It’s an annual fight in Alaska: the tax bill that the Trans Alaska Pipeline System must pay to Alaska localities. The fight also involves some assumptions about how long the line is sticking around, as Tim Bradner discusses in this week’s Oilgram News column, Petrodollars.
Trans Alaska Pipeline System owners are once again locked in combat with local municipalities and the state over the annual property tax valuation of the 800-mile pipeline.
The issue recurs every year as the state sets a value for TAPS. Under state law the state’s figure must be used by municipalities along the pipeline route for their own taxes on TAPS. The State Assessment Review Board must decide the issue by May 23.
For 2014, three Alaska municipalities most affected by the issue are claiming a tax value of $13.7 billion. They include the North Slope Borough, the Fairbanks North Star Borough and the city of Valdez. TAPS owners, led by major North Slope producers BP, ConocoPhillips and ExxonMobil, are claiming it is worth $2.7 billion.
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In 2013 the state assessment review board selected $11.9 billion as the value of TAPS for that year, a figure still under dispute.
The state assessment board will pick a number between the estimates for 2014. If the board selects a high figure for valuation it helps municipalities because they can collect more in taxes. A lower number is desired by the pipeline owners as it would reduce their tax bill.
The tax impact is considerable. A $13.7 billion valuation would result in a tax bill of $274 million. A lower valuation in line with what the companies want would make the tax $54 million. The state revenue department’s middle-ground figure would be $114 million in taxes owed.
The issue has meanwhile become a political football in Alaska. Bill Walker, lead attorney for the city of Valdez, is leading the municipalities’ push for higher taxes and is running against Governor Sean Parnell in state elections this fall. Valdez pushed the other two municipalities toward using the higher figure, sources within the municipal group said.
No matter what figure the assessment board picks, the dispute will be appealed to the courts, as it is every year. In February the state Supreme Court rendered its first final decision on TAPS tax dispute for 2006, and is still looking at years 2007 through 2009. Subsequent years are still in state Superior Court.
“You’d think that after a decade of litigation and superior court decisions and now a supreme court decision we’d have more certainty, not less,” said Jim Greeley, the state’s chief property tax assessor.
Property tax assessors use several methods to set values, the most common being market value, based on actual sales as in real estate. But there are few 800-mile Alaska pipelines on the market, so other methods are used, Greeley said.
For TAPS, the disputing parties have agreed to use an estimate of pipeline replacement, or what it could cost to build TAPS anew, with an allowance for depreciation. The parties agree on nothing else, though.
To arrive at their replacement estimate the municipalities hired a consulting firm, ProPlus. TAPS owners hired another firm, Stantec. Not surprisingly, the firms rendered estimates supporting their clients’ opposite positions.
Greeley said he based state’s middle-ground valuation on a TAPS replacement estimate from 2006 that is now approved in the Supreme Court but indexed to 2014 using an industry cost index. “We based our estimate in what the court has approved. The other two started from scratch,” Greeley said.
Depreciation is a key part of the dispute, Greeley said. If the municipalities’ view that a straight-line depreciation method is used the result is a gradual slope of declining value that ends up, in 2014, with a value of $13.7 billion the municipalities claim.
Pipeline owners, meanwhile, use a different method that is tied loosely to “units of production value,” which corresponds to throughput. Since TAPS throughput was steady at 2 million b/d in the 1980s, and started dropping in 1989, this depreciation method creates a steeper slope, resulting in the $2.7 billion value for 2014.
What also affects the depreciation slope is the end-point, and the TAPS owners and municipalities are far apart on this, too. The municipalities are assuming an end-of-life for TAPS in 2067, while the companies, and the state revenue department are assuming 2047. The longer life assumption flattens the depreciation curve further, strengthening the municipalities’ claims. Both assumptions assume TAPS can operate down to 100,000 b/d.
The municipalities argue that there are more reserves on the slope than in the state estimates, enough to stretch to the pipeline operating life to 2067 before the 100,000 b/d limit reached.
Whether TAPS can actually operate at 100,000 b/d is problematic. The pipeline now carries about 500,000 b/d but TAPS operator Alyeska Pipeline Service Co., has said that it can operate down to about 300,000 b/d, but then only with modifications.
— Tom Bradner in Anchorage