Anadarko Petroleum Corp. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 7, 1999 Decided October 29, 1999

No. 98-1227

Anadarko Petroleum Corporation, et al.,
Petitioners

v.

Federal Energy Regulatory Commission,
Respondent

Amoco Production Company, et al.,
Intervenors

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Consolidated with
Nos. 98-1228, 98-1229, 98-1230, 98-1231,
98-1232, 98-1297, & 98-1298

On Petitions for Review of Orders of the
Federal Energy Regulatory Commission

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 Carla J. Stovall argued the cause for petitioners State of
Kansas and Kansas Corporation Commission. On the briefs
were John McNish and Richard G. Morgan.

Mark H. Haskell argued the cause for petitioners Anadar-
ko Petroleum Corporation, et al. With him on the briefs
were Gordon Gooch, Dena E. Wiggins, Kristin E. Gibbs,
James W. Moeller, J. Kyle McClain, Robert W. Johnson,
Michael L. Pate, Charles F. Hosmer, Kevin M. Sweeney,
Mickey Jo Lawrence, John E. Dickinson, Norma J. Rosner,
Matthew M. Schreck, Eugene A. Lang, and Eugene R. Elrod.

Andrew K. Soto, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Jay L. Witkin, Solicitor, and Susan J. Court,
Special Counsel.

Karol Lyn Newman argued the cause for intervenors in
support of respondent. With her on the brief were James D.
Albright, David W. D'Alessandro, Dennis D. Ahlers, James
Howard, Linda M. Billings, Richard Green, Dana C. Con-
tratto, Gary W. Boyle, Jay V. Allen, Francis X. Berkemeier,
James F. Moriarty, Frank X. Kelly, Carl W. Ulrich, Drew J.
Fossum, and James R. Talcott.

Before: Edwards, Chief Judge, Sentelle and Randolph,
Circuit Judges.

Opinion for the Court filed by Circuit Judge Randolph.

Randolph, Circuit Judge: Petitioners in these consolidated
cases are natural gas producers, and the State of Kansas and
the Kansas Corporation Commission. Four issues are pre-
sented. The first concerns our jurisdiction. The remaining
three deal with the Federal Energy Regulatory Commission's
resolution of proceedings initiated in the wake of Public
Service Co. of Colorado v. FERC, 91 F.3d 1478 (D.C. Cir.
1996).

Although we will presuppose knowledge of our opinion in
Public Service and its predecessor, Colorado Interstate Gas
Co. v. FERC, 850 F.2d 769 (D.C. Cir. 1988), a description of

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

I. Prior Proceedings

Title I of the Natural Gas Production Act (NGPA), enacted
in 1978, imposed maximum lawful prices on first sales of
certain categories of natural gas, but s 110 of the NGPA
allowed producers to recover from their customers charges in
excess of the maximum limits "to the extent necessary to
recover ... State severance taxes attributable to the produc-
tion of such natural gas and borne by the seller." 15 U.S.C.
s 3320(a)(1) (1988) (repealed); see also id. ss 3311-3333
(1988) (repealed). After passage of the NGPA, the Commis-
sion continued to adhere to an earlier agency opinion1 treat-
ing the Kansas ad valorem tax imposed on producers as such
a severance tax. See, e.g., Independent Oil & Gas Ass'n of
W.Va., 7 F.E.R.C. p 61,094 (1979); Trio Petroleum Corp., 18
F.E.R.C. p 61,203 (1982). In a petition filed on October 4,
1983, several customers of Kansas producers tried unsuccess-
fully to persuade the Commission to change its mind. See
Notice of Petition to Reopen, Reconsider and Rescind Opinion
No. 699-D, 48 Fed. Reg. 45,287 (1983); Sun Exploration &
Prod. Co., 36 F.E.R.C. p 61,093 (1986), reh'g denied sub nom.
Northern Natural Gas Co., 38 F.E.R.C. p 61,062 (1987).

On judicial review, we held in Colorado Interstate that the
Commission's decision in Sun Exploration "fell short of rea-
soned decision-making." 850 F.2d at 770. We remanded the
matter to the Commission so that it might, if it could, offer
some "cogent theory of what makes a tax 'similar' to a
production or severance tax under s 110" of the NGPA. Id.
at 773. Five years passed before the Commission acted on
remand. In a ruling handed down after Congress had re-
pealed s 110 of the NGPA,2 the Commission determined that

__________
1 See Opinion No. 699-D, Just and Reasonable Rates for Sales of
Natural Gas, 52 F.P.C. 915 (1974).

2 On January 1, 1993, the Natural Gas Wellhead Decontrol Act of
1989, Pub. L. No. 101-60, 103 Stat. 157, came into effect, eliminating
the price limitations Title I of the NGPA had imposed.

the Kansas ad valorem tax was not the equivalent of a
severance tax attributable to production and therefore pro-
ducers already charging the maximum price could not recover
the tax from their customers. See Colorado Interstate Gas
Co., 65 F.E.R.C. p 61,292 (1993), reh'g denied, 67 F.E.R.C.
p 61,209 (1994). The Commission ordered the producers to
repay all overcharges made after June 28, 1988, when our
Colorado Interstate opinion issued. Our opinion, the Com-
mission believed, gave the producers sufficient notice to alter
their sales practices. See 65 F.E.R.C. at 62,372-73; 67
F.E.R.C. at 61,660.

When we reviewed the Commission's action in Public Ser-
vice, we agreed with the Commission's reconsidered position
on the Kansas tax. But we disagreed with the Commission
about the extent of the producers' refund obligation. In our
opinion, "the producers' liability for refunds extends back to
October [4,] 1983, the date when all interested parties were
given notice in the Federal Register that the recoverability of
the Kansas tax under s 110 of the NGPA was at issue." 91
F.3d at 1490. Although "anything short of full retroactivity
(i.e., to 1978) allow[ed] the producers to keep some unlawful
overcharges without any justification at all," we limited the
producers' liability to October 1983 because that was "the
earliest date advocated by any party before the court." Id.

After our Public Service decision issued, the producers
invoked the Commission's procedures for making equitable
adjustments to refund payments "as may be necessary to
prevent special hardship, inequity, or an unfair distribution of
the burdens." 15 U.S.C. s 3412(c). Collectively, the produc-
ers advanced two claims not explicitly decided in Public
Service: they requested a waiver of the interest due on the
overcharges they had to repay for the period between Octo-
ber 1983 and June 1988; and they requested a reduction in
their repayment obligation to the extent Kansas had over-
valued (and thus overtaxed) the gas they had sold under the
belief that those taxes were recoverable. In two orders, the
second on rehearing, the Commission rejected these petitions
for a blanket waiver but said it would allow individual produc-
ers to obtain relief upon a sufficient showing of hardship. See

Public Service Co. of Colo., 80 F.E.R.C. p 61,264, at 61,952
(1997) (Public Service Order I), reh'g denied, 82 F.E.R.C.
p 61,058, at 61,213, 61,214 (1998) (Public Service Order II).
The producers also challenged the Commission's interpreta-
tion of the Public Service decision's starting date for their
repayment obligation. As the Commission read our opinion,
the producers were liable to pay refunds of revenues collected
in excess of the applicable maximum price based upon any tax
bill rendered after October 4, 1983. As against this, the
producers argued that the Commission should have prorated
the annual tax bill they received from Kansas in 1984, an
error which they believed added nine months to the repay-
ment obligation imposed by this court. See Reply Brief of
Petitioners (Producers) at 19.

II. Jurisdiction

With respect to the portions of the orders denying the
producers' request for a generic, or collective, waiver of
interest on amounts to be refunded, the Commission tells us
the producers are not "aggrieved" within the meaning of 15
U.S.C. s 3416(a)(4). The idea is that they may still seek, and
the Commission may still grant, individual equitable adjust-
ments based on a producer's unique circumstances. We do
not think this possibility eliminates the injury the producers,
as a whole, suffered as a consequence of the Commission's
rulings. The rulings have "necessary legal significance."
Marathon Oil Co. v. FERC, 68 F.3d 1376, 1379 (D.C. Cir.
1995). For one thing, no producer would need to request
individual relief if the Commission had granted a generic
waiver of interest. For another, the Commission set proce-
dures in place for the customers to receive refunds back to
October 1983, including interest. See Public Service Order I,
80 F.E.R.C. at 61,956-57. If the Commission can deny the
producers' claim for a waiver of interest en masse and order
repayment--as it has done--then the producers may petition
for judicial review from the Commission's judgment. Other-
wise, one might as well say that a class representative has no
standing to challenge a district court's order refusing to
certify a class because the potential members of the class may

still bring individual claims for relief. That, of course, is not
the law. See, e.g., Deposit Guaranty Nat'l Bank v. Roper,
445 U.S. 326 (1980).

Marathon Oil Co. is not to the contrary. The details of the
case defy brief description. Suffice it to say that the court
held only this: injury-in-fact could not be established on the
basis of speculation about whether the Commission's refusal
to act would affect later determinations by the Internal
Revenue Service to grant or deny tax credits. See 68 F.3d at
1379. Nothing comparable is present here. There is no
guesswork involved in assessing the impact of the Commis-
sion's decision.3 If the decision stands, a producer could be
relieved from having to pay interest only by establishing
conditions specific to itself. See Public Service Order I, 80
F.E.R.C. at 61,952; Public Service Order II, 82 F.E.R.C. at
61,213, 61,214.

III. Interest

The Commission's general policy, in effect for many years,
requires interest to be paid on various kinds of overcharges.
See Natural Gas Policy and Procedures, FERC Statutes and
Regulations, Regulations Preambles 1977-1981, p 30,083
(1979), reprinted in 44 Fed. Reg. 53,493 (1979), aff'd United
States Gas Pipeline Co. v. FERC, 657 F.2d 790, 794-96 (5th
Cir. 1981). This policy serves three purposes: to "(1) provide
just compensation for the losses, or costs, imposed upon those
who have paid excessive rates; (2) reflect the benefits which

__________
3 In addition to Marathon, the Commission cites Southwest Gas
Corp. v. FERC, 40 F.3d 464, 468 (D.C. Cir. 1994), and Tenneco, Inc.
v. FERC, 688 F.2d 1018, 1022 (5th Cir. 1982), neither of which make
its point. Southwest Gas is a run-of-the-mill decision holding that
the petitioner failed to establish any nonspeculative injury resulting
from agency action. Tenneco merely holds that the petitioner was
not aggrieved by the agency's dismissal of an adjudicatory proceed-
ing in order to allow the agency's newly formed investigative
division to gather more evidence before going forward. See 688
F.2d at 1021. The dismissal adjudicated nothing; it did not fix
petitioner's rights; and it did not command petitioner to do or to
refrain from doing anything. See id.

were available to companies which collected excessive rates;
and (3) not provide incentives for any party to prolong
litigation." See id. at 30,546; 44 Fed. Reg. at 53,494. To
these ends, the regulation governing price increases for the
recovery of severance taxes gave notice that any such increas-
es were "subject to a general obligation to refund any portion
of the price, together with interest." 18 C.F.R.
s 270.101(2)(e) (1993); see also 18 C.F.R. s 154.102(c).

"Compensation deferred is compensation reduced by the
time value of money." In re Milwaukee Cheese Wisconsin,
Inc., 112 F.3d 845, 849 (7th Cir. 1997). In this case, compen-
sation has been deferred for a very long time--so long that
the interest on the producers' overcharges now amounts to
160 percent of the principal. See Reply Brief of Petitioners
(Producers) at 5, 10. The Commission is empowered, by
s 502(c) of the NGPA, to make adjustments giving relief from
its orders "as may be necessary to prevent special hardship,
inequity or an unfair distribution of burdens." 15 U.S.C.
s 3412(c). The producers have a list of "equitable" reasons
why the Commission should have relieved all of them of
having to pay interest: the litigation has gone on forever; the
Commission is responsible for much of the delay; the produc-
ers relied on the Commission's settled view that the Kansas
ad valorem tax was a severance tax. We think the Commis-
sion rightly brushed these objections aside.

The Commission's legal errors and the snail-like pace of its
administrative proceedings are cause for complaint, but are
not in themselves grounds for altering the producers' interest
obligation. See Southeastern Michigan Gas Co. v. FERC,
133 F.3d 34, 42-44 (D.C. Cir. 1998). It is the balance of
equities between the producers and their customers, not
between the producers and the Commission, that matters.
As the Commission has recognized, interest is simply a way of
ensuring full compensation. See Public Service Order II, 82
F.E.R.C. at 61,215. This is why the delay between the time
of the customers' injury and the granting of relief is a reason
for awarding interest, not for denying it, at least when the
delay cannot be laid at the feet of the customers. See
Milwaukee v. Cement Div. of Nat'l Gypsum Co., 515 U.S. 189,

196 (1995); General Motors Corp. v. Devex Corp., 461 U.S.
648, 657 (1983). It is why the producers' contention that they
are being penalized for their good faith reliance on the
Commission's long-standing treatment of the Kansas tax mis-
apprehends the purpose of awarding interest. Interest is not
awarded against someone for conducting litigation in bad
faith; it is, as the Commission knew, awarded to make the
prevailing party whole. See National Gypsum Co., 515 U.S.
at 196-97.

The Commission gave careful consideration to each of the
"equitable" reasons the producers offered for a generic waiv-
er of interest and said this: "granting a generic waiver of
interest of the ad valorem Kansas refunds ordered by Public
Service would be inconsistent with the Court's mandate."
Public Service Order II, 82 F.E.R.C. at 61,214. That the
Commission correctly read our Public Service opinion cannot
be doubted. We there rejected the producers' equitable
arguments against full refunds back to 1983, arguments the
producers now repeat in support of their request for a
generic waiver of interest regarding the same period. In
holding that the producers "must refund the full amount that
they unlawfully collected," 91 F.3d at 1490, we determined
that the producers had not established "detrimental reliance,"
id.;4 that even if they had relied on the Commission's treat-
ment of the Kansas tax, passage of the NGPA and the 1983
petition challenging this treatment rendered their reliance
unreasonable, id.; and that "we are hard pressed to see how
the producers would be harmed in any cognizable way even if
they were required to disgorge every dollar they received in
recovery of the tax," id. In view of these and other portions
of our Public Service opinion, the Commission properly con-
cluded that it should not grant a generic waiver of interest

__________
4 This part of our Public Service decision distinguishes Panhan-
dle Eastern Pipe Line Co. v. FERC, 93 F.3d 62 (D.C. Cir. 1996), in
which we sustained the Commission's order mandating a refund
without interest because the Commission's error not only prolonged
the litigation, but also caused the losing party to forego a viable
alternative means of recovering from the prevailing party. See id.
at 67-68.

because, to do so, it would have to assess the equities in a
manner contrary to Public Service.5

Estate of French v. FERC, 603 F.2d 1158 (5th Cir. 1979),
which the producers invoke, does not favor a different out-
come. The court of appeals held that "equitable consider-
ations" did not allow the Commission to award interest
against a petitioner seeking an economic hardship waiver for
the seven years it took to decide his claim because a delay of
that length was unreasonable per se. See id. at 1167-68.
Here, by contrast, the Commission acted quite promptly on
the producers' petition for a waiver of interest. There may
have been untoward delay here, but it occurred between our
remand in Colorado Interstate and the Commission's reversal
of its treatment of the tax. There is an ocean of difference
between being required to pay interest on a lawful obligation
(as the producers are being required to do here) and being
required to pay interest while waiting for the Commission to
decide whether one deserves a hardship waiver (which is what
the court refused to allow in French).

IV. Tax-on-Tax

One of the curious features of the complex system by which
Kansas taxed the production of natural gas was the way in
which assessors "grossed up" the value of the gas by approxi-
mately 10 percent to reflect the producers' ability to recover
the Kansas tax at the time of sale. See Ensign Oil & Gas,
Inc., 71 F.E.R.C. p 61,204, at 61,750 (1995). The producers
now argue that the Commission should reduce the amount of

__________
5 Whether the Commission's determination that Public Service
"foreclosed the granting of relief on a generic basis to all producers,
regardless of their individual circumstances," Public Service Order
II, 82 F.E.R.C. at 61,214, is inconsistent with its statement that it
retains equitable discretion to adjust individual producer liability in
cases of hardship, see id.; see also id. at 61,217, is a question not
before us and one on which we reach no judgment. Our decision
today does not affect the Commission's established standards for
granting hardship waivers and does not prohibit individual parties
from seeking hardship waivers in a proceeding under NGPA
s 502(c), 15 U.S.C. s 3412(c).

their refund liability to their customers by the amount of this
"tax-on-tax" because it rested on the false assumption that
they could recover the tax and because they now have no way
of recouping the inflated taxes they paid to Kansas. We hold
that the Commission properly determined that the producers
are responsible for refunding the Kansas tax-on-tax.

In terms of equity, the tax-on-tax problem disturbed the
balance of equities between the producers and Kansas, not
between the producers and their customers. There is no
reason why, in the Commission's words, "overcharged con-
sumers should forego refunds they are entitled to, to the
extent producers paid more ad valorem taxes to Kansas
localities than they should have." Public Service Order II, 82
F.E.R.C. at 61,219.6

V. Refund Date

In Public Service, we said that we would "not require
refunds of taxes recovered with respect to production before
October 1983 because there is before us no controversy over
those monies." Public Service, 91 F.3d at 1490-91. Our use
of the phrase "with respect to production," which appears
three times in the opinion, see id. at 1490, 1492, has generated
some confusion, particularly in view of our decision on the
merits that the Kansas tax was not a severance tax attribut-
able to production within s 110's meaning. 91 F.3d at 1482-
86. On remand, the Commission interpreted taxes "with
respect to production" to mean "revenues collected based
upon any tax bill rendered after October 4, 1983," Public
Service Order II, 82 F.E.R.C. at 61,220; accord Public Ser-
vice Order I, 80 F.E.R.C. at 61,953 n.25. Because Kansas
levied its ad valorem tax annually and collected it through a
bill sent toward the end of each year, the producers objected
to the Commission's interpretation because it appeared to
them to impose an additional nine months of liability. See

__________
6 Given this ground of decision in Public Service Order II,
there is no need for us to address the producers' arguments that
the Commission misconstrued Ensign Oil & Gas, Inc., 71 F.E.R.C.
p 61,204 (1995), in Public Service Order I.

Reply Brief of Petitioners (Producers) at 19. We find our-
selves in agreement with neither the Commission nor the
producers. Both focus on the tax transaction between pro-
ducers and Kansas rather than the sales transactions between
the producers and their customers. Our decision in Public
Service required the producers to refund all taxes passed
through to customers after October 4, 1983. In other words,
the phrase "with respect to production" means "when sold."

Public Service used the prepositional phrase "with respect
to production" three times to modify three different objects.
The opinion first stated that "we do not require refunds of
taxes recovered with respect to production before October
1983." 91 F.3d at 1491-92 (emphasis added). Here, "taxes
recovered" means taxes passed through at sale because that
is how taxes are "recovered." The second instance is this:
"Producers are liable to refund all Kansas ad valorem taxes
collected with respect to production since October 1983." Id.
at 1492 (emphasis added). Here, the natural first reading of
"taxes collected" might be taxes levied by Kansas because we
normally think of states, not private entities, as tax collectors.
In context, however, the better reading of "taxes collected" is
taxes collected from customers through higher prices. The
final instance is: "The customers are limited, however, to
recovery of taxes paid with respect to production since Octo-
ber 1983...." Id. (emphasis added). This last sentence
focuses most clearly on the sales transaction rather than the
tax transaction because it is the customers who are doing the
paying. In order to show that this is the correct interpreta-
tion, we need to look at the way the taxation and recovery
process worked.

During the period in question, Kansas would send a tax bill
to the producers near the end of the year assessing a well's
raw value during the previous year. See Public Service, 91
F.3d at 1484. That value was determined by a number of
factors including the volume of the reserve, the physical
capital at the well site, and the rate of production. See id. at
1484-85. It is also significant that the rate of production
factor was averaged over the lengthier of two time periods--
three or five years--whenever production had lasted that

long. See id. at 1484. After receiving the state tax bill for a
given year, the producers would take advantage of the federal
recovery policy by raising their prices in individual transac-
tions to reflect their individual tax liability.

Between October 1983 and January 1984, the producers
overcharged customers to recover state taxes assessed
against the value of their wells in 1982. The producers seem
to argue that one should look only to the tax bill they received
from Kansas in 1984 for the 1983 tax year and then reduce it
by roughly 75% (assuming even production over the year).7
That argument focuses on the tax transaction, which is the
wrong transaction. The transaction that caused the harm is
the sales transaction, and it is the overcharges made in those
individual transactions (plus interest) that the producers must
now repay.8

VI. Kansas

The State of Kansas and the Kansas Corporate Commis-
sion joined in this litigation to mitigate the "real and se-
vere.... impact on the gas industry in Kansas as a whole and
the economy of the state of Kansas as a whole." Final Initial
Brief of Petitioners (Kansas) at 13. While it may be true that
interest refunds could cause some marginal producers to fold,
it is hard to see how the people of Kansas have actually been
injured. Kansas was able to collect taxes during this entire
period (including their "tax-on-tax"); it has enjoyed the time
value of this money; and no one is asking the State to pay
back anything. If it is important to Kansas to limit the

__________
7 An accurate calculation would be far more complex because of
variations in production levels, especially when a well is new. See
Public Service, 91 F.3d at 1483-85; Colorado Interstate, 850 F.2d at
773.

8 We are aware that although our decision reverses the Commis-
sion, it might put the producers in a worse position than they would
have been if they had not challenged the Commission's starting date
for refunds. At oral argument, we suggested this possible outcome
to producers' counsel, but despite receiving notice, the producers
continued to press their objection to the Commission's date.

economic damage on marginal producers, it retains numerous
avenues for aiding them. It appears, however, the only
action taken by Kansas with respect to the producers' refund
liability was adverse. See Kan. Stat. Ann. s 55-1624 (enacted
Apr. 20, 1998). Indeed, some of the producers in this case
have already petitioned the Commission for equitable relief
from losses resulting from the state law. See Notice of
Motion for Waiver, 63 Fed. Reg. 30,736 (1998).

* * *

For the reasons stated, the Commission's decision regard-
ing the starting date for refunds is set aside and the cases are
remanded for the entry of an order prescribing a starting
date consistent with this opinion. In all other respects, the
petitions for judicial review are denied.