Supreme Court denies ML&P tax refund

Affirms decision in appeal by Anchorage electric utility against liability for state taxes for Beluga River field gas production

ALAN BAILEY

Petroleum News

The Alaska Supreme Court has affirmed an August 2014 decision by the state Superior Court, rejecting an appeal by Anchorage electric utility Municipal Light & Power, requesting a refund from the Alaska Department of Revenue for production taxes paid by the utility for gas production from the Beluga River gas field. The Superior Court judge had upheld an Office of Administrative Hearings decision that ML&P was liable for the taxes, paid between 1999 and 2005 and amounting to some $4 million.

The tax dispute relates to the purchase by ML&P in 1996 of Shell’s one-third ownership of the Beluga River field on the west side of Cook Inlet. Following the purchase, the utility owned one-third of the gas produced from the field and was thus able to use its own gas to fuel its gas-fired power generation facilities, an arrangement that has led to stable and advantageous gas pricing for the utility.

However, at the time of the purchase ML&P had gas supply contracts with the three existing field owners, ARCO Alaska, Chevron and Shell. Those contracts, which extended to 2005, entailed purchasing one-third of ML&P’s gas needs from each of the field owners. And, after its purchase of its share of the Beluga field, ML&P continued to purchase gas from ARCO and Chevron.

In addition, under the terms of its field purchase, ML&P acquired Shell contracts to supply Beluga gas to other organizations, including utilities Enstar Natural Gas Co. and Chugach Electric Association. But ML&P has said that between 1999 and 2005, after which time its contracts with ARCO and Chevron expired, it was meeting its contractual obligations to Enstar and Chugach Electric by allocating to these utilities gas that ML&P was purchasing from ARCO and Chevron.

This gas allocation was essentially a paperwork exercise, given that all gas from the Beluga field is delivered through the field’s metering system, with it being impossible to track the origin and destination of individual gas molecules.

As a municipal government entity, ML&P does not have to pay state production tax on gas it produces for its own use. But the utility does have to pay tax on gas produced for sale to other utilities. Thus, the utility would have had a tax liability for gas that it produced and subsequently sold to Enstar or Chugach Electric - ML&P did pay tax on the gas that it sold in this way. But, given that ARCO and Chevron paid production tax on gas that they produced, and given ML&P’s claimed routing for the gas that it sold externally, ML&P has claimed a refund from the Department of Revenue for the tax that it had paid, on the grounds of double taxation.

An administrative law judge from the Office of Administrative Hearings found, and the Superior Court judge agreed, that ML&P, with the burden of proof, had failed to prove that the utility had delivered purchased gas rather than its own produced gas to either Enstar or Chugach Electric. The administrative law judge also commented that Beluga field gas offtake statements prepared by ARCO, the field operator, indicated that ML&P’s purchased Beluga gas was delivered to ML&P, and not to Enstar or Chugach Electric. Moreover, a summary spreadsheet provided by the Department of Revenue to the Superior Court indicated that ML&P produced gas was used to fulfill the Enstar and Chugach Electric contracts.

ML&P unsuccessfully challenged reliance on the offtake statements as evidence, claiming that the statements were preliminary reports attributable to ARCO rather than ML&P and that the statements cannot demonstrate the manner in which each gas owner distributes its gas.

The administrative law judge also held that the configuration of the gas meters and flanges in the gas transmission system physically prevented ML&P from delivering its purchased gas to Enstar. The Superior Court judge disagreed with this finding, saying that it would be possible to deliver ML&P’s purchased Beluga gas to both Enstar’s and Chugach Electric’s gas intakes. However, despite this physical possibility of gas delivery, ML&P had failed to prove that deliveries of this type had actually taken place, the Superior Court found, and the Supreme Court agreed.