Judge doubles the tax valuation of trans-Alaska pipeline

Wesley LoyPetroleum News

An Alaska Superior Court judge has more than doubled the taxable value of the trans-Alaska pipeline system.

It's a golden victory for state and municipal officials and their lawyers, who for years have battled the pipeline owners over the pipeline's value for property-tax purposes.

Superior Court Judge Sharon Gleason's 170-page ruling last week concerns the assessed value of the 800-mile pipeline system for the year 2006. The state has been fighting the pipeline owners over setting the value.

Gleason pegged the value at $9.98 billion, which she said is just over half the estimated cost of replacing the pipeline. Her value is more than double the $4.3 billion the state Assessment Review Board had determined.

The pipeline system carries North Slope crude oil from Prudhoe Bay south to the Valdez tanker port. It belongs to five companies: BP, Exxon Mobil, Conoco Phillips, Chevron and Koch Industries.

BP is the largest owner at 46.9 percent.

Asked about Gleason's decision, BP's Alaska spokesman, Steve Rinehart, said in an e-mail: "We are reviewing the ruling, so that we can determine our best course forward."

EXTRA TAX BILL: $113 MILLION

"We're ecstatic," said Jim Greeley, petroleum property assessor with the state Department of Revenue. Greeley helps calculate the pipeline system's value each year.

"Though Judge Gleason changed the TAPS (Trans-Alaska Pipeline System) value determined by the department in 2006, that change was based on new information in 2009, while the decision in its entirety largely upholds the department's methods, policies, practices, and calculations in administering the value of the TAPS," he said.

Greeley estimated the implications of the Gleason decision in terms of property tax revenue.

The state and municipalities stand to share about $113 million in extra tax receipts for 2006, he said. Of this amount, about $56 million would go to the state, and $57 million would go to municipalities, including the North Slope Borough, the Fairbanks North Star Borough, and the cities of Valdez, Cordova and Whittier.

The extra revenue of course, depends on whether Gleason's ruling withstands appeals. The case is expected to land in the Alaska Supreme Court.

Gleason gave the opposing parties 30 days to file motions for reconsideration in her court.

MORE TAX CASES COMING

Gleason's ruling follows a five-week nonjury trial that involved dozens of witnesses last fall.

The issue was how much the pipeline owners believed they owed in property taxes, versus what the state and local governments aimed to collect.

The 2006 tax bill isn't the only one at issue. The owners have filed legal challenges to the state's escalating assessments for each tax year since. The challenges for 2007, 2008 and 2009 have been consolidated into a single case, Greeley said.

State officials have assessed the pipeline's value for 2010 at $9.2 billion, he said.

The Assessment Review Board recently held a hearing on the 2010 assessment, and the board "is currently in deliberations," Greeley said. The Department of Revenue is to send out tax bills on Tuesday.

The Assessment Review Board is a five-member, governor-appointed panel that hears oil and gas property-assessment appeals.

The pipeline owners complained that state officials used the wrong method to calculate the pipeline's value.

In court filings, their lawyers favored an "income approach to value," where revenue from fees they charge oil producers for using the pipeline is considered.

"The well-accepted principle is that a property is worth what it will earn," said one company filing from 2007.

Department of Revenue officials have adopted 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.

THE JUDGE'S VIEW

In her ruling, Gleason included a one-page summary of her determination -- based on expert testimony and other evidence presented in court -- of the pipeline system's assessed value as of Jan. 1, 2006. She started with a replacement cost of $18.7 billion and then worked in such factors as depreciation to reach an assessed value of $9.98 billion.

She disagreed with the owners that the pipeline system's economic value stems mainly from its shipping fees, and that the pipeline system was worth just $850 million in 2006.

"TAPS was built and is operated to monetize the vast ANS (Alaska North Slope) reserves of the producer oil companies by bringing those reserves to market," Gleason wrote. "It was not constructed, and is not maintained, in order to realize tariff income."

She added in her conclusion that the pipeline system's 1970s cost of construction was equivalent to $24 billion in 2006. The value of North Slope proven reserves was about $350 billion in 2006, she said.


By WESLEY LOY
Petroleum News