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Vol. 16, No. 2 Week of January 09, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Trans-Alaska pipeline owners ask for review of costly tax ruling

Owners of the trans-Alaska oil pipeline are appealing an expensive loss in a property tax case to the Alaska Supreme Court.

Meantime, the owners have failed so far in their bid to replace the lower court judge who handed them the tax defeat.

State Superior Court Judge Sharon Gleason of Anchorage last May ruled the pipeline system’s 2006 value for property tax purposes was $9.98 billion, far greater than the $850 million the owners had argued.

Gleason’s ruling, if upheld, will mean the owners will have to pay an extra $113 million in state and municipal property taxes for 2006 alone.

The owners are challenging tax assessments for subsequent years in Gleason’s court.

The 800-mile pipeline system carries Alaska North Slope crude oil from Prudhoe Bay south to the tanker port at Valdez.

Points on appeal

Owner companies BP, ConocoPhillips, ExxonMobil, Chevron and Koch Industries, along with their management consortium, Alyeska Pipeline Service Co., contend the Superior Court judge erred on a number of points.

Among the points the owners are raising:

• The judge adopted “a fundamentally wrong method of valuation” not authorized under state statutes, resulting in “unequal, excessive and improper valuation.”

• The judge “erred in ignoring known conditions affecting the value of the assessed property,” violating the due process rights of the companies under the U.S. and Alaska constitutions.

• The judge should have held that the method used to value the pipeline was “preempted” under the supremacy clause of the U.S. Constitution, as well as the Federal Energy Regulatory Commission’s “filed rate doctrine.”

• The lower court incorrectly based its pipeline valuation “on the value of property, including oil,” that is not taxable under the state’s oil and gas property tax statute.

• The judge failed to “account properly for all components of depreciation.”

• The lower court’s valuation failed to comply with a state statute concerning “the determination of proven reserves.”

The pipeline owners aren’t alone in appealing to the state Supreme Court.

Local governments that share in tax collections on oil and gas property, and thus prefer a higher assessed value on the pipeline, are raising a few points of their own on cross-appeal. The governments include the Fairbanks North Star Borough, the North Slope Borough and the city of Valdez.

One point the city of Valdez is raising: The lower court “erred in making a $981,781,545 economic obsolescence deduction in the value” of the pipeline.

Judge stays put

The pipeline owners have challenged the state’s property tax assessment for the years subsequent to 2006 as too high.

Gleason is scheduled to preside over a trial, possibly to begin in the fall, on the 2007, 2008 and 2009 tax years. However, the owners asked in November that the trial be postponed, arguing it would be best to wait until after the Supreme Court reviews the Gleason ruling on the 2006 tax year.

After Gleason consolidated their challenge to the state’s 2010 tax assessment into the same case with prior tax years, the owners moved to “peremptorily challenge” Gleason — that is, to replace her with a judge possibly more to their liking.

Under the Alaska Rules of Civil Procedure, each side in a Superior Court case is entitled to a change of one judge without any need to state a reason.

But another judge has ruled that Gleason should stay on the pipeline tax case.

Superior Court Judge Peter Michalski, in a three-page order issued Dec. 10, said the valuation of the pipeline is a continuing process, and “the determination from year to year requires understanding of methodology and process previously used.” He likened it to monitoring a children’s case, or a defendant on probation.

On Dec. 22, lawyers for the owners filed for reconsideration of Michalski’s order.

“There is not a continuing process, but one that begins anew each year” with a determination of the pipeline’s taxable value, the lawyers argued.

—Wesley Loy

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