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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 18, 2004 Decided January 21, 2005
No. 03-1340
BURLINGTON RESOURCES OIL & GAS COMPANY L.P.,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
NORTHERN NATURAL GAS COMPANY, ET AL.,
INTERVENORS
Consolidated with
No. 03-1432
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Thomas J. Eastment argued the cause and filed the briefs for
petitioner.
2
Judith A. Albert , Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief were Cynthia A. Marlette, General Counsel, and Dennis
Lane, Solicitor.
Frank X. Kelly, Steve Stojic, J. Gregory Porter, James F.
Moriarty, R. Bruce Beckner, David D’Alessandro, and John E.
McCaffrey were on the brief for intervenors Northern Natural
Gas Company, et al. in support of respondent. Marie D. Zosa
entered an appearance.
Before: GINSBURG , Chief Judge, and ROGERS and TATEL,
Circuit Judges.
Opinion for the Court filed by Circuit Judge ROGERS.
ROGERS, Circuit Judge: This petition for review involves
one of several efforts to resolve long-standing disputes related
to the refunds due to customers for ad valorem taxes collected
in excess of maximum lawful price ceilings under section
504(a)(1) of Title V of the Natural Gas Policy Act (“NGPA”),
15 U.S.C. § 3414(a)(1) (1989). See, e.g., Pub. Serv. Co. of Colo.
v. FERC, 91 F.3d 1478 (D.C. Cir. 1996), cert. denied, 520 U.S.
1224 (1997). Burlington Resources Oil and Gas Company L.P.
petitions for review of six orders of the Federal Energy
Regulatory Commission having the end result that Burlington
must refund certain ad valorem taxes it collected from two
pipeline gas purchasers pursuant to take-or-pay natural gas sales
contracts.1 The Commission declined to enforce the release and
1
Burlington Res. Oil & Gas Co. L.P., 102 F.E.R.C. ¶ 61,003
(2003); Burlington Res. Oil & Gas Co. L.P., 103 F.E.R.C. ¶ 61,005
(2003); Burlington Res. Oil & Gas Co. L.P., 104 F.E.R.C. ¶ 61,317
(2003); Panhandle Eastern Pipe Line Co., 103 F.E.R.C. ¶ 61,002
(2003); P anhandle Eastern Pipe Line Co., 103 F.E.R.C. ¶ 61,007
(2003); Panhandle Eastern Pipe Line Co., 105 F.E.R.C. ¶ 61,141
3
indemnity clauses in the take-or-pay contract settlement
agreements between Burlington and the two pipelines because
it concluded that to do so would allow Burlington to retain
revenues collected in excess of the price ceilings in section
504(a) of the NGPA. Yet the Commission approved Omnibus
Settlement Agreements allowing some producers to avoid full
or partial refunds of revenues collected from pipelines in excess
of the section 504 price ceilings. The important question left
unanswered by the Commission in the challenged Orders is how,
in light of the Commission’s approval of the Omnibus
Settlement Agreements, the rule in the Orders under review can
be correct. We grant the petition and remand the case to the
Commission for a more adequate explanation.
I.
The background to NGPA’s ceiling prices for first sales of
natural gas is set forth in Colorado Interstate Gas Co., 67
F.E.R.C. ¶ 61,209, 61,652 (1994). Following a remand in that
case, the Commission determined that the ad valorem tax
imposed by the State of Kansas did not qualify as a reimbursable
severance tax under section 110 of the NGPA, 15 U.S.C. §
3220(a)(1), and ordered producers to refund to pipelines, as of
1998, revenues collected in excess of the ceiling price. Colo.
Interstate Gas Co. v. FERC, 65 F.E.R.C. ¶ 61,292 (1993), reh’g
denied, 67 F.E.R.C. ¶ 61,209 (1994). This court upheld as
reasonable the Commission’s tax determination, but held that
the refunds accrued as of October 1983, when the
reimbursement was first challenged. Pub. Serv. Co. of Colo., 91
F.3d at 1488-91.
On September 10, 1997, the Commission ordered the
pipelines to serve upon first sellers of gas a statement of refunds
due for the Kansas ad valorem tax reimbursements collected by
(2003).
4
first sellers for 1983-1988. Pub. Serv. Co. of Colo., 80 F.E.R.C.
¶ 61,264, 61,955 (1997). The Commission also ordered any first
seller that had collected revenues in excess of NGPA ceiling
prices, as a result of reimbursement of Kansas ad valorem taxes,
to refund such excess revenues to the pipeline purchasers, with
interest. Id.
Prior to that time, the Northern Natural Gas Company
(“Northern”) in 1987, and the Panhandle Eastern Pipeline
Company (“Panhandle”) in 1992, had entered into separate take-
or-pay Settlement Agreements with Burlington’s predecessor in
interest to resolve claims and controversies involving multiple
gas purchase contracts. For the general background to these
controversies, see Associated Gas Distributors v. FERC, 893
F.2d 349, 353 (D.C. Cir. 1989) (“AGD”). Each agreement
included a release and indemnity clause. Thus, the Panhandle
clause provided:
Except for the obligations and rights specifically
provided for in this . . . Agreement, Buyer and Seller
hereby forever release, discharge, waive and indemnify
each other from and against all claims, demands,
causes of action, damages, liabilities, expenses or
payments known or unknown, present or future, that
each has or may have had against the other party
relating to all the above referenced contracts.
Panhandle 1992 Settlement Agreement at ¶ 7. The referenced
gas contracts were those through January 31, 1993 for
Panhandle and through January 31, 1989 for Northern. When
Burlington received statements of ad valorem refunds claimed
by Northern and Panhandle, it denied any responsibility for the
refunds, referencing the indemnity clauses in the 1989 and 1992
Settlement Agreements. Northern and Panhandle filed protests
5
with the Commission, and on May 12, 1999, Burlington filed a
Request for Resolution by the Commission.
Northern and Panhandle also filed in 2000 and 2001,
respectively, for Commission approval of Omnibus Settlement
Agreements, which settled their ad valorem refund claims under
take-or-pay contracts against certain producers, and reduced or
eliminated ad valorem refund claims against other producers.
Panhandle’s Omnibus Settlement Agreement, for example,
involved 34 producer parties and 14 non-producer parties.
Large first sellers (i.e., those with a maximum refund liability
greater than $400,000) agreed to pay 75% of their refund
amount (less amounts previously paid), while smaller first
sellers received a monetary credit of either $50,000 or $100,000,
and those with refund liability of less than $50,000 were exempt
from Kansas ad valorem tax refund liability. Northern’s
Omnibus Settlement Agreements had similar provisions. Both
Omnibus Settlement Agreements included provisions for mutual
release from liability. Panhandle and Northern claimed the
settlements obviated the need for protracted and costly litigation
while providing relief to customers. Panhandle Eastern
Pipeline Co., 96 F.E.R.C. ¶ 61,274, 62,039; N. Natural Gas Co.,
93 F.E.R.C. ¶ 61,311, 62,073.
On December 27, 2000, the Commission approved the
Omnibus Settlement Agreements, citing its “wide discretion” to
approve settlements and the strong public policy interests in
support of settling complex matters in order to avoid the costs
and burdens of litigation and to mitigate administrative burdens.
Panhandle Eastern Pipeline Co., 96 F.E.R.C. at 62,039; N.
Natural Gas Co., 93 F.E.R.C. at 62,075. The Commission
observed that the Omnibus Settlement Agreements are “a
reasonable compromise to resolve long, drawn-out complex
proceedings,” and that Commission approval “will permit a
substantial amount of the overcharges to be flowed through to
6
consumers during the current heating season when gas prices are
expected to be higher than in recent years, while providing relief
to Settling Parties, small producers, and royalty owners.” N.
Natural Gas Co., 93 F.E.R.C. at 62,076; see Panhandle Eastern
Pipe Line Co., 96 F.E.R.C. ¶ 61,274, 62,043, clarified, 97
F.E.R.C. ¶ 61,015, 62,044 (2001). The Commission also stated
that it “is once again heartened by the parties’ success in
resolving virtually all the refund claims in this proceeding
through settlement, and encourages similar efforts . . . pending
with other pipelines.” N. Natural Gas Co., 93 F.E.R.C. at
62,075; see Panhandle Eastern Pipe Line Co., 96 F.E.R.C. at
62,044. In each instance, the Commission noted that its
approval was without prejudice to producers, such as
Burlington, who opted out of the Omnibus Settlements.
Thereafter, the Commission proceeded in a parallel fashion
to address Northern’s and Panhandle’s refund claims against
Burlington. On January 2, 2003, the Commission issued two of
the challenged orders, establishing hearings to “resolve all issues
concerning the ad valorem tax refunds owed to [Northern and
Panhandle] that have not yet been resolved by settlement.”
Burlington Res. Oil & Gas Co., 102 F.E.R.C. ¶ 61,003, 61,005
(2003); Panhandle Eastern Pipe Line Co., 102 F.E.R.C. ¶
61,002, 61,004 (2003). Burlington moved for rehearing, and on
April 1, 2003, the Commission, in two other challenged orders,
granted rehearing and removed Burlington from the hearing
order because Burlington claimed there were no material issues
of fact to be decided. Burlington Res. Oil & Gas Co., 102
F.E.R.C. ¶ 61,005 (2003) (“April 1 Northern Order”);
Panhandle Eastern Pipe Line Co., 103 F.E.R.C. ¶ 61,007 (2003)
(“April 1 Panhandle Order”).
In the April 1 rehearing orders, the Commission questioned
whether the indemnity clauses in the Settlement Agreements
with Northern and Panhandle had the meaning Burlington
7
attributed to them, namely that it indemnifies Burlington for any
ad valorem tax refund liability and imposes that liability on the
pipelines. Declining to interpret the clauses, however, the
Commission stated that “even if the clause could be read as
having that meaning, Burlington cannot prevail on its request to
be relieved of the ad valorem refund liability.” April 1
Panhandle Order, 103 F.E.R.C. at 61,007. The Commission
explained that it had “stated in Anadarko [Petroleum Corp., 86
F.E.R.C. ¶ 61,040 (1999),] that the buyer in a first sale cannot
agree ‘to pay more than the [NGPA ceiling price],’ and thus any
agreement to do so ‘is unenforceable.’” Id. (quoting Anadarko,
86 F.E.R.C. at 61,158). The Commission also relied on
Williams Natural Gas Co., 67 F.E.R.C. ¶ 61,153 (1994), in
which it explained it had rejected the argument that take-or-pay
settlements could relieve producers of the liability for ad
valorem tax refunds relating to those contracts. Id. (citing
Williams, 67 F.E.R.C. at 61,450). The Commission
distinguished its approval of the Omnibus Settlement
Agreements as involving producers who agreed to immediate
payment of a substantial part of the refund in dispute, whereas
Burlington sought to be relieved from full refund liability. The
Commission also distinguished the pipeline/consumer
settlements it had approved as involving pipeline flow-through
to customers governed by the Natural Gas Act, 15 U.S.C. § 717,
which unlike section 504(a) of the NGPA, does not set ceiling
prices. The Commission denied Burlington’s alternative request
that it be relieved of any obligation to pay interest, on the
ground the request was a collateral attack on the Commission’s
orders in Public Service denying such waivers, and Burlington
had not shown hardship or inequity under section 502(c) of the
NGPA, 15 U.S.C. § 3412(c). Burlington sought rehearing.
In the final two orders challenged in the petition for review,
the Commission denied rehearing, affirming its April 1 Orders.
Burlington Res. Oil & Gas Co., 104 F.E.R.C. ¶ 61,317, 62,190-
8
91 (2003) (“Northern Rehearing”); Panhandle Eastern Pipe
Line Co., 105 F.E.R.C. ¶ 61,141, 61,787 (2003) (“Panhandle
Rehearing”). Regarding Northern’s refund request, the
Commission rejected Burlington’s argument that the
Commission’s interpretation of section 504(a) of the NGPA as
barring enforcement of the release and indemnity clause
conflicted with its approval of the analogous Northern Omnibus
Settlement Agreements, stating that it has “a degree of
prosecutorial discretion in determining how to expend its
resources in the enforcement of those ceiling prices.” Northern
Rehearing, 104 F.E.R.C. at 62,191. The Commission
distinguished its waiver of partial liability for some producers in
those settlements on the ground that the pipelines, producers and
customers were all parties to the settlements, and by waiving a
small portion of the refunds the pipelines were able to collect
larger amounts without further delay, thus collecting “the
maximum amount of refunds practical.” Id. “Where the
customers agree to the waiver of part of the claimed refund
amount, which amount producers were contesting, the
Commission may accept the settlement in the exercise of its
prosecutorial discretion to resolve a controversy without the
undue expenditure of resources.” Id. By contrast, Burlington’s
Settlement Agreements with Northern and Panhandle did not
involve customers and was a private agreement not filed with
the Commission for approval. Had Northern filed to flow
through the costs of settlement pursuant to Order Nos. 500/528
or Order No. 636, the Commission explained the only issue
would be the prudence of the settlement. Noting further that
Burlington could have joined the Omnibus Settlement
Agreements and paid less than the full amount Northern claimed
it owed, the Commission observed that Burlington sought
“complete elimination of the obligation.” Id. The Commission
dismissed Burlington’s reliance on El Paso Natural Gas Co., 85
F.E.R.C. ¶ 61,003 (1998), Natural Gas Pipeline Co. of America,
85 F.E.R.C. ¶ 61,004 (1998), and ANR Pipeline Co., 85 F.E.R.C.
9
¶ 61,005 (1998), because those cases involved pipeline/customer
agreements governed by the NGA. The Commission again
denied Burlington equitable relief under section 502(c).
Regarding Panhandle’s refund request, the Commission
further explained that by encouraging settlements, it did not
intend for NGPA ceiling prices to be exceeded. Departing from
its position in the April 1 Orders that it would not interpret the
indemnity clauses, the Commission concluded that while the
clauses “obviously relate to claims arising from the contract
between the parties,” the ad valorem tax refunds arise from a
Commission order rather than a claim between the parties and
thus applied “regardless of the terms of any contract the parties
may have entered into.” Panhandle Rehearing, 105 F.E.R.C. at
61,788. The Commission observed that the pipelines were
merely the vehicle for enforcing the Commission’s order and
respect for the NGPA ceiling prices.
II.
On petition, Burlington principally contends that the
Commission’s position, that the 1989 and 1992 Settlement
Agreements did not provide a lawful or equitable basis to shift
ad valorem tax refund liability to Northern and Panhandle, is
unsupported by a reasoned explanation and is inconsistent with
the Commission’s approval of the Omnibus Settlement
Agreements. In Burlington’s view, the Commission erred by
failing to exercise its prosecutorial discretion to enforce the
release and indemnity clauses in the Northern and Panhandle
Settlement Agreements, which were good faith, arms-length gas
sales contract settlements under which Burlington provided the
pipelines with valuable consideration, including a substantial
reduction in the pipelines’ take-or-pay liability, contract
reformation in future prices and pipeline take obligations, and
reciprocal releases and indemnifications. It also erred,
according to Burlington, by viewing the settlements as stand-
10
alone contracts, failing to acknowledge that the refund
obligations arise from the take-or-pay contracts addressed in the
Settlement Agreements.
Section 504 of the NGPA makes it “unlawful for any person
. . . (1) to sell natural gas at a first sale price in excess of any
applicable maximum lawful price under this Act.” NGPA §
504(a), 15 U.S.C. § 3414(a) (1989). The Commission
interpreted section 504(a) to bar Burlington’s interpretation of
the release and indemnity clauses because, in its view, the
interpretation would allow Burlington to retain ad valorem taxes
collected from Northern and Panhandle in excess of applicable
price ceiling. It relied on two decisions. First, in Anadarko, 86
F.E.R.C. ¶ 61,040, the Commission ruled that while Anadarko
could seek recovery in the federal district court regarding the
contract indemnification interpretation it presented as a defense
to refund liability, it must pay, as the first seller of natural gas,
refunds to Panhandle, from which it had spun off in 1985, or
violate the NGPA. Id. at 61,158. On rehearing the Commission
stated that it did not rely on Anadarko’s interpretation of the
indemnity clause in the 1986 spin-off agreement as a release
from refund liability, explaining that “an agreement by the
buyer, here Panhandle, to be responsible for any refund would
in effect be an illegal agreement to pay more than the MLP, and
thus unenforceable.” Id. at 61,157. Because the case did not
involve gas-sales contracts between a producer and a pipeline
but “a series of complex corporate arrangements” in which each
side disputed the other side’s interpretation of who was
responsible for first sale tax refund liability, the Commission
confined its role to determining which party, the first seller or its
successor in interest, was initially liable for the refund. Id. In
the second case, Williams Natural Gas Co., 67 F.E.R.C. ¶
61,153, the Commission ruled that irrespective of any agreement
by customers to the contrary, producers must make ad valorem
refunds to remedy violations of NGPA ceiling prices. Id. at
11
61,450. Declining to stay the deadline for challenging the
prudence of Williams’ settlement agreements with producers,
the Commission explained a stay was unnecessary because
“take-or-pay or [Gas Supply Realignment] settlements between
pipelines and their producer/suppliers cannot interfere with
refunds required by the Commission to remedy violation of
NGPA ceiling prices, or with the flowthrough of such refunds by
the pipelines to their customers.” Id.
Neither Anadark o nor Williams addresses whether a
pipeline “may lawfully agree to release and indemnify a
producer for the obligation to refund amounts paid to the
producer in excess of NGPA ceiling prices in exchange for
valuable consideration under a good faith arm’s-length gas sales
contract settlement.” Petitioner’s Br. at 22. But even if those
Commission orders were on point, the Commission would not
be absolved of its obligation, in the face of Burlington’s
challenges, to justify the basis for the rule announced in those
cases and applied in the orders under review.
The Commission’s Orders patch together a variety of
arguments for rejecting Burlington’s claim that its Settlement
Agreements with Northern and Panhandle release it from “all”
claims arising from the underlying take-or-pay contracts,
including excess ad valorem refund claims by the pipelines. But
none of the challenged Orders explain how the rule applied by
the Commission to the 1989 or 1992 Settlement Agreements is
consistent with its approval of the pipelines’ Omnibus
Settlement Agreements allowing some producers to escape all
or partial liability for ad valorem tax refunds. The
Commission’s position that its encouragement of settlement of
take-or-pay liability did not intend for NGPA ceiling prices to
be exceeded begs the question of how it could approve the
Omnibus Settlements Agreements, although such settlements
would likewise violate section 504(a) of the NGPA under the
12
Commission’s interpretation here. To the extent the
Commission explained that its approval of the Omnibus
Settlement Agreements reflected prosecutorial discretion, its
explanation betrays a recognition that section 504 of the NGPA
does not render unlawful all private agreements allowing a
producer to retain funds collected pursuant to unlawfully high
prices. Moreover, the Commission fails to explain why, in light
of the substantial consideration paid by Burlington, in part for
release and indemnification by Northern and Panhandle for all
claims arising from the take-or-pay contracts, it refused to
exercise its prosecutorial discretion to give effect to the release
and indemnity clauses in the 1989 and 1992 Settlement
Agreements. The Commission fails, then, to provide a reasoned
basis in the challenged Orders for its differing views of the
enforceability of such settlement agreements. See Balt. Gas &
Elec. Co. v. FERC, 26 F.3d 1129, 1135 (D.C. Cir. 1994); Nat’l
Fuel Gas Supply Corp. v. FERC, 811 F.2d 1563, 1569 (D.C. Cir.
1987) (citing Tenn. Gas Transmission Co. v. FERC, 789 F.2d
61, 62-63 (D.C. Cir. 1986)).
The reasoning underlying the Commission’s interpretation
of the release and indemnity clauses as not covering ad valorem
tax refunds is obscure; while a Commission order directed the
refunds, the parties’ take-or-pay contracts formed the basis for
Northern’s and Panhandle’s refund claims against Burlington.
As Burlington suggests, the Commission reads too much into the
language limiting the release and indemnification to claims
between the parties relating to the contracts; the contract
language does not reasonably permit exclusion of any claim that
relates to payments made under the contracts. The
Commission’s attempt to avoid the breadth of the release and
indemnity provision by suggesting that Panhandle is not the
claimant, but simply a vehicle for Commission enforcement
ignores the dual nature of the claim. While the Commission
seeks to enforce the NGPA ceiling prices, Panhandle’s claim
13
arises as a gas purchaser that made ad valorem tax payments to
Burlington, and both its claim and any Burlington liability not
only arise from the NGPA but also relate to the contracts under
which the payments were made.
Because the Commission has failed to provide “a reasoned
and consistent explanation to which we can defer,” AGD, 893
F.2d at 361, we grant the petition and remand the case for
further proceedings. We do not decide whether there could be
a legally relevant distinction between the Northern and
Panhandle Settlement Agreements and the Omnibus Settlement
Agreements, because pursuant to SEC v. Chenery Corp., 332
U.S. 194 (1947), the court will not consider any distinction not
offered by the Commission. Given our disposition, we do not
address Burlington’s claim under section 502(c) of the NGPA,
15 U.S.C. § 3412(c).
So ordered.