Case Title: WILLIAMS PRODUCTION RMT COMPANY V. WYOMING DEPARTMENT OF REVENUE

Citation: 

Docket Number: S-08-0018

State: wyoming

Court: Wyoming Supreme Court

Date: 2008-12-31T00:00:00Z

Document:
WILLIAMS PRODUCTION RMT COMPANY V. WYOMING DEPARTMENT OF REVENUE2008 WY 155197 P.3d 1258Case Number: S-08-0018Decided: 12/31/2008
OCTOBER 
TERM, A.D. 2008

 
 
WILLIAMS 
PRODUCTION RMT 
COMPANY,Appellant(Petitioner),v.WYOMING DEPARTMENT 
OF REVENUE,Appellee(Respondent).

 
 
Rule 
12.09(b) Certification from

the 
DistrictCourtofCampbellCounty

The 
Honorable Dan R. Price, II, Judge

 
 
Representing 
Appellant:

Patrick 
R. Day and Delissa L. Hayano of Holland & Hart LLP, Cheyenne, Wyoming.  
Argument by Mr. Day.

 
 
Representing 
Appellee:

Bruce 
A. Salzburg, Attorney General; Michael L. Hubbard, Deputy Attorney General; 
Martin L. Hardsocg, Senior Assistant Attorney General; Karl D. Anderson, Senior 
Assistant Attorney General.  
Argument by Mr. Hardsocg.

 
 
Before 
VOIGT, C.J., and GOLDEN, HILL, KITE, and BURKE, JJ.

 
 

KITE, 
Justice.

 
 
[¶1]  After the Wyoming State Board of 
Equalization (Board) affirmed the Department of Revenue's (DOR) valuations of 
Williams Production RMT Company's (Williams) coal bed methane (CBM) production 
for production years 2000-2002, Williams sought review in district court.  The DOR moved for, the district court 
ordered and this Court accepted certification pursuant to W.R.A.P. 
12.09(b).  The principal issue for 
our determination is whether, as the Board ruled, the point of valuation of 
Williams' 2000-2002 CBM production was at the outlet of the initial dehydrator 
pursuant to Wyo. Stat. Ann. § 39-14-203(b)(iv) (LexisNexis 2007), or, as 
Williams maintains, was upstream from the initial dehydrator where Williams 
transferred the CBM by bona fide arms-length transaction to a third party 
for  transportation.  For the reasons set forth in Kennedy Oil v. Wyo. Dep't of Revenue, 
2008 WY 154, ___ P.3d ___ (Wyo. 2008), we affirm the Board's ruling as to the 
point of valuation.  On the two 
secondary issues, we affirm the Board's ruling on the deduction allowed for 
downstream transportation costs and reverse the Board's decision denying 
Williams an on-lease fuel exemption.

 
 
ISSUES

 
 
[¶2]  The following issues are determinative 
of this appeal:

 
 
1. 
Whether the Board correctly determined that the point of valuation of CBM for 
severance and ad valorem tax purposes is at the outlet of the initial dehydrator 
rather than upstream where Williams sold or transferred it to a third 
party.

 
 
2.  Whether the Board's ruling on the 
deduction allowed for transportation costs downstream of the outlet of the 
initial dehydrator was supported by substantial evidence.

 
 
3.  Whether the Board's ruling denying 
Williams a fuel use exemption was supported by substantial evidence.   

 
 
FACTS

 
 
[¶3]  In 2000, 2001 and 2002, Williams 
produced CBM from the PowderRiver Basin in northeastern Wyoming.  Williams entered into a contract with 
Western Gas (Western) pursuant to which Williams transferred the CBM to Western 
at Western's screw compressor facility for transportation downstream to 
additional compressors, the dehydrator and the inlets of the Fort Union or MIGC 
pipeline. 

 
 
[¶4]  For production years 2000-2002, Williams 
considered the point of valuation to be the place of transfer and calculated and 
paid production taxes by deducting from the CBM sales price the fees charged by 
Western.1  In 2006, the Wyoming Department of Audit 
(DOA) completed an audit of Williams' 2000-2002 CBM production from the 
PowderRiver Basin.  The DOA re-evaluated Williams' 
production and disallowed the deduction of Western's fees.  The DOA issued a final decision letter 
to Williams in August of 2006 finding that Williams owed an additional 
$2,030,406.01 in severance taxes for the 2000-2002 production years.  The DOR adopted the DOA's findings and 
issued a letter notifying Williams that it owed the additional amount.   

 
 
[¶5]  Williams appealed the decision to the 
Board, which held a three-day contested case hearing in March of 2007.  At the hearing, Williams asserted that § 
39-14-203(b)(v) controlled the valuation of CBM transported by a third party 
prior to the outlet of the initial dehydrator and that paragraph (b)(v) worked 
with paragraph (b)(vi)(B) to allow the deduction of all third party charges, 
including those upstream from the outlet of the initial dehydrator. The DOR 
contended that the outlet of the initial dehydrator was the point of valuation 
of CBM and third party charges upstream from the point of valuation were not 
deductible in determining fair market value.  

 
 
[¶6]  In the course of the hearing, the 
parties agreed that portions of the audit required recalculation, including the 
disallowance of an exemption for fuel Western consumed in the production process 
upstream from the outlet of the initial dehydrator.  At the close of the hearing, the Board 
directed the parties to provide recalculated figures to each other and then 
submit briefs addressing the recalculation.  Upon considering the parties' 
supplemental briefs, the Board affirmed the DOR's valuation, concluding that § 
39-14-203(b)(iv) requires taxable value to include third party fees incurred 
prior to the outlet to the initial dehydrator. Addressing the collateral issue 
of Williams' entitlement to a fuel use exemption, the Board concluded that 
Williams failed to carry its burdens of proof and persuasion because it provided 
no evidence to support its claim.  
Williams filed a petition for review of the Board's decision in the 
district court, which certified the matter to this Court.        

 
 
STANDARD 
OF REVIEW

 
 
[¶7] 
Our review of administrative agency action is governed by Wyo. Stat. Ann. § 
16-3-114 (LexisNexis 2007), which provides in pertinent 
part:

 
 
   (c) To the extent necessary to 
make a decision and when presented, the reviewing court shall decide all 
relevant questions of law, interpret constitutional and statutory provisions, 
and determine the meaning or applicability of the terms of an agency 
action.  In making the following 
determinations, the court shall review the whole record or those parts of it 
cited by a party and due account shall be taken of the rule of prejudicial 
error.  The reviewing court 
shall:

            
(i) Compel agency action unlawfully withheld or unreasonably delayed; 
and

            
(ii) Hold unlawful and set aside agency action, findings and conclusions 
found to be:

            
(A) Arbitrary, capricious, an abuse of discretion or otherwise not in 
accordance with law;

            
(B) Contrary to constitutional right, power, privilege or 
immunity;

            
(C) In excess of statutory jurisdiction, authority or limitations or 
lacking statutory right;

            
(D) Without observance of procedure required by law; 
or

            
(E) Unsupported by substantial evidence in a case reviewed on the record 
of an agency hearing provided by statute.

 
 
[¶8]  When reviewing a case certified to us 
from a district court pursuant to W.R.A.P. 12.09(b), we apply the appellate 
standards applicable to a reviewing court of the first instance. Williams Prod. RMT Co. v. State Dep't of 
Revenue, 2005 WY 28, ¶ 7, 107 P.3d 179, 182-183 (Wyo. 2005) (Williams I).  We review factual determinations for 
substantial evidence, meaning we consider whether there is relevant evidence in 
the entire record which a reasonable mind might accept in support of the 
agency's conclusions.  Dale v. S 
& S Builders, LLC, 2008 WY 84, ¶ 21, 188 P.3d 554, 561 (Wyo. 2008).  Importantly, our review of any 
particular decision turns not on whether we agree with the outcome, but on 
whether the agency could reasonably conclude as it did based upon all of the 
evidence presented.  Id., ¶ 23, 188 P.3d  at 561.  The burden of proof 
with respect to tax valuation is on the party asserting an improper 
valuation.  Williams I, ¶ 7, 107 P.3d  at 183.  We review an agency's conclusions of law 
de novo, and will affirm an agency's 
legal conclusion only if it is in accordance with the law.  Dale, ¶ 27, 188 P.3d  at 562.    Statutory interpretation is 
a question of law and is reviewed de 
novo.  Williams I, ¶ 8, 107 P.3d  at 
183.

 
 
DISCUSSION

 
 

1.                  
Point 
of Valuation        

 
 
[¶9]  Section 39-14-203 provided in relevant 
part as follows:

 
 

§ 
39-14-203. Imposition

(a) 
Taxable event. The following shall apply:

(i) 
There is levied a severance tax on the value of the gross product extracted for 
the privilege of severing or extracting crude oil, lease condensate or natural 
gas in the state. The tax imposed by this subsection shall be in addition to all 
other taxes imposed by law including, but not limited to, ad valorem taxes 
imposed by W.S. 39-13-101 through 39-13-111.

(b) 
Basis of tax. The following shall apply:

(i) 
Crude oil, lease condensate and natural gas shall be valued for taxation as 
provided in this subsection;

(ii) 
The fair market value for crude oil, lease condensate and natural gas shall be 
determined after the production process is completed. Notwithstanding paragraph 
(x) of this subsection, expenses incurred by the producer prior to the point of 
valuation are not deductible in determining the fair market value of the 
mineral;

(iii) 
The production process for crude oil or lease condensate is completed after 
extracting from the well, gathering, heating and treating, separating, injecting 
for enhanced recovery, and any other activity which occurs before the outlet of 
the initial storage facility or lease automatic custody transfer (LACT) 
unit;

(iv) 
The production process for natural gas is completed after extracting from the 
well, gathering, separating, injecting and any other activity which occurs 
before the outlet of the initial dehydrator. When no dehydration is performed, 
other than within a processing facility, the production process is completed at 
the inlet to the initial transportation related compressor, custody transfer 
meter or processing facility, whichever occurs first;

(v) 
If the crude oil, lease condensate or natural gas production as provided by 
paragraphs (iii) and (iv) of this subsection are sold to a third party, or 
processed or transported by a third party at or prior to the point of valuation 
provided in paragraphs (iii) and (iv) of this subsection, the fair market value 
shall be the value established by bona fide arms-length 
transaction;

(vi) 
In the event the crude oil, lease condensate or natural gas production as 
provided by paragraphs (iii) and (iv) of this subsection is not sold at or prior 
to the point of valuation by bona fide arms-length sale, or, except as otherwise 
provided, if the production is used without sale, the department shall identify 
the method it intends to apply under this paragraph to determine the fair market 
value and notify the taxpayer of that method on or before September 1 of the 
year preceding the year for which the method shall be employed. The department 
shall determine the fair market value by application of one (1) of the following 
methods:

(A) 
Comparable sales--The fair market value is the representative arms-length market 
price for minerals of like quality and quantity used or sold at the point of 
valuation provided in paragraphs (iii) and (iv) of this subsection taking into 
consideration the location, terms and conditions under which the minerals are 
being used or sold;

(B) 
Comparable value--The fair market value is the arms-length sales price less 
processing and transportation fees charged to other parties for minerals of like 
quantity, taking into consideration the quality, terms and conditions under 
which the minerals are being processed or transported;

(C) 
Netback--The fair market value is the sales price minus expenses incurred by the producer for transporting produced minerals to the point 
of sale and third party processing fees. The netback method shall not be 
utilized in determining the taxable value of natural gas which is processed by 
the producer of the natural gas;

(D) 
Proportionate profits-- The fair market value is:

(I) 
The total amount received from the sale of the minerals minus exempt royalties, 
nonexempt royalties and production taxes times the quotient of the direct cost 
of producing the minerals divided by the direct cost of producing, processing 
and transporting the minerals; plus

(II) 
Nonexempt royalties and production taxes.

 

 
[¶10]  Williams asserts the Board's ruling that 
the point of valuation is at the outlet of the initial dehydrator pursuant to § 
39-14-203(b)(iv) is contrary to the plain meaning of the statute.  Williams contends that because it 
transferred the CBM to Western upstream from the outlet of the initial 
dehydrator, § 39-14-203(b)(v) controls and the fair market value of the CBM for 
tax purposes was to be established by considering the fees charged by a third 
party in an upstream arms-length transaction.  Williams maintains the following formula 
applied:  arms-length sales price 
minus fees paid to a third party in an arms-length transaction prior to the 
initial dehydrator equals fair market value at the end of production.   

 
 
[¶11]  The DOR responds that the Board 
correctly found the point of valuation of Williams' CBM production was at the 
outlet of the initial dehydrator. The DOR asserts that this result is in 
accordance with the plain meaning of § 39-14-203(b)(ii) and (iv).  The DOR maintains that a sale to or 
transportation by a third party upstream from the outlet of the initial 
dehydrator does not change the point of valuation, which § 39-14-203(b)(ii) and 
(iv) clearly define as "after the production process is completed," that is, 
"after extracting from the well, gathering, separating, injecting and any other 
activity which occurs before the outlet of the initial dehydrator."  Pursuant to § 39-14-203(b)(ii), the DOR 
contends Williams was not entitled to deduct expenses incurred prior to the 
outlet of the initial dehydrator in determining the fair market value of its CBM 
production, including Western's fees for transporting the product.   

            

[¶12]  Our review of statutory provisions is 
governed by the following standards:

 
 
The 
paramount consideration is to determine the legislature's intent, which must be 
ascertained initially and primarily from the words used in the statute.  We look first to the plain and ordinary 
meaning of the words to determine if the statute is ambiguous.  A statute is clear and unambiguous if 
its wording is such that reasonable persons are able to agree on its meaning 
with consistency and predictability.  
Conversely, a statute is ambiguous if it is found to be vague or 
uncertain and subject to varying interpretations.  If we determine that a statute is clear 
and unambiguous, we give effect to the plain language of the statute.  

RME 
Petroleum Co. v. Wyo. Dep't of Revenue, 
2007 WY 16, ¶ 25, 150 P.3d 673, 683 (Wyo. 2007) (citation 
omitted).

 
 
[¶13]  Applying these principles, we addressed 
the same issue presented here in Kennedy 
Oil as follows: 

 
 
Section 
39-14-203(b)(ii) clearly and unambiguously provides that the fair market value 
for gas is determined after the production process is complete.  Paragraph (b)(iv) further provides that 
the production process for gas is completed after it is extracted from the well, 
gathered, separated, injected and any other activity which occurs before the 
outlet of the initial dehydrator.  
Under the clear language of paragraph (b)(ii), producer expenses incurred 
prior to the point of valuation, i.e. the outlet of the initial dehydrator, are 
not deductible.  The DOR properly 
determined the fair market value of Kennedy's CBM production after the 
production process was complete and disallowed expenses Kennedy incurred before 
the outlet of the initial dehydrator.

 
 

Kennedy 
Oil, 
¶ 28, _____ P.3d at ______.

 
 
[¶14] 
For the reasons explained fully in Kennedy, we hold that the DOR properly 
determined that the fair market value for Williams' CBM included the third-party 
transportation fees incurred before the outlet of the initial dehydrator.  The fair market value of the production 
was the value established by bona fide arms-length transactionthe arms-length 
sales price plus the fee Williams paid to Western  for getting the gas to the initial 
dehydrator minus the transportation fees incurred downstream of the point of 
valuation.  Rather than the formula 
Williams advances (arms-length sale price minus all of the arms-length 
transportation fees, including those incurred prior to the point of valuation, 
equals fair market value at the end of production), the DOR properly determined 
the taxable value of the gross CBM production based upon the value established 
by the sales price and the bona fide arms-length transaction in which Williams 
paid Western a fee to transport the gas to the initial dehydrator.  That fee was due to activities that 
occurred before the outlet of the initial dehydrator, which means the production 
process was not complete when the fee was incurred.  The point of valuation remained the 
point at which the production process was complete and the expenses Williams 
incurred prior to that point were not deductible in determining the fair market 
value.     

 
 
[¶15]  In arguing otherwise, Williams begins 
with the assertion that transportation and processing activities are not 
taxable.  Williams cites RME, ¶ 51, 150 P.3d  at 691, where, in 
describing the taxpayers' argument in that case, we said: 

 
 
Taxpayers 
contend, somewhat persuasively, that the Department's approach undermines the 
allocation function of the direct cost ratio because as prices for oil and gas 
rise, royalties and production taxes also increase.  As a result, the direct cost ratio 
approaches 100% when prices are high, negating the purpose of allocating a 
portion of a taxpayer's revenue to non-taxable functions, i.e. processing and 
transporting.   

 
 
[¶16]  The question for this Court's 
determination in RME was whether the 
Board properly determined that § 39-14-203(b)(vi)(D), which describes the 
proportionate profits method for determining fair market value when minerals are 
sold downstream from the dehydrator, required royalties and production taxes to 
be treated as direct costs of production.  
We held the Board's determination was incorrect and that royalties and 
production taxes were not "direct costs of producing" within the direct cost 
ratio of the oil and gas proportionate profits formula. After finding § 
39-14-203(b)(vi)(D) ambiguous because it did not specify that royalties and 
production taxes were either to be included or excluded as direct costs of 
producing, we looked to the Rules promulgated by the DOR after § 
39-14-203(b)(vi)(D) was enacted defining "direct costs of producing."  Because the Rules did not include 
royalties and production taxes within the definition, we held royalties and 
production costs were not "direct costs of producing."    

 
 
[¶17]  Our decision in RME is of limited 
significance to the issue before us in this case.  RME involved the question of how 
royalties and production taxes were considered in the proportionate profits 
method for determining the fair market value of minerals sold downstream of the 
point of valuation, an entirely different scenario than when minerals are sold 
to or transported by a third party upstream of the point of valuation.  Although it is not evident from the 
discussion in that case, we presume the costs of production utilized in the 
proportionate profit formula included all costs up to the outlet of the initial 
dehydrator. In the valuation methods prescribed by statute for both sales 
upstream and sales downstream of the point of valuation, § 39-14-203(b)(ii) 
clearly provides that any  expenses 
incurred by the producer prior to the point of valuation are included in the 
calculation of fair market value.  
Williams incurred the expenses prior to the point of valuation; 
therefore, they were not deductible in determining the fair market value of the 
CBM for tax purposes.   

 
 
[¶18]  Williams contends that paragraph (b)(vi) 
supports its reading of the statute.  
That section provides that when CBM is not sold at or before the point of 
valuation by bona fide arms-length sale, or if it is used without sale, the fair 
market value is determined by application of one of four methods:  comparable sales, comparable value, 
netback or proportionate profits.  
As support for its claim that it was entitled to a deduction, Williams 
points to language in paragraphs (b)(vi)(B) and (C), which allow the deduction 
of processing and transporting expenses under the comparable value and netback 
methods for determining fair market value.  
Williams argues that because § 39-14-203(b)(vi) allows the deduction of 
all processing and transporting costs when a sale occurs after the outlet of the 
initial dehydrator,  the legislature 
must have intended those deductions to be allowed for all of those costs when a 
sale to or transportation by a third party occurs before the outlet of the 
initial dehydrator. Williams' argument misses the point that, under the approach 
taken by the legislature, it is not the characterization of the costs as 
processing or transportation that makes them deductible, but where the 
activities occur in the chain of events from the wellhead to the interstate 
transmission pipeline. Again, we conclude that if the legislature had intended 
to allow deductions for transportation expenses incurred prior to the point of 
valuation, it would have said so.  
Instead the legislature clearly established the end of the production 
process as the point of valuation and declared that expenses incurred prior to 
that point, however they may be delineated, are not deductible from the fair 
market value of the gas.2 

 
 
[¶19]  Williams also argues that under 
established oil and gas law, production occurs when the minerals are severed 
from the earth; minerals cannot be sold until they are produced; therefore, the 
sale of minerals to a third party signals the end of the production 
process.  Williams' argument in this 
regard ignores the plain language of § 39-14-203(b)(iv), which expressly defines 
the end of the production process for mineral tax purposes.  Nowhere in that definition is the sale 
of minerals to a third party identified as an event that completes the 
production process.  Williams also 
asserts that the language contained in § 39-14-203(b)(iv) defining when the 
production process for natural gas is completed was intended to determine 
taxable value only when the producer does its own transporting and processing 
with its own equipment, not when a third party carries out those 
activities.  We see nothing in the 
provision to support that conclusion.  
If the legislature had intended paragraph (b)(iv) to apply only to 
activities performed by the producer itself before the outlet of the initial 
dehydrator, it easily could have said so.  
We will not insert the word "producer" into the existing statutory 
language.  Williams suggests that 
use of the different terms in subsection (vi) "expenses incurred by the producer" and 
"fees charged to third parties," and 
the language in subsection (ii) providing that only "expenses incurred by the 
producer" are not deductible indicates the legislature meant to differentiate 
between producer expenses and third party fees and   allow deduction of third party fees 
upstream of the point of valuation.  
We find the terminology in subsection (vi) insufficient to support a 
conclusion that directly contradicts the many clear statements in the statute 
that the outlet of the initial dehydrator is the legislatively drawn point of 
valuation.

 
 

[¶20]  It is true that the statute, as 
interpreted by the DOR, results in some aspects of gas transportation being 
included on the production side of the ledger.  The line for taxation purposes between 
mineral production and transportation or processing has been the subject of 
dispute for many years.  Hillard v. Big Horn Coal Co., 549 P.2d 293 (Wyo. 1976); Appeal 
of Monolith Portland Midwest Co., Inc., 
574 P.2d 757 (Wyo. 
1978).  While 
gas gathering necessarily involves some element of transportation, it is, by 
statute, defined as part of the production process.  Section 39-14-203(b)(iii).  Drawing the line between gathering and 
transportation has been the source of considerable debate in the royalty context 
and the legislature ended that debate by statute. Wold 
v. Hunt Oil Co., 
52 F. Supp. 2d 1330 (D.Wyo. 1999).  
See 
Cabot Oil & Gas Corp. v. Followill, 
2004 WY 80, 93 P.3d 238 (Wyo. 2004) (discussing the fact that gathering involves 
transportation and costs associated with transportation during the gathering 
process are non-deductible).  It is 
clear to us that the legislature was determined to end that dispute in the tax 
arena also by drawing a clear line at the outlet of the initial dehydrator where 
production would be considered complete.  
Williams makes a persuasive argument that the free market should control 
the valuation of gas; a bona fide arms-length transaction assures the true fair 
market value; and the legislature's prime concern was assuring that a fair value 
was reached when the producer transported and processed its own gas, and 
consequently, the legislature must have intended arms-length transactions before 
the initial dehydrator would determine fair market value.  However, to reach that conclusion we are 
asked to assume too much, read language in and out of the statute, and ignore 
the plain language chosen by the legislature.  We simply cannot go that far.  We are confident that if we are wrong, 
and Williams is correct in its divination of legislative intent, the legislature 
will act.

 
 
[¶21]  Citing Wyo. Dep't of Revenue v. Guthrie, 2005 
WY 79, ¶ 23, 115 P.3d 1086, 1095 (Wyo. 2005), Williams asserts that its contract 
with Western rather than the location of the dehydrator established the fair 
market value of its production for tax purposes.  In Guthrie, a CBM producer sold its 
production pursuant to a bona fide arm's-length transaction the terms of which 
were reflected in gas purchase contracts.  
The purchaser paid the producer for the gas received less the amount of 
gas it used as fuel for compression activities.  The producer accepted the purchaser's 
invoice pricing and reported and paid taxes on the revenue received from the 
purchaser.  

 
 
[¶22]  During an audit, the auditor requested 
information from the producer to verify the fuel use adjustment. When the 
producer failed to provide verification, the auditor disallowed the 
deduction.  The Board affirmed the 
decision disallowing the deduction because the producer failed to produce 
evidence of the actual amount of gas used as fuel.  Id., ¶ 7, 115 P.3d  at 1090.  On appeal, the 
district court reversed, holding that the producer's acceptance of the 
purchaser's invoice pricing was sufficient evidence to support the deduction 
and, if more verification was needed, data showing typical industry fuel usage 
in the region was sufficient.  
Id., ¶ 38, 115 P.3d  at 1093.  

 
 
[¶23]  The DOR appealed to this Court and the 
focus of our inquiry was "what, exactly, [the producer] was required to prove" 
to support its fuel use deductions and reported taxable value for its gas 
production.  Id., ¶ 17, 115 P.3d  at 1093.   We concluded the DOR properly 
disallowed the deduction.  We said, 
"Because the exact volume of gas used for fuel was not documented, the contract 
price for that gas, its legislatively defined fair market value, could not be 
precisely established."  
Id., ¶ 38, 115 P.3d  at 1098.  

 
 
[¶24]  In the context of the inquiry in Guthrie, we said the specific terms of 
the gas purchase contracts must be used to establish the legislatively defined 
fair market value. We did not say, as Williams seems to contend, that the 
purchase contracts changed the point of valuation or allowed the producer to 
deduct expenses incurred prior to the point of valuation.  Our holding in Guthrie was limited to the determination 
that the DOR properly disallowed fuel deductions for which there was 
insufficient verification.  The fact 
that the DOR may not have addressed the expenses the producer incurred upstream 
of the initial dehydrator in Guthrie 
does not undermine its application of the statute in this case and in Kennedy.

 

[¶25]  In Williams I, this Court affirmed a Board 
ruling that the point of valuation was at the outlet of the TEG dehydrator, a 
specialized dehydrator, rather than upstream at one of the points where 
incidental water separation occurs.  
We agreed that the Board's interpretation of § 39-14-203(b)(iv) as 
placing the point of valuation at a piece of equipment (the outlet of the TEG 
dehydrator) rather than at the point where a particular function takes place 
(the initial point of any dehydration) was consistent with legislative 
intent.  In accordance with Williams, we hold that the point of 
valuation for William's CBM production was the outlet of the initial dehydrator 
(a particular piece of equipment) and not some point upstream where the product 
was sold to or transported by a third party (a particular function).  We further hold that, in determining the 
fair market value of its production for tax purposes, Williams was not entitled 
to deduct expenses incurred prior to the point of valuation.  

 
 

2.         
Disallowance of Downstream Transportation Fee Deduction and On-Lease Fuel 
Exemption  

 
 
[¶26]  Williams also contends the Board erred 
when it disallowed a deduction for transportation expenses incurred downstream 
of the outlet of the initial dehydrator and refused to recognize an on-lease 
fuel exemption under Wyo. Stat. Ann. § 39-14-205(j) (LexisNexis 2007).  We review these issues to determine 
whether substantial evidence supported the Board's rulings.  We address the two issues Williams 
raises separately, beginning with the downstream transportation expenses.  

 
 
[¶27]  As provided by the gas gathering 
agreement, Williams paid Western a fee of $29.4/MCF3 to transport the CBM from the point 
where it was delivered to Western to the FortUnion or MIGC pipelines.  FortUnion, 
for a fee of $.14/MCF, and MIGC, for a fee of $.35/MMBTU,4 transported the CBM downstream to 
interstate transmission pipelines near Glenrock, Wyoming.  
From there, the gas continued on downstream and was sold.    

 
 
[¶28]  Because the dehydrator, i.e., the point 
of valuation, was located downstream from the point where Western took over 
transporting the product but upstream from the inlet to the FortUnion and MIGC pipelines, the DOR 
determined Williams was entitled to deduct part of the transportation fee it 
paid to Western.  The DOR determined 
that $.21/MCF of the fee was attributable to upstream transportation, making it 
non-deductible, and the remaining $.8/MCF fee was attributable to downstream 
transportation and was deductible.  

 
 
[¶29]  For gas transported to the MIGC 
pipeline, Western gave Williams a rebate of $.21/MMBTU.5 For gas transported to the 
FortUnion pipeline, Williams 
received no rebate.  In calculating 
the fair market value of the production transported to the Fort Union pipeline, 
the DOR disallowed a deduction for the $.21/MCF Williams paid Western to 
transport the gas upstream to the dehydrator, but allowed a deduction for the 
$.22/MCF Williams paid to have it transported downstream from the dehydrator, 
that is, the $.8/MCF fee for transportation from the dehydrator to the pipeline 
plus the $.14/MCF FortUnion charged for transporting the gas 
through its pipeline.  For gas 
transported to the MIGC pipeline, the DOR likewise disallowed a deduction for 
the $.21/MCF Williams paid to have Western transport the gas to the dehydrator, 
but allowed a deduction for the $.43/MCF paid to have it transported downstream 
from the dehydrator, that is, $.8/MCF from the dehydrator to the MIGC inlet plus 
the $.35/MMBTU MIGC charged for transporting the gas through its pipeline. 

 
 
[¶30]  Williams challenges this last 
calculation as not accounting for the $.21/MMBTU rebate it received from Western 
for transporting the CBM from the point where it was delivered to Western to the 
MIGC pipeline.  Williams asserts 
that the net effect of the rebate was that Williams paid Western the difference 
between the fee amount of $.29/MCF and the rebate amount of $.21/MMBTU, or 
$.10/MCF.  Williams contends the DOR 
should have allowed the $.10/MCF as a deduction. 

 
 
[¶31]  The DOR responds that, with no 
cooperation from Williams, it calculated a deduction for the part of Western's 
fee downstream from the dehydrator, something it was not required to do when 
Williams provided no supporting information.  The DOR also points out that this Court 
previously upheld the same method for calculating allowable deductions in Williams I.  There, as here, the deduction the DOR 
allowed was comprised of $.14/MCF for transportation fees from the inlet to the 
pipeline to Glenrock, plus $.08/MCF of the $.29/MCF fee paid to Western for 
transporting the CBM from the point where Western received it to the 
pipeline.  Williams I, ¶ 25, 107 P.3d  at 186-187. 
There, as here, the $.08/MCF was an estimate of the costs of transporting the 
CBM from the outlet of the dehydrator to the inlet of the MIGC or FortUnion pipeline.  Id. In Williams I, as here, the DOR disallowed 
$.21/MCF, the fee paid to Western for transportation upstream from the outlet of 
the dehydrator, and did not account for the $.21 rebate in the way Williams 
asserts it should have.  As we did 
in Williams I, we conclude that the 
Board's findings were supported by substantial evidence.  

 
 
[¶32]  Williams next contends that the Board 
improperly rejected its request for an on-lease fuel exemption.  Williams asserts that it was entitled to 
the exemption pursuant to Wyo. Stat. Ann. § 39-14-205(j), which provides in 
pertinent part as follows:

 
 
            
(j)  Natural gas . . . which 
is . . . consumed prior to sale for the purpose of maintaining, stimulating, 
treating, transporting or producing crude oil or natural gas on the same lease 
or unit from which it was produced has no value and is exempt from 
taxation.          

 

[¶33]  The DOR responds that the Board 
correctly denied the exemption request because Williams did not identify the 
issue in advance of the hearing and did not develop a sufficient record during 
the hearing to support its claim.  
The DOR asserts the lack of timely notice to the DOR and the Board 
invokes due process concerns.  The 
DOR also contends, even if Williams had properly raised the issue, it failed to 
carry its burden of proving the amount of the claimed exemption.  Rather, the DOR contends, Williams 
"relied upon broad statements of entitlement and a hope that the Department 
would graciously re-open the audit after the assessment, appeal and 
hearing."  The DOR contends the 
Board's ruling that Williams failed to carry its burden of proof and persuasion 
was supported by substantial evidence. 

 
 
[¶34]  From the record before us, we know that 
Williams' district manager testified that Western's compression equipment was 
located on the lease, and fueled by gas produced by Williams from the 
lease.  We also know that one of the 
State's auditors testified that an exemption should have been allowed for fuel 
used on the lease prior to the point of valuation because such fuel has no value 
for tax purposes.  Additionally, in 
its post-hearing brief, the DOR stated that it had reviewed additional 
information Williams supplied and agreed to "revise the audit assessment 
consistent with [the parties'] cooperative recalculation of taxable value."  The DOR calculated the taxable value of 
the exempt production at approximately $2,998,927 while Williams offered the 
figure of $2,998,620.         

 
 
[¶35]  The record is clear that both parties 
agreed Williams was entitled to a fuel use exemption; their figures differed by 
only $307.00.   Given the parties' agreement, we hold 
that the Board could not reasonably conclude that Williams failed to meet its 
burden of showing that it was entitled to a fuel use exemption.  However, Williams failed to present 
evidence substantiating its assertion that the taxable value of the fuel used 
was $2,998,620; therefore, we hold that the specific adjustment is to be based 
upon the DOR's figure of $2,998,927.

 
 
CONCLUSION

 
 
[¶36]  Section 39-14-203(b) clearly provides 
that CBM is to be valued after completion of the production process which occurs 
after it is extracted, gathered, separated, injected and any other activity 
which occurs before the outlet of the initial dehydrator.  Pursuant to that provision, the point of 
valuation of Williams' 2000-2002 CBM production was at the outlet of the initial 
dehydrator.  The statutory language 
also clearly provides that expenses incurred by the producer prior to the point 
of valuation are not deductible in determining fair market value.  Therefore, the expenses Williams 
incurred in contracting with Western to transport the CBM upstream from the 
outlet of the initial dehydrator were not deductible.

 
 
[¶37]  The Board's ruling upholding the DOR's 
calculations of the allowable deductions was supported by substantial 
evidence.  The Board's ruling 
disallowing an on-lease fuel exemption was not supported by substantial 
evidence.  Williams was entitled to 
the exemption based upon the DOR's calculation of the taxable value of the fuel 
used on-lease.  

 
 
[¶38]   Affirmed in part, reversed in part, 
and remanded to the district court for further proceedings consistent with this 
opinion.

 
 
FOOTNOTES

 
 

1Although it 
is not clear from the record, we assume the sales price was determined by the 
comparable value method as provided in § 
39-14-203(b)(vi)(B).

 
 

2It is 
interesting to note that Williams' appellate brief recognizes that the 
proportionate profit and netback valuation methods only allow deduction of 
transportation and processing costs incurred after the initial dehydrator which 
is completely consistent with subsection (v) and the legislative scheme that 
establishes that point as the point of valuation whether the sale is upstream or 
downstream. 

 
 

3MCF, or 
one thousand cubic feet of natural gas measured at 
standard pressure and temperature conditions, is a volumetric 
measurement.

 
 

4MMBTU, or 
one million British thermal units, is a thermal content 
measurement.

 
 

5A former 
Western employee testified at the Board hearing that the reason for the rebate 
was that it allowed Western the flexibility of moving the gas onto either the 
MIGC or Fort Union pipeline with the cost to Williams being approximately the 
same, i.e. going by Fort Union, the fee for Western was $.29.4/MCF plus $.14/MCF 
for Fort Union, or $.43.4/MCF; going by MIGC, the fee for Western was $29.4/MCF 
with a rebate of $.21/MMBTU plus $.35/MMBTU for MIGC, or $.43.4.  The same witness explained that the fee 
provisions for delivery into the MIGC or FortUnion 
pipelines were based on MCFs because volumes of gas need to be compressed and 
dehydrated even though BTU content varies across the PowderRiver Basin.  Western based its anticipation of a 
revenue stream on service costs without regard for heat content. Western's 
responsibility for redelivery of gas, however, was based on thermally equivalent 
volumes because the producer ultimately sells on a BTU basis.  In its findings of fact, the Board noted 
the witness's lack of strict attention to measurement by MCF or MMBTU while also 
noting that a charge of a given number of cents per volume does not directly 
translate into a charge of a given amount per 
MMBTU.