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.
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.
Before 2001 there were no administrative or court challenges involving the value of TAPS. The Department had previously used an income method
For the 2006 tax year the Department again relied on the replacement-cost-newless-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.
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.
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.
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.
Although in the 2006 case there was disagreement regarding whether a deduction for economic obsolescence
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
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 various aspects of the superior court's decision.
In an appeal from the superior court's review of an administrative decision in a trial de novo we review only the superior court's decision.
We review the superior court's decision to apply collateral estoppel for abuse of discretion.
During the trial de novo the Municipalities moved to introduce exhibits that the Department argued contained confidential information. Among the exhibits were production reports provided by the Department's expert, and also references to communications with operators and field-by-field forecasts. The Department was worried that the under-development and under-evaluation totals for different fields could be extrapolated from the information contained in the documents. The superior court eventually admitted the documents in redacted form.
The Department asserts that the superior court erred by admitting the documents. It argues that under AS 40.25.100(a) all "information designated confidential by the taxpayer, or the Department, or confidential taxpayer information the Department used in preparing its own documents" is not public record and must not be publicly disclosed.
Despite our decision in BP Pipelines I holding otherwise,
The Owners argue that the only legally permissible use of TAPS is as a regulated common-carrier pipeline available to all shippers. They contend the superior court erred by finding that TAPS was a "non-investment property within each Owner's integrated system" and determining that its "highest and best use was to transport oil from the North Slope to Valdez for [Owners'] affiliates in an integrated system." But there is no authority supporting the Owners' position that the value of TAPS for tax assessment purposes must be based only on the tariff income it generates. And the superior court's decision to value TAPS based on its actual use — transporting oil and gas from the Alaska North Slope for affiliated producers — is well supported.
The superior court found that TAPS is a special-purpose property that was "specifically designed, constructed, and adapted for its particular use — to move affiliated crude oil from the [Alaska North Slope] to Valdez." The court also found that "TAPS is a limited-market property," with no real market for ownership interests in TAPS outside of the Alaska North Slope oil producers. The court found that four of the five TAPS owners are vertically integrated oil companies that ship their own oil through TAPS, and the fifth, Koch Alaska Pipeline company, "has an affiliate [whose] contract with the State provides it with oil for delivery to the largest refinery connected to TAPS." The superior court relied in part on the Owners' appraisal expert's testimony — that the owners of TAPS would not sell TAPS even for $20 billion if the sale were "for the expressed purpose of shutting TAPS down" — to find that there was "no market for TAPS as a stand-alone investment based solely on its tariff income." The superior court also found that TAPS's highest and best use was its current use — "the transport of [Alaska North Slope] oil to market."
Based on these findings, the superior court concluded that the Board's use value standard, which based the value of TAPS "on the economic value of its continued use in transporting [Alaska North Slope] proven reserves to market, has not been demonstrated to constitute a fundamentally wrong principle of valuation." In conformance with our decision in the 2006 appeal, and based on the court's findings in the current case, it was not error to assess TAPS under a use value standard.
The Owners argue, as they did in the 2006 appeal,
We again agree with the superior court that "if the income shortfall method was applied based on tariff income, the [replacement-cost-new-less-depreciation] valuation would no longer reflect the `full and true' economic value of TAPS as a critical component of the integrated [Alaska North Slope] production and transportation system." And we again express our scepticism with the income shortfall method of valuation.
The Department, Owners, and Municipalities each challenge the superior court's end-of-life determination. The Department argues that the court wrongly relied on production forecasts produced by the Municipalities' expert, Dudley Platt, which the Department claims are less reliable than the production forecasts provided by its expert, Frank Molli. The Municipalities challenge the court's use of a 100,000 bbl/d minimum mechanical throughput for TAPS, arguing that no minimum should have been applied. And the Owners argue that the minimum throughput should have been higher than 100,000 bbl/d.
The superior court concluded that production forecasts and economic life estimates prepared by Platt were more reliable than those prepared by the Department's and Owners' experts. Platt's forecast used a "decline curve analysis at the pool level, as opposed to a well-by-well analysis" (used by the Department and the Owners), and the superior court found that "a pool-based analysis is generally preferable to a well-based analysis." The court consequently found that Platt's forecasts were more reliable than those prepared by the Department and the Owners.
A decline curve analysis is a required component of forecasting the life of proven reserves.
The Department suggests that its expert, Molli, was better credentialed and used more accepted methods than Platt. And the Department criticizes Platt's use of b-factors greater than one. The Department argues that it is well accepted that a b-factor greater than one represents an infinite or unbounded reserve, which is technically impossible.
In this case the superior court reviewed enormous amounts of evidence on oil- and gas-field production forecasts generally and the use of b-factors specifically. The superior court found that "Platt is one of the preeminent production forecasters in the state," and his estimates of economic life correlated well with the estimates BP submitted to the United States Securities and Exchange Commission in connection with other proceedings unrelated to assessing the value of TAPS. And the superior court found that Platt's economic testing was reliable and that "[overall] ... Mr. Platt's production forecast and economic testing [was] persuasive."
The record does not show that Platt's use of a b-factor greater than one had a material effect on TAPS's projected end of life. The fact that projected production continues for an infinite time period using one b-factor, but only for billions of years using another, is not in any way instructive on which projection more accurately predicts pool decline over the relevant period — the next several decades. While there appears to be legitimate debate regarding the methods used by each of the expert forecasters, no party has presented evidence sufficient to show that the superior court clearly erred in choosing the production forecast it relied on to predict TAPS's end of life.
The Municipalities argue that the court erred by applying a minimum throughput limitation for TAPS when determining the life of the estimated proven reserves under AS 43.56.060. The Owners argue that the court correctly applied a minimum throughput limitation, but that the court's minimum throughput limit of 100,000 bbl/d was too low.
The superior court held that AS 43.56.060(e)(2) "does not expressly require the [c]ourt to consider the transportation facility's hydraulic, mechanical, or operational capacity to transport all of those proven reserves." Nevertheless, the court concluded that the Board's interpretation that the statute requires a minimum throughput determination was reasonable, and the court deferred to that interpretation. The Municipalities argue that the superior court erred by deferring to the Board's interpretation because it is not consistent with the Board's application of AS 43.56.060(e)(2) to other pipelines in the state. They further argue that there is no evidence in the record of a specific minimum mechanical throughput limitation for TAPS.
Alaska Statute 43.56.060(e)(2) provides that the full and true value of an oil or gas transportation facility must be determined "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." As the superior court correctly explained, the statute nowhere mandates consideration of a "facility's
The superior court noted that "[a]t trial, many expert witnesses testified that they were unaware of any pipeline that had suspended transportation service for oil that was otherwise economic to produce due to mechanical, hydraulic or operational limitations of the pipeline." But in this case the record supports the superior court's finding that TAPS has a minimum mechanical throughput limitation. The superior court reviewed multiple studies that discussed minimum operating levels from 300,000 bbl/d to as low as 50,000 bbl/d. It mainly relied on a 2010 study that BP Pipelines commissioned that set TAPS's lowest operational level at 70,000 to 80,000 bbl/d. Thus, the superior court did not err when it applied a minimum throughput limit in its assessment.
After considering extensive evidence, the superior court found that evidence supported a minimum throughput of 100,000 bbl/d. The Owners argue that evidence suggests "serious operational problems associated with lower levels of throughput, particularly for throughput levels below 300,000 [bbl/d]."
The evidence supports the superior court's determination that TAPS can effectively operate with a throughput as low as 100,000 bbl/d. Several experts testified that there is no hydraulic constraint that would prevent TAPS from operating even at levels near zero throughput. A BP analyst, John Haines, suggested that TAPS's operational limit is about 100,000 bbl/d. A study conducted for BP in 2004 suggested a low-flow limit for the existing pipeline of 135,000 bbl/d. In 2010 Phil Carpenter conducted a low-flow study for BP Pipelines and concluded that TAPS could operate effectively at throughputs between approximately 70,000 and 100,000 bbl/d and possibly down to 50,000 bbl/d. The Carpenter study also suggested that there could be technological options for reducing flow even further.
Based on this evidence, the superior court did not clearly err by finding that TAPS's minium throughput capacity was at least 100,000 bbl/d.
The replacement-cost-new-less-depreciation valuation method requires an assessor to deduct for three types of depreciation: physical deterioration, functional obsolescence, and economic obsolescence. Physical deterioration is the "loss in value or usefulness ... due to the using up or expiration of [the property's] useful life caused by wear and tear" and other like
The superior court applied the economic age-life method to estimate depreciation, which "[i]n its simplest form ... considers all three forms of depreciation using a single calculation." But the economic age-life method is limited by depreciating all property on a straight line basis; the court concluded that "[w]ithout a scaling adjustment, the approach can lead to an overestimation of the value of pipeline property that transports declining proven reserves."
The court recognized that low throughput decreased the value of TAPS but declined to make a functional obsolescence adjustment for superadequacy
The Municipalities argue that if an adjustment were legally allowable, the superior court erred by miscalculating it.
Because the superior court's decision is supported by the evidence, we hold that the superior court's scaling calculations were not clearly erroneous. However, we note that in the future it would be helpful to see more detailed findings and reasoning in the superior court's decision on some of these issues.
The Municipalities argue that even if the superior court appropriately considered excess capacity as economic obsolescence, it erred by scaling all TAPS asset categories because all other categories are assumed to be efficient at current volumes. They suggest that "[t]he court did not explain its rationale for deviating from the Assessor's and the Board's approaches in scaling only the pipeline."
The Municipalities cite evidence that the Department and the Board scaled only the pipeline for the years 2008-2010, based on the Assessor's conclusion that other TAPS facilities and property may not be sensitive to low throughput. But the evidence also shows that the Assessor applied a scaling adjustment to the entire system in 2006 and began doing so again in 2011 in response to the superior court's decision in the 2006 assessment appeal that scaling was external rather than functional obsolescence. The Department's assessor, Greeley, explained that "starting in 2007, in considering the obsolescence as a functional issue, I had only been scaling the pipeline portion ... because functional obsolescence emanates from within the property and can only affect pieces and parts of the property." But he testified that after the superior court's decision in the 2006 appeal he thought it was "pretty obvious ... that the source of the obsolescence is external,... and the obsolescence does affect the entirety of the property." He then elaborated that it is a "tenet of appraisal theory ... that external obsolescence affects the property in its entirety."
The superior court heard testimony and reviewed appraisal literature
The Municipalities argue that the superior court erred by using the original design basis of 1.42 million bbl/d in its scaling calculation. The Municipalities contend that the court should have used the mechanical capacity of TAPS (the throughput achievable without use of drag reducing agents), 760,000 bbl/d, or at least the 1.1 million bbl/d design basis of the ProPlus Replacement Cost New (RCN). And they contend that it was inconsistent for the superior court to reject the Owners' argument that the pipeline should be scaled to 2.1 million bbl/d because this throughput could be achieved only using drag reducing agents but then choose to scale to another number that is also achievable only using drag reducing agents.
The superior court found that the design capacity of the replacement pipeline was the
The superior court's finding — that although ProPlus RCN's design basis is 1.1 million bbl/d, its design capacity is that of the existing TAPS pipeline — is supported by the record. ProPlus, which designed the hypothetical replacement pipeline for the Municipalities, estimated a maximum capacity of up to 1,382,000 bbl/d without drag reducing agents. The Municipalities' expert testified that this capacity is the same as the existing TAPS capacity, but that higher throughput can be achieved using drag reducing agents. He also suggested that the design included expandable capacity to 1.8 million bbl/d. In other words, the capacity of the existing pipeline and a hypothetical replacement pipeline can be increased well beyond a 1.1 million bbl/d design basis by adding or enhancing pumps and/or by using drag reducing agents.
One of the treatises relied upon by the parties states that unused utility is present when a plant is operating below its "rated or design capability."
While we believe that the Board's decision to use a mechanical limit is reasonable, the superior court's decision to use design capability is not clearly erroneous considering that using design capability is one of the approaches advocated by the valuation treatises relied upon by the parties. Because the superior court permissibly chose to use the design capability, we hold that it did not clearly err in choosing 1.42 million bbl/d as its scaling denominator.
The Municipalities argue that the superior court should not have made a deduction for economic obsolescence because TAPS's extra capacity has value. They argue that the extra capacity gives the Owners flexibility to ramp up production and has "day-to-day operational utility." The Owners respond that the excess capacity does not have utility because there is no predicted increase in throughput that such capacity would be useful to accommodate.
The Municipalities are correct that excess capacity that has functional utility should not be deducted as a form of functional obsolescence.
The Municipalities argue that the superior court erred by failing to consider positive external factors in its economic obsolescence analysis. The Municipalities' argument suggests that there are many positive external factors derived from the fact that TAPS is part of a valuable broader enterprise that is very profitable and that oil prices are likely to increase,
The superior court's implicit rejection of these arguments was not clearly erroneous. According to the testimony of the Department of Revenue appraiser, James Greeley, a high price of oil alone does not decrease the underutilization of the pipeline: he explained that with increased oil prices the value of oil flowing through the pipeline would be higher, but the quantity of oil would not change; the pipeline would still be underutilized. And it is the low quantity of oil flowing through the pipeline that makes a deduction for economic obsolescence warranted, not the price of the oil. As the Owners note, a higher price of oil might make more reserves economically recoverable, resulting in a later end of life for TAPS, but an increased price would not, on its own, increase the amount of oil in the pipeline. The price of oil or the Owners' profitability does not change the amount of inutility the pipeline experiences from the decreased amount of oil flowing through it.
We conclude that the superior court did not clearly err by not adopting the Municipalities' argument that the proffered positive factors should offset the court's economic obsolescence deduction for low throughput.
Before the trial began the superior court issued an order precluding relitigation of
Collateral estoppel prohibits relitigation of issues actually decided in earlier proceedings where:
But "the existence of [these] elements provides only the underlying basis for the trial court's exercise of discretion to apply or not apply collateral estoppel, and ... this discretion must be tempered by principles of fairness in light of the circumstances of each particular case."
The superior court expressed legitimate concerns about applying collateral estoppel in this case given the complexity of the issues and potential for some change in the relevant facts, and we conclude this was a permissible exercise of the court's discretion.
We AFFIRM the superior court's decision in all respects.
The Municipalities seek to apply the standard of review under which the Board reviews a Department decision, but the superior court reviews the Board's action de novo and need not give deference to the Board's decision. See id. at 493 (citing AS 43.56.130(i)). Second, we held in BP Pipelines I that the economic age-life method did not result in any double counting because "when operating level is significantly less than design capacity, `the asset is less valuable than it would otherwise be,' and that drop in value comes not just from the decline in operating level, but also from the superadequacy that exists." Id. at 494-95 (quoting AM. SOC'Y OF APPRAISERS, supra note 5, at 97). This is intuitive because the economic age-life method only measures the economic obsolescence due to the fact that the North Slope reserves will be exhausted before the end of TAPS's useful life. It does not account for the fact that during this time TAPS will be underutilized. Finally, we held that "whether a deduction for economic obsolescence is appropriate does not depend on any obligation the Owners may have to maintain a certain capacity." Id. Whether the low throughput decreases TAPS's value is a question of fact, id. at 493, but this argument — that as a matter of law no economic obsolescence deduction may be taken for required capacity — was already considered and decided in the 2006 appeal. Id. at 494-95.