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For first time in 24 years, state’s annual property tax assessment of trans-Alaska pipeline appealed State Assessment Review Board hears arguments from pipeline owners, state and municipalities on valuations of $2.1 billion, $2.75 billion and $2.9 billion Kristen Nelson PNA Editor-in-Chief
The state assesses the value of the trans-Alaska pipeline system each year for property taxes and this year, for the first time, that assessment has been appealed — as too high and as too low.
The entire system cost more than $10 billion to build in the 1970s. The property tax assessment was $3.076 billion for 1999 and $2.892 billion for 2000.
The Department of Revenue Tax Division set the 2001 assessment at $2.75 billion, but the owners argue it should be only $2.1 billion and the City of Valdez, the North Slope Borough and the Fairbanks North Star Borough — the local governments who receive property taxes based on the state assessment — say it should be $2.9 billion, and have offered a $5.9 billion alternative.
An appeal of the Department of Revenue assessment was heard by the State Assessment Review Board in Anchorage beginning May 16, and State Assessor Steve Van Sant, the chairman of the assessment review board, said this was the first time the trans-Alaska pipeline assessment has been appealed. The public portion of the hearing ended May 18, the board had seven days to decide and a decision had not been issued when PNA went to press. Value based on income Dan Dickinson, director of the Department of Revenue’s Tax Division, said the decline in the assessment recently — about 5 percent a year over the last five years — was somewhat shallower than in earlier years. The state’s 2001 assessment fits this pattern, he said.
The state has two taxes and three big tax payers who account for 60-65 percent of the state’s public money, Dickinson said, and you could send them a bill: “I’ve chosen to talk with these taxpayers and others” about the state’s assessment, and ask them what they think. It’s a reality check, he said, and also a way of trying to make sure the state doesn’t end up in court every year.
In 2001, however, not only were the municipalities and the pipeline owners unable to agree on a valuation, the municipalities told the state that they favored an alternative, straight-line depreciation, allowed by statute if economic life is materially shorter than the physical life of the transportation facility.
Straight-line depreciation, calculated by the appraiser for the municipalities, produced a value of more than $5.9 billion.
Dickinson said this approach had been tried for the Cook Inlet pipeline in the 1970s, and the courts said it was not appropriate — that you only go to the alternate if the reserves are short of the pre-construction estimate, which is not the case on the North Slope where the pre-construction estimate was 9 billion barrels, and more than that has already been produced. Variables at issue Both the municipalities and the owners provided the state with their appraisals and the state did its own studies, Dickinson said.
The statutes for valuing the trans-Alaska pipeline system, Dickinson said, instruct that the “full and true value” of the taxable property be determined each Jan. 1 “with due regard to the economic value of the property based on the estimated life of the proven reserves…”
The calculations used to produce the economic value of the property involve discounted cash flow estimates which require a cost of capital, a number which varies from company to company. Since the trans-Alaska pipeline system is not a separate company, but is owned by pipeline subsidiaries of the oil companies on the North Slope, information from “comparable companies” is used to generate a hypothetical cost of capital.
The appraisers for the municipalities and for the owners used smaller and larger groups of integrated oil companies as comparable companies.
The state formerly used integrated oil companies, but this year, in consultation with energy economist Jerome Hass of Cornell University, the state selected five partnerships which only own pipelines as its comparable companies. Hass told the review board that pipelines are such a small part of the business of integrated oil companies they are seldom even reported separately. And, he said, the risks are different for integrated oil companies — so their cost of capital is different. Level of risk Dailey Shank, who did the appraisal for the pipeline owners, said the real difference between the appraisals was the selection of comparable companies. Shank’s selection of comparable companies produced the highest cost of equity, 12 percent, and the lowest debt to equity ratio, 20 percent debt to 80 percent equity.
Shank’s final number was $2.1 billion, down from the 2000 assessment of $2.892, and Shank said that was realistic because the pipeline is older, reserves are less — and in the regulatory scheme, he said, that creates a necessary decline in value.
Tom Tegarden, the appraiser for the municipalities, used a broader base of companies and an additional source of information about the companies, and selected companies with sales of $1 billion or more (including the pipeline owners). His selection produced a 28 percent debt and 78 percent equity and an 11 percent cost of equity, and an appraisal value of $2.9 billion.
The state brought in a review appraiser, Michael Goodwin, to look at all the appraisal work done and at the studies the state had run, and Goodwin said the different discount rates were significant in the different valuations the parties reached, especially Shank’s $2.1 billion appraisal. He said for appraisals of this scope, 5 percent difference between the state and the municipalities was too close to call.
The Tax Division had access to all of the numbers, all the variations, and Goodwin said he believed the division reached a reasonable result.
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