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Vol. 14, No. 40 Week of October 04, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Tax tussle rages

Tens of millions at stake as lawyers argue trans-Alaska pipeline’s value

Wesley Loy

For Petroleum News

The state, major oil companies and a trio of local governments are locked in an epic battle over how much the trans-Alaska oil pipeline is worth for property tax purposes.

The parties recently completed an arduous, six-week trial in Anchorage involving dozens of witnesses. The case is now on hiatus until early November, when lawyers on all sides will make closing arguments to state Superior Court Judge Sharon Gleason, who is hearing the case without a jury.

The case centers on the question of how to value the 800-mile pipeline, which has been carrying North Slope crude oil to the tanker port at Valdez since 1977.

The five companies that own the pipeline — BP, ExxonMobil, ConocoPhillips, Chevron and Koch Industries –— believe state officials have valued the pipeline too high.

The three local governments — the North Slope Borough, the Fairbanks North Star Borough and the city of Valdez — believe the state valuation isn’t high enough.

In the middle is a state panel that set the pipeline’s value at $4.3 billion for 2006, the tax year at issue in the trial.

At stake is potentially tens of millions of dollars in property taxes — the difference between what the pipeline owners believe they owe and what the state and the local governments aim to collect and divide among themselves.

The judge has indicated she’ll likely render a verdict sometime after the first of the year.

Regardless of her ruling, the court fight probably won’t end there without a settlement of some sort. The case is expected to advance to the Alaska Supreme Court.

What’s more, additional lawsuits are piling up like pancakes, in the words of one attorney, as the pipeline owners file new challenges to the state’s escalating assessments for each tax year since 2006.

How pipeline was valued

The trans-Alaska pipeline system is an indispensible working asset not only for the companies that produce oil from Prudhoe Bay and other fields on the North Slope, but for the state economy.

Today it carries about 700,000 barrels of oil per day, well under half the peak throughput of more than 2.1 million barrels in early 1988.

Property taxes on the oil industry are a major source of revenue for the state, though not as large as three other oil revenue streams — production taxes, royalties and corporate petroleum income taxes.

The state Department of Revenue annually assesses the value of the pipeline and sends the owners a bill.

The owners didn’t like the department’s assessment of $3.3 billion for 2006, so they filed an appeal, arguing the correct value was $1 billion.

The local governments also appealed, claiming a value of $5.6 billion. Because the state has responsibility for assessing oil and gas property statewide, its pipeline valuation is critical for the local governments, as a higher assessment means greater property tax collections on the pipeline segments running through their respective regions.

A state official, the petroleum property tax assessor, weighed the company and local government appeals and, on April 3, 2006, adjusted the pipeline value up a bit to $3.6 billion.

The pipeline owners and local governments appealed again, this time to the state Assessment Review Board, a five-member, governor-appointed panel that hears oil and gas property assessment appeals.

The board convened for four days in May 2006 and on the last day of the month issued a 30-page decision pegging the pipeline assessed value at $4.3 billion.

From there, the pipeline owners and two of the local governments, the Fairbanks North Star Borough and the city of Valdez, appealed to the Superior Court.

Dueling appraisal methods

A key complaint of the owner companies is that state officials didn’t use the right method to determine the value of the pipeline.

In court filings, lawyers for the companies say they favor an “income approach to value,” where the revenue from tariffs charged for shipping oil through the pipeline is considered.

“The well-accepted principle is that a property is worth what it will earn,” says one company filing from February 2007.

Department of Revenue officials favor a different approach known as “replacement cost new less depreciation,” which they say more accurately estimates the full and true value for property tax purposes.

Randall Hoffbeck, who was then the state petroleum property tax assessor, said in his April 3, 2006, decision that the department’s valuation approach was appropriate.

Pipeline rates are regulated to ensure investors receive an adequate return on their investment in the property. Valuing the pipeline for that purpose won’t capture its full value for property tax purposes, Hoffbeck said.

“The relevant question to ask,” he wrote, is how much would the shippers for whom the pipeline was designed and built pay to replace the property.

Oil company lawyers insist, however, that their income approach is the correct way to value the pipeline.

The taxing authorities oppose that method “because tariff revenues are declining,” thus resulting in lower assessed values, company lawyers wrote in their February 2007 filing.

The preemption play

Shortly before the trial got under way on Aug. 10, the pipeline owners took a significant new tack in their fight to tamp down the state’s assessed value.

They filed a motion on July 17 asking the judge to declare them the winners in the case based on the argument that the ruling from the state Assessment Review Board is improper and “preempted by federal law.”

In rejecting tariff income as inadequate for valuing the pipeline, state officials in effect “second-guess” the Federal Energy Regulatory Commission, which has exclusive authority for approving interstate oil transportation rates, lawyers for the pipeline owners argue.

That’s a problem under the supremacy clause of the U.S. Constitution, the lawyers say, as a state law or agency decision can’t conflict with a federal law or agency decision.

“Federal law trumps state law,” attorney Mark Horning said during a Sept. 30 court hearing on the motion.

Ken Diemer, the assistant attorney general leading the state’s defense of its pipeline valuation, said the federal preemption argument “is completely inapplicable to this proceeding.”

Diemer, in court filings, has argued the state’s sovereign power to levy property taxes shouldn’t be confused with the FERC’s oversight of pipeline tariffs.

He said after the hearing he suspects the pipeline owners raised the preemption issue merely as “a feint” to steer the case into federal court, where they might feel their chances are better.

At the hearing, Robin Brena, an attorney for the Fairbanks North Star Borough, was blunt in his assessment of the preemption argument.

“I think it’s ridiculous,” he told the judge.

Gleason said she’d take the motion under advisement and possibly rule on it the week ending Oct. 2.

The trial’s closing arguments are scheduled for Nov. 2-3.

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