FAIRBANKS -- Last spring, the Parnell administration sided with oil companies in seeking to disqualify a longtime member of the State Assessment Review Board (SARB) from taking part in a key case setting the tax value of the trans-Alaska pipeline.
The other board members rejected the argument and allowed Marty McGee to participate, declaring that he had shown himself to be fair and impartial during his years on the board.
McGee, the chairman of the board and the former chief assessor of the Municipality of Anchorage, had served on the board since the last year of the Murkowski administration.
There won't be a repeat of that confrontation this spring because Gov. Sean Parnell has fired McGee from his volunteer position on the committee, which is set up to hear appeals on the tax value of oil and gas property. Parnell has replaced McGee and filled another position on the board with two former oil company officials, one from Anchorage and one from Salinas, Calif. A third position on the five-member board is vacant as member Ron Brown resigned after the appointments were made.
'Stacking the board'
McGee said he received a phone call from a state official in late January informing him that he was to be replaced, but there was no explanation why he was removed. He said he believes the administration is “stacking the board in favor of industry.”
The industry has argued the assessment board has valued the pipeline billions too high. Last year the board set a value of $11.9 billion on the pipeline, while the industry argued for $2.3 billion. McGee said the oil industry failed to get a lower pipeline assessment from the board, which in the past has been staffed chiefly by Alaska appraisers and assessors, but “now they’re trying to replace the board members and see if they get a different result.
“I don’t like that. I think that’s bad public policy and a dangerous thing to have happened,” he said. “With two board members closely associated with industry, I think they would find industry’s argument a lot more persuasive than we have in the past, and that concerns me,” he said.
The governor’s office has not responded to repeated requests for comment on why McGee was fired. A statement Thursday from the governor's office said the two new appointments are to "bring a fresh perspective to the board" and were made without consultation with the oil industry.
Attorney Bill Walker, an independent candidate for governor, said he was disappointed to hear that Parnell had removed McGee, a man who Walker said had become assessment board chairman because he is “one of the preeminent appraisers in Alaska.
“It is shocking the influence the North Slope producers have over this administration,” said Walker, who has represented Valdez in the pipeline valuation cases.
In a Feb. 4 press release listing 80 appointments to various boards and other positions, the governor said he was appointing Bernard Washington of Anchorage and Dennis Mandell of Salinas, Calif., to the state board. Their appointments are subject to legislative confirmation.
The only holdover members of the board are James Mosley of Eagle River and Michael Salazar. Salazar did not participate in the pipeline case last year.
Assessment board members serve indefinite terms at the pleasure of the governor. Clear signs of the growing displeasure of the administration with McGee appeared last spring. The oil companies and the state had asked the other board members to determine that McGee, who was still assessor for the Municipality of Anchorage at the time, had a conflict of interest and should excuse himself from the case.
One part of the alleged conflict concerned a $2,100 contract he had issued in 2010 as Anchorage assessor with petroleum engineer Dudley Platt. The two-page report, which Platt said took a few hours of work, dealt with the value of Enstar property for Anchorage tax calculations.
Platt has testified in the pipeline value cases as a witness for the municipalities. The assessment board has said in its decisions that board members found him to be more reliable than experts offered by the state on questions about future oil reserves.
In 2011, the state said the oil companies were wrong to challenge McGee’s participation based on the two-page Platt report. Complaints against McGee were based on “mere speculation and inference.
“The imputation that Mr. McGee has any kind of direct, personal, substantial pecuniary interest in the outcome of the upcoming SARB hearing and therefore must disqualify himself is baseless,” the state said on May 2, 2011.
But two years later, on April 16, the state switched sides. It said there could be an appearance of impropriety, so there was a conflict of interest and McGee should bow out. McGee said he did not have a conflict, as he did not have a personal or social relationship with Platt.
Regardless of whether McGee thinks he has a conflict, the state in 2013 said the revenue department can “move for his disqualification for any conflict of interest he may have. And because Mr. McGee has engaged in a professional relationship with Mr. Platt as an expert witness for the municipalities involving pipeline property valuation in the Enstar case, it amounts to a conflict of interest as it calls into question the objectivity of his decision-making in that Mr. McGee may place improper weight on Mr. Platt’s expert opinion at SARB compared to the expert opinions of the other parties’ witnesses on production forecasting and pipeline life.”
The contentious resolution of the Enstar case last year led to McGee’s resignation from the Anchorage assessing job. He said Mandell, one of the new appointees to the assessment board, was brought in to negotiate a settlement with Enstar that McGee said was unfair to Anchorage taxpayers. It should not have been approved, he said.
“The CFO for Anchorage had brought him in on a case that I was involved in for Enstar pipeline properties, and I didn’t like what he was doing there,” McGee said of his work for the municipality. “He negotiated a settlement on that case. That was part of the reason that I resigned.”
McGee said the settlement did not reflect the true value of the Enstar property. The chief financial officer of Anchorage, Lucinda Mahoney, defended the Enstar settlement last year, according to news reports. Mahoney is married to the lead attorney for the oil companies in the pipeline value case. She told Anchorage reporters that the Enstar deal had no connection to his work.
The oil companies said last spring that lawyer Steve Mahoney did not take part in writing or even read the second motion they filed, on May 8, seeking to have McGee removed from the pipeline valuation case.
The conflict that arose from the flap with Lucinda Mahoney "provides a clear basis for him to be hostile to the owners' (oil companies) lead counsel," the oil companies said. They said the resignation and the relationship of his former boss to the oil company lawyer created a "personal financial interest in this matter that the Ethics Act prohibits."
"The owners should not be faced with that dilemma for a conflict that is not of their making," the lawyers for BP, ExxonMobil, ConocoPhillips and Unocal said. "The only way to fairly eliminate that dilemma is for Mr. McGee to be removed from the SARB for purposes of this proceeding."
Pipeline assessment critical to local governments
McGee resigned from his assessing job last spring. Responding to the claims that he should disqualify himself or face disqualification by the assessment board, the three other board members rose to his defense and said they needed him for his expertise and to maintain a quorum.
“He has demonstrated his ability to be fair and impartial and has told the board that the facts in this disclosure do not affect his ability to adjudicate this appeal,” they said.
In the end, McGee and the two other board members who heard the case released a decision May 29 on pipeline tax value that took issue with the methodology used by the oil industry and the Parnell administration to put a dollar value on the pipeline.
The board said the pipeline was worth $9.6 billion more than the oil companies asserted and $4.7 billion more than the state contended. The board concluded that state estimates of the life expectancy of the pipeline were too short because 2.59 billion barrels of proven reserves were not included in the state analysis.
The decision has major financial implications for the three local governments whose boundaries include sections of the pipeline. The North Slope Borough and Valdez gain or lose the most in tax revenue after changes in valuation, while the Fairbanks North Star Borough also stands to see its income rise or fall by millions.
The state collects more in property taxes when the value is higher. But the tax level is a factor in the cost of transporting oil for the oil companies, which means a lower wellhead value for the state on royalties and a deduction for the companies.
The board found that the state assessor erred in rejecting evidence relied upon by former Superior Court Judge Sharon Gleason about costs and future oil reserves.
“An additional fundamental error was the decision of the assessor to adopt his own estimate of proven reserves, without providing any justification for rejecting the Superior Court’s estimate,” the board said. “This a fundamental error because having the best estimate of the value of the reserves is crucial to producing a defensible estimate of TAPS.”
“The remaining age of the TAPS is not a function of its physical life. The TAPS is very well maintained and as long as it is maintained, it will not wear out,” the board said. “The remaining life of the TAPS, therefore, depends on when the supply of oil will be so diminished that it will no longer be economical to ship oil on the TAPS.”
The board said the state forecast did not account for 2.59 billion barrels of additional proven reserves that will increase the value and life expectancy of the pipeline beyond the state estimates. The administration contended that Gleason’s “use of confidential reserves data resulted in a clear misapplication of that data and error," but no one has explained the error, the board said.
The court said that a confidential estimate by BP was the best estimate on the future extent of oil reserves.
“The assessor did not present any evidence to show that this was an error and the board has not been presented with any credible evidence that reserves were less than the amount determined by the Superior Court,” the board said. “No expert testified that he or she had uncovered evidence to show that the Superior Court was wrong. For the assessor to fail to use the best evidence from the Superior Court trial, without providing justification for that decision, was improper."
“The division again used a production forecast that failed to account for billions of barrels of proven reserves that the board and court found to be available for transportation through the TAPS,” it said.