Well Category Determinations

AGENCY:

Federal Energy Regulatory Commission.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Federal Energy Regulatory Commission (Commission) proposes to amend its regulations to reinstate certain regulations involving well category determinations for Internal Revenue Code Section 29 tax credits, but limited to certain well recompletions commenced after January 1,1993. These regulations were deleted by the Commission in Order No. 567.

DATES:

Comments on the proposed rulemaking are due on or before April 10, 2000.

ADDRESSES:

File comments on the notice of proposed rulemaking with the Office of the Secretary, Federal Energy Regulatory Commission, 888 First Street, NE, Washington, DC 20426. Comments should reference Docket No. RM00-6-000.

FOR FURTHER INFORMATION CONTACT:

Marilyn Rand (Technical Information), Office of Pipeline Regulation, 888 First Street, NE, Washington, DC 20426, (202) 208-0444

Jacob Silverman (Advisory Attorney), Office of the General Counsel, 888 First Street, NE, Washington, DC 20426, (202) 208-2078

SUPPLEMENTARY INFORMATION:

In addition to publishing the full text of this document in the Federal Register, the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the Internet through FERC's Home Page ( http://www.ferc.fed.us ) and in FERC's Public Reference Room during normal business hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room 2A, Washington, DC 20426.

From FERC's Home Page on the Internet, this information is available in both the Commission Issuance Posting System (CIPS) and the Records and Information Management System (RIMS).

—CIPS provides access to the texts of formal documents issued by the Commission since November 14, 1994.

—CIPS can be access using the CIPS link or the Energy Information Online icon. The full text of this document will be available on CIPS in ASCII and WordPerfect 8.0 format for viewing, printing, and/or downloading.

—RIMS contains images of documents submitted to and issued by the Commission after November 16, 1981. Documents from November 1995 to the present can be viewed and printed from FERC's Home Page using the RIMS link or the Energy Information Online icon. Descriptions of documents back to November 16, 1981, are also available from RIMS-on-the-Web; requests for copies of these and other older documents should be submitted to the Public Reference Room.

User assistance is available for RIMS, CIPS, and the Website during normal business hours from our Help line at (202) 208-2222 (E-Mail to WebMaster@ferc.fed.us) or the Public Reference at (202) 208-1371 (E-Mail to public.referenceroom@ferc.fed.us).

During normal business hours, documents can also be viewed and/or printed in FERC's Public Reference Room, where RIMS, CIPS, and the FERC Website are available. User assistance is also available.

I. Introduction

The Federal Energy Regulatory Commission (Commission) proposes to amend its regulations to reinstate provisions for well category determinations. With such determinations, natural gas producers may claim tax credits provided for by section 29 of the Internal Revenue Code (Section 29 tax credit).

The Section 29 tax credits are available only for certain categories of high cost gas. In 1999, the United States Court of Appeals for the Tenth Circuit in True Oil Co. v. Commissioner of Internal Revenue (True Oil), held that, in order to obtain the tax credit, there must be a formal determination under the procedures provided by section 503 of the Natural Gas Policy Act of 1978 (NGPA) that the gas is high cost gas. However, after the January 1, 1993 decontrol of wellhead sales of natural gas by the Wellhead Decontrol Act of 1989 (Decontrol Act), the Commission, in 1994, in Order No. 567, deleted its regulations implementing NGPA ceiling prices, including the well category determination procedures under section 503, even though the tax credit was still available for gas produced through the year 2002. The True Oil decision has prompted the Commission to reconsider its prior action. In addition, a number of producers filed a petition requesting the Commission to reinstate the NGPA section 503 well category procedures because at present while producers are entitled to the section 29 tax credit for qualified gas, there is no procedure to obtain the prerequisite determination. The Department of Energy (DOE) filed in support of the producers' petition and requested the Commission to renew the well category section 503 procedures as consistent with the nation's energy policy of increasing the supply of domestically produced natural gas. As a result, the Commission is proposing to reinstate some of these regulations, with modifications, in order to permit qualifying parties to obtain the tax credit provided under section 29 of the Internal Revenue Code (Code). Determinations would be limited to well recompletions commenced after January 1, 1993, and which comply with IRS Revenue Ruling 93-54, as detailed below.

II. Background

A. The NGPA and the Adoption of the Tax Credits

The NGPA established a system of varying price ceilings for different categories of natural gas. Among other things, section 107(b) authorized the Commission to establish incentive prices for various categories of unconventional natural gas. Section 107(c) of the NGPA specifically identified four types of natural gas deemed to be “high-cost natural gas”, which were gas from (a) deep wells, (b) geopressurized brine, (c) coal seams, and (d) Devonian shale. In addition, section 107(c)(5) of the NGPA gave the Commission the authority to include in the term “high-cost natural gas” any natural gas “produced under such other conditions as the Commission determines to present extraordinary risks or costs.” NGPA section 503 set forth the procedures used for determining whether gas qualified as section 107(c) “high-cost natural gas.” Under that section the agency having regulatory jurisdiction with respect to the production of the natural gas in question (the jurisdictional agency) makes the initial determination, and submits it to the Commission. The Commission can either affirm, reverse, remand, make a preliminary finding on, or simply take no action, regarding the agency's determination. If the Commission takes no action within 45 days after receipt of the agency's determination, that determination becomes final. Judicial review is available under section 503 only if the Commission remands or reverses the determination.

In Order Nos. 99 and 99-A, the Commission exercised its authority under NGPA sections 107(b) and (c)(5) to define gas produced from tight formations as high-cost gas, and to establish an incentive ceiling price for that gas, and also set forth procedures for the designation of specific portions of formations as tight formations. After the designation of a portion of a formation as a tight formation, in order for production from a specific well to qualify as tight formation gas, the appropriate state or federal jurisdictional agency was required to make a determination that that well was producing gas from the formation which had been found to be a tight formation, and submit its determination to the Commission. In Williston Basin Interstate Pipeline Co. v. FERC, the Court held that jurisdictional agency tight formation determinations must be reviewed only through the procedural scheme set forth in NGPA section 503.

Two years after passage of the NGPA, Congress enacted section 29 of the Internal Revenue Code as part of the Crude Oil Windfall Profit Tax of 1980. Section 29 allowed taxpayers to claim a credit for qualified fuels (1) which were produced from wells drilled between January 1, 1980 and December 31, 1990, and (2) which were sold before January 1, 2001. The section 29 list of qualified fuels included only the NGPA section 107 (c)(2)-(4) categories, and tight formation gas under section 107(c)(5). Section 29(c)(2)(A) also provided that the determination whether gas falls into a category qualifying for the tax credit “shall be made in accordance with section 503 of the [NGPA].”

The Natural Gas Wellhead Decontrol Act of 1989 repealed all remaining NGPA price controls on wellhead sales of natural gas, as well as NGPA section 503, effective January 1, 1993. The Senate Committee on Energy and Natural Resources' Report on the 1989 Wellhead Decontrol Act stated, “The Committee intends that any incomplete section 503 procedures continue to be carried out by the state agencies and the FERC, so that the necessary determination can be made as to sales of gas delivered before contract expiration and decontrol.” The Senate Report also expressly noted that section 29 of the Code provided for tax credits for certain types of fuels which qualify under the NGPA section 503 procedures. The Senate Report stated that approval of the Decontrol Act, which repealed the NGPA sections referenced in section 29, was “not intended * * * to reflect an adverse judgment by the Committee as to the merits of tax credits for any categories of natural gas production that might be affected by such action.”

B. The Commission's Actions After Passage of the Decontrol Act

In February 1990, before full wellhead price deregulation took effect under the Decontrol Act, the Commission issued Order No. 519, terminating the incentive ceiling price for sales of tight formation natural gas produced from wells spudded or recompleted after May 12, 1990. Shortly thereafter, Congress, in the Revenue Reconciliation Act of 1990, extended the Section 29 tax credit so that it would be available for qualified fuels produced from wells drilled before January 1, 1993, and sold before January 1, 2003. That act also revised the terms of eligibility so that tight formation gas would be eligible for the tax credit even though the price for such gas was no longer regulated. However, that act made no change to the provision of Section 29 (c)(2)(A) that the determination of eligibility for the tax credit shall be made in accordance with NGPA section 503.

In Order No. 523, issued April 25, 1990, the Commission amended its regulations to conform them to the Decontrol Act. In that order the Commission recognized its duty to continue processing requests for well category determinations under NGPA section 503 to allow producers to obtain tax credits, even if the determinations no longer affected the price of the gas. After summarizing the statement in the Senate Report on the Decontrol Act that the Act was not intended to reflect an adverse judgment by the Committee as to the merits of tax credits for decontrolled gas, the Commission stated:

In view of the legislative history noted above which indicates that Congress did not intend the Decontrol Act to limit the availability of tax credits for qualified fuels (footnote), the Commission will continue to process well determinations, until January 1, 1993, in order to allow producers to obtain tax credits that are dependent upon such determinations even if the gas has been otherwise decontrolled.

Congress' decision in the Revenue Reconciliation Act of 1990 to reinstate the tax credit for tight formation gas even though the price for such gas was no longer regulated necessitated certain technical changes in the standards the Commission used to determine whether gas qualified as tight formation gas. On April 9, 1992, the Commission issued Order No. 539, making the necessary technical changes. In addition, Order No. 539 clarified the Commission's statement in Order No. 523 that it would only continue processing well determination requests until December 31, 1992. A concern had been expressed to the Commission that it would not be practical for the Commission to complete the processing of well determination requests with respect to wells drilled through December 31, 1992 by that same date, since ordinarily such requests are not filed until after the well is drilled. The Commission stated that both the House and Senate committee reports on the Decontrol Act had stated that decontrol on January 1, 1993, would not affect proceedings pending on that date. Therefore, the Commission concluded that Congress did not intend that repeal of NGPA Title I and section 503, would terminate the authority of the Commission to process well category applications filed with the jurisdictional agencies on or before December 31, 1992. Accordingly, the order stated that the Commission would continue to process notices of determination which were filed with the jurisdictional agencies by December 31, 1992, and received by the Commission by June 30, 1993.

On July 7, 1992, the Commission issued Order No. 539-A, denying rehearing of Order No. 539. On rehearing, no party contended that the Commission should continue to process well determination requests under NGPA section 503 for wells drilled or recompleted after January 1, 1993. However, parties did seek an extension of the December 31, 1992 date for producers to file applications with applicable jurisdictional agencies for well category determinations for pre-January 1, 1993 wells. The Commission denied that request, explaining that while both the jurisdictional agencies and the Commission have authority to complete the processing of applications for well category determinations under section 503 which were pending on December 31, 1992, there was no authority to commence new proceedings before jurisdictional agencies after that date. The Commission reiterated that the December 31, 1992 deadline was jurisdictional, stating:

In light of the fact that—effective January 1, 1993—decontrol applies to all section 503 procedures carried out by the state agencies and the FERC, the Commission clarifies that the December 31, 1992 and September 30, 1993 deadlines pertain to all NGPA categories, not just applications and determinations under section 107(c)(5).

However, the Commission extended the date by which jurisdictional agencies could submit their determinations to the Commission until September 30, 1993.

On July 12, 1993, the Commission issued Order 539-C, extending until April 30, 1994, the time for jurisdictional agencies to submit their determinations. The Commission explained that the reason for continuing to review agency determinations for a transition period, was “while NGPA Section 107 well category determinations have no price consequence, they are necessary to obtain the Section 29 tax credit.” However, the Commission reiterated that it “will not accept determinations where the well was spudded or recompletion commenced on or after January 1, 1993.”

C. The Internal Revenue Service's Recompletion Ruling

As discussed above, section 29 of the Code provides that, in order to qualify for the tax credit, gas must be produced from a well drilled before January 1, 1993. During the period the Commission was issuing the above orders, both the Commission and all the parties appear to have assumed that this provision of Section 29 meant that the tax credit would not be available for wells originally drilled before December 31, 1992, that were recompleted after December 31, 1992. In any event, no party raised the issue whether the Commission's refusal to process well determination requests for wells recompleted after December 31, 1992, would improperly prevent producers from obtaining tax credits for such wells.

On August 16, 1993, a month after the Commission issued Order No. 539-C, the IRS issued Revenue Ruling 93-54, which took a different view of the eligibility of recompletions after January 1, 1993 to receive the Section 29 tax credit. The IRS interpreted the provision of Section 29 that states that gas must be produced from a well drilled before January 1, 1993, as permitting tax credits for non-conventional fuels produced from a well that was drilled before January 1, 1993, through a post-January 1, 1993 recompletion in the well, as long as the recompletion does not involve additional drilling to deepen or extend the well. The IRS reasoned that the drilling deadline in Section 29 referred to the date of the initial drilling of the well, and not to the date of any subsequent recompletion in the portion of the well which had already been drilled.

After the IRS Revenue Ruling 93-54, the Commission received jurisdictional agency determinations for recompletions commenced after January 1, 1993. However, the Commission refused to process those submissions relating to those recompletions on the ground that the Decontrol Act's repeal of NGPA section 503 eliminated the Commission's authority to review well determinations for wells recompleted after December 31, 1992. For example, in Railroad Commission of Texas, the Commission returned two well determinations to the jurisdictional agency because they were for well recompletions commenced after January 1, 1993. The Commission observed that regardless of the Commission's action, “the IRS has the responsibility to determine whether production from a well that has not received a determination under NGPA section 503 is eligible for a tax credit.” In Oklahoma Corporation Commission and Oil Conservation Division, the Commission rejected that part of the jurisdictional agency's determination that related to recompletions after December 31, 1992.

Producers sought review of the Commission's action, and argued to the Court that the Commission had misapplied the Commission's own definition of recompletion, and that by refusing to process these determinations, the Commission was improperly denying them the ability to obtain the Section 29 tax credit they were entitled to because the IRS had stated that such a recompletion could receive the tax credit. In Marathon Oil Company versus FERC, (Marathon Oil) the Court upheld the Commission's refusal to process the post-December 31, 1992 recompletion determinations. The Court stated the IRS was the agency responsible for granting the tax credit, not the Commission. The Court noted that:

While the IRS might be required to apply FERC's substantive definition of tight formation gas, it does not seem to us obliged to employ the same eligibility limitations that the Commission has adopted. Indeed, a revenue ruling seems to indicate that the IRS will consider recognizing a tax credit for gas from wells that would no longer be eligible to receive a tight formation gas designation from FERC (citing Revenue Ruling 93-54).

The Court added that the Commission has obviously changed its mind as to the necessity of its role regarding tax credits, because the Commission had previously stated it was continuing to process well determinations after section 503 was repealed to enable parties to get the tax credit. The Court concluded since “the IRS may well simply ignore FERC's determination during its phase-out period” (i.e. the period after January 1, 1993), “FERC's actions in this case have no necessary legal significance bearing on the IRS' decision whether to grant the tax credit,” and denied the petitions for review.

The Court in Marathon did not directly discuss whether the Commission had the authority to process well determinations for recompletions commenced after the Decontrol Act's effective date. Rather, the Court concluded that there was no injury to the party from the Commission's action of not processing the determination because it did not foreclose the party from obtaining the tax credit from the IRS.

Following the Marathon decision, the Commission continued to decline to process jurisdictional agency determinations for post-December 31, 1992 recompletions. However, since it appeared that the IRS would permit the Section 29 credit for such recompletions without any Commission action, there did not seem to be any need for the Commission to reconsider its position.

In addition, on July 29, 1994, the Commission issued Order No. 567, deleting regulations that were no longer required due to the decontrol of wellhead sales of natural gas. Among the regulations the Commission deleted were those in Part 270 through Part 275 of its regulations which set forth eligibility requirements, filing requirements, and the procedures for making well determinations under section 503 of the NGPA. The Commission concluded that those regulations were no longer needed because the Decontrol Act had repealed NGPA section 503 and the deadline for jurisdictional agency determinations to be filed with the Commission had passed.

Thus matters stood from 1994 until the True Oil decision changed the legal landscape.

D. The 10th Circuit's True Oil Decision

In 1999, in True Oil v. Commissioner of Internal Revenue, the Tenth Circuit reviewed the IRS's denial of a claim of the Section 29 credit because the producer had not obtained a formal well category determination from the jurisdictional agency or the Commission. The well was completed in 1984, but due to an oversight, no well-category determination application was filed with the jurisdictional agency. There was no issue whether the well could have qualified for the tax credit if there had been a determination. On appeal, the producer asserted that the reference to section 503 of the NGPA in section 29(c)(2)(A) merely incorporated the Commission's substantive definitions of tight formation gas. It contended that for purposes of section 29(c)(2)(A), the taxpayer itself can make the initial determination of whether a well is producing from a tight formation by applying those substantive definitions. The IRS denied the tax credit because there had been no well category determination by any authority authorized to make such determination. The Tax Court upheld the IRS, and the 10th Circuit similarly rejected the producer's contention. The Court held that notwithstanding the D.C. Circuit's decision in Marathon Oil, certain IRS revenue rulings, and the Commission's last position on the lack of a need for a formal well determination under NGPA section 503 to qualify for the tax credit, “[a] producer must obtain a formal well-category determination before it can claim the Section 29 Credit.” The Court stated that, although section 29 has been amended more than once since the repeal of section 503 of the NGPA, Congress has never deleted the reference to section 503 from section 29.

The Court also specifically addressed the potential conflict between (1) the Commission's decision in Order No. 539 not to process well determinations for post-January 1, 1993 recompletions and (2) the IRS' revenue ruling one month later that gas produced from a post-January 1, 1993 recompletion could qualify for tax credits if it was produced in a well initially drilled before January 1, 1993. The producer contended that the IRS' revenue ruling should be interpreted as a finding that a well determination by the Commission was unnecessary for a producer to qualify for a tax credit for post-January 1, 1993 recompletions, since otherwise the revenue ruling would have been meaningless. The Court responded that revenue rulings do not have the force and effect of law and do not control when contrary to statute or the intent of Congress. Therefore, to the extent the revenue ruling could be interpreted to conflict with the requirement in section 29 of the Code for an NGPA section 503 determination, the Court held that it would not give the revenue ruling any weight. The Court then stated:

While it is apparently true that a well recompleted after January 1, 1993 will not qualify for the Section 29 Credit because it is no longer possible to obtain a well category determination, this court is not at liberty to ignore the plain language of the statute and hold that a well-category determination is not required to claim the Section 29 Credit. It is the responsibility of this court to interpret statutes, not rewrite them.

Thus, under True Oil, unless the Commission's NGPA section 503 procedures are available, the Section 29 tax credit cannot be obtained for post-January 1, 1993 recompletions, despite the IRS' revenue ruling that post-January 1, 1993 recompletions can qualify for the tax credit as long as there is no additional drilling to deepen or extend the well.

After the True Oil decision, a number of producers, supra n.4, filed a petition under Commission Rule 207, 18 CFR § 385.207, requesting that the Commission resume the NGPA section 503 well determination review process. They assert that unless the Commission does so, Congress' will would be thwarted because Congress provided that the producers could claim the Section 29 tax credit for qualified fuels until at least January 1, 2003 but at present there is no procedure to obtain it for gas produced from post-January 1, 1993 recompletions.

III. Discussion

The Commission proposes to resume processing jurisdictional agency well category determinations for certain recompletions commenced after January 1, 1993, so the Section 29 tax credit can be claimed for natural gas produced from these qualifying wells. Since the agency responsible for ruling on the Section 29 tax credit, the IRS, will permit the tax credit for certain recompletions after January 1, 1993, and in light of the True Oil decision requiring Commission action under NGPA section 503 procedures for a producer to obtain the Section 29 tax credit, the Commission believes it can, and should, reinstate those procedures for well recompletions commenced after January 1, 1993, in wells initially drilled before January 1, 1993, until the tax credit ends, which is now scheduled to cease on December 31, 2002. Below, the Commission first discusses its legal authority to resume processing jurisdictional agency well category determinations under NGPA section 503. The Commission then discusses the details of its proposal.

A. Legal Authority

The Commission recognizes that, in Order Nos. 539 and 539-A, the Commission stated that the Decontrol Act had terminated the Commission's authority to make well category determinations under NGPA section 503 with respect to all drilling activity after the effective date of decontrol, namely January 1, 1993. However, the Commission now concludes that Congress, in both the Wellhead Decontrol Act and the Revenue Reconciliation Act of 1990, intended to authorize the Commission to continue to review well category determinations under NGPA section 503 after wellhead decontrol, to the extent such determinations are necessary to permit qualifying producers to receive tax credits under section 29 of the Code.

At the time of Order Nos. 539 and 539-A, the Commission did not have to confront the possibility that its interpretation of the Wellhead Decontrol Act as terminating its authority to review well category determinations with respect to all post-December 31, 1992 “drilling activity” would affect the availability of the section 29 tax credit. It was only after Order No. 539-A that the IRS issued Revenue Ruling 93-54, interpreting section 29 of the Code, as amended by the Revenue Reconciliation Act of 1990, as permitting tax credits for post-January 1, 1993 recompletions in wells initially drilled before January 1, 1993, so long as the recompletion does not involve additional drilling to deepen or extend the well. While the Commission continued to refuse to perform well category determinations under NGPA section 503 for post-January 1, 1993 recompletions, the Commission suggested that its refusal to perform well determinations did not necessarily conflict with the IRS's revenue ruling. This was because the Commission believed a formal Commission well determination under NGPA section 503 might not be a prerequisite for a tax credit. Similarly, the D.C. Circuit in Marathon Oil concluded that the Commission's refusal to process well category determinations did not injure producers, because producers might obtain the tax credit from the IRS without a formal NGPA section 503 determination from the Commission. In Marathon Oil, the jurisdictional agency had made the determination that the gas was from a well that met the tight formation requirement. Thus, neither the Commission nor the D.C. Circuit have thus far had to address the question whether Congress intended to permit the Commission to make NGPA section 503 well category determinations with respect to post-December 31, 1992 drilling activity, where such determinations are a necessary prerequisite to obtaining tax credits Congress authorized in Section 29 of the Internal Revenue Code.

The Tenth Circuit's True Oil decision, combined with the IRS' interpretation of section 29 as authorizing tax credits for post-December 31, 1992 recompletions, now squarely presents this question to the Commission. In True Oil, the Court held that section 29 of the Internal Revenue Code requires a formal NGPA section 503 determination to obtain the Section 29 tax credit, since Section 29 states that the tight formation determination shall be made in “accordance with section 503 of the Natural Gas Policy Act of 1978.” Moreover, in True Oil, the Court specifically referred to post-January 1, 1993 recompletions as being subject to its ruling. The Court concluded:

Although the result of our holding may appear unfair to producers who failed to obtain well-category determinations while they were being issued by FERC or to those producers who recomplete their wells after January 1, 1993, the judiciary is not “licensed to attempt to soften the clear import of Congress' chosen words whenever a court believes those words lead to a harsh result (citing case).”

Thus, True Oil requires that in order to obtain the Section 29 tax credit the entire section 503 procedure must be followed, including Commission review of jurisdictional agency well determinations.

Therefore, unless the Commission recommences processing of requests for well category determinations under NGPA section 503, producers will be unable to obtain tax credits for gas produced from post-January 1, 1993 recompletions that qualify under Revenue Ruling 93-54. This will be true despite the fact the IRS has interpreted Section 29 of the Code, as amended by the Revenue Reconciliation Act of 1990, as authorizing tax credits for such gas. The Commission defers to the IRS's interpretation of Congress's intent in enacting the current version of section 29 as it applies to recompletions. This is because the IRS is the agency that administers the Code, and is responsible for determining whether the section 29 tax credit should be permitted in a particular situation. In light of the IRS' view that Congress intended its amendment of section 29 of the Internal Revenue Code by the Revenue Reconciliation Act of 1990 to permit tax credits for post-January 1, 1993 recompletions, we believe Congress must also have intended the Commission to continue the NGPA section 503 procedures after the decontrol date for those recompletions. Otherwise, the producers could not obtain the very credits the IRS has found Congress intended to authorize.

This conclusion is buttressed by the legislative history of the Decontrol Act. As the Commission found in Order No. 523, supra, that legislative history “indicates that Congress did not intend the Decontrol Act to limit the availability of tax credits for qualified fuels (footnote) * * * .” In particular, there is the statement in the Senate Report accompanying the Decontrol Act that refers to the tax credit for qualifying fuels and states that the repeal in the Decontrol Act of NGPA sections referenced in Section 29 of the Code was not intended to reflect any adverse judgment on the merits of the tax credit. Moreover, the Chairman of the Senate Committee involved in the Decontrol Act had written to the Commission that until the Code was amended to provide a new mechanism for qualification for the gas subject to the section 29 tax credit, the Commission should continue to make the section 503 determination. Since that time the Code has not been amended to provide any other mechanism for obtaining a formal determination even though the Section 29 tax credit is available at least through December 31, 2002.

Also, the Revenue Reconciliation Act of 1990 permitted tight formation gas to qualify for tax credits, even though it was no longer subject to NGPA ceiling prices. The Commission accordingly continued to process requests for well category determinations through April 1994 to aid producers in obtaining the tax credits, even though such determinations were no longer necessary to allow the gas to qualify for NGPA ceiling prices. Thus, despite the fact Congress originally enacted the NGPA section 503 well category determination procedures for the purpose of qualifying gas for NGPA ceiling prices, the Commission has previously recognized that those procedures can continue to be used, even where the determination has no significance for purposes of NGPA ceiling prices. This fact also suggests that the Wellhead Decontrol Act's elimination of all such price ceilings as of January 1, 1993, should not be viewed as requiring the Commission to cease well category determinations for tax credit purposes as of that date. Congress had previously unlinked eligibility for the tax credit from the existence of NGPA ceiling prices in 1990, and expanded the tax credit to tight formation gas.

Enabling producers to receive the tax credit would also be consistent with Congress' desire to encourage, enhance, and expand the United States natural gas supply base, allowing legitimately qualified producers to call upon a tax credit associated with developing and producing gas from formations and wells that otherwise might not have been available to supply consumers.

In summary, since the agency responsible for ruling on the Section 29 tax credit, the IRS, will permit the tax credit for certain recompletions after January 1, 1993, and in light of the True Oil decision which requires Commission action under NGPA section 503 procedures for a producer to obtain the Section 29 tax credit, the Commission believes it can, and should, reinstate those procedures for well recompletions commenced after January 1, 1993, in wells initially drilled before January 1, 1993, until the tax credit ends, which is now scheduled to cease on December 31, 2002. In light of this, the Commission proposes to reinstate these procedures until the later of June 30, 2003, or six months after the tax credit is no longer available for production from any well should Congress further extend the tax credit.

B. Details of the Commission's Proposal

The Commission proposes to accept jurisdictional agency determinations on those post-January 1, 1993 recompletions which satisfy the IRS' definition under Revenue Ruling 93-54, namely, that the recompletion does not involve additional drilling to deepen or extend the well. For this purpose, the Commission proposes to reinstate regulations necessary to (1) define the categories of high cost gas eligible for the tax credit and (2) provide procedures for jurisdictional agencies to file their determinations and the Commission to review those determinations. The Commission's action to provide a mechanism for claiming the section 29 tax credit for gas produced from these recompleted wells should have no consumer price impact. This is because the wellhead ceiling prices were terminated long ago, and therefore the only effect of this proposed rule will be to enable producers to obtain the tax credit. DOE states that the tax credits will help increase the Nation's supply of domestically produced natural gas by permitting unconventional gas wells to continue to operate. In addition to adding to the nation's natural gas supply, DOE states that continued operation of unconventional gas wells will be important in testing the new generation of petroleum technology.

With respect to the tight formation gas category, the Commission action will be limited to reviewing the jurisdictional agency determinations for qualifying recompletions in already designated tight formations. Well determinations for recompletions in coal seams and Devonian Shale will also be accepted. The Commission proposes not to accept determinations with respect to either initial completions in wells spudded before January 1, 1993, or any pre-1993 recompletions. In Order No. 539, the Commission established deadlines for filing applications involving wells that were spudded and/or recompleted prior to January 1, 1993, and the time has long passed when those applications should have been filed. Also, in their petition, producers have not requested that the Commission accept determinations with regard to wells spudded or recompleted before January 1, 1993. However, parties may comment on this matter. Finally, the substantive rulings that the Commission has made previously concerning well determinations and the qualification under these NGPA section 107 category will continue to govern.

The Commission estimates that there are probably at least 4,000 recompletions that were performed between 1993-1999 for which a determination may be sought under the proposed rule, and that another 1,500 recompletions may occur between 2000-2002, when the tax credit is now scheduled to end. The Commission finds the assistance of the State and Federal agencies to be essential to its ability to process the substantial number of new well category determination requests the Commission anticipates will be filed under the proposed rule. NGPA section 503 requires the jurisdictional agencies to make an initial well category determination, unless, as permitted by section 503(e)(2), the Commission enters into an agreement with a State or Federal agency under which the Commission would make the determinations that would otherwise be made by that agency. The Commission intends not to exercise its discretion to enter into any such agreement. Since the Commission's role in the producing area has virtually been eliminated, the Commission's resources in this area have been substantially reduced. Thus, the Commission must rely upon the jurisdictional agencies to develop the full record in these proceedings, and the Commission will limit its role to reviewing initial determinations made by the jurisdictional agencies. The Commission requests comments from the jurisdictional agencies whether they will make initial determinations under NGPA section 503, if this rule is adopted. If the jurisdictional agencies are not prepared to do this, the Commission may not proceed with the proposed rule.

Accordingly, the Commission is proposing to reinstate those portions of its prior regulations, with appropriate modifications, that are necessary to allow producers to obtain well category determinations solely for tax credit purposes. In general, the proposed regulations retain the definitions, the filing and notice requirements, and the review procedures that the Commission promulgated prior to the termination of the regulations due to the Decontrol Act. The significant changes are identified below.

Proposed § 270.101 contains the necessary definitions to implement well determination procedures to receive determinations for tax credit purposes. Definitions for tight formation gas, coal seam gas and Devonian shale gas, three of the types of gas eligible for tax credits, are included. The Commission is not including a definition for gas produced from geopressured brine since our past experience shows that there is no gas likely to qualify for this category given the Commission's definition of geopressured brine and the current state of technology. Comments on this matter are requested.

Proposed § 270.201 limits the availability of the determination procedures to recompletions commenced after January 1, 1993, in wells initially drilled before that date. As discussed above, this reflects the Commission's decision to limit the determination process to correct the situation caused by the True Oil decision, but parties may comment on this matter. Similarly, the Commission is also not proposing any regulations that would allow a jurisdictional agency to designate additional tight formation areas. The designation of additional tight formations would require the Commission to review extensive geologic data. This could place an undue burden on the Commission. Also, it appears likely that most producing formations that qualify as tight formations were designated as such during the decade when such a designation enabled producers to qualify for a higher price ceiling.

Consistent with the Commission's prior NGPA regulations, the Commission is also proposing to revise the delegation authority to the Director of the Office of Markets, Tariffs and Rates (OMTR) or the Director's designee in § 375.307 to include tolling letters advising jurisdictional agencies notices of determination are incomplete. In addition, to facilitate the Commission's review under the reinstated procedures, the Commission is proposing to delegate to the Director of OMTR the authority to issue preliminary findings under the proposed section. However, the Commission is not proposing to delegate the authority to issue a final order to the Director of OMTR.

The Commission is also proposing to revise its regulations by adding § 381.401 to the regulations to specify a filing fee of $115 per well determination. This reflects the last fee ($100) for review of a jurisdictional agency well determination that was in effect prior to the repeal of the determination procedures, adjusted for inflation. It is the Commission's best estimate, at this time, of the cost to the Commission to review well determinations. As in the past, this fee will be revised annually in accordance with § 381.104. In addition, the past billing procedures will apply, whereby the Commission will bill each producer at the end of each billing year based on the number of determinations received during that year for that producer.

The proposed regulations contain no provisions permitting a jurisdictional agency to request alternative filing requirements. The proposed filing requirements are not unduly burdensome and are readily available to producers. However, since the Commission previously approved alternative filing requirements for Devonian shale wells in Michigan based on unique circumstances, the proposed regulations reflect those previously-approved alternate filing requirements.

The Commission is reinstating and revising FERC Form No. 121, which a producer files with an application for determination. This form, a copy of which is attached, identifies the producer filing the application, the type of determination the producer is seeking, and information identifying the well and the completion location of the well. The Commission is considering whether or not to require producers to file this form electronically, to facilitate the Commission's noticing of determinations and requests comments on this issue.

IV. Environmental Statement

The Commission excludes certain actions not having a significant effect on the human environment from the requirement to prepare an environmental assessment or an environmental impact statement. The instant proposed rule reinstates regulations that were previously in effect, and does not substantially change the effect of the underlying legislation or the regulations being revised. Accordingly, no environmental consideration is necessary.

V. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612, requires rulemakings to contain either a description and analysis of the effect that the proposed rule will have on small entities or a certification that the rule will not have a significant economic impact on a substantial number of small entities.

In Mid-Tex Elec. Coop. v. FERC, 773 F.2d 327 (D.C. Cir. 1985), the court found that Congress, in passing the RFA, intended agencies to limit their consideration “to small entities that would be directly regulated” by proposed rules. Id. at 342. The court further concluded that “the relevant ‘economic impact’ was the impact of compliance with the proposed rule on regulated small entities.” Id. at 342.

The instant proposed rule reinstates regulations that were previously in effect, and would enable entities to obtain Internal Revenue Code Section 29 tax credits. There is no reporting requirement, merely the ability to obtain a formal determination that gas qualifies for the tax credit. The Commission certifies that this proposed rule will not have a significant economic impact upon a substantial number of small entities.

VI. Public Reporting Burden and Information Collection Statement

The following collections of information pursuant to Part 270 contained in this proposed rulemaking are being submitted to the Office of Management and Budget (OMB) for review under Section 3507(d) of the Paperwork Reduction Act of 1995. These information collection requirements were previously in effect until the removal of the Commission regulations implementing NGPA section 503 and are now proposed to be reinstated.44 U.S.C. 3507(d)

Comments are solicited on the Commission's need for this information, whether the information will have practical utility, the accuracy of the provided burden estimates, ways to enhance the quality, utility, and clarity of the information to be collected, and any suggested methods for minimizing respondents' burden, including the use of automated information techniques. The burden estimates for complying with this proposed rule are as follows:

Public Reporting Burden: Estimated Annual Burden

Total Annual Hours for Collection (Reporting + Record keeping) = 11,268.

Based on the Commission's previous experience for processing applications for well determinations and completion of the FERC Form 121, it is estimated that about 1800 filings per year will be made over the next three years at a burden of 6.01 hours per filing for the application, .25 hours per filing for the Form 121, for a total of 11,268 hours under the proposed regulations. These two collections of information were eliminated after passage of the Wellhead Decontrol Act of 1989. The Commission is requesting that OMB reinstate these data collections to their inventory. The total hours associated with the proposed rule will be added to the total hours for the Commission's collections of information as well as to OMB's inventory.

Information Collection Costs: The Commission seeks comments on the costs to comply with these requirements. It has projected the average annualized cost for all respondents to be:

Annualized Capital/Startup Costs: $201,425.

Annualized Costs (Operations & Maintenance) $0.00.

Total Annualized Costs: $201,545.

The OMB regulations require OMB to approve certain information collection requirements imposed by agency rule. Accordingly, pursuant to OMB regulations, the Commission is providing notice of its proposed information collections to OMB.

Title: FERC Form 121, Application for Maximum Lawful Price under the Natural Gas Policy Act of 1978, FERC-568, Well Category Determinations.

OMB Control No: 1902-0038 and 1902-0112.

The applicant shall not be penalized for failure to respond to this collection of information unless the collection of information displays a valid OMB control number.

Respondents: Business or other for profit, including small businesses.

Frequency of Responses: On occasion.

Necessity of the Information: The proposed rule reinstates the regulations to establish the procedures for the Commission to make determinations under NGPA Section 503. A determination by the Commission will enable producers of natural gas to claim credits for high cost gas as provided for by Section 29 of the Internal Revenue Code. The 10th Circuit held in a recent decision that a formal section 503 determination is required to obtain the Section 29 tax credit. The implementation of these data requirements will help the Commission to carry out its responsibilities under the NGPA.

Internal Review: The Commission has assured itself, by means of its internal review, that there is specific, objective support for the burden estimates associated with the information requirements. The Commission's Office of Markets, Tariffs, and Rates will use the data submitted by the information collections to determine whether it should affirm, reverse, remand, make a preliminary finding on, or take no action on an initial determination by a jurisdictional agency. The agency's initial determination is as to whether any natural gas produced under extraordinary conditions in terms of risks or costs can be considered as “high-cost natural gas” under Section 107(c) of the NGPA. These requirements have been reinstated as a result of the Court's decision to require well determinations in order to obtain Section 29 tax credits. These tax credits are available for qualified fuels through January 1, 2003 unless Congress should extend the program. These requirements conform to the Commission's plan for efficient information collection and management within the natural gas industry.

Interested persons may obtain information on the reporting requirements by contacting the following: Federal Energy Regulatory Commission, 888 First Street, NE Washington, DC 20426, [Attention: Michael Miller, Office of the Chief Information Officer, Phone: (202) 208-1415, fax: (202) 208-2425, email: mike.miller@ferc.fed.us].

For submitting comments concerning the collection of information(s) and the associated burden estimate(s), please send your comments to the contact listed above and to the Office of Management and Budget, Office of Information and Regulatory Affairs, Washington, DC 20503, [Attention: Desk Officer for the Federal Energy Regulatory Commission, phone: (202) 395-3087, fax: (202) 395-7285.]

VII. Public Comment Procedures

Prior to taking final action on this proposed rulemaking, we are inviting written comments from interested persons. The Commission also is notifying each affected State Commission and is giving reasonable opportunity to each State Commission to present its views for our consideration. All comments in response to this notice should be submitted to the Office of Secretary, Federal Energy Regulatory Commission, 888 First Street, NE, Washington, DC 20426, and should refer to Docket No. RM00-6-000. An original and fourteen (14) copies of such comments should be filed with the Commission on or before April 10, 2000.

In addition to filing paper copies, the Commission encourages the filing of comments either on computer diskette or via Internet E-Mail. Comments may be filed in the following formats: WordPerfect 8.0 or lower version, MS Word Office 97 or lower version, or ASCII format.

For diskette filing, include the following information on the diskette label: Docket No. RM00-6-000; the name of the filing entity; the software and version used to create the file; and the name and telephone number of a contact person.

For Internet E-Mail submittal, comments should be submitted to “comment.rm@ferc.fed.us” in the following format. On the subject line, specify Docket No. RM00-6-000. In the body of the E-Mail message, include the name of the filing entity; the software and version used to create the file, and the name and telephone number of the contact person. Attach the comments to the E-Mail in one of the formats specified above. The Commission will send an automatic acknowledgment to the sender's E-Mail address upon receipt. Questions on electronic filing should be directed to Brooks Carter at: 202-501-8145, E-Mail address: brooks.carter@ferc.fed.us.

Commenters should take note that, until the Commission amends its rules and regulations, the paper copy of the filing remains the official copy of the document submitted. Therefore, any discrepancies between the paper filing and the electronic filing or the diskette will be resolved by reference to the paper filing.

All written comments will be placed in the Commission's public files and will be available for inspection in the Commission's Public Reference room at 888 First Street, NE, Washington DC 20426, during regular business hours. Additionally, comments may be viewed, printed or downloaded remotely via the Internet through FERC's Homepage using the RIMS or CIPS link. RIMS contains all comments but only those comments submitted in electronic format are available on CIPS. User assistance is available at 202-208-2222, or by E-Mail to rimsmaster@ferc.fed.us.

List of Subjects

18 CFR Part 270

• Natural gas
• Price controls
• Record and recordkeeping requirements

18 CFR Part 375

• Authority delegations (Government agencies)
• Seals and insignia
• Sunshine Act

18 CFR Part 381

• Natural gas
• Reporting and recordkeeping requirements

In consideration of the foregoing, the Commission proposes to amend Part 270, Chapter I, Title 18 of the Code of Federal Regulations, as follows:

1. Part 270 is added to read as follows:

PART 270—PROCEDURES GOVERNING WELL DETERMINATIONS FOR TAX CREDIT PURPOSES

Subpart A—General Definitions

Sec.

§ 270.101 General definitions

Subpart B—Determination by Jurisdictional Agencies

§ 270.201 Applicability

§ 270.202 Definition of determination

§ 270.203 Determinations by jurisdictional agencies

§ 270.204 Notice to the Commission

Subpart C—Requirements for Filing with Jurisdictional Agencies

§ 270.301 General requirement

§ 270.302 Occluded natural gas produced from gas seams.

§ 270.303 Natural gas produced from Devoian Shale

§ 270.304 Tight formation gas

§ 270.306 Recompletions in Devonian Shale wells in Michigan.

Subpart D—Identification of State and Federal Jurisdictional Agencies

§ 270.401 Jurisdictional agency

Subpart E—Procedures for Commission Review of Jurisdictional Agency Determination

§ 270.501 Publication of Notice from Jurisdictional Agency

§ 270.502 Commission review of final determination

§ 270.503 Protests to the Commission

§ 270.504 Contents of protests to the Commission

§ 270.505 Procedure for reopening determinations

§ 270.506 Confidentiality

Authority: 15 U.S.C. 717-717w, 3301 et. seq.; 42 U.S.C. 7101 et seq.; EO 12009, 3 CFR 1978 Comp., p. 142.

Subpart A—General definitions

Subpart B—Determinations by Jurisdictional Agencies

Subpart C—Requirements for Filings With Jurisdictional Agencies

Subpart D—Identification of State and Federal Jurisdictional Agencies

Subpart E—Procedures for Commission Review of Jurisdictional Agency Determinations

PART 375—THE COMMISSION

3. The authority citation for part 375 continues to read as follows:

Authority: 5 U.S.C. 551-557; 15 U.S.C. 717-717w, 3301-3432; 16 U.S.C. 791-825r, 2601-2645; 42 U.S.C. 7101-7352.

4. § 375.307 paragraph (p) is added to read as follows:

PART 381—FEES

Subpart D—Fees Applicable to the Natural Gas Policy Act of 1978

5. The authority citation for part 381 will continue to read as follows:

Authority: 15 U.S.C. 717-717W; 16 U.S.C. 791-828c, 2601-2645; 31 U.S.C. 9701; 42 U.S.C. 7101-7352; 49 U.S.C. 60502; 49 App. U.S.C. 1-85.

6. Section 381.401 is added to read as follows: