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Parnell administration gives oil producers a break on pipeline property taxes

Lisa Demer

The Parnell administration quietly made a deal last year with Alaska's major oil producers that lets them withhold tens of millions of dollars in property taxes -- at least for now -- because they disagreed with the state board that set the value of the trans-Alaska pipeline, according to public documents.

The state negotiated the arrangement last summer after an attorney for the oil pipeline owners, Steven Mahoney, complained in a June 4, 2013, email that a state board had set too high a value for the pipeline, raising the tax bill for the oil companies.

"As you may be aware, Owners consider the Determination of the Board to be both aberrant and irresponsible," Mahoney wrote to Ken Diemer, an assistant attorney general.

It's the latest twist in a long-running fight over how to value the trans-Alaska pipeline. That battle scars include the firing by the governor of the chairman of the tax-setting board, a bruising battle in the Legislature over whether Gov. Sean Parnell could appoint two former oil-company executives, including a California resident, to the board, and decisions that the administrations of Govs. Frank Murkowski, Sarah Palin and Parnell had put too low a value on the pipeline, resulting in less property taxes than the state and local governments were owed.

The State Assessment Review Board hears appeals from local governments and oil companies over the valuation of crude oil transport properties, including the trans-Alaska pipeline, that are initially set by the state Department of Revenue.

The deal to give the oil companies at least a temporary break only emerged in public view in April when some of the municipalities that receive property taxes on the pipeline appealed the state's valuation for 2014, arguing the state's dramatic reduction from the year before was improper.

Craig Richards, one of the lawyers protesting the lower value, said it was "shocking" that the state allowed the companies to withhold taxes.

"How does the state have a secret agreement with the oil companies that they don't have to pay their taxes, pending future litigation outcomes, and nobody knows about it?" Richards said.

The arrangement appears to be part of a broader strategy to ensure oil companies pay less, he said.

Lawyers for municipalities highlighted the deal in their April 18 appeal to the State Assessment Review Board as an example of disarray within the state system for assessing the value of the pipeline and related properties operated by Alyeska Pipeline Service Co.

Some of the turmoil already has drawn headlines: Marty McGee, chairman of the board that set the 2013 value at a record $11.9 billion, was kicked off the board by Parnell. Another board member resigned. Parnell appointed two ex-oil industry executives to the board only to have one withdraw his name because of controversy over his California residency.

The state tax division "expressly disregarded" the prior board's determination, lawyers for the North Slope Borough, Fairbanks North Star Borough and the city of Valdez said in their April appeal of the 2014 valuation, which suggested the pipeline had somehow lost $6 billion in value over a year.

PIPELINE'S WORTH

Property taxes related to the oil pipeline are small compared to oil production taxes and royalties but are an important source of revenue for communities along the 800-mile route. The main beneficiaries are the North Slope Borough, the Fairbanks North Star Borough, Valdez and the state of Alaska, which collects half the property taxes. Anchorage also gets a share, mainly for offices and the pipeline's operations center.

The oil producers didn't seek a break from the tens of millions they owed the municipalities under the 2013 board determination. Anchorage received more than $4 million.

But Mahoney noted in his June 4 email that the pipeline owners were planning to protest the 2013 payments due to the state.

The board increased the taxable property by 20 percent "with a sweep of the pen," Mahoney wrote.

The value of the trans-Alaska pipeline system, or TAPS, increased four-fold in seven years despite declining production, a lack of new crude oil discoveries on the North Slope and concerns about complications from the low amount of oil flowing through the pipeline, Mahoney wrote.

His email set off "a flurry of activity" by state tax collectors and lawyers over the tax payments, according to the recent appeal by the municipalities. That was evident from a document filed with the appeal -- an email log -- though the actual emails weren't included.

Twenty days later, on June 24, then-Revenue Commissioner Bryan Butcher and Attorney General Michael Geraghty said producers could pay taxes on the state's $7.1 valuation of the pipeline, not the $11.9 billion set last year by the State assessment Review Board, or SARB.

BOARD SUPPOSED TO RULE

That appears to be a first, said Martin Schultz, the supervising attorney in the oil, gas and mining section of the Department of Law.

With the lower value, the state tax bill amounts to $66 million, with another $47 million owed under the SARB ruling.

If a court determines more money is owed or a settlement is reached for a higher amount, the oil producers will owe it plus interest, Schultz said.

"The state has not waived that," he said.

The state didn't want to have to repay the oil companies taxes plus interest if they appealed the amount set by the review board and won, he said. The state doesn't have a mechanism to set the money aside in escrow, he said.

"The value that SARB set for 2013 ... is so much higher than has ever been set before by anybody, including the courts," Schultz said. "It seemed like a legitimate concern that potentially it could expose the state to a tax refund."

But under state law, the board has the last word before a court appeal, not the tax division, the municipalities say.

Among other things, the board in 2013 determined the state tax division was deducting too much from the value for declining amounts of oil flowing through the pipeline, Richards said.

Unlike the assessment for a house, which is based on its market price, the calculation for some kinds of business property includes how much money it earns for its owner. Oil companies pay their property taxes based on the value of the pipeline.

The Parnell administration is arguing in the property tax case that declining oil flow is a reason for lower property taxes. But on another front, Parnell is pushing to keep the cuts in oil production taxes approved by the Legislature last year, arguing that those cuts already are generating new investment that will curb the decline.

"Developing these prospects doesn't happen overnight and you do a new assessment each year," Schultz said. "Certainly as more and more production comes on line it will be factored in, or looks like it's going to come on line."

A TAXING ODYSSEY

Municipalities, the state and oil producers have battled over the pipeline's value since 2006. Each year, the state petroleum property assessor in the Department of Revenue sets the value. Municipalities and oil producers typically appeal to the State Assessment Review Board. One or both sides then takes the matter to court.

Starting in 2006, the state assessment has been challenged every year except 2012.

"The last decade in regard to these appeals is best described as an odyssey," assessor James Greeley wrote in an April 1 decision setting the 2014 pipeline value.

In February, the Alaska Supreme Court ruled on the first of the cases before it, the 2006 valuation of the pipeline. It upheld an earlier decision by then-Superior Court Judge Sharon Gleason setting the value at more than $9.9 billion. But appeals from other years are still before either the Supreme Court or still in Superior Court.

"With the Alaska Supreme Court decision, all of the issues in this matter have become much clearer, if not resolved," Greeley wrote. "As a practical matter, a decade's worth of litigation culminating in a Supreme Court decision presumably should provide more certainty in a mass appraisal process moving forward, not less; otherwise, the entire process will continue on its path in a perpetual state of entropy."

He defined entropy: "The inexorable tendency of the universe and any system in it, to slide toward a state of increasing disorder."

Despite his hope for clarity and certainty, the warring parties are further apart than ever.

Now, a year after the state board set the value at nearly $11.9 billion, the state tax assessor decided to cut the value by more than half, to $5.7 billion.

The state tax division failed "to determine a full and true value for TAPS that is consistent with the statutory requirements, including those determined by the Alaska Courts over the past decade," the municipalities said in their appeal.

The $5.7 billion value now is being appealed to the State Assessment Review Board with a hearing set for the week of May 12 in a ConocoPhillips conference room downtown.

Just three people will hear the appeal because the appointed board is short two members.

They include former Arco executive Bernie Washington, picked by Parnell and confirmed by the Legislature to fill a seat that's been open since the end of 2011. The other members are James Mosley of Eagle River, appointed in 2011, and Michael Salazar of Ketchikan, on the board since 1985.

Reach Lisa Demer at ldemer@adn.com or 257-4390.



Valuation of trans-Alaska pipeline system over the years

The pipeline’s assessed value for property tax purposes has fluctuated wildly in recent years. The Alaska Supreme Court this year confirmed the 2006 valuation of almost $10 billion. The next three years of tax assessments were ruled on in Superior Court and now are before the Supreme Court. The 2010, 2011 and 2013 assessments are now being appealed in Superior Court. The 2014 valuation is being argued this month before the review board.


YearDepartment
of Revenue
State Assessment
Review Board
 
Court

2005 $3.00 billion $3.00 billion N/A

2006 $3.64 billion $4.30 billion $9.98 billion

2007 $4.58 billion $4.59 billion $8.94 billion

2008 $7.17 billion $6.15 billion $9.64 billion

2009 $7.72 billion $9.05 billion $9.25 billion

2010 $9.20 billion $9.64 billion

2011 $7.93 billion $8.67 billion

2012 $8.25 billion N/A

2013 $7.16 billion $11.87 billion

2014 $5.75 billion


By LISA DEMER
ldemer@adn.com