As Recommended by Senate Committee on



Sub. for S.B. 686 would establish a mechanism for distributing certain refunds paid by natural gas producers to interstate or intrastate pipelines as a result of an order by the Federal Energy Regulatory Commission (FERC). That order required producers to make reimbursements to pipelines retroactively from October 4, 1983 through June 28, 1988. The pipelines, for their part, were required to transmit the money to eligible retail consumers. However, a portion of those refunds, defined in the bill as "undisbursed," were collected by the pipelines but were not paid to intended consumers because those consumers could not be located. (The origin of FERC's action is summarized in the Background section below.)

The bill would require pipelines to remit the undisbursed refunds to the State Treasurer. The State Treasurer must record the specific amount of each undisbursed refund. The State Treasurer also must deposit the entire amount of each undisbursed refund into the Natural Gas Refund Fund, to be established as an interest-bearing account.

The bill would authorize any retail consumer who claims a share of the undisbursed refunds to apply to the KCC and, if so entitled, to receive a refund, with interest, from the Natural Gas Refund Fund. A pipeline could also apply for a refund on behalf of the consumer. The KCC would adjust the account of each producer to reflect reimbursements to eligible retail consumers. On or after August 31, 2000, the KCC would authorize payment to producers of any remaining amounts, including interest, of undisbursed refunds that had not been paid to retail consumers. The Natural Gas Refund Fund would be abolished on September 1, 2000.

The bill would take effect upon publication in the Kansas Register.


S.B. 686 was requested by Senator Stephen Morris in an effort to assist Kansas producers. The bill has its origins in a determination made in 1974 by the Federal Power Commission, FERC's predecessor, that Kansas ad valorem tax qualified for recovery under the Natural Gas Act as a severance tax, to be recovered in wellhead rates. FERC subsequently authorized recovery of the severance tax in rates under Section 110 of the Natural Gas Policy Act of 1978. In 1983, Northern Natural Gas, an interstate pipeline company, petitioned FERC to reconsider the Federal Power Commission's Kansas tax ruling. Northern Natural Gas contended that the Kansas ad valorem tax did not qualify as a severance tax. Consequently, the tax could not be collected from natural gas purchasers under Section 110 of the Natural Gas Policy Act. In 1986 and 1987, FERC denied Northern Natural Gas' request for rehearing and reaffirmed its earlier position that the Kansas ad valorem tax qualified as a severance tax. Colorado Interstate Gas Company appealed to the United States Court of Appeals for the D.C. Circuit the decision by FERC to reject Northern Natural Gas' petition. In 1988, the D.C. Circuit Court remanded FERC's order for further explanation as to why the Kansas tax qualified as a severance tax under Section 110 of the Natural Gas Policy Act. In 1993, five years after the Court's decision, FERC issued its order on remand and established that natural gas producers should not be able to recover the cost of the Kansas tax and ordered the payment of refunds by producers retroactive to 1988--the date of the Colorado Interstate Gas decision. Producers appealed the decision to the D.C. Circuit Court, which concurred with FERC that the Kansas ad valorem tax was not eligible for recovery. The D.C. Circuit Court ordered refunds for production retroactive to October 1983--the date upon which notice was published of Northern Natural Gas' petition in the Federal Register. Following that decision, producers filed petitions with the Supreme Court but on May 12, 1997, the Supreme Court refused to hear the appeal.

The introduced version of the bill was supported by Ron Hein, representing Pioneer Natural Resources USA, Inc. and, in written testimony, by Erick Nordling, Southwest Royalty Owners Association. KCC staff raised several concerns with the introduced version of the bill. The bill was opposed by Don Schnacke, Kansas Independent Oil & Gas Association. Mr. Schnacke also expressed concerns with the substitute bill recommended by the Senate Committee. He noted that the bill attempts to encroach on federal jurisdiction.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at