Operational Planning Within The Price Regulatory And Windfall Profit Tax Framework

Federal regulation of prices charged by producers of crude oil was based on a "property" concept focusing on the "right to produce" as it existed in 1972, which the Department of Energy (DOE) and its predecessor, the Federal Energy Administration (FEA) attempted to define and clarify through numerous Rulings, Interpretations and Decisions. Producers often faced substantial liabilities in the context of compliance actions by the Economic Regulatory Administration of the Department of Energy by reason of their failure to designate properties in accordance with Department of Energy Regulations and Rulings. By the same token, however, Producers often failed to take advantage of the substantial flexibility inherent in the DOE property definition. Unfortunately the ambiguities, interpretative problems, uncertainties and risks which have attended property determinations and designations under crude oil pricing regulations did not cease to exist on January 28, 1981, when President Reagan signed an Executive Order removing all federal price controls on crude oil. The Crude Oil Windfall Profit Tax Act of 1980 relies upon and incorporates by reference the Department of Energy regulations as they existed in June, 1979, for purposes of determining the appropriate taxation tier for crude oil-- "without regard to decontrol of oil prices or any other termination of the application of such regulations. The term "property" which was the pivotal concept in determining whether crude oil qualified as "new oil," production from a "stripper property" or "newly discovered crude oil" under the June, 1979, regulations has been defined in Section 150.4996-I of the excise tax regulations under the windfall profit tax as having "the same meaning as that term is given by the energy regulations. Just as a failure to understand and properly apply the property definition under price regulations resulted in substantial over or undercharges by producers, such failure could result in taxation at an improper tier under the Crude Oil Windfall Profit Tax Act of 1980, resulting in some instances, in taxation of crude oil production at substantially higher rates under one tier than would apply under another tier for which the production could also properly qualify. The following discussion is intended only to point out the factors involved in a property analysis and is not intended to serve as a complete guide to property determinations.