a single producing area on the basis of average production costs. In Area Rate Proceeding (Permian Basin), 34 FPC 159 (1965), aff'd sub nom. Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968), the first regional rate order, it allowed producers to add on to the ceilings "the full amount of taxes actually incurred either in Texas or New Mexico." Id. at 206. Although the Commission did not explain the separate treatment, one may surmise that it regarded it as appropriate because the state boundary formed a bright line between the two different cost levels. Thus there was not the same practical need to use average figures for severance taxes as there was for other costs. The Commission again followed this approach when it adopted national ceilings in Just and Reasonable National Rates for Sales of Natural Gas, Opinion No. 699, 51 FPC 2212, reh. denied in relevant part, 52 FPC 1604 (1974), aff'd sub nom. Shell Oil Co. v. FPC, 520 F.2d 1061 (5th Cir.1975), cert. denied sub nom. California Co. v. FPC, 426 U.S. 941, 96 S.Ct. 2660, 49 L.Ed.2d 394 (1976). There it provided generically for adjustment of the national rates upward for "all ... production, severance, or similar taxes." Just and Reasonable National Rates, supra, at 2301-02. The words are, of course, exactly those used in part of Sec. 110's definition of allowable severance taxes, though Sec. 110 slightly alters the order.
In Opinion No. 699 the Commission did not explicitly state why producers should be able to recover severance or production taxes but not, say, property taxes. The reason that immediately comes to mind, of course, is that non-recovery of a cost that varies with production will work as a disincentive to production, while non-recovery of invariant costs will not. A production tax is a cost of producing, a property tax a cost of holding an asset. Indeed, to the extent that extraction reduces the base against which a property tax is applied, its imposition may tend to accelerate production. Compare Anthony Scott, Natural Resources: The Economics of Conservation 195-96 (Carleton Library ed. 1973) () with id. at 185 (). A special feature of natural gas (or any "fugacious" resource) blurs the distinction: in a reservoir with multiple producers, the extraction by a taxpayer's fellow owners may have far more effect on the annual decline in a property's recoverable reserves than his own.
In October 1974, at the behest of the Kansas State Corporation Commission, the Commission declared that Kansas's ad valorem tax on "all oil and gas wells, producing or capable of producing oil or gas in paying quantities," Kan.Stat.Ann. Sec. 79-329, was eligible for Opinion No. 699's adjustmnet. Opinion No. 699-D, 52 FPC 915 (1974).
Without claiming to grasp the refinements of the Kansas tax, we can briefly describe its calculation. The market value of annual production is calculated by multiplying past production (averaged over a three- or five-year period where available) by the price actually paid the producer on January 1 of the assessment year. Kansas then capitalizes annual production (i.e., infers a present capital value from income expected to be received over the future) by multiplying it by a "present worth factor" or "PWF."
As would any capitalization formula, the PWF incorporates an assumed discount rate and expectations as to future price changes. Because natural gas is an exhaustible resource, the PWF also builds in assumptions (or information) about rates of decline in production and the probable length of production; these naturally vary from property to property. The Kansas Department of Revenue has calculated PWFs for many specific Kansas gas fields, ranging from 6.30 for the Hugoton (above 3000 feet) to 2.50 for the Glick. See Kansas Oil & Gas Appraisal Guide (1986), Joint Appendix (J.A.) 83, 98. For "all other Kansas gas fields," Table B sets forth PWFs for rates of production decline experienced and for either a five- or eight-year estimated future life. See Appraisal Guide, J.A. at 101. The PWFs in Table B range from 3.915 (for a zero decline rate and an eight-year life) to .673 (for a 50% decline rate and a five-year life). After annual production is multiplied by the PWF, the resulting figure is adjusted downwards for operating costs and upwards for the assumed value of equipment. Although production plays an important role in tax computation, the variation caused by other elements--included because of the state's interest of ascertaining capital value--may make the ultimate tax on equal production vary nearly by a factor of ten.
The Commission found the Kansas tax "similar" to a production or severance tax within the meaning of its offset rule because "the bulk of the Kansas ad valorem tax is based upon production factors, and, as such, is in fact, a severance or production tax merely bearing the title 'ad valorem tax.' " Just and Reasonable National Rates for Sales of Natural Gas, Opinion No. 699-D, 52 FPC 915 (1974).
Two years later the Commission found that Texas's ad valorem tax on real and tangible personal property was not eligible for add-on treatment under Opinion No. 699. Mobil Oil Corp., 55 FPC 917, 918 (1976). It said that Id. We will return later to the meaning and validity of the Commission's efforts to distinguish the two taxes.
In 1978 Congress substantially overhauled federal regulation of natural gas prices by adopting the...
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