In re Tax Appeal of CIG Field Services Co.

Decision Date03 June 2005
Docket NumberNo. 92,655.,92,655.
Citation112 P.3d 138,279 Kan. 857
PartiesIn the Matter of the Appeals of CIG FIELD SERVICES COMPANY from Orders of the Director of Property Valuation of the State of Kansas.
CourtKansas Supreme Court

Laurence E. Garrett, of the El Paso Corporation, of Colorado Springs, Colorado, argued the cause, and Michael Lennen, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, and was with him on the briefs for appellant.

William E. Waters, of Division of Property Valuation, Kansas Department of Revenue, argued the cause and was on brief for appellee.

The opinion of the court was delivered by

BEIER, J.:

CIG Field Services Company (CIG) appeals from a decision by the Board of Tax Appeals (BOTA), which upheld the Department of Revenue's valuations and assessments for tax years 1997 to 2003. CIG contends that Kansas' statutory differentiation between the tax treatment for interstate and intercounty gas gathering systems on the one hand and intracounty gas gathering systems on the other violates the federal Commerce Clause and the federal and state Equal Protection Clauses.

During the tax years in question, appellant CIG owned and operated certain natural gas gathering systems in Kansas. Those systems crossed the state line into Oklahoma and Colorado. The Property Valuation Division of the Kansas Department of Revenue (PVD) therefore valued and assessed CIG's property as public utility property at 33 percent of its fair market value, pursuant to K.S.A. 79-5a01 and K.S.A. 79-1439(b)(2)(C). Intercounty gas gathering systems also meet the statutory definition of "public utility" under K.S.A. 79-5a01 and are valued in the same manner and assessed by the PVD at the same tax rate as interstate gas gathering systems.

In contrast, intracounty gathering systems do not meet the definition of "public utility" under K.S.A. 79-5a01. Their property is classified instead as "commercial and industrial" property. Such property is depreciated on a 7-year, straight-line basis to a floor of 20 percent of its original cost and assessed by the county appraiser at 25 percent of its calculated depreciated value, pursuant to K.S.A. 79-1439(b)(2)(E).

None of the above facts has been in dispute. The parties also stipulated before BOTA that Kansas Corporation Commission licensing and regulation of gas gatherers is the same regardless of tax classification.

Other evidence before BOTA was conflicting, including the expert testimony on whether interstate and intercounty gas gathering systems were competitive with or otherwise similarly situated to intrastate gas gathering systems.

Richard Heltzel, ad valorem tax manager, indicated that, hypothetically, if the Kansas property taxes on CIG's property are higher than the taxes on comparable property owned by a similarly situated intracounty facility, "[t]he end result would be increase in costs of doing business and probably put the locally assessed gatherer at a competitive advantage I would think."

Dr. David Dismukes, CIG's consulting economist, examined the nature of natural gas gathering in Kansas to determine the competitive structure of the industry. He concluded that, although there is some moderate concentration of ownership in the market, Kansas is "well within a competitive market structure for gathering services" whether the companies involved are intercounty, intracounty, or interstate. In addition, Dismukes agreed there was "heads-up" competition between intracounty gathering systems and CIG and opined they were similarly situated. He observed, for example, that in Haskell County, Kansas, there are some intracounty transmission pipelines in "very close proximity if not laying right on top of" CIG's line. Dismukes said these lines could either be connecting or close enough in proximity to pull "leases or wells or other volumes" from those areas.

Dismukes gave no specific examples to support the theory that the intracounty systems gained a competitive edge through differential valuation and assessment. In addition, Dismukes conceded that a low-volume producer might not have the same economic opportunities as a large-volume producer.

Glenn Smith, a private consultant retained by the Department of Revenue and a former Chief of Pipeline Safety for the Kansas Corporation Commission, testified that intracounty gas gathering systems generally gather gas from marginal wells. Further, both Smith and Robert Badenoch, Bureau Chief for State Appraised Properties, indicated that intracounty systems generally are not directly connected to a transmission pipeline because intracounty systems do not have the necessary pressure. According to Smith, intracounty systems are "short segments of pipe which interconnect with other gathering systems through which the gas is moved." Generally intracounty gas gathering systems are connected to intercounty systems.

Smith disagreed with Dismukes' conclusions that interstate and intercounty systems are competitive with and similarly situated to intracounty systems. He concluded that intracounty systems are customers, not competitors, of intercounty systems, because most natural gas transported by intracounty systems also is transported by interstate or intercounty systems for a fee.

The BOTA Decision

The BOTA majority ultimately found that the cumulative appraised value for CIG property for 1997 to 2003 was approximately $11 million higher than it would have been if CIG were an intracounty gas gathering system and its property classified as commercial or industrial rather than public utility. The corresponding higher tax impact was approximately $900,000.

The BOTA majority stated the following among its paragraphs of "ANALYSIS AND FACTUAL CONCLUSIONS":

"[18] . . . .
. . . .
(b) The Taxpayer introduced evidence demonstrating that as an interstate gas gathering company, [it is] adversely affected by the different tax treatment accorded intra-county gas gathering companies under K.S.A. 79-5a01.. . . Taxpayer has made a showing that it was unfavorably affected vis-a-vis a higher tax impact.
(c) In many significant respects, the Taxpayer is similarly situated with intra-county gas gathering companies.
(i) According to a witness for the Department, because most intra-county gas gathering systems interconnect with an inter-county/interstate gas gathering system, `virtually all' of the natural gas produced in Kansas is transported by inter-county/interstate gas gathering systems . . . . This would tend to acknowledge that most gas gathering systems in Kansas are similarly situated.
(ii) [N]atural gas gathering systems are not regulated differently by the KCC based on mileage of pipe; volumes of throughput; the number of wells connected to particular systems; or their geographic location . . . . There are no functional differences between a natural gas gathering system located and operating in a single county and one that crosses state lines . . . . Furthermore, natural gas systems are not required to seek KCC approval to serve particular wells or geographic areas . . . .
(iii) As acknowledged by . . . a witness for the Department, whether gathering systems cross either county or state lines is more a product of where producing wells may be located (i.e., a matter of `happenstance') than a matter of design . . . . As further embellished by a witness for the Taxpayer, all such systems — whether single county, multi-county or interstate — consist of pipes collecting natural gas and moving it from the wellhead to more centralized locations such as processing plants or pipelines. . . .
(iv) With regard to the degree of competition within the natural gas gathering business in Kansas, according to a witness for the Department, there is virtually no competition within the natural gas gathering business in Kansas because: (i) gas gathering services are existent to handle all producing wells; (ii) the construction of new facilities when existing gas gathering contracts expire is expensive and not cost effective . . . ; and (iii) there is little evidence of gas gatherers losing customers to other gas gatherers. . . . However, according to a witness for the Taxpayer, although small gas gathering companies have some barriers to entry into the Kansas gas gathering market, which include capital requirements and management. . ., there are a number of alternatives available to the purchasers of natural gas gathering services (i.e., producers) in the Kansas natural gas gathering market. These alternatives include: (1) purchasing gathering services from an inter-county-interstate provider; (2) purchasing gathering services from an intercounty/intrastate provider; (3) purchasing gathering services from an intra-county provider; or (4) self providing those gathering services.
The Department's claim that intra-county systems are customers and not competitors with interstate systems fails to recognize one of the most basic, and fundamental conditions of competition in all infrastructure industries (pipelines, power transmission, telecommunications) over the past 20 years: open access and interconnectivity into physical infrastructure systems. In the case of natural gas gathering and transmission systems, the open season/open access requirement of [Federal Energy Regulatory Commission] Order 636 [requiring interstate pipelines to "unbundle" transportation and sales and provide transportation to buyers from other sources] is a key component of pipeline transmission competition. . . .
There are various degrees of market competitiveness depending upon whether the market structure is monopoly, oligopoly, monopolistic competition, or pure competition . . . . Of these four broad market structure classifications, only one form of market structure entirely precludes all competition — a monopoly market structure. In a monopoly, there is only one firm and the firm is the market. However, the other three market structures represent, to varying degrees,
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