Navajo County v. Four Corners Pipe Line Co.

• Decision Date: 31 December 1970
• Docket Number: No. 10139--PR,10139--PR
• Parties: NAVAJO COUNTY, Arizona, Mohave County, Arizona, Apache County, Arizona, Coconino County, Arizona, Yavapai County, Arizona, and State Department of Property Valuation, Appellants, v. FOUR CORNERS PIPE LINE COMPANY, Appellee.
• Court: Arizona Supreme Court

Page 174

479 P.2d 174

106 Ariz. 511

NAVAJO COUNTY, Arizona, Mohave County, Arizona, Apache County, Arizona, Coconino County, Arizona, Yavapai County, Arizona, and State Department of Property Valuation, Appellants, v. FOUR CORNERS PIPE LINE COMPANY, Appellee.

No. 10139--PR.

Supreme Court of Arizona, In Banc.

Dec. 31, 1970.

Gary K. Nelson, Atty. Gen., by James D. Winter, Asst. Atty. Gen., Phoenix, for appellants.

Ryley, Carlock & Ralston by George Read Carlock, and William F. Wilder, Phoenix, for appellee.

McFARLAND, Justice.

This is a petition for review of a decision of the State Court of Appeals, 12 Ariz.App. 348, 470 P.2d 496 which affirmed the judgment of the Maricopa County Superior Court in favor of the Appellee, Four Corners Pipe Line Co., (hereinafter referred to as the Company) and adverse to the appellants and the defendants in the court below (Navajo County, Mohave County, Apache County, Coconino County and Yavapai County, hereinafter referred to as the State). The Company is the owner of certain property involved in this case which consists of a 16-inch diameter pipe-line originating in the Four Corners area of Arizona and thence crossing the counties involved into the Los Angeles area and which is used primarily for the gathering and transportation of crude oil. The pipe-line was constructed in 1958 at the approximate cost of $45,000,000.00. In 1967 it was valued by the Interstate Commerce Commission for rate making purposes at $35,000,000.00. It has been stipulated by the parties here that the portion of the pipe-line which is in Arizona represents 45.4% Of the total system. The sole question involved in this matter is the valuation of the pipe-line by the State Department of Property Evaluation for the purposes of ad valorem taxes. It is contended by the Company that the proper valuation should be $8,141,128.00. On the other hand the State takes the position that the valuation made by the Department was properly assessed at $19,799,985.00.

The Company, in accordance with the statutes paid the taxes that were levied against it by the State on behalf of the various counties and then appealed the taxation to the Superior Court. After a lengthy trial, having heard witnesses from both sides, it decided in favor of the Company that the proper assessed valuation was, as claimed by the Company, $8,141,128.00. From this judgment the State appealed. The Court of Appeals sustained the lower court and it is now before this Court.

In the lower court the Company raised the question of the constitutionality of the taxing system, claiming that they were deprived of due process of law in that a valuation, or method of evaluation, was placed upon their property differing from that used for other similar businesses. This has not been an issue in the appellate courts and apparently has been abandoned by the Company on appeal. However, the question of due process as far as taxation of companies, such as railroads and pipe-lines, has recently been answered by this Court in the case of Apache County et al. v. Atchison, Topeka and Santa Fe Railway Company and Southern Pacific Company, decided by this Court on November 13, 1970, 106 Ariz. 356, 476 P.2d 657. Therefore the sole question before this Court is the method of evaluating the pipe-line system, for the purposes of levying taxes by the Department.

Under § 42--124.01, A.R.S. the director of the Department is obliged to make an annual assessment of pipe-lines within the state. He is bound to determine in this assessment the full cash value of the pipe-line systems. Section 42--201, subsec. 7, A.R.S. defines full cash value as follows: 'Full cash value for property tax purposes is synonymous with market value which means that estimate of value that is derived annually by the use of standard appraisal methods and techniques'. Section 42--147, subsec. B, A.R.S. states that the evaluation approved by the State Board is presumed to be correct and lawful. In the trial court the Company introduced a series of witnesses who testified to a method that the State refers to as 'the wasting asset method' which we will develop more fully. On the other hand the State relied upon the Board's evaluation which was based upon the capitalization of income, using the income of the five years prior to the year of evaluation here in question (1968). Primarily the difference between the two systems is that the State relies on past income to capitalize it and project it into the future; whereas, the Company has used the system of projecting the income based upon the through-put of the number of barrels of oil that will be pumped each day to the Los Angeles market up to the year 1980, and then capitalizing and discounting it to bring it back to the year of taxation.

The Company's contention is that the income will be measurably reduced in the future because of several factors which their experts have taken into consideration; that is the claimed declination in production in the Four Corners area and also because the potential of the market in the Los Angeles area is forecast for a reduction because of off-shore oil production and because of the new discoveries of oil off the coast of Alaska, which it is claimed will now find its way down to the Los Angeles market. They also claim that the Texas-New Mexico pipe-line, which originates in the same area (Four Corners) but services the midwest will take more and more of the oil production in that area; and that 'local usage', which they are obliged to serve first in the Arizona area will continue to increase. Based upon this the Company claims that from the pertinent 1968 date, when the evaluation was fixed for the pipe-line system, that the through-put of the Arizona section of the Four Corners pipe-line will decline from 47,000 barrels per day to 5,000 per day in 1980. On these facts the trial court made a specific finding that the reasonable future expectations for through-put of oil, potential gross revenue, operating expenses, income taxes, and the discount factor set forth by the Company were appropriate and properly set forth the method of computing the present value of the pipe-line.

It is this formula which the State refers to as the 'wasting asset' valuation claiming that at the very least it is speculative in that it uses unknown future income, unknown future tariffs, unknown future production; whereas, on the other hand, the State bases its valuation on known factors of what the pipe-line has produced in the prior five years. Basically, the argument comes down to the argument between experts on whether a proper present valuation is more accurately portrayed by using the past five years or by capitalizing the future possible income over a period of twelve years.

Rightly, the State points out that the method being used by the Company has been employed for quite some years by mining companies, whether it be for solid minerals or, for what is known as 'fugitive' type of minerals such as oil. But this method when used for the calculation of the valuation of a field, whether it be a mine or an oil field, can be boxed in and a determination made with some accuracy by experts as to the total projected production be it in barrels or tons of whatever mineral will come out of the field. The State claims that this cannot be used for the transportation industry, which in the case of a pipe-line is no different from a railroad or trucking company, in predicting future income. Granted the through-put of a pipe-line depends in a great measure upon the oil reserves which are found in the area from which it originates; but the method used here by the Company does not rely as much upon the reserves as upon the potential usage by the markets at the termination point of the line.

At the trial over a thousand pages of testimony was recorded based upon the evidence given by the expert geologists and engineers. For example, there was a great deal of testimony by the experts as to the possibility of the Los Angeles Market being utilized by imports from foreign countries; by the production of the Santa Barbara off-shore oil wells; testimony as to the losses because of cracks and splits which resulted in the unfortunate ecological problems caused thereby; a good deal of testimony about the potential production of the north and south slope of Alaska, and the new oil finds there; testimony that at the time consumption of oil was approximately 50 barrels per every person in the United States per year. Willard Pye, on behalf of the State, testified that considering our population increase that by 1980 consumption will go up to about 62 barrels of energy per person. He stated that as of 1968, oil and gas produced about 75% Of the energy used per person, but by 1980 it will drop to about 70%. The drop will be picked up by atomic or other forms of energy but, although the percentage will drop, consumption of oil itself will increase from 1968's 4.5 billion barrels of oil to about 6.7 billion barrels of oil per year in 1980. All of this points up the problem facing a court in hearing in a trial de novo in a case of this type.

It is true, as pointed out by the Company and agreed to by the State, that the case of State Tax Commission v. Phelps Dodge Corp., 62 Ariz. 320, 157 P.2d 693 gives to the Superior Court full and exclusive right to hear the case from beginning to end; to consider all the evidence and make the same decision as if it were sitting as an expert board of property evaluators. The State has referred to this as a 'presumption' that the decision made by the Board, shall be presumed to be correct and lawful, § 42--147 A.R.S., but giving to the court authority to make its own private independent decision. It is on this ground that the State has based its entire case, arguing that the Company came forth in the trial court with a method of evaluation which was not a standard approved method of appraisal and that by presenting evidence of...