TAPS valuation disputed again as legal engine churns

Trans-Alaska Pipeline System owners — mostly the North Slope producers — and municipalities along the pipeline route are once again at each others’ throats over the valuation of the pipeline for property tax.

In what has become an economic engine for lawyers, the State Assessment Review Board met May 12 through May 15 to hear arguments over whether TAPS should be valued at $13.7 billion as claimed by the municipalities; $2.7 billion as claimed by the pipeline owners and taxpayers, or the $5.7 billion determined by the state Department of Revenue, which has essentially come down in the middle of the conflicting claims between TAPS owners and the municipalities for the 2014 tax year.

The North Slope Borough, the Fairbanks North Star Borough and the City of Valdez are the local governments most affected by the outcome.

Under state law, the Department of Revenue sets the property tax value for oil and gas properties including pipelines. Municipalities are required to use the state’s assessed value, which is why they care about this.

The state has a 20-mil state property tax on pipelines and oil and gas producing properties. Under state statutes, the municipalities levy their own taxes against these properties, and taxpayers are allowed to deduct these payments against what they owe the state.

Most of the pipeline is within the taxing jurisdiction of the three most-affected municipalities, so the bulk of the property tax revenues go to the local governments.

The state assessment review board considered the claims of the three parties including the state Revenue Department and must make its decision on the value within a few days, and no later than June 1.

Municipalities will send tax bills to the pipeline owners based on that value, and the companies will also pay the state.

The dispute over valuation is complex, however. At issue are factors like what it would cost to replace the pipeline if it were built today, a key measure, and once that is established, what form of depreciation should be allowed — a straight line of depreciation from the date TAPS began, which is one approach, or a “unit of value” depreciation which correlates to the amount of oil moving through the pipeline.

A huge disagreement exists over what it would cost to replace TAPS. The municipalities have one consulting firm giving them a figure that creates a higher replacement cost, to give a higher value, and the TAPS owners have another firm giving a lower cost for replacement, creating a lower value figure.

Both sides acknowledge TAPS would be built differently if rebuilt today, using new technology and small-size pipe.

On depreciation, the municipalities argue for a straight line method because the slope of decline is more gradual, which helps their case in creating a higher value figure. The companies argue for the unit-of-value depreciation because that slope of production decline is steeper, in recent years at least, and that helps their case by creating a lower value.

The companies use unit-of-value depreciation in their own financial reporting and a form of it is also accepted for valuation of the North Slope producing properties, which are taxed separately from TAPS.

The tax review board must sort through these claims but no matter what decision they make the issue will be appealed to the courts, as has virtually every other value determination in recent years.

05/14/2014 - 9:57am