Chevron U.S.A., Inc. v. State

• Decision Date: 18 June 1996
• Docket Number: No. 95-214,95-214
• Citation: 918 P.2d 980
• Parties: 134 Oil & Gas Rep. 209 CHEVRON U.S.A., INC., a Pennsylvania corporation, Appellant (Petitioner), v. STATE of Wyoming, Wyoming State Board of Equalization and its members Nancy Freudenthal, Marvin Applequist and Terry Rubald, in their official capacities; and the Department of Revenue and Taxation, State of Wyoming, Appellees (Respondents).
• Court: Wyoming Supreme Court

Page 980

918 P.2d 980

134 Oil & Gas Rep. 209

CHEVRON U.S.A., INC., a Pennsylvania corporation, Appellant (Petitioner), v. STATE of Wyoming, Wyoming State Board of Equalization and its members Nancy Freudenthal, Marvin Applequist and Terry Rubald, in their official capacities; and the Department of Revenue and Taxation, State of Wyoming, Appellees (Respondents).

No. 95-214.

Supreme Court of Wyoming.

June 18, 1996.

Rehearing Denied July 16, 1996.

William J. Thomson and Brandin Hay of Dray, Madison & Thomson, P.C., Cheyenne; and Gary S. Hook, Chevron Corporation, San Francisco, California, for appellant.

William U. Hill, Attorney General; Michael L. Hubbard, Deputy Attorney General, Cheyenne, for appellees.

Before GOLDEN, C.J., and THOMAS, MACY, TAYLOR and LEHMAN, JJ.

GOLDEN, Chief Justice.

Chevron U.S.A., Inc. appeals the Wyoming State Board of Equalization's interpretation of former WYO.STAT. § 39-2-202(b) which determined that the expenses of operating Chevron's Birch Creek compressor station were nondeductible expenses of production for ad valorem and severance tax purposes.

We reverse.

ISSUES

Chevron U.S.A., Inc. (Chevron) presents a single issue for our review:

Did the district court err in affirming the State Board of Equalization's interpretation of former Wyoming Statute § 39-2-202(b) and rules promulgated thereunder by the Department of Revenue and Taxation determining that the costs of operating Chevron's Birch Creek compressor station facility were nondeductible "expenses of production" for ad valorem and severance tax purposes?

Wyoming State Board of Equalization (Board) presents two issues:

I. Where is the point of valuation for natural gas under W.S. 39-2-202(b) (1985 pamphlet)?

II. Do the activities at Chevron's compressor station constitute processing or transportation?

FACTS

Chevron produces natural gas from several wells in the Birch Creek field in Sublette County, Wyoming. The gas in the Birch Creek field is low in hydrogen sulfide and meets pipeline specifications without removal of hydrogen sulfide. After the gas is extracted from the wells in the Birch Creek field, it runs through a three-phase separator at the wellhead. The separator separates condensate, water, and gas from the natural gas well stream. The gas is then run through a dehydrator. After dehydration, the condensate and gas streams are remixed at the wellhead. Gathering pipelines then transport the gas from the well-head through at least a mile of pipeline to the Birch Creek compressor station.

The compressor station consists of several large compressors housed in specially constructed buildings, associated piping, a three-phase separator, tankage, and other associated equipment. At the inlet of the compressor station, the gas-condensate mix flows through another three-phase separator, which separates the gas, condensate, and any residual water, resulting in dry gas. Finally, the dry gas is compressed to facilitate its injection into the pipeline.

Chevron sells its Birch Creek gas at the outlet of the compressor station. The gas is delivered into Northwest Pipeline Company's 30-inch, high pressure pipeline which operates at approximately 800 pounds per square inch. Northwest also has a 16-inch, low pressure pipeline which transports gas from the Birch Creek field without compression. However, all of Chevron's Birch Creek gas is transported on the high pressure pipeline because the low pressure pipeline is fully nominated. The compressor station is necessary to boost the pressure of the gas for transportation in the high pressure pipeline. All Birch Creek gas must be run through a compressor to be injected into the high-pressure pipeline.

Chevron reported its gas production from 1984 through 1989, the years relevant to this appeal, pursuant to WYO.STAT. § 39-2-201. In its 1984, 1985, 1987 and 1988 reports, Chevron treated its Birch Creek operating expenses as processing costs pursuant to WYO.STAT. § 39-2-202 and the Department's rules and regulations, excluding the expenses from the taxable value of the gas for ad valorem and severance tax purposes. In 1992, the Department of Revenue performed an audit on Chevron's reported production for 1984 through 1989, disallowed the deduction for operating costs of the compressor facility and ordered Chevron to pay additional tax, interest and a penalty.

Chevron appealed the Department's order and the issues were submitted to the Board on briefs of the parties. The Board subsequently entered a final order, concluding the compression expenses were not processing or transportation costs and may not be deducted when valuing the gas. The Board vacated the penalty assessment. Chevron filed a petition for review in the District Court for the First Judicial District on December 1, 1993. In the petition, Chevron asked the court to find the Board's order denying the deduction for costs of the Birch Creek compression facility unlawful. Chevron also asked the court to enter a judgment ordering the deduction of the Birch Creek compression expenses as costs of processing and/or transportation in arriving at the value of Chevron's natural gas production. The district court issued a decision letter and an order affirming the Board's decision. Chevron's motion to reconsider was denied and Chevron filed this appeal.

STANDARD OF REVIEW

When considering an appeal from a district court's review of agency action, we do not accord any special deference to the district court's decisions on questions of law. Union Pacific Railroad Co. v. Wyoming State Bd. of Equalization, 802 P.2d 856, 859 (Wyo.1990). "Using the same evidentiary materials and the same review standards as the district court, we conduct an independent inquiry into the matter, just as if it had proceeded directly to us from the agency." Id. (quoting Southwest Wyoming Rehab. Center v. Employment Sec. Comm'n, 781 P.2d 918, 920 (Wyo.1989)).

To resolve the issue in this case, we must interpret WYO.STAT. § 39-2-202(b) and apply that interpretation to the facts. Statutory interpretation is a question of law and is reviewed de novo. Trefren v. Lewis, 852 P.2d 323, 325 (Wyo.1993); B & R Builders v. Beilgard, 915 P.2d 1195, 1197 (Wyo.1996). If an agency's action "is supported by substantial evidence, its decision should be reversed only for errors of law. If the agency did not apply the correct rule of law, or applied it incorrectly, this Court does not defer to the agency's conclusion. The agency's errors of law are corrected by this Court." Laramie County Board of Equalization v. Wyoming State Board of Equalization, 915 P.2d 1184, 1188 (Wyo.1996) (quoting Butts v. Wyoming State Board of Architects, 911 P.2d 1062, 1065 (Wyo.1996)).

WYO.STAT. § 16-3-114(c) and WYO.R.APP.P. 12.09 provide the scope for our review of agency decisions:

To the extent necessary to make a decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. * * * The reviewing court shall:

* * * * * *

(ii) Hold unlawful and set aside agency action, findings and conclusions found to be:

(A) Arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law;

(B) Contrary to constitutional right, power, privilege or immunity;

(C) In excess of statutory jurisdiction, authority or limitations or lacking statutory right;

* * * * * *.

WYO.STAT. § 16-2-114(c) (1990). Since the issues presented in this case involve statutory interpretation, our review will focus on whether the Board's decision was in accordance with law and within its statutory authority, right or jurisdiction. WYO.STAT. § 16-2-114(c) (1990).

DISCUSSION

This case requires us to interpret WYO.STAT. § 39-2-202 to determine the valuation point of natural gas for severance and ad valorem tax purposes. The Board argues that the point of valuation is at the outlet of the compressor facility, where the gas enters the pipeline for transportation to market. Chevron argues the point of valuation is at the inlet of the compressor station, before the gas is compressed for transportation to market. If the point of valuation is at the outlet of the compressor facility, Chevron's Birch Creek compressor expenses are not deductible when calculating the value of the natural gas. If the point of valuation is at the inlet of the compressor facility, the compression expenses are deductible.

During the years relevant to this appeal, WYO.STAT. § 39-2-202 provided the legislative authority for determining the point of valuation for natural gas. The relevant portion of the statute stated:

(a) Based upon the information received or procured pursuant to W.S. 39-2-201(b) or (c), the board shall annually value the gross product for the preceding calendar year, in appropriate unit measures of all mines and mining claims from which valuable deposits are produced, at the fair cash market value of the product at the mine or mining claim where produced, after the mining or production process is completed.

(b) The ... production process is deemed completed when the mineral product is removed from the ... well, and prior to any ... further processing is placed in storage prior to transportation to market, or in the case of natural gas, in the pipeline for transportation to market.

1977 Wyo.Sess.Laws Ch. 45, § 1; WYO.STAT. § 39-2-202 (1977). Pursuant to the statute, the Board annually values the gross product of all mines and mining claims at the fair market cash value of the mineral product at the mine or mining claim where produced after the production process is completed. Thus, the point of valuation is at the mine or mining claim after the production process is completed. WYO.STAT. § 39-2-202(a) (1977). Subparagraph (b) of WYO.STAT. § 39-2-202 designates the point at which the production process is complete. According to the statute, the production...