In re Tax Appeal of Colorado Interstate Gas Co.

• Decision Date: 07 November 2003
• Docket Number: No. 89,494.,89,494.
• Parties: In the Matter of the Appeal of COLORADO INTERSTATE GAS COMPANY from a Decision of the Director of Property Valuation of the State of Kansas.
• Court: Kansas Supreme Court

276 Kan. 672

79 P.3d 770

In the Matter of the Appeal of COLORADO INTERSTATE GAS COMPANY from a Decision of the Director of Property Valuation of the State of Kansas.

No. 89,494.

Supreme Court of Kansas.

Opinion filed: November 7, 2003.

Richard D. Greene, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, argued the cause, and Karen L. Pauley, of El Paso Corporation, of Houston, Texas, was with him on the briefs for appellant.

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

The opinion of the court was delivered by

DAVIS, J.:

This matter comes before this court for the second time following the Board of Tax Appeals' (BOTA) valuation of Colorado Interstate Gas Company's (CIG) property in Kansas for ad valorem taxation purposes. In the first appeal, In re Tax Appeal of Colorado Interstate Gas Co., 270 Kan. 303, 14 P.3d 1099 (2000), this court reversed the BOTA final decision primarily based upon BOTA's application of an erroneous standard of review. Upon remand, the matter was again submitted to BOTA upon the existing record.

CIG appeals, claiming that BOTA ignored this court's decision in Colorado Interstate Gas again by applying an incorrect standard of review. CIG also raises the following three issues: (1) BOTA failed to honor this court's mandate to embrace an allocation methodology that achieves fair market value, (2) BOTA erred when it taxed CIG's intangible property, and (3) the 1992 amendment to article 11, § 1 of the Kansas Constitution, which denies public utilities an exemption from taxation of their inventories, violates CIG's equal protection rights under the United States Constitution

Facts

There is little agreement between the parties as to the material facts of this case. In its decision upon remand, BOTA sets forth a statement of facts consisting of 42 paragraphs. CIG's statement of facts consists of 10 separate paragraphs in its initial brief, with support to the record. The Department of Revenue Property Valuation Division (PVD) lists 34 separate paragraphs of facts, also with support in the record. In its reply brief, CIG, in 10 separate paragraphs, again with support in the record, argues that the PVD's facts distort the record. Both parties use facts favorable to their respective positions to argue the case before this court. A far better approach, perhaps unattainable in light of the voluminous record and the disparate position of the parties, would have been a stipulation as to the material facts. Since we are called upon to review the BOTA decision in this case, we begin with BOTA's statement of facts, leaving the factual arguments of the parties to the analysis portion of this opinion.

The BOTA order on remand sets forth the following factual findings:

"3. On remand, the parties have agreed that additional evidence is not necessary and that the Board should review the evidence previously presented and issue a decision utilizing the standards set forth by the Supreme Court. The following issues are before the Board:

"A. The appropriate unit valuation of the Taxpayer's property for 1993, 1994 and 1995 tax years, including

"a. The Appropriate Capitalization Rate.

"i. Appropriate Cost of Equity.

"b. Inclusion of Non-taxable Intangibles in the Unit Valuation.

"B. The allocation of that unit valuation to Kansas, including which of the following allocation methodologies should be used:

"a. Original cost.

"b. Rate base.

"c. Net book cost.

"d. Blend of rate base and net book cost.

"4. At the January 1997 hearing of these matters the following individuals testified:

"Called as witnesses by the Taxpayer:

"Richard G. Smead Senior Vice-President, Colorado Interstate Gas Co.

"Dan A. Homec Ass't. Vice-President and Controller, Colorado Interstate Gas Co.

"Kenneth Williams Vice-Chairman, Brown, Williams, Scarbrough & Quinn, Inc., Consulting

"Prof. J. Peter Williamson The Laurence F. Whittemor Professor of Finance, Amos Tuck School of Business, Dartmouth College

"Dr. John H. Davis, III PhD, MAI, SRPA, ASA, Business Valuation Services, Inc.

"Robert M. Badenoch Bureau Chief, State Appraised Properties, Division of Property Valuation, Kansas Dept. of Revenue "John Hughes Tax Examiner 4, Division of Property Valuation, Kansas Dept of Revenue

"Floyd Rumsey Supervisor, Utility Section, State Appraised Properties, Division of Property Valuation, Kansas Dept. of Revenue

"Called as witnesses by the Division of Property Valuation:

"Michael W. Goodwin CAE, ASA, Michael W. Goodwin & Associates

"Dr. A. James Ifflander PhD, CFA, Private Consultant

"Robert M. Badenoch Bureau Chief, State Appraised Properties, Division of Property Valuation, Kansas Dept. of Revenue

"John Hughes Tax Examiner 4, Division of Property Valuation, Kansas Dept. of Revenue

"Floyd Rumsey Supervisor, Utility Section, State Appraised Properties, Division of Property Valuation, Kansas Dept of Revenue

"5. The Taxpayer has also raised a number of constitutional issues. The Board does not have the authority to determine whether these arguments have merit. The Board is to presume that the Kansas Constitution does not violate the federal constitution and that the Kansas statutes do not violate the U.S. Constitution or Kansas Constitution. The Board has no authority to determine constitutional questions. Zarda v. State, 250 Kan. 364, 826 P.2d 1365, cert. denied, 504 U.S. 973, 119 L. Ed 2d 566, 112 S. Ct. 2941 (1992). Therefore, the Taxpayer's constitutional arguments will not be addressed.

"6. The allocation of unit valuation to Kansas is the primary issue before the Board. The Taxpayer does not take issue with the method used by PVD to apportion the allocated unit value to the respective taxing jurisdictions within the State of Kansas.

"FINDINGS OF FACT

"General Findings

"7. The Taxpayer is a natural gas company providing production, gathering, processing, storage, transportation, and sales of natural gas from the Montana-Wyoming border through Utah, Colorado, Kansas, Oklahoma, and into Texas. The Taxpayer has tangible property located in seven different states in the Rocky Mountain region and its vicinity.

"8. The Taxpayer is regulated by the Federal Energy Regulatory Commission (`FERC') which exercises preemptive jurisdiction over nearly all of Taxpayer's interstate natural gas transmission, storage and gathering business activities. However, production, merchant, processing, and gathering functions are essentially unregulated.

"9. FERC regulates the Taxpayer's rates by establishing through adversary proceedings (rate cases) the amount Taxpayer is allowed to charge for each unit of service.

"10. As defined by FERC, `rate base' is the original cost of assets minus depreciation and deferred federal income taxes (DFIT).

"11. Effective October 1, 1993, FERC Order 636 changed the business environment for the Taxpayer by unbundling the several functional operations of the Taxpayer and providing for increased competition.

. . . .

"Intangibles

"26. Intangible property was included in the Taxpayer's unit value only to the extent that it enhanced the unit value of the Taxpayer's property. No specific amount of the unit valuation can be directly attributed to intangible components of the unit. As required by K.S.A. 79-3109c, money, mortgages, and other evidence of debt were not included in the unit valuation of the Taxpayer's property.

"27. Interest and overhead are not intangible assets, but are a capitalized part of the operating property of the Taxpayer. Ifflander, Transcript, pp. 859-860. Therefore, interest and overhead are appropriately included in the Taxpayer's unit value.

"Inventory

"28. PVD included inventory items in the unit valuation of the Taxpayer's property. The Taxpayer did not identify any of its inventory that has been inappropriately valued, assessed, and taxed in Kansas.

"Allocation of Unit Valuation to Kansas

"29. The process of dividing up the unit value of a company among the states where it has a presence is called allocation. The process of dividing up the allocated state value among the taxing jurisdictions within a state is called apportionment.

"30. PVD used original cost to allocate all public utility unit values to Kansas for the tax years in question. This includes all pipeline companies subject to state assessment and all other companies whose values are required to be apportioned by K.S.A. 79-5a25.

"31. There are twenty-eight states that use various allocation factors to allocate public utility unit values. Of these, nine states, including Kansas, use original cost as the sole allocation factor. Ten states use original cost along with other factors to allocate unit value.

"32. Original cost is used by FERC to allocate expenses, plant, and intangibles.

"33. The taxpayer used original cost to allocate deferred federal income taxes to the states in which they operate.

"34. Allocation factors are not designed to determine the fair market value of assets in a particular location, but are designed to determine a reasonable apportionment of a unit's value to such assets. All allocation processes are arbitrary and may import or export value to a state. However, even though allocation processes may be arbitrary in nature, the process used to allocate value must have some relation to the assets whose value is being allocated. Allocation is not an appraisal process.

"35. Original cost as an allocation factor accounts for the amount of investment made throughout the utility system, the quantity of utility property at different locations, the age of the utility property and has a high correlation with income.

"36. Michael W. Goodwin, PVD's expert witness, compared PVD's original cost allocation factors for the subject tax years with allocation factors obtained by the use of other generally recognized allocation methodologies, such as inch miles and MCF miles of transmission lines, as well as horsepower hours of compressors, and he concluded that

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