In re Application of Transcanada Keystone Pipelike, L.P.

Decision Date05 November 2012
Docket Number2010-8538-PVX
CourtTax Court of Kansas



Now the above-captioned matter comes on for consideration and decision by the Court of Tax Appeals of the State of Kansas on cross motions for summary judgment pursuant to K.S.A 60-256, Kan. Sup. Ct. R. 141, and K.A.R. 94-5-15. Oral arguments were heard on March 28, 2012. Jurisdiction over the parties and of the subject matter is proper pursuant to K.S.A. 79-213.

The applicant, TransCanada Keystone Pipeline, LP ("Keystone") appeared by and through its attorneys of record, S. Lucky DeFries and Jeffrey A. Wiethern of Coffman, DeFries & Nothern PA, along with John. R. Haug ofSNR Denton U.S. LLP, admitted pro hac vice. The Kansas Department of Revenue, Property Valuation Division ("PVD") appeared by and through its attorney of record, William E. Waters. Amici curiae papers were filed with permission of this court on behalf of the counties of Butler, Clay, Cowley, Dickinson Marion and Washington. The attorney of record for the amici curiae is Carol B. Bonebrake of Cosgrove, Webb & Oman.

In this matter Keystone seeks review of PVD's final recommendation denying exemption from ad valorem property tax for that portion of an interstate crude oil pipeline known as the "Cushing Extension" located within the state of Kansas. The subject pipeline enters Kansas from Nebraska and crosses the state from north to south through the counties of Butler, Clay, Cowley Dickinson, Marion, and Washington. For purposes of this exemption matter, the subject pipeline is identified as: PVD ID NO. F3202.

I. Summary Judgment Standards

The standards for summary judgment are well known. Summary judgment is appropriate where the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. K.S.A. 60-256(c). The purpose of summary judgment is to eliminate delay in legal disposition where there are no genuine issues of material fact. Timi v. Prescott State Bank, 220 Kan. 377, 386, 553 P.2d 315, 323 (1976). Summary judgment is nonetheless a drastic remedy; the movant has the burden of demonstrating there are no genuine questions of material fact and that judgment as a matter of law is appropriate. See Saliba v. Union Pac. R.R., 264 Kan. 128, 131, 955 P.2d 1189 (1998).

Questions involving statutory interpretation or construction, such as those presented in this instance, are questions of law and, as such, are particularly suited for summary judgment. See Mitchell v. Liberty Mutual Ins. Co., 271 Kan. 684, 692, 24 P.3d 711 (2001). Whether certain property is exempt from ad valorem taxation is a question of law if the material facts are not disputed. See Lario Enterprises, Inc. v. State Bd. of Tax Appeals, 22 Kan.App.2d 857, 859, 925 P.2d 440 (1996).

II Uncontroverted Facts

It is agreed that the material facts of this case are not subject to genuine dispute. Keystone is a company engaged in the business of constructing and operating pipelines for transporting oil, natural gas, hydrocarbons, and petroleum products and byproducts. It is a limited partnership comprised of one limited partner, TransCanada Keystone Pipeline, LLC, and one general partner, TransCanada Keystone Pipeline GP, LLC. The two partners are wholly owned subsidiaries of TransCanada Corporation, which is headquartered in Calgary, Alberta, Canada.

In February 2005, Keystone announced plans to build a 2, 148 mile pipeline beginning at Hardisty, Alberta, Canada, crossing the United States border and traversing the states of North Dakota, South Dakota, Iowa, Missouri, and terminating in Wood River and Patoka, Illinois. This transnational pipeline is known as the "Mainline." The United States portion of the Mainline was later rerouted to include approximately 1, 084 miles of pipeline and 24 pumping stations in the states of North Dakota, South Dakota, Nebraska, Kansas, Missouri and Illinois. Keystone began construction of the Mainline in the spring of 2008 and commenced commercial operations on the line in June 2010. The Mainline delivers approximately 435, 000 barrels of crude oil per day to refineries in Wood River and Patoka, Illinois.

Relevant to this case is a pipeline known as the "Cushing Extension, " which connects with the Mainline and extends from Steele City, Nebraska, crosses Kansas from north to south for a distance of approximately 210 miles, and terminates in Cushing, Oklahoma. Keystone seeks exemption for that portion of the Cushing Extension located in Kansas.

Plans to build the Cushing Extension were announced in late 2005. Construction of the line began in spring 2010, and commercial operations commenced in February 2011. The Cushing Extension delivers approximately 156, 000 barrels of crude oil per day from Steele City, Nebraska, through Kansas, and on to the Cushing facility in Oklahoma. The Cushing facility is a major crude oil marketing, refining and pipeline hub. The Mainline and Cushing Extension together deliver to the United States approximately 591, 000 barrels of crude oil per day from production sources in Canada. Keystone maintains and operates both the Mainline and the Cushing Extension.

During the Cushing Extension planning phase, the Kansas legislature began debating a piece of legislation known as the Kansas Energy Development Act. In general terms, the Act authorizes incentives for energy-related projects for refineries, pipelines, fertilizer plants, and other such capital investment. The Act includes income tax credits, financing assistance, and property tax exemptions for qualifying projects, including a property tax exemption for certain new pipeline projects. The Act's pipeline exemption applies to all taxable years from the commencement of construction or installation of a qualifying pipeline and for the ten taxable years immediately following completion of the project. The Act went into effect July 1, 2006.

The Kansas Department of Commerce is the agency of government delegated authority to implement the provisions of the Kansas Energy Development Act. On October 17, 2008, Keystone submitted an application for income tax credits for its pipeline project pursuant to K.S.A. 79-32, 224. The application identified all three phases of the project: the Mainline (Phase I), the Cushing Extension (Phase II), and the Keystone XL (Phase III). Keystone sought, and was granted, tax credits in connection with Phases II and III, and an Incentive Agreement confirming Keystone's entitlement to ten years of state income tax credits was executed for those phases of the project. The Incentive Agreement recites that refineries in Kansas would have access to the pipeline project for the transportation of crude oil and/or natural gas liquids.

On or about March 11, 2008, the United States Department of State issued its presidential permit authorizing construction, connection, operation and maintenance of Keystone's pipeline project. The permit followed an extensive State Department investigation into the project, including an assessment of the project's potential impact on the environment and on historical lands and endangered species.

On November 1, 2010, Keystone filed its application for property valuation exemption (the "PVX Application") pursuant to K.S.A. 79-227, seeking exemption from ad valorem property tax for that portion of the Cushing Extension located within Kansas. In general terms, an exemption under K.S.A. 79-227 is available for segments of new pipelines in Kansas that have a certain minimum length within Kansas and that are accessible to refineries in Kansas.

PVD recommended denial of the exemption request upon its review of the PVX Application and continues to oppose the exemption to date. In its responsive recommendations and comments to the PVX Application, the agency stated as follows:

"Although refineries in this state have access to crude oil being transported into Cushing, Oklahoma via the subject pipeline, no evidence has been submitted establishing that they have access to a 'pipeline which is located in this state."'

Keystone concedes that Kansas refineries do not receive Canadian crude oil pumped through the subject pipeline via access points located within the political boundaries of Kansas. Rather, the oil that is moved through the subject pipeline is accessible to refineries in Kansas by means of existing delivery lines that connect to the Cushing Extension at the Cushing market hub in Oklahoma. This existing infrastructure is commercially adequate to transport Canadian crude oil to refineries in Kansas, and refineries in Kansas are capable of transporting and refining the product supplied via the Cushing Extension.

Refineries in Kansas at no time contemplated having—or needing—access to crude oil supplied through the Cushing Extension by any means other than the existing delivery lines and supporting infrastructure. The cost to construct new lateral delivery lines connecting refineries in Kansas to the Cushing Extension at points within the political boundaries of Kansas would be considerably higher than the estimated value of the property tax exemption.

III. The Pipeline Exemption

All property in this state not expressly exempt is taxable. K.S.A. 79-101. The exemption of property to advance a public purpose or to promote the public welfare is solely the province of the legislature. See State ex rel. Tomasic v Kansas City, 237 Kan. 572, 578, 701 P.2d 1314 (1985). As a political body, "[t]he legislature is...

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