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State, Department of Revenue v. BP Pipelines (Alaska) Inc.

Supreme Court of Alaska

August 28, 2015


Appeal from the Superior Court No. 3AN-06-08446 CI of the State of Alaska, Third Judicial District, Anchorage, Sharon Gleason and Andrew Guidi, Judges.

Kenneth J. Diemer, Assistant Attorney General, Anchorage, and Michael C. Geraghty, Attorney General, Juneau, for Appellant/Cross-Appellee State of Alaska, Department of Revenue.

Leon T. Vance, Faulkner Banfield, P.C., Juneau, and Alexander O. Bryner, Feldman Orlansky & Sanders, Anchorage, for Appellees/Cross-Appellants/Cross-Appellees BP Pipelines (Alaska) Inc., ConocoPhillips Transportation Alaska, Inc., ExxonMobil Pipeline Company, Koch Alaska Pipeline Company, LLC, Unocal Pipeline Company, and Alyeska Pipeline Service Company.

Jessica Dillon and Mauri Long, Dillon & Findley, PC, Anchorage, for Appellee/Cross-Appellant/Cross-Appellee North Slope Borough.

A. Rene Broker, Borough Attorney, Fairbanks, and Robin O. Brena, Kevin G. Clarkson, Anthony Guerriero, and Laura S. Gould, Brena, Bell & Clarkson, PC, Anchorage, for Appellee/Cross-Appellant/Cross-Appellee Fairbanks North Star Borough.

William M. Walker, Craig W. Richards, and Jon S. Wakeland, Walker & Richards, LLC, Anchorage, for Appellee/Cross-Appellant/Cross-Appellee City of Valdez.

Before: Fabe, Chief Justice, Winfree, Stowers, Maassen, and Bolger, Justices.


STOWERS, Justice.


This is an appeal of the superior court's de novo valuation of the Trans-Alaska Pipeline System (TAPS) for tax assessment years 2007, 2008, and 2009. In February 2014 we issued a decision affirming the superior court's de novo valuation of TAPS for the 2006 assessment year.[1] The parties introduced considerably more evidence during trial for the 2007, 2008, and 2009 years, but the operative facts remained substantially the same and the superior court applied similar standards and methods for valuation. Many of the issues raised on appeal are similar or identical to issues raised in the 2006 appeal and thus are partially or wholly resolved by our prior opinion. Because the superior court did not clearly err or abuse its discretion with regard to any of its findings or its methodology, and because it committed no legal error in its conclusions, we affirm.


A. Facts

TAPS is an 800-mile-long oil pipeline system that connects the Alaska North Slope oil reserves to a shipping terminal in Valdez. The pipeline was constructed between 1974 and 1977 at a cost of approximately $8 billion. This appeal involves a dispute over the value of TAPS for property tax purposes during the assessment years 2007, 2008, and 2009. Because this is our second appeal involving TAPS, we provide only a brief overview of the facts.

Under Alaska law municipalities "may levy and collect a tax on the full and true value" of oil and gas property, including pipelines, but only the Department of Revenue may assess the value of that property.[2] Alaska Statute 43.56.060(e)(2) requires an assessor to determine the "the full and true value" of oil and gas production and transportation facilities "with due regard to the economic value of the property based on the estimated life of the proven reserves of gas or unrefined oil then technically, economically, and legally deliverable into the transportation facility." A party may appeal the Department's valuation to the State Assessment Review Board.[3] The Board's decision is, in turn, appealable to the superior court, which reviews the Board's decision in a trial de novo.[4]

Before 2001 there were no administrative or court challenges involving the value of TAPS. The Department had previously used an income method[5] to assess TAPS's value, relying on tariff income as the primary source of value, and the ultimate valuation was reached in a negotiated settlement between the Department and TAPS's Owners.[6] For the 2001 tax year the Owners and the Municipalities[7] appealed the Department's valuation of $2.75 billion to the Board. The Board adjusted the valuation to $3.017[8] billion and suggested that accurately valuing the pipeline was difficult because there had never been a replacement cost study for TAPS. For the 2002 to 2004 tax years the Department, Owners, and the Municipalities stipulated to a value of $3.017 billion. For the 2005 tax year the Department used the replacement-cost-new-less-depreciation method, [9] also called the cost approach, and arrived at a value of $3 billion. The Owners and Municipalities appealed the 2005 assessment; the Board affirmed the valuation and agreed with the Department's conclusion that the income method was unreliable and TAPS should be valued using a cost approach.

For the 2006 tax year the Department again relied on the replacement-cost-new-less-depreciation methodology and determined an assessed value of $3.641 billion. Both the Owners and the Municipalities appealed to the Board, which, using the same methodology but rejecting certain deductions the Department made, adjusted the value to $4.306 billion.[10] The parties then appealed to the superior court. [11]

In the 2006 appeal the superior court concluded that the Department and the Board correctly used a replacement-cost-new-less-depreciation method to value TAPS.[12] In October 2010 the superior court issued its decision following a trial de novo. The superior court found that the Municipalities' cost study was more reliable and accurate than those relied on by the Department and the Board.[13] The court also determined that a scaling adjustment[14] for excess capacity should be made as a form of economic obsolescence rather than functional obsolescence.[15] The superior court's final valuation for the 2006 year was $9.978 billion.[16] In our opinion issued in February 2014 we affirmed the superior court's decision, finding no error in the superior court's valuation decision or its specific deductions made to account for depreciation.[17]

For the 2007 assessment year, the Department assessed TAPS's value at $4.578 billion, which the Board adjusted to $4.589 billion. For the 2008 assessment year, the Department valued TAPS at $7.166 billion, relying for the first time on a ProPlus cost study provided by the Municipalities. The Board, utilizing the same study but making some adjustments, concluded that the value of TAPS in 2008 was $6.154 billion. Finally, for the 2009 assessment year, the Department valued TAPS at $7.715 billion, and the Board concluded that the value was $9.046 billion.

B. Proceedings

The superior court considered the appeals for the assessment years 2007, 2008, and 2009 together in a trial de novo that lasted approximately nine weeks beginning on September 6, 2011.

The Municipalities asserted that the value of TAPS for each of the years in question should be about $14 billion, while the Owners asserted that the value should be little more than $1 billion. The reason for the difference in these values was that the Owners continued to argue for the income approach to valuation, which would limit TAPS's value based on its tariff income, while the Municipalities advocated for a cost approach using the replacement-cost-new-less-depreciation method.

Both the Municipalities and the Owners relied upon different replacement-cost-new (RCN) surveys than they did in the 2006 trial - the Municipalities submitted a ProPlus RCN that replicated the existing pipeline diameter and capacity of TAPS, and the Owners submitted a Stantec RCN with a much smaller pipeline diameter to account for the low volume of oil then flowing through the pipeline. The Owners' appraiser applied the "breakdown method" to account for depreciation, which quantifies each type of depreciation individually.[18] The Municipalities argued for continued application of the economic age-life method, [19] as in the 2006 case. All parties submitted substantial evidence relating to TAPS's proven reserves, including expert reports from each party. And the Municipalities and the Owners submitted voluminous evidence relating to possible minimum flow rates for TAPS.

Although in the 2006 case there was disagreement regarding whether a deduction for economic obsolescence[20] had actually been litigated, it was exhaustively litigated for the 2007, 2008, and 2009 years. The Municipalities argued strenuously that any deduction for economic obsolescence was unwarranted, or if it was warranted, it was outweighed by positive external economic factors. They submitted evidence regarding the Owners' profitability and the then-high price of oil. The Municipalities also offered evidence that the mechanical limit of TAPS without using drag reducing agents is 760, 000 barrels (bbl) per day, and argued that this limit should be used as TAPS's "full capacity" if the court chose to account for low throughput. The parties also contested whether only the pipeline should be scaled for low throughput or whether all TAPS property - including the Valdez Marine Terminal and the pumps - should be scaled.

As it did in the 2006 case, the superior court found that TAPS was a limited-market, special-purpose property. The court again determined that the replacement-cost-new-less-depreciation method was the most accurate method for valuing TAPS. The court found that the ProPlus replacement cost study provided by the Municipalities was more accurate than the Stantec study provided by the Owners. It further found that TAPS's status as a regulated pipeline did not result in any further diminution of its value and rejected the Owners' attempts to apply either an income approach or an income shortfall approach[21] in order to account for governmental regulation of TAPS.

The court again applied the economic age-life method as an approximation of physical, functional, and economic obsolescence, and it rejected the Owners' argument for the breakdown method. The court was unpersuaded by the Municipalities' arguments against an economic obsolescence deduction, and it deducted for additional obsolescence not captured by the economic age-life method. In deducting for economic obsolescence, it agreed with the Municipalities that the number to use as TAPS's full capacity should not be its maximum capacity achievable only with drag reducing agents, but the court disagreed that it should use TAPS's mechanical limit. Instead, the court scaled TAPS using TAPS's original design basis, after finding that the ProPlus RCN had the same design capacity as the original TAPS. And the court scaled all TAPS property, not just the pipeline.

The superior court determined that TAPS's value was $8.941 billion in 2007, $9.644 billion in 2008, and $9.249 billion in 2009. All of the parties now appeal ...

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