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

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 2005-03-02T00:00:00Z

Document:
WILLIAMS PRODUCTION RMT COMPANY V. STATE OF WYOMING DEPARTMENT OF REVENUE2005 WY 28107 P.3d 179Case Number: 04-41Decided: 03/02/2005
OCTOBER TERM, A.D. 2004

 
 
                                                                                                                                   

 
 
 
 
WILLIAMS 
PRODUCTION RMT COMPANY,

 
 
Appellant

(Petitioner),

 
 
v.

 
 
STATE OF 
WYOMING DEPARTMENT OF

REVENUE,

 
 
Appellee

(Respondent).

 
 
 
 

 
 

Representing 
Appellant:

 
 
            
Scott P. Klosterman, Margo Harlan Sabec and Nicol M. Thompson of 
Williams, Porter, Day & Neville, P.C., Casper, 
Wyoming.

 
 

Representing 
Appellee:

 
 
            
Patrick J. Crank, Attorney General; Michael L. Hubbard, Deputy Attorney 
General; Karl D. Anderson, Senior Assistant Attorney General; and Martin L. 
Hardsocg, Senior Assistant Attorney General, Cheyenne, 
Wyoming.

 
 
 
 
Before 
HILL, C.J., and GOLDEN, KITE, VOIGT, JJ., and JAMES, 
DJ.

 
 
 
 
           
VOIGT, Justice.

 
 
[¶1]      This is a 
W.R.A.P. 12.09(b) certification of a petition for review of administrative 
action in which the underlying question is the point of valuation for severance 
tax purposes of coal bed methane gas.  
We affirm the determination of the Wyoming State Board of 
Equalization.

 
 

 
 
[¶2]      Barrett Resources 
Company (Barrett) began producing coal bed methane gas (CBM) in Campbell 
County, Wyoming, in 1999.  Williams Production RMT Company 
(Williams) is Barrett's successor in interest through merger.  CBM is subject to the severance tax 
imposed in Wyo. Stat. Ann. § 39-14-203 (LexisNexis 2003), the relevant portions 
of which read as follows:

 
 
(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;

 
 
            
* * *

 
 
            
(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[.]

 
 
Pursuant to Wyo. Stat. Ann. §§ 39-13-102(m)(i) and 
39-13-103(b)(iv) (LexisNexis 2003), the same valuation is used for ad valorem 
tax purposes.

 
 
[¶3]      In 2001, the Wyoming 
Department of Audit (DOA) began an audit of Barrett's 1999 CBM production.  The audit was 
completed after Williams succeeded to Barrett's interests.  At the conclusion 
of the audit, the Department of Revenue (Department) determined that Williams 
owed an additional $170,747.15 in severance taxes, plus interest of $58,304.00, 
and the Department certified to CampbellCounty an increase in taxable 
value for ad valorem tax purposes of $3,392,635.00.  Williams paid the 
severance taxes under protest and filed a timely appeal with the Wyoming State 
Board of Equalization (Board) on September 23, 2002.  After a contested 
case hearing, the Board affirmed the Department's determination.  Williams then filed 
a petition for review in the district court pursuant to Wyo. Stat. Ann. § 
16-3-114(a) (LexisNexis 2003).  The district court subsequently granted the 
Department's motion to certify the matter to this Court pursuant to W.R.A.P. 
12.09(b), and this Court accepted certification on March 17, 2004.  Oral argument was 
heard on October 4, 2004.

 
 

 
 
[¶4]      We rephrase Williams' 
presented issues as follows:

 
 
            
1.         
Whether the Board acted arbitrarily, capriciously, without substantial 
evidence, and in violation of the Wyoming Constitution when it held that Western 
Gas Resources' facility is not a processing facility and, therefore, the point 
of valuation for CBM is not located at the custody transfer meter?

 
 
            
2.         
Whether the Board acted arbitrarily, capriciously, without substantial 
evidence, and in violation of the Wyoming Constitution when it held that the 
triethylene glycol dehydrator located in Western Gas Resources' facility is the 
initial dehydrator and, therefore, the point of valuation for CBM?

 
 
            
3.         If 
the Board is correct in determining that the legislature did not intend the oil 
and gas statutes in Wyo. Stat. Ann. §§ 39-14-201, et 
seq. (LexisNexis 2003), to apply to CBM, should 
CBM be taxed as an "other valuable deposit" under Wyo. Stat. Ann. §§ 39-14-701, 
et seq. (LexisNexis 2003)?

 
 
            
4.         
Whether the Board acted arbitrarily, capriciously, without substantial 
evidence, and in violation of the Wyoming Constitution when it held that 
Williams is not entitled to deductions for all processing and transportation 
fees incurred downstream of the Department's selected point of valuation for 
Barrett's CBM?

 
 
            
5.         
Whether the Board acted arbitrarily, capriciously, without substantial 
evidence, and in violation of the Wyoming Constitution when it held the 
assessment of interest on the alleged underpayment of taxes was proper?

 
 
[¶5]      We rephrase the 
Department's presented issues as follows:

 
 
            
1.         
Whether the Board correctly affirmed the Department's determination that 
the point of valuation for Barrett's 1999 CBM production was the outlet of the 
triethylene glycol dehydrator pursuant to Wyo. Stat. Ann. § 
39-14-203(b)(iv)?

 
 
            
2.         
Whether the Board correctly affirmed the Department's determination that 
dehydrators or compressors, individually or in combination, did not comprise a 
"processing facility" pursuant to Wyo. Stat. Ann. § 39-14-203(b)(iv)?

 
 
            
3.         
Whether the Board correctly affirmed the Department's determination that 
separators and compressors are not "dehydrators" pursuant to Wyo. Stat. Ann. § 
39-14-201(a)(vii) and are not the "initial dehydrator" pursuant to Wyo. Stat. 
Ann. § 39-14-203(b)(iv)?

 
 
            
4.         
Whether the Board correctly affirmed the Department's and the DOA's 
calculation of transportation expenses?

 
 
            
5.         
Whether the Board reasonably concluded that Williams failed to sustain 
its burden of proving that the Department's calculation of transportation 
expenses was incorrect?

 
 
            
6.         
Whether the Board correctly affirmed the Department's assessment of 
interest upon unpaid taxes?

 
 

 
 
[¶6]      Wyo. Stat. Ann. § 
16-3-114 provides for judicial review of administrative agency action.  In particular, Wyo. 
Stat. Ann. § 16-3-114(c)(ii) requires the reviewing court to "[h]old 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.

 
 

[¶7]      We have held that 
"the substantial evidence test is the appropriate standard of review in appeals 
from [Wyoming Administrative Procedure Act] contested case proceedings when 
factual findings are involved and both parties submit evidence."  Newman v. State ex rel. Wyoming Workers' Safety and 
Compensation Div., 2002 WY 
91, ¶ 22, 49 P.3d 163, 171 (Wyo. 
2002).  In addition,

 
 
[w]hen we are reviewing cases [that] have been certified to 
us pursuant to W.R.A.P. 12.09(b), we apply the appellate standards [that] are 
applicable to a reviewing court of the first instance.  Hepp. v. State ex rel. Wyoming Workers' Compensation 
Division, 881 P.2d 1076, 1077 
(Wyo.1994).  
When we are conducting our review,

 
 
"[o]ur task is to examine the 
entire record to determine whether substantial evidence supported the hearing 
examiner's findings.  
We will not substitute our judgment for that of the hearing examiner when 
substantial evidence supports his decision.  Substantial evidence is relevant evidence 
[that] a reasonable mind might accept in support of the agency's 
conclusions."

 
 

Latimer v. Rissler & McMurry Co., 902 P.2d 706, 708-09 (Wyo.1995) (citations omitted).

 
 
"We do not, however, defer to an agency's conclusions of 
law.  Instead, 
if the "correct rule of law has not been invoked and correctly applied, . . . 
the agency's errors are to be corrected."'  Thunder Basin Coal 
Company v. Study, 866 P.2d 1288, 1291 (Wyo.1994) (quoting Devous v. Wyoming 
State Board of Medical Examiners, 845 P.2d 408, 414 
(Wyo.1993))."

 
 

Celotex Corporation v. Andren, 917 P.2d 178, 180 (Wyo.1996).

 
 

JM v. Department of Family Services, 922 P.2d 219, 221 (Wyo. 1996).  The burden of proving a lack of substantial 
evidence is upon the party appealing an agency's determination.  Mountain Fuel Supply Co. v. Public Service Com'n of 
Wyoming, 662 P.2d 878, 883 
(Wyo. 1983).  And specifically, the burden of proof with 
respect to tax valuation is on the party asserting an improper valuation.  Amoco Production Co. v. Wyoming State Bd. of Equalization, 
899 P.2d 855, 858 
(Wyo. 1995) (quoting TetonValley Ranch v. State Bd. of 
Equalization, 735 P.2d 107, 113 (Wyo. 1987)).

 
 

[¶8]      "Statutory 
interpretation is a question of law and is reviewed de novo."  State ex rel. Wyo. Dept. of Revenue v. Powder River Coal 
Co., 2004 WY 54, ¶ 5, 90 P.3d 1158, 1159 (Wyo. 
2004).

 
 
When interpreting statutes, we follow an established set of 
guidelines.  
First, we determine if the statute is ambiguous or unambiguous.  A statute is 
unambiguous if its wording is such that reasonable persons are able to agree as 
to its meaning with consistency and predictability.  Unless another 
meaning is clearly intended, words and phrases shall be taken in their ordinary 
and usual sense.  
Conversely, a statute is ambiguous only if it is found to be vague or 
uncertain and subject to varying interpretations.  Parker Land & 
Cattle Co. v. Wyoming Game 
& Fish Comm'n, 845 P.2d 1040, 1042-43 (Wyo. 1993).

 
 

Powder River Coal Co., 2004 WY 54, ¶ 5, 90 P.3d  at 1160.

 
 
DISCUSSION

 
 
            
Point of Valuation

 
 
[¶9]      The fair market value 
of CBM for severance and ad valorem tax purposes is determined "after the 
production process is completed."  Wyo. Stat. Ann. § 39-14-203(b)(ii).  The present 
controversy arises from application of Wyo. Stat. Ann. § 39-14-203(b)(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[.]

 
 
[¶10]   Determining the point of valuation is 
of particular significance because "expenses incurred by the producer prior to 
the point of valuation are not deductible in determining the fair market value 
of the [CBM.]"  
Wyo. Stat. Ann. § 39-14-203(b)(ii).  Thus, because certain expenses "downstream" 
of the point of valuation are 
deductible, it is to the producer's benefit to have the point of 
valuation determined "upstream" as far as possible.  That is the instant 
case in a nutshell.  
Williams seeks an "upstream" point of valuation instead of the 
"downstream" point of valuation determined by the Department and confirmed by 
the Board.

 
 
[¶11]   The progression of CBM from coal seam 
to commercial pipeline is a complex process involving extraction, gathering, 
processing, and transportation.  Numerous separate activities occur throughout 
the process, including, as a result of CBM's association with water in the 
ground, dehydration.  
Barrett's CBM is gathered from separate wellheads in a spoke-and-wheel 
system of individual pipelines.  The CBM passes through well meters at a 
central delivery point.  Next, the CBM passes through a nearby custody 
transfer meter, where custody and possession is transferred to Western Gas 
Resources (Western).  
The CBM then flows through Western's initial transportation related 
compressor, and then through Western's low-pressure pipeline a distance of about 
five miles, where it then passes through Western's reciprocating compressors and 
a triethylene glycol (TEG) dehydrator.  From that location, the CBM then enters 
either the FortUnion or the MIGC commercial 
pipeline.

 
 
[¶12]   The Department has determined that the 
correct point of valuation for Barrett's CBM is at the outlet to the TEG 
dehydrator.  
Williams counters with two alternative theories:  (1) if the TEG 
dehydrator is the "initial dehydrator" under Wyo. Stat. Ann. § 39-14-203(b)(iv), 
then the point of valuation should be at the custody transfer meter because the 
TEG dehydrator is located within a "processing facility;" and (2) the TEG 
dehydrator is not the "initial dehydrator" because dehydration also occurs 
within both the central delivery point and the initial transportation related 
compressor.

 
 
[¶13]   The Board's Findings of Fact, 
Conclusions of Law, Decision and Order is a document containing 170 separate 
numbered paragraphs.  
(See Appendix A as attached).1  We have reviewed 
the findings and conclusions, along with the record citations contained therein, 
and we conclude that the Board properly affirmed the Department's determination 
that the point of valuation should be the outlet to the TEG dehydrator.

 
 
[¶14]   Rather than reiterate all of the 
Board's findings that support its conclusion, we will simply note some of the 
findings and underlying facts we find to be significant.  For instance, when 
Barrett first responded to the DOA concerning the upcoming audit, it identified 
no dehydrators in the system upstream from the TEG dehydrator and it made no 
reference to a "processing facility."  Later, in response to a specific request from 
the DOA for information, Barrett replied that "[t]here are no dehydrators at the 
wells, the [central delivery points], or the compression stations."  And during a later 
conference between DOA and Barrett representatives, Barrett specified that the 
dehydrator was located at the "booster station" after the "booster 
compressor."  
Judging from Williams' own schematic drawing of Barrett's system, this 
clearly indicates the TEG dehydrator.  Even after the merger with Williams, Barrett 
employees identified to the DOA the TEG dehydrator as the initial 
dehydrator.

 
 
[¶15]   When Williams' representatives took 
over dealings with the DOA, they perpetuated Barrett's position that the TEG 
dehydrator was the initial dehydrator.  They added the contention, however, that the 
portion of Western's facilities where the TEG dehydrator was located was a 
"processing facility" and, therefore, inasmuch as dehydration took place within 
a processing facility, the point of valuation should be the inlet to the initial 
transportation related compressor.  But significantly, Williams did not argue at 
the time that the initial dehydrator was anything other than the TEG 
dehydrator.

 
 
[¶16]   The DOA did not accept Williams' theory 
that the described portion of Western's facilities was a "processing 
facility."  In 
accepting the DOA's position, the Board described the evidence upon which the 
DOA relied:

 
 
40.       The auditors 
were not persuaded by this statement of position.  For a variety of reasons, [the DOA 
representative] disagreed that the Barrett gas was processed.  . . .  Barrett had not 
reported a processing deduction on its state tax forms.  . . .  In a federal 
royalty audit, Barrett had reported the gas as unprocessed, and claimed no 
processing allowance.  
. . .  
The engagement letter had requested documentation of processing costs, 
but none was provided.  . . .  Barrett never provided any processing 
agreements or plant statements, nor were the auditors advised of a plant name or 
facility at which the gas was processed.  . . .  [The DOA representative] did not receive any 
construction and operating agreements.  She did not receive settlement statements to 
indicate the segregation and sale of liquid natural gas products, or byproducts 
such as sulfur.  
. . .  
[The DOA representative] had previous experience with gas processing 
facilities such as WhitneyCanyon.  See Union Pacific Resources Company et al, Docket No. 
2000-147, 2003 WL 21774603 (Wyo. St. Bd. Eq.).  She had an understanding of typical gas 
processing facilities, and she saw no evidence of such facilities in this 
case.

 
 
[¶17]   In addition to the observations of the 
DOA representative, the Board also relied upon a lengthy analysis whereby 
relevant statutory definitions and concepts were applied to Barrett's system, 
and it also gave deference to the Department's interpretation of a "processing 
facility" because such was not in conflict with legislative intent.  We find that the 
Board's analysis, which is revealed in paragraphs 89-132 of the final order, 
that the TEG dehydrator was not located within a processing facility was a 
correct interpretation of the applicable statutes.2  Williams argues 
essentially that because the TEG dehydrator performs some of the functions 
listed in the definition of "processing" contained in Wyo. Stat. Ann. § 
39-14-201(a)(xviii), ipso facto, it too is a 
processing facility.  
When the statutes are read in para materia, 
as we are required to do, that reasoning simply does not fly.  As the Board noted 
in Conclusion #122, Williams' approach relies on a circular reading of the 
statute that is not supported by its plain language.  The first sentence 
of the definition limits any activity deemed to be processing to those occurring 
"beyond the inlet to a natural gas processing facility."  Wyo. Stat. Ann. § 
39-14-201(a)(xviii).  
In addition, the definition recognizes that some of the functions 
specifically listed may occur during production.  In reality, the definition of processing is 
of little assistance in determining what the legislature meant by processing 
facility in the context of the severance tax statutes.

 
 
[¶18]   However, we can look, as the Board did, 
to the definition of "natural gas" for purposes of taxation for some insight 
into the legislative intent as to what was meant by "processing" in this 
context.  Wyo. 
Stat. Ann. § 39-14-201(a)(xv) provides that "[f]or the purposes of taxation, the 
term natural gas includes products separated for sale or distribution during 
processing of the natural gas stream including, but not limited to plant 
condensate, natural gas liquids and sulfur[.]"  This language implies that the legislature 
understood processing would separate certain products from the natural gas 
stream.  Thus a 
processing plant logically would be a facility constructed to perform the 
function of removing such products.  The TEG dehydrator would not constitute such 
a facility.

 
 

[¶19]   In addition, when construing technical 
terms contained within statutes, we look to the meaning ascribed to those terms 
in the applicable field.  Wyo. Stat. Ann. § 8-1-103(a)(i) (LexisNexis 
2003); Amoco Production Co. v. State, 751 P.2d 379, 382-83 
(Wyo. 1988).  A noted authority in the oil and gas industry 
indicates that a processing plant is one that removes liquefiable hydrocarbons 
from wet gas or casing-head gas.  Howard R. Williams & Charles J. Meyers, 
Oil and Gas Law 833 (2003).  This accepted meaning of the term "processing 
facility" within the industry most likely explains why neither Barrett nor 
Williams considered the TEG dehydrator to be a processing facility before 
attempting to achieve a more favorable point of valuation for their CBM 
production.

 
 
[¶20]   It follows that, unless the TEG 
dehydrator was not the 
initial dehydrator, its outlet was the proper point of valuation.  This conclusion, 
contained in the Department's final determination, apparently induced Williams 
to "prepare[] a new approach to the dehydrator definition."  "Dehydrator" is 
defined at Wyo. Stat. Ann. § 39-14-201(a)(vii) as "a device which removes water 
vapor that is commonly associated with raw natural gas[.]"  Williams' quest 
became to show that equipment in the central delivery points, as well as in the 
initial transportation related compressor, acted as dehydrators, which would 
make the appropriate point of valuation the custody transfer meter, rather than 
the TEG dehydrator.

 
 
[¶21]   Williams hired Bret Rhinesmith to 
evaluate its theory.  
Rhinesmith's testimony at the contested case hearing revealed that "the 
function of removing water is ubiquitous in coalbed methane equipment and 
piping."  The 
Board recited Rhinesmith's testimony that water vapor is separated from the CBM 
in the headers located in the central delivery points, that water vapor content 
of CBM decreases after passing through the screw compressor in the initial 
transportation related compressor, and that water removal occurs throughout the 
entire sequence of equipment from wellbore to the outlet of the TEG 
dehydrator.

 
 
[¶22]   Citing to numerous pieces of technical 
evidence in the record, the Board found that, unlike the incidental separation 
of water and CBM in headers and compressors, and in the pipeline, itself, the 
TEG dehydrator is a specialized dehydratora particular piece of equipment.  The Board found 
this significant because of Wyo. Stat. Ann. § 39-14-203(b)(iv)'s location of the 
point of valuation at the outlet of the initial dehydratora piece of 
equipmentrather than at the initial place that any dehydrationa functiontakes 
place.  Once 
again, we find that the Board's interpretation of the statute to be consistent 
with legislative intent.

 
 
[¶23]   Before going on to the next substantive 
issue, we will briefly discuss Williams' third stated issue, which questions 
whether the legislature intended CBM to be taxed as "oil and gas" under Wyo. 
Stat. Ann. § 39-14-201, et seq., or as an "other 
valuable deposit" under Wyo. Stat. Ann. § 39-14-701, et 
seq.  We 
conclude, for two reasons, that this is not actually an issue in this case.  First, both parties 
agree that CBM is and should be taxed under Wyo. Stat. Ann. § 39-14-201, et seq.  Second, Williams' query is founded on the 
apparent assumption that the Board determined that the legislature did not 
intend for CBM to be taxed under Wyo. Stat. Ann. § 39-14-201, et seq., for which assumption we find no basis in the 
record.  The 
Board did not even suggest that CBM should not be taxed under Wyo. Stat. Ann. § 
39-14-201, et seq.  Rather, in assessing statutory 
definitions, the Board merely considered the fact that CBM was not being 
commercially produced at the time the statutes were drafted.  There is no 
substance to this issue.

 
 
            
Deduction of Expenses

 
 
[¶24]   Intertwined with Williams' point of 
valuation argument is a separate argument that the Department incorrectly 
determined allowable expense deductions.  In consonance with its theory that the point 
of valuation was at the custody transfer meter, Barrett had deducted all costs 
associated with Western's services.  The Department's determination that the 
correct point of valuation was the outlet of the TEG dehydrator required a 
recalculation of allowable expenses.

 
 
[¶25]   Barrett paid Western $0.43 per mcf (one 
thousand cubic feet) of CBM for gathering and transportation to the point of 
sale.3  Of that fee, $0.294 was paid pursuant to a 
gas gathering agreement, and $0.14 was paid for transportation and other 
services on the MIGC pipeline, which was owned by Western.  Barrett's reported 
taxable values reflected a transportation deduction for the expenses incurred 
between the custody transfer meters and the point of sale.  In attempting to 
adjust these figures based on a point of valuation at the TEG dehydrator, the 
DOA several times requested from Williams a breakdown of the $0.294 per mcf fee 
but, without attempting to obtain the information from Western, Williams 
indicated that it could not provide such information.

 
 
[¶26]   Eventually, the DOA decided that, of 
the $0.294 fee paid to Western under the gas gathering agreement, $0.084 would 
be allowed as a deduction for transportation from the outlet of the TEG 
dehydrator to the inlet of the MIGC pipeline.  That figure was determined by reducing the 
$0.294 by the contractual rebate of $0.21 given by Western to match the lower 
rate charged by the parallel FortUnion pipeline.  In addition, the 
DOA also allowed $0.14 per mcf for the fee to transport the CBM on the MIGC 
pipeline to the point of sale in Glenrock.

 
 
[¶27]   Williams contends that these 
conclusions were not supported by substantial evidence and that the Board acted 
arbitrarily and capriciously.  Williams argues that Barrett was statutorily 
entitled to deduct all transportation fees downstream of the Department's 
selected point of valuation, including fuel charges on the MIGC and Fort Union 
pipelines and all transportation fees incurred downstream of those 
pipelines.  
Further, Williams contends that the DOA's audit worksheets showed that 
the DOA acknowledged these fees and that the Department presented no evidence as 
to why such fees were not legitimate transportation deductions.

 
 
[¶28]   The Board's refutation of Williams' 
position is partly based upon evidence supporting the position of the DOA and 
the Department, and partly based upon Williams' failure to meet its burden of 
proof.  As with 
the point of valuation issue, we will not reiterate the Board's complete thought 
process, which is revealed in the attached Appendix A, particularly in 
paragraphs 16-17, 26, 32-33, 35, 37, 42-45, 73-79, and 148-162.  We will, however, 
discuss some of the pertinent reasoning.

 
 
[¶29]   After examining the record concerning 
the various charges previously deducted by Barrett, the Board made a specific 
finding noting the DOA's conclusion that Barrett had deducted both a gathering 
charge, paid to Western, and a transportation charge, paid to MIGC, and that the 
former cannot be deducted under Wyo. Stat. Ann. § 39-14-203(b)(iv) and 
(vi).  In its 
findings, the Board then narrated the DOA's attempt to obtain from Williams 
information to allow a deduction for that portion of the Western charges that 
represented transportation costs from the outlet of the TEG dehydrator to the 
MIGC or FortUnion pipelines.  The Board found 
that "Williams has offered no evidence in this proceeding that would enable the 
Department of Revenue or Department of Audit to disaggregate the Western 
fee."  Despite 
noting further that the auditors could have disallowed any deduction for the 
Western expenses because Williams failed to provide information for that 
purpose, the Board nevertheless found that the DOA's decision to allow the 
$0.084 per mcf deduction was "a reasonable exercise of auditor judgment to reach 
a fair valuation for a taxpayer that refused to be cooperative."  The DOA's 
rationale, approved by the Board, was as follows:

 
 
Instead, the auditors determined that the total allowable 
transportation deduction would be $0.224, or $.084 more than the original 
allowance of $0.14.  
. . .  
This number was reached by subtracting $0.21/MCF from the Western Gas 
Resource Fee of $0.294.  . . .  The $0.21/MCF was inspired by the rebate 
Western gave to Barrett on gas shipped on the MIGC pipeline.  . . .  The auditors 
intended to allow transportation costs after the initial dehydrator, and broadly 
reasoned that all of Western's most expensive equipment was located before the 
outlet of the initial dehydrator.  . . .  They allocated approximately 70% of the fees 
charged by Western to service between the custody transfer meter and the outlet 
of the glycol dehydrator.  The auditors made no effort to account for 
fuel costs because fuel would be associated with the same equipment.

 
 
The Board also found that the administrator of the 
Department's mineral tax division "embraced this logic" given the unavailability 
of further information.  And finally, the Board found inconsequential 
the Department's use of a $0.21/MMBTU rebate as "inspiration" for a deduction 
against a $0.294/mcf fee, given that the ultimate allowance of $0.084 was an 
estimate, not a precise calculation.  As with earlier issues, we find that 
substantial record evidence supports these findings of the Board.4

 
 
[¶30]   Williams' next major issue is the 
alleged failure of the DOA and the Department to allow deductions for 
transportation charges to points of sale downstream from Glenrock.  The Board found 
that "the evidence supporting this conclusion is negligible."  Specifically, the 
Board noted that Williams had not called any witnesses who could speak to 
possible sales beyond Glenrock, and also noted that this issue was not raised 
until after the final letters were sent by the DOA and the Department.  Further, the Board 
found that the inferences of such sales contained in the testimony of Williams' 
representative were entitled to little weight because they were not supported by 
the evidence.  
Instead, the Board's findings relied upon the fact that the DOA had tied 
invoices to sales summaries in accepting Barrett's own representation that 
Glenrock was the point of sale.

 
 
[¶31]   Not surprisingly, the Board's 
conclusions mirrored its findings as to these issues.  The Board concluded 
that Williams had failed in its burden of going forward and in its burden of 
persuasion, meaning the burden never shifted to the Department to prove its 
determinations were correct.  We affirm the conclusions of the Board in 
respect to this issue.  The record evidence showing Glenrock to be 
the point of sale included Barrett's own representations, as well as the 
auditors' findings based upon review of invoices and sales summaries.  Evidence to the 
contrary consisted only of a Williams' witness's suggestion that the records 
showed "inferences" that such sales took place.

 
 
            
Interest

 
 
[¶32]   Wyo. 
Stat. Ann. § 39-14-208(c)(ii) provides for the collection of interest on 
delinquent severance taxes "when a taxpayer or his agent knew or reasonably 
should have known that the total tax liability was not paid when due[.]"  Williams' position 
is that "Barrett did not and could not have predicted [the Department's] 
interpretation of the natural gas valuation and tax statutes would be so 
radically different from its own."  Williams supports this position with 
references to the Department's refusal to supply a copy of an attorney general's 
memorandum regarding taxation of CBM, and to the Board's finding that the 
statutes are ambiguous.  Finally, Williams claims that "[t]he obvious 
complexity of the issues surrounding the [point of valuation] for this new 
process' of natural gas production make it clear that it was reasonable for 
Barrett to interpret the statutes as it did and assessment of interest is 
inappropriate under these circumstances."

 
 
[¶33]   The Board emphasized three points in 
affirming the Department's assessment of interest:  First, Wyo. Stat. 
Ann. § 39-14-208(c)(iv) requires the assessment of interest on delinquent 
taxes.  Second, 
in describing their own facilities and those of Western, no Barrett employee 
characterized the booster compressor and TEG dehydrator as a processing 
facility, and no Barrett employee identified more than one dehydrator.  And third, no 
Barrett or Williams employee requested of the Department either a written 
interpretation of the statute or a value determination, both of which are 
available as a matter of right under Wyo. Stat. Ann. § 39-14-209(a).

 
 
[¶34]   Wyo. Stat. Ann. § 39-14-203(b)(iv) is 
quite clear in pronouncing that the natural gas production process is completed, 
for severance tax purposes, at the outlet of the initial dehydrator, unless no 
dehydration is performed other than within a processing facility.  The record is just 
as clear that at no time did Barrett treat anything other than the TEG 
dehydrator as a dehydrator, and at no time did Barrett consider the TEG 
dehydrator as being part of a processing facility.  In other words, 
Barrett's own knowledge and description of its and Western's facilities 
recognized that the point of valuation of the CBM was at the outlet to the TEG 
dehydrator.  
For Williams belatedly to argue otherwise was not reasonable and the 
Board certainly was free to discount the credibility of Williams' witness.  Under these 
circumstances, the Department and the Board made no error of law in assessing 
interest.  The 
Board's concession in its order that the statutory definitions of dehydrator and 
processing facility may be a "little ambiguous" in the CBM context is not 
sufficient to create confusion for Barrett that did not exist at the time it was 
reporting its production.  We agree with the Board's conclusion that 
Barrett and Williams "simply failed to apply the plain language of the 
statute."

 
 
[¶35]   Finally, we note that the attorney 
general's memorandum sought by Williams was the subject of a motion to compel 
discovery that resulted in a motion hearing and in camera review of the 
memorandum.  
The Board decided that the memorandum, which contained legal advice from 
the office of the attorney general to the Department in an unrelated case, was a 
privileged communication between attorney and client and was, therefore, not 
discoverable.  
In this appeal, Williams has shown us neither how that decision was 
legally incorrect nor how Williams may have been prejudiced by the ruling.

 
 
CONCLUSION

 
 
[¶36]   The Board's determination that the 
point of valuation of Barrett's CBM was at the outlet of the TEG dehydrator and 
its determination that the TEG dehydrator was not located within a processing 
facility were supported by substantial evidence.  Interest was lawfully assessed against 
Barrett's delinquent taxes because both Barrett and Williams knew or should have 
known the proper point of valuation, inasmuch as the TEG dehydrator clearly was 
the initial dehydrator and it was not located within a processing facility 
within the meaning of the statute.

 
 
[¶37]   Affirmed.

APPENDIX "A"

 
 
BEFORE THE STATE BOARD OF 
EQUALIZATION

 
 
FOR THE STATE OF WYOMING

 
 
IN THE MATTER OF THE APPEAL OF                           )

WILLIAMS PRODUCTION RMT COMPANY                )           
Docket No. 2002-                                                                                               
)           
103

FROM A PRODUCTION TAX AUDIT                                ) 

ASSESSMENT DECISION OF THE                                 )
DEPARTMENT OF REVENUE                                         
)

(Production Year 1999)                                                       
)

 
 

 
 

FINDINGS OF FACT, CONCLUSIONS OF LAW, DECISION AND 
ORDER

 
 

 
 
 
 

APPEARANCES

 
 
Margo 
Harlan Sabec, Scott P. Klosterman, and Nicol M. Thompson, of Williams, Porter, 
Day & Neville, P. C., for Williams Production RMT Company, (Williams), 
successor in interest to Barrett Resources Company (Barrett).

 
 
Martin L. Hardscog, and Karl D. Anderson, Senior Assistant 
Attorneys General, for the Department of Revenue (Department).

 
 
 
 

DIGEST

 
 
This matter came on for hearing on August 18 through 22, 
2003, before the State Board of Equalization (Board), consisting of Roberta A. 
Coates, Chairman, Alan B. Minier, Vice Chairman, and Thomas R. Satterfield, 
Member.  Gayle 
R. Stewart acted as Hearing Officer.  All Board Members have considered this matter 
by attending the hearing, reviewing the file, hearing transcript, and exhibits, 
and participating in this Decision and Order.  This appeal arises from an audit of Williams' 
production of coal bed methane gas during 1999, and the Department's subsequent 
assessment of additional severance taxes and certification of increased value 
for ad valorem tax purposes. 

 
 
 
 

JURISDICTION

 
 
The Board must review final decisions of the Department of 
Revenue on application of any interested person adversely affected.  Wyo. 
Stat. Ann. § 30-11-102.1(c). Taxpayers are specifically authorized to appeal 
final decisions of the Department concerning oil and gas valuation 
amendments.  
Wyo. Stat. Ann. § 39-14-209(b)(v).  The taxpayer's 
appeal must be filed with the Board within thirty days of the Department's final 
decision.  
Wyo. Stat. Ann. § 
39-14-209(b)(iv); Rules, WyomingState Board of Equalization, 
Chapter 2, § 5(a).  This case arises from the Department of 
Revenue's assessment of additional severance taxes and increase in taxable 
valuation on Petitioner's gas production following an audit by the Wyoming 
Department of Audit.  
Wyo. Stat. Ann. § 39-14-208(b). 

 
 
 
 

DISCUSSION

 
 
Williams Production RMT Company is the successor in 
interest to Barrett Resources Company.  In 1999, Barrett produced coalbed methane 
from natural gas wells located in Campbell 
County, Wyoming.  In 2001, the 
Wyoming Department of Audit (DOA), began an audit of Barrett's severance and ad 
valorem taxes.  
At the conclusion of the audit, the Department of Revenue determined that 
$170,747.15 of additional severance tax was due, together with interest in the 
amount of $58,304.  
The Department also certified a total increase of ad valorem taxable 
value of $3,392,635 to CampbellCounty.

 
 
Williams filed a timely appeal, identifying four 
errors:

 
 
1.  The Department determined that Barrett's 
production process was completed, and therefore the point of valuation was 
located, at the outlet of a dehydration unit owned by Western Gas Resources.

 
 
2.  The Department miscalculated the allowable 
transportation deduction.

 
 
3.  The Department failed to exclude the total 
amount of exempt royalties from the taxable value of Barrett's 1999 
production.

 
 
4.  The Department assessed interest on the 
alleged underpayment of taxes.

 
 
We affirm the Department on all four issues.

 
 
The dispute between the parties turns in large part upon 
the names and characterizations of equipment owned and used by Barrett, and 
equipment owned and used by Western Gas Resources, Inc. (Western), a company 
which provided services to Barrett for a fee.  Generally speaking, the correct names of and 
characterizations of Barrett's and Western's equipment determine the point of 
valuation at which Barrett's gas is valued, and thereby affects the value of the 
gas.  The case 
largely turns on the existence of a "dehydrator" and/or "processing 
facility."  
However, the positions of Barrett and Williams about names and 
characterizations varied considerably from the commencement of the audit to the 
conclusion of the hearing.  In order to clearly demonstrate the record 
supporting our findings of fact and to reach the correct conclusions of law, we 
must pay attention to the details of the Barrett/Williams position over 
time.

 
 
 
 

FINDINGS OF FACT

 
 

Coalbed methane compared to conventional natural 
gas

 
 

1.                  
Coalbed methane is produced from wells that are drilled 
into coal seams.  
These wells typically have a center tube through which water is pumped 
from the coal seam.  
The act of pumping off water reduces pressure on the coal, which 
liberates the natural gas from the coal seam.  The gas enters an open-hole completion area, 
and flows to the surface through a production casing that surrounds the center 
tube.  
[Transcript Vol. I, pp. 73-74].

 
 

2.                  
Generally speaking, coalbed methane differs from other 
natural gas produced in Wyoming.  It is typically 
produced at lower pressure. It has lower flow rates per well.  Coalbed methane is 
not complex natural gas, that is, coalbed methane does not contains heavy 
hydrocarbons and has few impurities. [Transcript Vol. I, pp. 66-70].  Because coalbed 
methane does not have heavier hydrocarbons, there is no byproduct stream of 
natural gas liquids that can be used to generate revenue, nor any need to 
separate out oil or other liquid hydrocarbons. [Transcript Vol. I, pp. 71, 76]. 

 
 

3.                  
Coalbed methane is in contact with water when produced, so 
the gas produced from the well is saturated with water.  [Transcript Vol. I, 
p. 76].  The 
water vapor content of gas from a high pressure conventional well is 
approximately 100 pounds of water vapor per million cubic standard cubic feet a 
day of gas. [Transcript Vol. I, pp. 76-77].  The water vapor content of gas from a coalbed 
methane well is approximately 1000 pounds of water vapor per million standard 
cubic feet a day of gas, or about ten times more for the same volume of 
gas.  
[Transcript Vol. I, p. 77].

 
 

4.                  
No 
party introduced precise information about industry-wide production of coalbed 
methane from the Powder River Basin of Wyoming, although such information is 
available from the Wyoming Oil and Gas Conservation Commission.  [Transcript Vol. 
II, p. 292].  
However, the parties agree, and we find, that coalbed methane production 
was not significant until the latter part of the decade of the 1990's. 
[Transcript Vol. II, pp. 292-293; Transcript Vol. IV, pp. 679-680].  The Petitioner's 
expert testified that, "1999 is probably the first year when things started 
ramping up."  
[Transcript Vol. II, p. 292].

 
 

The audit of Barrett

 
 

5.                  
In 
early 2001, the DOA commenced an audit of Barrett.  Barrett had 
produced natural gas from coal bed methane wells in Campbell 
County, Wyoming, and paid severance and 
gross products taxes on that natural gas production.  The period covered 
by the audit was 1999.  Barrett commenced production in February 
1999. [Transcript Vol. IV, p. 824; Exhibit 505]. 

 
 

6.                  
Valerie Simmons, a principal auditor for the DOA, contacted 
Barrett in early 2001 to request documentation for an initial pre-audit 
review.  
William McGuire of Barrett sent the requested information to Simmons on 
January 10, 2001. [Exhibit 512].  McGuire's transmittal included three folders 
of material related to accounting, transportation, marketing, and gas purchase 
contracts, together with a map of the "[c]oalbed methane area showing well 
locations, PODS [central delivery points for the collection of gas from 
individual wells], Compressors and Pipelines." [Exhibit 512].  The transmittal 
made no reference to a dehydrator or processing facility.

 
 

7.                  
McGuire's January 10, 2001, letter refers to agreements 
between Barrett (and a subsidiary) and a number of entities, including Western 
Gas Resources, Fort Union Gas Gathering, L.L.C., and MIGC. [Exhibit 512].

 
 

8.                  
Barrett was a party to a "Gas Gathering Agreement" with 
Western Gas Resources, Inc., dated February 1, 1999. [Exhibit 144].  Under this 
Agreement, Western provided certain Gathering Facilities, defined as "including, 
but not limited to dehydration, pigging equipment, pipelines, metering 
facilities and compressors..." [Exhibit 144, Article I Definitions].  Western took 
custody of the Barrett gas at a custody transfer meter located between Barrett's 
Central Delivery Points and a screw compressor owned by Western.  [Transcript Vol. 
III, pp. 397-398]. Western was obliged to redeliver Barrett's gas to points of 
"interconnection of the facilities of [Western] and those of MIGC or of 
FortUnion, as applicable."  [Exhibit 144, 
Article I Definitions; Transcript Vol II, p. 398]. 

 
 

9.                  
MIGC 
is a pipeline that is regulated by the Federal Energy Regulatory Commission 
(FERC).  The 
pipeline provides service from the terminus of Western's facilities to 
Glenrock, Wyoming. [Transcript Vol. III, pp. 
435, 442].  On 
February 1, 1999, Barrett entered into an agreement with MIGC for service on a 
firm basis. [Exhibit 530].  On February 25, 1999, Barrett entered into an 
agreement with MIGC for service on an interruptible basis.  [Exhibit 530].

 
 

10.             
Fort Union Gas Gathering, L.L.C. (FortUnion) is a pipeline, but it is 
not regulated by FERC. [Transcript Vol. III, p. 437]  The record includes 
a Firm Gathering Agreement between FortUnion and Bargath, Inc., dated 
March 1, 1999. [Exhibit 531].  Bargath was a subsidiary of Barrett.  [Transcript Vol. 
III, p. 614].  
FortUnion provided only limited 
service to Barrett during 1999. [Exhibit 507; Exhibit 140, showing FortUnion charges only in September 
1999].

 
 

11.             
On 
February 9, 2001, Elwood Soderlind, Audit Supervisor for the DOA, sent a formal 
engagement letter to McGuire of Barrett. [Exhibit 505; Transcript Vol. IV, p. 
824].  McGuire 
had been designated Barrett's audit contact. [Transcript Vol. IV, p. 825].  The engagement 
letter identified Simmons as DOA's contact. [Exhibit 505].  Among other things, 
the engagement letter requested, by February 28, 2001, comprehensive 
documentation for Barrett's 1999 coalbed methane production from CampbellCounty.  The request 
encompassed volumes of gas produced, prices received, "costs (allowances) of 
processing, gathering, dehydrating, and transporting," gas sales contracts, tax 
workpapers, "a listing of actual government royalties paid", and "all gathering 
and transportation agreements and field schematics." [Exhibit 505].  

 
 

12.             
On 
March 2, 2001, McGuire sent an e-mail to Simmons, explaining how Barrett 
calculated the volumes of production associated with each coalbed methane well. 
[Exhibit 502].  
Simmons responded with a specific question about the presence of 
dehydrators "at the wellhead, the pod, or the compression station" because she 
knew "the statute was pretty clear about needing to know where that was."  [Transcript Vol. 
IV, p. 833].

 
 

13.             
Tom 
Piecuch of Barrett responded to Simmons' request on March 5, 2001. [Exhibit 
502].  He 
stated that, "There are no dehydrators at the wells, the pods or compressor 
stations.  
However, there is a water knock-out at the compressor stations." [Exhibit 
502].  We find 
that a water knock-out is synonymous with a separator. [Transcript Vol. II, pp. 
261-262; Vol. IV, pp. 689-690].

 
 

14.             
Representatives of Barrett and DOA, including McGuire and 
Simmons, met on May 1, 2001, for an opening conference.  They discussed the 
tax audit and an audit of state and federal royalties. [Exhibit 507; Transcript 
Vol. IV., pp. 826-827].  The purpose of the conference was for the 
auditors to make sure that necessary information was available and to gain an 
understanding of the company, including deductions that were taken and who 
purchased production. [Transcript Vol. IV., p. 826].  Simmons made notes 
that are included in the audit file. [Transcript Vol. IV, pp. 828-829; Exhibit 
507].

 
 

15.             
During the conference, Barrett employees described the 
sequence of the equipment between the wellheads and Glenrock, Wyoming.  Four to twelve of 
Barrett's wells are served by a pod.  At the pod, the gas is measured.  From the pod, the 
gas goes to a Western screw compressor.  From the screw compressor, the gas goes on to 
a booster compressor before entering a transportation pipeline to Glenrock.  Simmons' notes 
state that, "[t]he dehydrator is located at the booster station and occurs prior 
to the booster compression." [Exhibit 507].  (This note was incorrect.  The dehydrator is 
located after the booster compressor. [Transcript Vol. IV, p. 837].)  Western owned the 
metering equipment and pipeline from the screw compressor to the main 
transportation line. [Exhibit 507].  

 
 

16.             
During the conference, Barrett employees stated that 
Barrett paid Western a fee of approximately $0.43 per thousand cubic feet of gas 
(MCF) for all services necessary to move Barrett gas from Western's screw 
compressor to Glenrock, including the services of MIGC and Fort Union.  [Transcript Vol. 
IV, p. 830; Exhibit 507]. The next day, Piecuch told Simmons that only $0.294 of 
the total fee paid to Western was for services provided by Western. [Transcript 
Vol. IV, p. 830; Exhibit 507].  The remainder of the total fee was for 
pipeline services.  
There was charge of $.014 per MCF for gas sent on the FortUnion pipeline. [Transcript 
Vol. IV, p. 830; Exhibit 507].  Barrett's price to Glenrock was essentially 
equal via either FortUnion or MIGC, however, because Western 
provided a rebate against MIGC's FERC-tariffed rate to match the FortUnion rate.  [Transcript Vol. 
IV, p. 830; Exhibit 507].

 
 

17.             
Barrett deducted from its taxes all of the charges billed 
by Western. [Exhibit 507].  Barrett deducted these charges as 
transportation expenses against Barrett's total revenues from the PowderRiver Basin, allocated to the 
well level based on the production volume of each well. [Transcript Vol. II, pp. 
391-392].

 
 

18.             
During the conference Barrett employees told the auditors 
that Barrett sold its gas to Western at the screw compressor, then Barrett 
repurchased the gas at Glenrock, where Barrett marketed the gas. [Exhibit 507; 
Transcript Vol. IV, p. 831].  However, the auditors could see that the sale 
to Western was not the ultimate sale.  [Transcript Vol. IV, p. 831].  Sales invoices 
provided by Barrett did not give a specific detailed location of where sales 
occurred.  
[Transcript Vol. IV, p. 831].  

 
 

19.             
Barrett later represented that the point of sale for its 
coalbed methane gas was Glenrock, and the auditors were able to tie invoices to 
sales summaries that Barrett provided.  [Transcript Vol. IV, p. 831].  The auditors 
accepted Barrett's representation of the point of sale [Transcript Vol. IV, p. 
932], and so do we.  
We find that the point of sale was Glenrock, Wyoming.  This finding is 
supported by Barrett's deduction of the charges billed by Western, which 
implicitly reflects Barrett's position on (a) the point of valuation, i.e., the 
custody transfer meter between Barrett's pod and Western's screw compressor, and 
on (b) the point of sale, i.e., Glenrock.

 
 

20.             
On 
May 7, 2001, Barrett accepted a bid from Williams to acquire Barrett. 
[Transcript Vol. II, p. 359].  Simmons received notice of the pending merger 
on May 14, 2001. [Transcript Vol. V, p. 878].  The merger closed in two steps.  Williams bought 
fifty percent of the stock of Barrett in a transaction that closed on June 11, 
2001.  Williams 
acquired the balance of Barrett stock in a stock trade which closed on August 1, 
2001.  
[Transcript Vol. II, pp. 359-360]. 

 
 

21.             
On 
June 14, 2001, Simmons and three other auditors took a field tour of Barrett 
facilities in CampbellCounty. [Transcript Vol. IV, p. 
836].  The 
auditors had requested the tour because they were new to coalbed methane 
audits.  The 
tour was arranged through an audit contact at Barrett and as part of the audit 
process.  
[Transcript Vol. IV, pp. 832, 844].  Nathan Lopez conducted the tour; Lopez was an 
operations superintendent for Barrett. [Transcript Vol. IV, p. 836].  Simmons was 
specifically interested in learning "where the initial [dehydrator] was because 
that was key in the point of valuation decision." [Transcript Vol. IV, p. 
837].

 
 

22.             
Simmons took notes of the trip.  Her notes 
memorialize the terms Lopez used to describe the equipment. [Exhibit 537; 
Transcript Vol. IV, pp. 837-838, 840].  Lopez showed the auditors several wells, and 
three different pods.  
[Transcript Vol. IV, pp. 839-840; Exhibit 537].  Lopez showed the 
auditors two booster compressor stations.  [Transcript Vol. IV, pp. 839-840; Exhibit 
537].  Lopez 
stated that there were two different equipment configurations.  With three stage 
compressors, the gas went from the wellhead to a pod, from the pod to a screw 
compressor, from the screw compressor to a booster compressor, from the booster 
compressor to a dehydrator, and from the dehydrator to the pipeline.  With four stage 
compressors, the gas went directly from the pod to a booster compressor, but the 
sequence was otherwise the same.  [Transcript Vol. IV, pp. 839-841; Exhibit 
537]. 

 
 

23.             
Lopez 
showed Simmons a dehydrator in a building.  The dehydrator came after a booster 
compressor. [Transcript Vol. IV, pp. 840-841].  Lopez described the dehydrator to Simmons as 
a glycol dehydrator.  
[Transcript Vol. IV, p. 841]. 

 
 

24.             
Once 
the merger with Barrett closed on August 1, 2001, Williams decided to 
consolidate Barrett's accounting functions from Denver to the Williams home office in Tulsa. [Transcript Vol. II, p. 
360].  Williams 
did not offer McGuire a position after the merger.  [Transcript Vol. 
II, p. 362].  
Piecuch accepted a job with Williams, but Williams severed Piecuch in 
November of 2001.  
[Transcript Vol. II, p. 363].  At the hearing of this matter, Williams did 
not provide testimony from McGuire, Piecuch, Lopez, or any other former Barrett 
employee having personal knowledge of Barrett's policies or practices with 
respect to accounting, contracts administration, sales, or operations. 

 
 

25.             
In 
August 2001, Williams Exploration and Production gave Greg Storts the 
responsibility to report Wyoming severance, conservation, and gross 
products taxes, as well as Wyoming state 
royalty.  
[Transcript Vol. II, pp. 385, 387].  

 
 

26.             
On 
October 11, 2001, Simmons entered a memorandum in the audit file.  She memorialized 
her preliminary conclusion that Barrett had deducted both a gathering charge, 
paid to Western, and a transportation charge, paid to MIGC. [Exhibit 517].  Generally speaking, 
gathering charges relate to services provided prior to the point of valuation, 
and cannot be deducted.  Wyo. 
Stat. Ann. §§ 39-14-203(b)(iv), 39-14-203(b)(vi).  

 
 

Williams reviews Barrett's point of 
valuation

 
 

27.             
On 
October 29, 2001, Storts attended a seminar hosted by the Wyoming Department of 
Revenue. [Transcript Vol. II, p. 392].  The seminar was designed to instruct mineral 
taxpayers on how to correctly fill out the different forms associated with the 
Mineral Tax Division.  
[Transcript Vol. II, p. 392].  The seminar prompted Storts to review 
Barrett's calculation of taxable value.   [Transcript Vol. II, p. 393].  According to 
Storts, "Williams had been told that Barrett was using the custody transfer 
meter as the point of valuation."   [Transcript Vol. II, p. 394]. 

 
 

28.             
Storts reviewed the appropriate Wyoming statutes, and contacted Dean Tinsley, 
an engineer in Barrett's Denver offices, to learn 
about Barrett's coalbed methane operations.   [Transcript Vol. II, pp. 393-394]. 

 
 

29.             
Tinsley advised Storts that the field layout "went from the 
well to the POD to the screw compressor to the [reciprocating] station and then 
into the pipelines."   [Transcript Vol. III, p. 598].  Tinsley also 
explained such details as "what a screw compressor was and where it was located 
in the system."   
[Transcript Vol. III, p. 599].

 
 

30.             
Storts then reached a conclusion based on his own reading 
of the Wyoming statutes.  [Transcript Vol. 
II, p. 394].  
Storts saw that there was no statutory definition of "processing 
facility," but decided that a processing facility must be a facility where 
processing occurred.  
Storts then analyzed Western's facilities in light of the statutory 
definition of "processing."  [Transcript Vol. II, p. 395].  Based on what 
Tinsley had told him about the Western facilities, Storts concluded that 
Western's facilities were a processing facility.   [Transcript Vol. II, pp. 395-396].  Storts then 
consulted the portion of the statute that identifies the point of valuation for 
processing facilities, and concluded that the point of valuation was the custody 
transfer meter.   
[Transcript Vol. II, pp. 394-396]. 

 
 

31.             
Prior 
to this time, no one from either Barrett or the DOA had referred to the 
Western's facilities as a "processing facility."  We find that the previous usages are entitled 
to heavier weight, particularly with respect to the customary usage in the 
industry.

 
 

The Preliminary Issue Letter and Williams' 
Response

 
 

32.             
On 
April 17, 2002, the DOA sent its Preliminary Issue Letter to Williams.  [Exhibit 101].  The purpose of the 
letter was to identify preliminary findings, and to give the audited party a 
chance to address the findings. [Transcript Vol. IV, p. 847]. The letter 
identified only two issues. The first issue was incorrect calculation of new gas 
well tax incentives.  
[Exhibit 101].  
Williams accepted this audit finding.  [Transcript Vol. II, p. 392]. 

 
 

33.             
The 
second issue was the transportation deduction claimed by Williams.  The auditors stated 
that:

 
 
After careful review of the transportation/gathering 
information provided by Barrett Resources Corporation during the audit, we have 
determined that the allowable transportation charge is $0.14/MCF.  Barrett Resources 
Corporation may wish to furnish additional information regarding the breakdown 
of all charges incurred to move the gas from the wellhead to the ultimate sales 
point.

 
 
[Exhibit 101].  The letter stated that a response was due by 
May 17, 2002.  
[Exhibit 101].

 
 

34.             
When 
Williams received the Preliminary Issue Letter, Storts took over as the audit 
contact for Williams. [Transcript Vol. II, p. 400].

 
 

35.             
By 
the time the DOA sent the Preliminary Issue Letter, the auditors had concluded 
that the correct point of valuation was in the outlet of Western's glycol 
dehydrator.  
[Transcript Vol. IV, p. 850].  The auditors were prepared to allow a 
deduction for the portion of the Western charges associated with Western's 
pipeline connection from the glycol dehydrator outlet to the inlet of the MIGC 
or FortUnion pipeline.  The auditors had 
not made such an allowance because they had no information about those 
costs.  
[Transcript Vol. IV, p. 852]. 

 
 

36.             
Williams responded to the DOA by letter of May 16, 
2003.  Margo 
Sabec, outside counsel for Williams, wrote the response. [Exhibit 503].  The letter is 
significant because it states additional details of fact; it ties those details 
to a legal position; and it conflicts with facts and positions later taken by 
Williams.  The 
letter proceeds on the premise that the Department has disallowed fees related 
to the services provided by Western. [Exhibit 503].

 
 

37.             
Sabec 
asserted the following facts, among others, and in doing so supplemented the 
positions previously taken by Barrett employees:

 
 
a.  Gas "from individual wells was gathered from 
the wellhead to a central delivery point ("CDP") in Barrett's separate and 
individual pipelines....The CDP is sometimes referred to as the pod house."

 
 
b.  At the CDP, the commingled gas flowed 
"through a separator that allowed the gas to separate from the water it was 
produced with."

 
 
c.  "The commingled gas was transported in 
Barrett's pipelines downstream from the CDP to a custody meter, where custody 
and possession of the gas was transferred to a third party transporter 
(Western)."

 
 
d.  "....Western charged Barrett a fee of 
$0.32/MCF, including fuel, to transport and process its gas on Western's 
pipeline system."

 
 
e. "....The inlet of the initial screw compressor was 
located immediately downstream of the custody transfer meter...."

 
 
f.  "....FortUnion and MIGC charged Barrett 
a fee or rate of $0.14/MCF to transport and process its gas from the inlet of 
their pipeline systems downstream to the interstate transportation hub." 

 
 
g.  "....Barrett did not sell its natural gas at 
or prior to the point of valuation by bona fide arm's length sale during 
production year 1999."

 
 
[Exhibit 503].  In reference to paragraph d above, we find 
that $0.32/MCF referred to the $0.294/MCF fee for services provided only by 
Western, to which Sabec added a maximum fuel charge.  In reference to 
paragraph f above, we find that $0.14/MCF referred imperfectly to the fact that 
Western provided Barrett a rebate of $0.21/MMBTU of gas to provide a pipeline 
rate to Barrett that was essentially the same no matter which one of the two 
pipelines was used to move Barrett's gas to Glenrock. [Transcript Vol. III, p. 
434].  
Referring to paragraph g above, we note that Sabec said nothing to 
repudiate the point of sale previously represented by Barrett's employees.

 
 

38.             
Sabec 
also asserted positions that mixed facts with statutory characterizations:

 
 
a.  "On its pipeline system, Western performed 
processing functions to Barrett's and other third party gas at screw compressors 
(boost the pressure of the gas to approximately 80 psi), reciprocating 
compressors (boost the pressure to approximately 1,400 psi), and 
dehydrators...." 

 
 
b.  "....The inlets to the FortUnion or MIGC pipeline systems 
are located downstream of Western's processing facility (where compression and 
dehydration are performed)."

 
 
c.  "....Barrett reported that its production 
process was completed at the inlet to the initial transportation related 
compressor (the screw compressor)...."  

 
 
d.  "....Barrett's gas had been extracted and 
severed from the ground and gathered from multiple wells via Barrett's separate 
pipelines to a central point of accumulation (CDP), where separation and water 
removal occurred.  
There was no dehydration, as it is defined in the 
statutes, performed by Barrett in the production process...."(emphasis 
supplied)

 
 
[Exhibit 503].

 
 

39.             
Williams' key point was that the Barrett gas was dehydrated 
within a processing facility that belonged to Western.  Like Storts 
individually, Williams concluded that Barrett had correctly selected the inlet 
of the initial transportation related compressor as the point of valuation.  Williams cast its 
lot with the definition of point of valuation found in the second sentence of 
Wyo. Stat. Ann. § 39-14-203(b)(iv):  "Where 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."  Williams accordingly concluded that it was 
entitled to deduct all of the fees charged by Western. [Exhibit 503].  

 
 

40.             
The 
auditors were not persuaded by this statement of position.  For a variety of 
reasons, Simmons disagreed that the Barrett gas was processed. [Transcript Vol. 
IV, p. 859].  
Barrett had not reported a processing deduction on its state tax 
forms.  
[Transcript Vol. IV, p. 860].  In a federal royalty audit, Barrett had 
reported the gas as unprocessed, and claimed no processing allowance. 
[Transcript Vol. IV, p. 860].  The engagement letter had requested 
documentation of processing costs, but none was provided.  [Transcript Vol. 
IV, p. 860].  
Barrett never provided any processing agreements or plant statements, nor 
were the auditors advised of a plant name or facility at which the gas was 
processed. [Transcript Vol. IV, p. 860]. Simmons did not receive any 
construction and operating agreements.  She did not receive settlement statements to 
indicate the segregation and sale of liquid natural gas products, or byproducts 
such as sulfur.  
[Transcript Vol. IV, pp. 861-862].  Simmons had previous experience with gas 
processing facilities such as WhitneyCanyon.  See Union Pacific Resources Company et al, Docket No. 
2000-147, 2003 WL 21774603 (Wyo. St. Bd. Eq.).  She had an understanding of typical gas 
processing facilities, and she saw no evidence of such facilities in this 
case.  
[Transcript Vol. IV, p. 861]. 

 
 

41.             
Williams sought and received an audit conference. 
[Transcript Vol. II, p. 403].  The conference was held on June 13, 
2002.  
[Transcript Vol. IV, p. 853].   At this conference, the auditors stated 
their position that the point of valuation was at the outlet of the initial 
dehydrator [Transcript Vol. IV, pp. 851-852]; we find the testimony of Simmons 
more credible than contrary testimony of Storts that the auditors did not do 
so.  
[Transcript Vol. II, p. 405]. Williams discussed its view about the 
existence of a processing facility, and  about what processing functions occurred at 
Western's facilities.  
[Transcript Vol. II, p.  404].  During the conference the auditors asked for 
a breakdown of the $0.294 Western charges, in order to allow a portion of the 
charges.  
[Transcript Vol. IV, p. 852]. 

 
 

42.             
On 
June 25, 2002, Simmons spoke again with Storts about a breakdown of the Western 
fee.  [Exhibit 
510].  Storts 
told her that Williams did not have a way to break the fee down. [Exhibit 
510].  On July 
9, 2002, Storts reiterated this position in an e-mail to Simmons, stating that, 
"Since this is a 3rd party, arms-length 
contract, Williams has no information regarding any breakdown of the fixed 
charge, as it relates to separate functions performed or segments of the Western 
Gas Resources system." [Exhibit 513].  However, Storts concedes that Williams did 
nothing to see if a breakdown was available from Western.  [Transcript Vol. 
III, p. 508].  
Williams management chose not to contact Western.  [Transcript Vol. 
III, p. 509].  
We find that Williams has offered no evidence in this proceeding that 
would enable the Department of Revenue or Department of Audit to disaggregate 
the Western fee.

 
 
The Final Issue Letter and the Department of Revenue's 
Determination

 
 

43.             
On 
July 25, 2002, Simmons wrote a memo to the file to reflect that the auditors had 
modified the allowable transportation deduction.  The auditors added a deduction value for the 
transport of gas from the outlet of the initial dehydrator to the inlet of the 
MIGC pipleline. [Exhibit 518].  We note that the auditors could have 
disallowed any Western expense because Williams did not come forward with 
information. [Transcript Vol. V, p. 898].  Instead, the auditors determined that the 
total allowable transportation deduction would be $0.224, or $.084 more than the 
original allowance of $0.14. [Exhibit 518].  This number was reached by subtracting 
$0.21/MCF from the Western Gas Resource Fee of $0.294. [Exhibit 518].  The $0.21/MCF was 
inspired by the rebate Western gave to Barrett on gas shipped on the MIGC 
pipeline. [Exhibit 518].  The auditors intended to allow transportation 
costs after the initial dehydrator, and broadly reasoned that all of Western's 
most expensive equipment was located before the outlet of the initial 
dehydrator. [Transcript Vol. IV, pp. 866-867].  They allocated approximately 70% of the fees 
charged by Western to service between the custody transfer meter and the outlet 
of the glycol dehydrator.  The auditors made no effort to account for 
fuel costs because fuel would be associated with the same equipment.  [Transcript Vol. 
IV, p. 863].  
We find that this was a reasonable exercise of auditor judgment to reach 
a fair valuation for a taxpayer that refused to be cooperative.  

 
 

44.             
On 
August 23, 2002, the Department sent Williams a final determination assessment 
notice. [Exhibit 500].  This notice stated the amount of severance 
tax underpayments including interest, and notified Williams of additional 
taxable value for ad valorem tax purposes.  [Exhibit 500].  The Department determination was accompanied 
by a final issue letter to Williams from the DOA. [Exhibit 501].  The DOA's final 
issue letter adopted the rationale expressed by Simmons in her July 25 
memorandum, with this explanation:

 
 
...[W]e consider the Western Gas Resource Fee of $.294/MCF 
less the $.21/MCF rebate, or $.084/MCF, as the allowable transportation 
deduction from the outlet of the dehydrator to the 
inlet of the main transmission line, and any charges prior to the outlet of the 
dehydrator are considered gathering and therefore 
deemed unallowable.  
The MIGC Fee of $.14/MCF to transport gas from the inlet of the main 
transmission line to market has been deemed an allowable transportation 
deduction.  
Therefore, the total allowable transportation deduction is the $.084/MCF 
charge plus the $.14/MCF charge, or $.224/MCF. (Emphasis supplied).

 
 
[Exhibit 501].  

 
 

45.             
Randy 
Bolles, Administrator of the Mineral Tax Division of the Department of Revenue, 
testified that the Department embraced this logic, despite being aware of the 
limits of the information available.  [Transcript Vol. III, pp. 736-744]. For 
Bolles, the key points were the total cost of $0.434/MCF, and the unavailability 
of information that would allow anyone to precisely allocate the cost of 
Western's services  
[Transcript Vol. III, pp. 736-744].  Bolles stated that, "we did, I think, the 
best we could do with the information we had to determine this piece....of that 
fee." [Transcript Vol. III, p. 741].

 
 

46.             
Williams paid the severance taxes under protest [Exhibit 
104], and filed a timely appeal on September 23, 2002. [Board Record].

 
 

Williams prepares a new approach to the dehydrator 
definition

 
 

47.             
On 
review of the final issue letter, Williams took particular notice of the DOA's 
reliance on the first sentence of Wyo. Stat. Ann. § 39-14-203(b)(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." (emphasis 
supplied) [Transcript Vol. III, pp. 418-424].  Williams also directed its attention to the 
definition of "dehydrator" in Wyo. Stat. Ann. § 39-14-201(a)(vii): "Dehydrator' 
means a device which removes water vapor that is commonly associated with raw 
natural gas." [Transcript Vol. III, pp. 423-424]. Williams reasoned that if the 
equipment in the CDP were a dehydrator, or the screw compressor were a 
dehydrator, then the point of valuation would be at or near the custody transfer 
meter, whether or not Western's equipment constituted a processing facility. 
[Transcript Vol. III, p. 425]. 

 
 

48.             
Williams hired Bret Rhinesmith to determine whether water 
vapor was removed from the Barrett gas by equipment other than the glycol 
dehydrator. [Transcript Vol. III, pp. 424, 551-552].  Rhinesmith's 
testing demonstrated that the function of removing water is ubiquitous in 
coalbed methane equipment and piping.  We find that water removal started in the 
wellbore itself and continued along the entire sequence of equipment to the 
outlet of the glycol dehydrator.  

 
 

49.             
Unfortunately, Rhinesmith insisted on adding the name, 
"dehydrator," to the equipment he tested. [E.g., Exhibit 112, depicting a piece 
of equipment identified as "Initial dehydrator: stacked vertical type 
dehydrator"].  
By doing so, Rhinesmith confused the results of his functional analysis 
with the application of statutory terms, although he insisted that he had no 
such intention. [Transcript Vol. II, pp. 207-208].  We therefore make 
findings that disentangle the functional analysis from the application of 
statutory terms.

 
 

50.             
Within each central delivery point, or pod, there is a 
cylindrical vessel, into which gas flows via pipes from individual wells.  We find that this 
vessel is a "header," based on a standard dictionary definition [Webster's New 
World College Dictionary, 4th Edition (2001), p. 
655], on the language used in a patent [Exhibit 116, "Multiple Well Header 
System for Collection of Methane Coal Gas"], and on Rhinesmith's testimony 
[Transcript Vol. II, p. 299, "a header is a device that .... commingles 
streams"].  

 
 

51.             
The 
headers in coalbed methane pods are not used in the production of conventional 
natural gas; they are devices specifically designed for coalbed methane 
production. [Transcript Vol. I, pp. 99-100; Vol. II, p. 271].  The volume of gas 
produced from individual coalbed methane wells is relatively low, and the wells 
are somewhat closely spaced, so it is both useful and efficient to route the 
production from several wells to a single point.  [Transcript Vol. I, p. 99; Transcript Vol. 
II, p. 283].  
The pressure of gas from the individual wells is also low, so it is not 
necessary for headers to be code stamped pressure vessels, that is, they are not 
built under the American Society of Mechanical Engineers boiler and pressure 
vessel code.   
[Transcript Vol. I, pp. 100, 302].  However, the gas pressure is high enough so 
that the gas normally flows into and through the header under its own 
pressure.   
[Transcript Vol. I, pp. 99-100, 300].

 
 

52.             
Rhinesmith tested four different types of headers, which he 
classified as stacked vertical, vertical, slanted, and horizontal. [Transcript 
Vol. I, p. 98].  
These headers were in four different locations [Transcript Vol. I, p. 
85], corresponding to operating locations of the principal coalbed methane 
producers in the PowderRiver Basin.  [Transcript Vol. 
II, p. 293; Exhibit 107].

 
 

53.             
Barrett's header was a vertical stacked header. [Transcript 
Vol. I, p. 118].  
The design of this header was explained by a patent that was admitted 
into evidence. [Exhibit 116; Transcript Vol. I, p. 119].  However, with 
respect to removing water from the gas stream, all four types of headers 
functioned in essentially the same way.  [Transcript Vol. II, p. 310].

 
 

54.             
Gas 
from the individual wells enters the body of the header, then the gas expands 
due to the larger space. [Transcript Vol. I, p. 120].  With expansion, the 
pressure of the gas drops, and the gas cools. [Transcript Vol. I, p. 120].  As the gas cools, 
water vapor in the gas stream condenses and falls to the bottom of the header, 
where water drains off.  [Transcript Vol. I, p. 120].  There is also 
liquid water that reaches the header through the pipes from individual wells. 
[Transcript Vol. I, p. 120; Vol. II, p. 300].

 
 

55.             
The 
patent on the header consistently refers to the header's action on water vapor 
as separation:

 
 
....The inclined header receives the raw methane coal gas 
from the separate pipes and the separation of water 
vapor from the gas is expected to occur in the inclined head merely due to 
the force of gravity on the heavier water vapor.  Heretofore, water 
vapor separation has been both inefficient and incomplete in this prior art 
collection system based on the use of inclined collection heads....

 
 
....gas entrained with water vapor....enters the interior 
chamber of the header through the inlet pipes where the 
water vapor being heavier than the gas separates from the gas and falls to 
and condenses above and within the water collection area of the header whereas 
the gas rises to the upper end of the header...

 
 
[Exhibit 116, p. Williams/Barrett 0047](emphasis 
supplied)

 
 

56.             
In 
tests on the Barrett header, Rhinesmith found that the header removed 17.66 
pounds of water vapor per million standard cubic feet a day of gas. [Transcript 
Vol. I, p. 123].  
The test results on the other headers ranged from 14.24 pounds to 114.34 
pounds of water vapor per million standard cubic feet a day of gas.  [Transcript Vol. 
II, p. 304].  
Rhinesmith confirmed these results with a computer simulation which 
showed that 28.67 pounds of water vapor per million standard cubic feet a day of 
gas would be removed in a header. [Transcript Vol. I, pp. 157-160; Exhibit 
129].

 
 

57.             
From 
an engineering perspective, the principles at work in the header are not limited 
by size. [Transcript Vol. II, p. 301].  One could construct and insert a smaller 
vessel next to the well head, and achieve water removal by condensation. 
[Transcript Vol. II, p. 302].  Moreover, Rhinesmith testified that water is 
lost by condensation in the well bore itself.  [Transcript Vol. I, p. 252].  

 
 

58.             
Rhinesmith conducted field testing for water vapor content 
at a screw compressor located in facility unrelated to Barrett. [Transcript Vol. 
I, pp. 164-165].  
Rhinesmith took measurements before the inlet to the screw compressor, 
and beyond the outlet of a cooling unit just after the screw compressor.  [Transcript Vol. I, 
pp. 164-165].  
He found a change in water vapor content of 65.43 pounds of water vapor 
per million standard cubic feet of gas per day [Transcript Vol. I, pp. 164-165], 
although the resulting water is "removed in downstream processes," not at the 
location of the screw compressor. [Transcript Vol. I, p. 165; Vol. II, p. 
263].  
Rhinesmith again confirmed his field results with a computer simulation; 
his model showed the removal of 118.1 pounds of water vapor per million standard 
cubic feet of gas per day.  [Transcript Vol. I, pp. 165-167; Exhibit 
132].

 
 

59.             
Water 
was removed from the sequence of equipment at separators located in advance of 
the booster compressor, and at coolers located after the booster 
compressors.  
[Transcript Vol. I, pp. 171-174].  Rhinesmith conducted a computer simulation 
that, when adjusted to be expressed consistent with the other results, showed 
165.52 pounds of water vapor per million cubic feet of gas coming into the 
booster compressors, which left about 100 pounds of water vapor to be removed by 
the glycol dehydrator. [Transcript Vol. II, pp. 315-319; Exhibit 134].

 
 

60.             
We 
find that removing this last 100 pounds of water vapor per million standard 
cubic feet a day of gas by glycol dehydrator is crucial to rendering the gas 
suitable for pipeline transport. [Transcript Vol. I, pp. 179-186].

 
 

61.             
The 
triethylene glycol dehydrator employs absorption, not condensation, to remove 
water.  
[Transcript Vol. I, p. 108].  It includes a number of pieces of 
equipment.  
[Transcript Vol. I, p. 226].  Unlike the header, the TEG contactor vessel 
is usually "code stamped because of the pressures at which it's operating."  [Transcript Vol. 
II, p. 303].  
Rhinesmith testified that there is no dehydrator in the computer 
simulation he uses.  
Instead, the glycol dehydrator function is simulated by use of a series 
of component functions.  [Transcript Vol. II, p. 322].  These functions 
include an absorber; a separator to model filtration; a two-part force used to 
drive the glycol pump; a heat exchanger; a distillation operation, including a 
reboiler; a pump to return the glycol to the TEG contactor; another heat 
exchanger, to cool the glycol and warm the dry natural gas; and a recycle 
function.  
[Transcript Vol. II, pp. 322-324].  We find that these functions fairly reflect 
the workings of the glycol dehydrator.

 
 

62.             
The 
glycol dehydrator reduces the presence of other components of the coalbed 
methane, such as carbon dioxide. [Transcript Vol. I, p. 186; Exhibit 136]. 
Speaking generally, coalbed methane does not include volatile organic compounds, 
so the minor components removed by the glycol dehydrator are vented to the 
atmosphere. [Transcript Vol. II, pp. 328-329].  In contrast, conventional gas often contains 
aromatics, such as benzene, toluene, methylbenzene and xylenes, that are subject 
to regulation if released.  [Transcript Vol. II, p. 328].

 
 

63.             
Taking all of Rhinesmith's findings together, and using his 
modeling for the sake of simplicity, we find that water is removed throughout 
the sequence of equipment, beginning with the annulus of the well.  There are 1000 
pounds of water vapor per million cubic feet of gas when the gas rises from the 
coal seam. [Transcript Vol. I, p. 77].  Most of this water must be removed to meet a 
pipeline requirement 5 pounds of water at the outlet of the glycol dehydrator. 
[Transcript Vol. II, pp. 295-296]. 

 

64.             
Subtracting 28.67 pounds for the header, 118.1 pounds for 
the screw compressor and its cooling unit, and about 160 pounds for the booster 
compressors through the glycol dehydrator outlet, Rhinesmith's calculations 
showed that two-thirds of the water vapor was removed at points other than the 
header, the screw compressor, and the booster compressor/dehydrator.  Rhinesmith says 
that rest of the vapor is removed in the pipeline systems connecting the 
equipment. [Transcript Vol. II, p. 320].  

 
 

65.             
Water 
in the pipelines between the screw compressor and the booster compressor is 
removed by a device known as a pig.   Rhinesmith stated that a pig "is a 
device that is put into a pipe and is used like a squeegee to push those liquids 
to downstream systems..." [Transcript Vol. I, p. 172].  He further stated 
that a pig is "the device that flows through the pipeline to push any liquids 
from one point in the pipeline system to another point in the system."  [Transcript Vol. 
II, p. 249].  
The pig is inserted in the pipeline by a pig launcher located downstream 
of the screw compressor.  The pig pushes water that has condensed in 
the pipeline to an initial separator located upstream from the booster 
compressors. [Transcript Vol. II, pp. 320-322].  We find that Rhinesmith is correct in his 
explanation of the pig and its use.  Rhinesmith did not characterize the pig as a 
dehydrator, and Craig Grenvik affirmed that the Department did not view the pig 
as a dehydrator. [Transcript Vol. V, p. 1032].

 
 

66.             
If we 
contrast the 1000 pounds with the 100 pounds of water associated with 
conventional gas [Transcript Vol. I, pp. 76-77], and use Rhinesmith's estimate 
of about 100 pounds of water removed by the glycol dehydrator [Transcript Vol. 
II, p. 317], it is easy to see that all 100 pounds of water in conventional gas 
could be removed by a glycol dehydrator.  Our observation is consistent with 
Rhinesmith's explanation of the function of a dehydrator in his account of his 
prior gas processing experience in the MobileBay field.  [Transcript Vol. I, 
pp. 50-51; Vol. II, pp. 288-289].

 
 

67.             
Dehydrators are commonly associated with the processing and 
transport of conventional natural gas.  In the record made in this case, these 
included field dehydrators [Transcript Vol. II, p. 213], and dehydrators 
associated with improving the quality of gas for transport in downstream 
pipelines.  
[Transcript Vol. II, p. 297].  If more carbon dioxide must be removed to 
meet the specifications of downstream pipelines, the gas can be treated with 
amine.  In 
doing so, the gas will become resaturated, and "a triethylene glycol dehydrator 
is typically used downstream of those amine systems to remove the water 
essentially a second time." [Transcript Vol. II, p. 297].  We therefore find 
that it is meaningful to distinguish between an initial dehydrator and other 
dehydrators in the context of conventional natural gas.

 
 

68.             
We 
find that Rhinesmith's functional orientation results in an extremely broad view 
of the purposes that any piece of equipment might serve, and would affect 
distinctions that are made in the statute.  For example, Rhinesmith stated that a screw 
compressor is also a dehydrator. [Transcript Vol. II, p. 263].  Beyond that, 
Rhinesmith stated that a pipeline is a dehydrator, because it removes water. 
[Transcript Vol. II, p. 258]. 

 
 

69.             
Further, Rhinesmith testified that almost any piece of 
equipment has one or more functions that can be characterized as processing, 
based on the functions identified in the statutory definition of processing. 
[Transcript Vol. II, pp. 223-230, 224-236].  Following this logic, the CDP could be 
characterized as a processing facility. [Transcript Vol. II, p. 236].

 
 

70.             
Storts took a slightly different position than 
Rhinesmith.  
Like Rhinesmith, Storts stated that  one statutory definition does not preclude 
others.  
[Transcript Vol. III, p. 594].  According to Storts, a header can be both a 
separator and a dehydrator.  [Transcript Vol. III, p. 593].  However, Storts 
drew the line at a pipeline, on the premise that a pipeline is not a 
device.  
[Transcript Vol. III, p. 595].

 
 

The Department's Interpretation

 
 

71.             
The 
Department interprets the pertinent tax statutes in a distinctly different 
way.  The 
Department's interpretation rests on administration of statutes since 1990, 
although principally in the context of conventional natural gas production. 
[Transcript Vol. IV, pp. 673-678].  The Department's interpretations were 
supported by the professional training and experience of Craig Grenvik, a 
supervisor manager with responsibilities for oil and gas taxation who also 
reviews mineral tax audits.  [Transcript Vol. V, p. 1002].  Grenvik has an 
undergraduate degree in petroleum engineering.  [Transcript Vol. V, p. 1028].

 
 

72.             
The 
Department stated its position as follows:

 
 
a.  The statutes were drafted and passed when 
conventional gas production was the only gas production in Wyoming.  [Transcript Vol. 
IV, p. 707].

 
 
b.  The statutes define equipment separately and 
do not allow interchangeable application of terms.  [Transcript Vol. 
IV, p. 707].

 
 
c.  The headers are separators.  [Transcript Vol. 
IV, p. 706; Vol. V, p. 1009].  Separation is a production function.  [Transcript Vol. 
IV, p. 707]. The patent description of a header [Exhibit 116], which refers to 
the header as a separator, is consistent with common usage in the industry. 
[Exhibit 116; Vol. V, pp. 1036-1037].

 
 
d.  The only dehydrator in the sequence of 
equipment is the glycol (or TEG) dehydrator. [Transcript Vol. IV, p. 682; Vol. 
V, pp. 1008, 1013].  
This is consistent with common usage in the production of conventional 
natural gas.  
[Transcript Vol. IV, p. 682].

 
 
e.  For statutory purposes, dehydration occurs in 
a dehydrator; the existence of dehydration, as the term is commonly used, does 
not define a dehydrator. [Transcript Vol. IV, pp. 797-798].  Dehydration is a 
production function unless it occurs within a processing facility.  [Transcript Vol. V, 
p. 1016].

 
 
f.  A processing facility is not defined by 
reference to the definition of "processing". Instead, processing facilities are 
generally large, noticeable, expensive, and identifiable plants that were 
epitomized by specific installations long known to the Department and the 
legislature, including but not limited to Opal, Echo Springs, Painter, Whitney 
Canyon, Carter Creek, Patrick Draw, and Anschutz.  [Transcript Vol. IV, pp. 723, 800-801].  

 
 
g.  The principal purpose for the definition of 
"processing" is to establish which of the expenses incurred at a processing 
facility are eligible for deduction as processing expense, in the statutory 
context of alternative valuation methods that must be used when natural gas is 
not sold at or prior to the point of valuation.  [Transcript Vol. IV, p. 799; Wyo. Stat. Ann. §39-14-203(b)(vi)(B)-(D)]. 

 
 
h.  Western's booster compressors and TEG 
dehydrator do not make a processing facility.  [Transcript Vol. IV, p. 722]. 

  
 
 
i.  The point of valuation is at the outlet of 
the TEG dehydrator.  
[Transcript Vol. IV, p. 701].

 
 
j.  If the Department were to accept Williams' 
theories, established policies for the valuation of natural gas would be 
unsettled.  
[Transcript Vol. IV, pp. 706-707].

 
 

Williams' Transportation Issues

 
 

73.             
Storts testified that the calculations of the auditors were 
flawed because the auditors failed to accurately account for MIGC fees and the 
associated rebate.  
The MIGC tariff is $0.35/MMBTU, and the rebate is $0.21/MMBTU. 
[Transcript Vol. III, pp. 432, 444].  Storts explained that an MCF is not 
necessarily equal to an MMBTU, and that the appropriate conversion factor varies 
from well to well. [Transcript Vol. III, pp. 432-433, 435].  However, Simmons 
made an adjustment for the MCF/MMBTU difference. [Transcript Vol. V, pp. 
910-911, 969-970].  
We find that these adjustments appear on a schedule attached to the Audit 
Department's final issue letter. [Transcript Vol. V, pp. 969-970; Exhibit 501; 
Exhibit 143, column K].  We also find that, in the aggregate, the 
effect of the MMBTU conversion was negligible, since the conversion factors for 
the individual wells are predominantly .957 and 1.045. [Transcript Vol. V, p. 
911; Exhibit 143, column K].  

 
 

74.             
To 
the extent that Williams is concerned about the Department's use of the 
$0.21/MMBTU rebate as the inspiration for the deduction against the Western fee 
of $0.294/MCF, we find that the ultimate allowance of $0.084 for transportation 
on Western's pipeline was an estimate from the outset, and the precise 
calculation of an MCF/MMBTU conversion was unnecessary for that purpose.

 
 

75.             
Williams also complained that the Department failed to 
account for fuel use charges by the pipelines.  However, we find that the calculations of all 
parties reflect fuel charges as a deduction from gross volumes, allocated back 
to specific wells. [Exhibit 137; Exhibit 138; Transcript Vol. III, p. 635].  Williams' complaint 
is therefore baseless.

 
 

76.             
As a 
separate issue related to transportation, Storts testified that the auditors had 
failed to deduct transportation charges downstream from Glenrock. [Transcript 
Vol. III, p. 427].  
This claim depends on two points.  The first point is that Barrett sold its gas 
at points downstream of the Glenrock terminus of the Fort Union and MIGC 
pipelines. [Transcript Vol I, p. 398].  The second point is that, in the audit of 
state royalty payments, the auditors accepted worksheets showing that Barrett 
had incurred transportation charges past Glenrock on the Trailblazer Pipeline 
Corporation and Wyoming Interstate Corporation pipelines.  [Transcript Vol 
III, pp. 464-470].  
Taken together, Williams concludes that the auditors failed to deduct all 
transportation charges that occurred before the (unspecified) point of sale.

 
 

77.             
We 
find, however, that the evidence supporting this conclusion is negligible.  As we have already 
noted, Williams made no effort to produce Barrett witnesses.  In particular, 
Williams made no effort to produce Barrett witnesses who could speak to the 
representations about point of sale that were made to the auditors.  Supra., ¶24.  Storts testified that he was unaware that 
Barrett representatives had made a representation to the auditors about the 
point of sale. [Transcript Vol. III, p. 651].  We find that this was in part a consequence 
of the fact that Williams did not identify this issue until after the final 
letters were sent from the Departments of Revenue and Audit.

 
 

78.             
The 
auditors had different guidance for the state royalty audits. [Transcript Vol. 
V, p. 920].  
Unlike the tax audit, the Office of State Lands and Investments directed 
the auditors to allow transportation after Glenrock, but not transportation to Glenrock. [Transcript Vol. V, p. 
920].  Williams 
did not call any witness from the Office of State Lands and Investments to 
explore the rationale for this difference in guidance, although there is no 
dispute that calculations of taxes and royalties are governed by different 
statutes. [Transcript Vol. III, pp. 563-564].  Moreover, since the auditors had accepted 
Barrett's representation of a Glenrock point of sale, and this issue was not 
raised by Williams until the appeal following the final audit letter, we find 
that the auditors never had reason to initiate an investigation of the reasons 
for the different guidance.  

 
 

79.             
Indeed, Storts was the only witness called by Williams to 
testify on the downstream transportation issue, and his knowledge was strictly 
limited to inferences he had drawn from royalty audit spreadsheets.  He was unfamiliar 
with the terms and provisions of the Wyoming state leases for the audited wells. 
[Transcript Vol. III, p. 564].  He was unable to establish reliable 
foundation for actual delivery points, actual sales, and the revenues and costs 
associated with actual sales. [Transcript Vol. III, pp. 580-582].  That was the job of 
Barrett's marketing department.  [Transcript Vol. III, p. 582].  Similarly, he was 
unable to assure that transportation charges were properly associated with 
Powder River Basin sales, since that was the job of Barrett's gas management 
people.  
[Transcript Vol. III, p. 584].  Such basic items as rebates paid by Western 
against the MIGC charges are not evident from the face of the schedules offered 
into evidence. [Exhibit 139; Transcript Vol. V, p. 585].  Storts further 
admits that he has never negotiated any contracts, and never discussed his 
factual conclusions with a Williams contract administrator or a Barrett contract 
administrator. [Transcript Vol. III, p. 603].  Taking all of his testimony into account, we 
find that Storts' inferences are entitled to little weight. 

 
 

80.             
As a 
separate issue related to transportation, Williams examined Simmons for the 
purpose of demonstrating that the auditors failed to account for a fixed 
shipping rate under the two agreements with Fort Union. [Transcript Vol. V, pp. 
936-937].  
However, based upon a comparison of actual Fort Union charges and the 
rates required under the terms of Fort Union's Firm Gathering Agreement if it 
were in effect, we find that the fixed rates were not in effect in 1999. 
[Transcript Vol. V, pp. 953-955; Exhibit 140, p. 2; Exhibit 145, Section 
4.2].

 
 

The Exempt Royalty Issue

 
 

81.             
Storts testified that the calculations of the auditors were 
in error because the auditors failed to allow a deduction for state royalties, 
which are exempt from severance taxes. [Transcript Vol. III, pp. 426, 
447-449].  
Barrett's payments of state royalties were audited for the period 
February 1999 through December 1999.  On March 15, 2002, the Department of Audit 
ordered Williams to report and pay additional state royalties. [Exhibit 
152].  However, 
Wyoming State Lands and Investments had agreed to stay action pending current 
litigation regarding state royalties. [Transcript Vol. III, p. 565]. 

 
 

82.             
Williams accrued the exempt royalties on its general ledger 
in a long-term liability account. [Transcript Vol. III, pp. 565, 568].  

 
 

83.             
Williams disagrees that the royalties should be paid, and 
has taken no action to comply with the March 15, 2002, order other than the 
accrual in its books. [Transcript Vol. III, pp. 572-573].  The Department 
refuses to allow a deduction for royalties that are in dispute. [Transcript Vol. 
IV, pp. 804-805].  
Simmons likewise says that the auditors would allow an amount that has 
been accrued only after the dispute is resolved. [Transcript Vol. IV, pp. 
962-963].

 
 

Other

 
 

84.             
Any 
Conclusion of Law set forth below which includes a Finding of Fact may also be 
considered a finding of fact and is therefore incorporated herein by reference. 

 
 
 
 

CONCLUSIONS OF LAW

 
 

85.             
Williams identified four principal errors in its Amended 
Case Notice/Amended Notice of Appeal.  The four claimed errors were:

 
 
1.  The Department determined that Barrett's 
production process was completed, and therefore the point of valuation was 
located, at the outlet of [Western's] dehydration unit.

 
 
2.  The Department miscalculated the allowable 
transportation deduction.

 
 
3.  The Department failed to exclude the total 
amount of exempt royalties from the taxable value of Barrett's 1999 
production.

 
 
4.  The Department assessed interest on the 
alleged underpayment of taxes.

 
 

86.             
Williams elaborated considerably on the details of these 
four errors in subsequent pleadings.  Those pleadings have been reflected in our 
decision.

 
 

The Role of the Board

 
 

87.             
The 
role of this Board is strictly adjudicatory:

 
 
It is only by either approving the determination of the 
Department, or by disapproving the determination and remanding the matter to the 
Department, that the issues brought before the Board can be resolved 
successfully without invading the statutory prerogatives of the Department.

 
 

Amoco Production Company v. Wyoming State Board of 
Equalization, 12 P.2d 668, 674 (Wyo. 2000).  The Board's duty is 
to adjudicate the dispute between the taxpayers and the Department.   

 
 

Burden of proof

 
 

88.             
"The burden of proof is on the party asserting an improper 
valuation."  Amoco Production Company v. Wyoming State Board of 
Equalization, 899 P.2d 855, 858 (Wyo. 1995); Teton Valley Ranch v. 
State Board of Equalization, 735 P.2d 107, 113 (Wyo. 1987).  The Board's Rules provide that, "the 
Petitioner shall have the burden of going forward and the ultimate burden of 
persuasion, which burden shall be met by a preponderance of the evidence.  If Petitioner 
provides sufficient evidence to suggest the Department determination is 
incorrect, the burden shifts to the Department to defend its action...." Rules, Wyoming State Board of Equalization, Chap. 2, § 
20.

 
 
The point of valuation

 
 

Objective of the Statutes

 
 

89.             
The 
Wyoming Constitution requires the gross product of mines to be taxed in 
proportion to the value thereof and uniformly valued for tax purposes at full 
value as defined by the legislature.  Wyo. Const. Art. 15, 
§§ 3, 11.  
For natural gas, the value of the gross product "means fair market value 
as prescribed by Wyo. Stat. Ann. 39-14-203(b), less any deductions and exemption 
allowed by Wyoming law or rules."  Wyo. Stat. Ann. 
§39-14-201(a)(xxix).  

 
 

90.             
"The 
fair market value for...natural gas shall be determined after the production 
process is completed. ...[E]xpenses incurred by the producer prior to the point 
of valuation are not deductible in determining the fair market value of the 
mineral." Wyo. Stat. Ann. §39-14-203(b)(ii).  These two sentences 
contain two fundamental premises for our decision.

 
 

91.             
First, the point of valuation is a physical location.  This physical 
location is determined by reference to the production process, and where that 
production process is completed.  We will accordingly be deciding which party 
appropriately identified a point in the sequence of equipment that was the point 
of valuation.   

 
 

92.             
Second, the point of valuation directly affects the 
calculation of expenses that may be deducted from Barrett's sale price to 
determine fair market value.  Barrett sold its gas at a location beyond the 
point of valuation.  
Findings of Fact, ¶19.  For natural gas sold 
after the point of valuation, expenses incurred after the point of valuation are 
deducted from the sale price to reach fair market value.  Wyo. Stat. Ann. §39-14-203(b)(vi).  The taxpayer argues 
for a point of valuation that is closer to the wellhead, and further from the 
point of sale, than the point of valuation chosen by the Department of 
Revenue.  If we 
found for the taxpayer, the effect would be to increase the deduction of 
expenses from the sale price of the taxpayer's natural gas. 

 
 

The Point of Valuation Statute

 
 

93.             
The 
statute determines the point of valuation for natural gas by reference to the 
production process:

 
 
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. 

 
 

Wyo. Stat. Ann. §39-14-203(b)(iv)(hereafter, the point of valuation statute).

 
 

94.             
Williams takes two conflicting positions that reach the 
same result.  
On the one hand, Williams argues that both the header and the screw 
compressor were dehydrators, so that the custody transfer meter located between 
them was an acceptable point of valuation.  See Findings of Fact, 
¶¶ 48, 49, 68-70.  On the other hand, Williams argues that if the 
glycol dehydrator was the only piece of equipment in which dehydration was 
performed, then the glycol dehydrator was located in a processing facility 
operated by Western, and the custody transfer meter is the point of 
valuation.  See Findings of Fact, ¶¶37-39.  If either theory 
were correct, Barrett's original deduction for expenses would likewise be 
correct, since Barrett reported its taxes using the custody transfer meter as 
the point of valuation.  See Findings of Fact, 
¶27.

 
 

95.             
The 
Department takes the position that the glycol dehydrator is the only dehydrator, 
and that there is no processing facility.  Findings of Fact, 
¶72.  Under 
this theory, the point of valuation is the outlet of the glycol dehydrator.  Findings of Fact, ¶72.

  

96.             
     We must construe the 
point of valuation statute in light of all of statutory language relating to the 
same subject matter, as found in the Oil and Gas Article of Chapter 14 of the 
Wyoming Statutes. Petra Energy, Inc., v. Department of 
Revenue, State of Wyoming, 6 P.3d 1267, 1270 (Wyo. 2000). This is a complex set of sections in which some 
words have been defined.  The defined words 
include "dehydrator," Wyo. Stat. Ann. 
§39-14-201(a)(vii); "natural gas", Wyo. Stat. Ann. 
§39-14-201(a)(xv); "processing", Wyo. Stat. Ann. 
§39-14-201(a)(xviii); "separating", Wyo. Stat. Ann. 
§39-14-201(a)(xxii); "compressor", Wyo. Stat. Ann. 
§39-14-201(a)(v); and "gathering", Wyo. Stat. Ann. 
§39-14-201(a)(ix).  Other significant words and phrases are not 
defined, including "process", "production process", "processing facility", 
"dehydration", "compression", and "separation."  In view of the care with which the 
legislature has both defined and employed these words, we conclude that settled 
interpretations of earlier versions of the point of valuation statute provide 
little guidance.  
E.g., Chevron U. S. A., Inc. v. State, 918 P.2d 980 (Wyo. 1996).

 
 

A. The initial dehydrator

 
 

97.             
The 
point of valuation statute provides two possible avenues to determine when and 
where the production process is completed.  Wyo. Stat. Ann. 
§39-14-203(b)(iv). The first avenue turns on the existence of an "initial 
dehydrator."  

 
 

98.             
We 
determine the meaning of the word "initial" by reference to its plain and 
ordinary meaning.  
Campbell County School District v. Catchpole, 
6 P.3d 1275, 1285 (Wyo. 2000).  It is an adjective which means "having to do 
with, indicating or occurring at the beginning."  Webster's New World 
College Dictionary (4th Edition 2001) 
p. 735.  We 
will therefore be concerned with the first dehydrator to occur in the sequence 
of equipment.  

 
 

99.             
On 
behalf of Williams, Rhinesmith directed our attention to three possible 
dehydrators: the header; the screw compressor; and the glycol dehydrator.  Findings of Fact, ¶¶56-59.  We will consider 
whether the statute enables us to determine whether one or more of these pieces 
of equipment is a dehydrator.  We note that Williams' Hearing Brief asserts 
that "dehydration occurs" at the header and "was 
performed" at the screw compressor.  Petitioner's Hearing Brief, pp. 8-9.  We conclude the 
plain language of the first sentence of Wyo. Stat. Ann. §39-14-203(b)(iv) 
directs our attention to a "dehydrator," not to dehydration.

 
 

100.         
The 
statute defines "dehydrator" as "a device which removes water vapor that is 
commonly associated with raw natural gas."  Wyo. Stat. Ann.  § 
39-14-201(a)(vii).  

 
 

The glycol dehydrator

 
 

101.         
The 
common meaning of "device" is "an invention or contrivance, esp. a mechanical 
one, for some specific purpose."  Webster's New World 
College Dictionary (4th Edition 2001) p. 
395.  
Considering this common meaning in the context of the statutory 
definition, the glycol dehydrator is clearly an invention or contrivance for the 
specific purpose of removing water vapor from natural gas.  Findings of Fact, ¶61.  As its name implies, the glycol dehydrator 
fits within the core of the statutory definition of a dehydrator as a "device 
which removes water vapor."

 
 

The screw compressor

  

102.         
By 
statutory definition, the screw compressor a different type of device.  A "compressor" is 
"a device associated with processing or transporting natural gas which 
mechanically increases the pressure of the natural gas."  
Wyo. Stat. Ann. §  39-14-201(a)(v).  We conclude that the 
screw compressor is such a device.  We must "construe the statute as a whole, 
giving effect to every word, clause, and sentence, and we construe together all 
parts of the statute in pari materia so that no part 
will be inoperative or superfluous."  Fall v. State, 963 P.2d 981, 983 (Wyo. 
1998).  It 
follows that the screw compressor cannot be both a compressor and a dehydrator, 
because that would make the legislative distinction superfluous.  The screw 
compressor is a compressor.

 
 

103.         
Our 
disposition of the screw compressor is further supported by the fact that water 
which condenses in the vicinity of the screw compressor is removed 
elsewhere.  Findings of Fact, ¶58.  

 
 

104.         
Our 
disposition of the screw compressor also disposes of the argument that the 
booster compressors act as dehydrators.  They, too, are compressors.

 
 

The header

 
 

105.         
The 
header presents a more complex question.  The witnesses appear to be in general 
agreement that the header is a separator.  E.g., Findings of 
Fact, ¶¶70-72c.  This consensus is supported by such 
documentary evidence as the language of the patent on Barrett's stacked vertical 
header, Findings of Fact, ¶55, and Williams' 
admissions in its  
response to the preliminary audit findings.  Findings of Fact, ¶¶37b, 38d.  It is further 
supported by the Audit Department memorials of conversations with Barrett 
personnel in the fact-finding stage of the audit.  Those Barrett personnel identified only the 
glycol dehydrator, not the header, as a dehydrator.  Findings of Fact, ¶¶12-13, 22-23.

 
 

106.         
One 
objection to characterizing the header as a separator is that the statute 
defines "dehydrator" as a kind of device, and defines "compressor" as a kind of 
device, but does not define "separator" as a device.  Instead, the 
statute defines "separating."  "Separating" is "the isolation of the well 
stream into discrete gas, liquid hydrocarbons, liquid water and solid 
component."  Wyo. Stat. Ann. § 39-14-201(a)(xxii).  Based on the 
evidence, we conclude that the header performs the function of separating, as 
that function is defined by statute.  Nonetheless, the legislature could have 
defined another device, a separator, but instead chose to define a function.

  
 
 

107.         
The 
statutory distinction between "dehydrator" and "separating" is therefore not as 
clear as the statutory distinction between "dehydrator" and "compressor."  However, the 
Department has interpreted the statute to preclude the characterization of a 
device as both a separator and a dehydrator.  Findings of Fact, 
¶72b.  We 
conclude that the Department's interpretation of the statute does not conflict 
with legislative intent.  We therefore defer to the Department's 
conclusion that the header is a separator, and is not a dehydrator.  Board of County Commissioners, Sublette County, v. State 
Board of Equalization, 33 P. 3d. 
107, 113, 2001 WY 91, ¶16 (Wyo. 
2001).

 
 

The pig

 
 

108.         
Williams' expert characterized the pig as a device that 
flows through the pipeline to push liquids from one point in the pipeline system 
to another point in the system.  Findings of Fact, 
¶65.  It is 
therefore a different type of device than a dehydrator, even though it is not a 
device that is addressed in the statute.  We conclude that the pig and its related 
components are not a dehydrator.

 
 

Other possible devices

 
 

109.         
We 
conclude that pipelines are not devices, and cannot be dehydrators.

 
 

110.         
The 
evidence established that any intentional enlargement of the pipeline, at a 
point as far upstream as next to the wellhead, could create a pressure drop 
causing water condensation.  Such an enlargement might be characterized as 
a special-purpose device intended to remove water at that point.  By our heavy 
reliance on the common meaning of "device," we do not wish to suggest that the 
intention of a device wholly governs the result we reach today.  We do not conclude 
Williams has merely failed to identify as a dehydrator some section of the 
equipment train that was not specifically considered during the course of the 
hearing.  This 
is therefore an occasion when we believe it is appropriate to depart from the 
general rule and resort to extrinsic aids to interpretation to confirm the plain 
meaning.  Parker Land & Cattle Co. v. Wyoming Game & Fish, 
845 P.2d 1040, 1043 (Wyo. 
1993).

 
 

111.         
The 
Department has suggested that a focus on the word "remove" can resolve any 
questions related to the identification of devices that are dehydrators.  The common meaning 
of remove in this context is "to take, extract, separate, or withdraw (someone 
or something from)."   Webster's New 
World College Dictionary (4th Edition 2001) p. 
1213.  The 
Department takes the position there is significant nuance in "remove."  The Department 
believes that this nuance supports a distinction between active and passive 
devices. [Transcript Vol. IV, pp. 708-709; Vol. V, pp. 1033-1034].  On this basis the 
Department would not characterize a passive condensation device as a 
dehydrator.  
[Transcript Vol. IV, pp. 708-709; Vol. V, pp. 1033-1034].  The Department's 
interpretation does not conflict with legislative intent, and we will defer to 
its conclusion. Board of County Commissioners, Sublette 
County, v. State Board of Equalization, Id., ¶16 (Wyo. 2001).  However, since the 
common meaning of "remove" includes the verb "separate," which is confusing in 
this context because the statute defines "separating," we are not completely 
satisfied with this analysis.

 
 

112.         
Taking into account the positions of the parties, we 
conclude that the definition of "dehydrator" is ambiguous with respect to what 
water vapor is the "water vapor that is commonly associated with raw natural 
gas." A statute is ambiguous if it is found to be vague or uncertain and subject 
to varying interpretations.  Parker Land & 
Cattle Co. v. Game & Fish, 845 P.2d 1040, 1043 (Wyo. 1993).  Williams assumes that all water vapor 
associated with raw natural gas, including the water vapor associated with 
coalbed methane, satisfies this definition.  Williams makes this assumption, however, in 
the face of the testimony of their expert that there are substantial differences 
between coalbed methane production and the production of conventional natural 
gas.  Findings of Fact, ¶¶1-3.

 
 

113.         
Coalbed methane is distinguished from conventional natural 
gas by saturation with water; we have accepted Rhinesmith's testimony that 
coalbed methane initially carries approximately ten times as much water as 
conventional natural gas.  Findings of Fact, 
¶3.  
Indeed, Rhinesmith has testified that in handling coalbed methane, 
"water was a key factor in trying to decide the configuration of the systems, 
how the gas would be produced, and how to make that gas transportable into 
downstream markets." [Transcript Vol. II, p. 284].  We question whether 
the legislature intended to apply the definition of dehydrator to apply in a 
production environment where condensation is unavoidable throughout the sequence 
of equipment and piping. 

 
 

114.         
The 
low pressure under which coalbed methane is produced, Findings of Fact, ¶2, also causes us to conclude that 
coalbed methane must be distinguished from conventional natural gas.  The low pressure 
environment contributes to the ease of creating condensation by simple 
modifications to the equipment train. Findings of Fact, 
¶57.

 
 

115.         
In 
ascertaining legislative intent in enacting a statute, we may look at the 
historic setting surrounding the enactment of the statute.  
Parker Land & Cattle Co. v. Game and Fish, id., at 1044.

 
 

116.         
The 
legislature enacted the point of valuation statute and the definitions of 
dehydrator, compressor, separating, and processing in 1990. 1990 Wyo. Sess. Laws, Ch. 54.  Coalbed methane was 
not commercially significant at the time.  Findings of Fact, 
¶4.  We 
accordingly conclude that the reference to water vapor commonly associated with 
raw natural gas is a reference to the water vapor in conventional natural 
gas.  Based on 
the facts presented in this case, the glycol dehydrator, all by itself, 
possessed adequate capacity to remove water vapor in quantities associated with 
conventional natural gas.  Findings of Fact, 
¶¶60, 66.  
We conclude that the legislature's intention was to only identify as a 
dehydrator a device that is the same or similar to the one identified in this 
case as the glycol dehydrator.  The Department offered a similar rationale 
for its interpretation of the statute, but declined to concede that the statute 
is in any way ambiguous. [Transcript Vol. IV, pp. 680-682, 708-709, 750].

 
 

117.         
We 
are also obliged to avoid a construction that reaches an absurd result.  Stauffer Chemical Company v. Curry, 778 P.2d 1083, 1093 (Wyo. 1989).  It would be absurd to accept as a dehydrator 
any enlarged space that creates condensation.  This would allow the taxpayer to freely 
manipulate the point of valuation with inexpensive measures. It is also contrary 
to an expectation expressed in the first sentence of Wyo. Stat. Ann. § 
39-14-203(b)(iv) that the initial dehydrator follows other production 
functions.  As 
the record in this case also shows, a principal purpose of a glycol dehydrator 
was to make raw natural gas ready for transportation by pipeline.  Further, we believe 
it is logical to infer that the legislature contemplated that normally such 
dehydration would be a last step in the production of gas that was not 
processed. 

 
 

118.         
Our 
resolution of the ambiguity is consistent with the conclusions we have already 
reached.  The 
glycol dehydrator fits within the statutory definition, but the headers, 
compressors, pipelines, and pig do not.  Our resolution is consistent with, and 
supports, the Department's interpretation.  Our resolution provides a basis for 
distinguishing between dehydration and incidental condensation during the 
production process.

 
 

B. The definition of a processing 
facility

 
 

119.         
Williams' alternative theory is that Western's booster 
compressors and glycol dehydrator are a processing facility.  Under this theory, 
the point of valuation is determined by reference to the second sentence of Wyo. 
Stat. Ann. § 39-14-203(b)(iv): "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."  Williams' alternative argument rests an 
assumption that the Board might conclude that the glycol dehydrator was the only 
dehydrator, and we have done so.  Supra., ¶¶97 et. seq. 
 If the 
glycol dehydrator were part of a processing facility, Williams would be correct 
in concluding that the custody transfer meter is the point of valuation.  However, we 
conclude that Western's equipment is not a processing facility.

 
 

120.         
As a 
preliminary matter, we note that the second sentence of Wyo. Stat. Ann. 
§39-14-203(b)(iv) refers to "dehydration" rather than to a dehydrator.  We conclude that 
such dehydration must be performed in a statutorily-defined dehydrator.  The second sentence 
begins, "When no dehydration is performed...."  The word "performed," in such close proximity 
to the word "dehydrator" at the end of the first sentence, suggests that the 
statutorily-defined dehydrator is what performs dehydration.  However, if 
dehydration could be performed by a piece of equipment that is not a dehydrator, 
the statute might prescribe no point of valuation under some circumstances: 
there might not be a dehydrator to satisfy the requirements of the first 
sentence, but there might also be dehydration outside of a processing facility, 
which would negate the contingency of the second sentence.  Our interpretation 
should avoid this absurd result.  Stauffer Chemical 
Company v. Curry, id., at 1093.  The statute means that dehydration, as used 
in the second sentence of Wyo. Stat. Ann. §39-14-203(b)(iv), is performed in a 
dehydrator, as defined in Wyo. Stat. Ann. §39-14-201(a)(viii).  

 
 

The definition of processing

 
 

121.         
The 
statute does not define "processing facility."  The statute does define "processing:"

 
 
"Processing" means any activity occurring beyond the inlet 
to a natural gas processing facility that changes the well stream's physical or 
chemical characteristics, enhances the marketability of the stream, or enhances 
the value of the separate components of the stream.  Processing 
includes, but is not limited to fractionation, absorption, adsorption, flashing, 
refrigeration, cryogenics, sweetening, dehydration within a processing facility, 
beneficiation, stabilizing, compression (other than production compression such 
as reinjection, wellhead pressure regulation or the changing of pressures and 
temperatures in a reservoir) and separation which occurs within a processing 
facility.  

 
 

Wyo. Stat. Ann. § 39-14-201(a)(xviii).  
This is a more complex definition than one would expect for the root word 
of "processing", which is "process".  The common meaning of process is "a 
particular method of doing something, generally involving a number of steps or 
operations."  
Webster's New World College Dictionary (4th Edition 2001) p. 1144.  

 
 

122.         
The 
Williams position rests on the premise that the existence of a processing 
facility may be determined by reference to the functions described and listed in 
the definition of processing.  Storts testified that he was the original 
source of this position.  Findings of Fact, ¶30.  The position was 
later elaborated in detail by Williams' counsel in response to the preliminary 
audit findings.  
Findings of Fact, ¶¶38-39.  The difficulty with 
the Williams position is that Williams depends upon a circular reading of the 
statute.  We 
conclude that a circular reading is not supported by the plain language of the 
statute.  Our 
conclusion is supported when we read the definition of "processing" in pari 
materia with other provisions of the statute, as we must. Fall v. State, id., at 983; Parker Land & Cattle Co. v. Game and Fish, id., at 
1042.

 
 

The characteristics of a processing 
facility

 
 

123.         
Processing is "any activity occurring beyond the inlet to a 
natural gas processing facility..."  "Natural gas", is defined by statute.  Wyo Stat. Ann §39-14-201(a)(x).  In its briefs and 
argument, Williams has ignored this definition, which provides direct insight 
into the legislature's intent, even though this definition was not enacted until 
1998. 1998 Wyo. Sess. Laws, Ch. 5.  The second sentence 
of the definition of natural gas states, "For the purposes of taxation, the term 
natural gas includes products separated for sale or 
distribution during processing the natural gas stream including, but not limited 
to plant condensate, natural gas liquids and sulfur."  Wyo. Stat. Ann. § 
39-14-201(a)(xv)(emphasis supplied).  This definition expresses at least some of 
the anticipated results of processing.

 
 

124.         
The 
only substantial difference in composition between coalbed methane at the 
wellhead, and the same gas at the inlet to the glycol dehydrator, is the degree 
to which that gas is saturated with water.  In the glycol dehydrator, amounts of various 
impurities are removed in such trivial quantities that they may be vented into 
the air without being subject to Wyoming's air quality regulations.  Findings of Fact, ¶62.  We have accepted Rhinesmith's testimony that 
coalbed methane is not complex natural gas, because it contains few heavy 
hydrocarbons and few impurities.  In the absence of heavy hydrocarbons and 
substantial impurities, we would not anticipate that Barrett's coalbed methane 
would yield "plant condensate, natural gas liquids [or] sulfur," as stated in 
the statutory definition of "natural gas."  The evidence was consistent with our 
expectation. 

 
 

125.         
The 
witnesses from the Departments of Revenue and Audit uniformly testified to an 
understanding of the characteristics of processing facilities in Wyoming.  Findings of Fact, ¶¶40, 72f. That common understanding 
fits squarely with the results of processing anticipated by the second sentence 
of the natural gas definition.   For example, Simmons testified that if 
there were a processing facility, she would have expected settlement statements 
to indicate the segregation and sale of liquid products or byproducts such as 
sulfur.  Findings of Fact, ¶40.  Bolles explained that there was an 
identifiable universe of processing plants, such as Whitney Canyon, Painter, and 
Carter Creek.  
Findings of Fact, ¶72f.

 
 

The statutory context of the processing 
definition

 
 

126.         
In 
formulating its position, Williams has also ignored the principal statutory 
context in which the word "processing" appears, although the Department has 
not.  Findings of Fact, ¶72g.  The statute provides four methods for 
determining the fair market value of natural gas sold after the point of 
valuation.  Wyo. Stat. Ann. § 39-14-203(b)(vi).  Three of these 
methods depend on calculations which account for processing fees or costs.  Wyo. Stat. Ann. §§ 39-14-203(b)(vi)(B)(comparable value); 
39-14-203(b)(vi)(C)(netback); 39-14-203(b)(vi)(D)(proportionate profits).  

 
 

127.         
Valuation determinations with direct and significant tax 
consequences warrant the precision that the detailed definition of "processing" 
provides.  The 
plain language of the definition demonstrates the care taken by the legislature 
to distinguish between production activity (not deductible) and processing 
activity (deductible).  For example, separation for production 
purposes is not deductible under the first sentence of the point of valuation 
statute.   
Wyo. Stat. Ann. § 93-14-203(b)(iv).  However, separation 
which occurs within a processing facility is deductible due to the definition of 
"processing" and the use of that word in the valuation methodology provisions of 
the statute.  
Wyo. Stat. Ann. § 39-14-203(b)(vi).  Moreover, the 
functional breadth of the "processing" definition provides useful guidance 
regarding the limits deductible fees and costs.

 
 

128.         
We 
must interpret the statute in light of its grammatical structure.  Resolution Trust Corp. v. Love, 36 F.3d 972, 976 (10th Cir. 1994). A careful observer may object that 
the statute defines processing as a noun (an activity), yet employs processing 
as an adjective in the valuation methodology provisions.  We conclude instead 
that processing, as used in the valuation methodology provisions, is an 
attributive modifier, and is therefore a noun.  The Cambridge Grammar 
of the English Language, Chapter 6, §2.4.1 (2002), p. 537.  Grammatical 
structure does not interfere with our interpretation.

 
 

Deference to the Department's 
interpretation

 
 

129.         
When 
we take the evidence in the case into account, in light of all of the pertinent 
provisions of statute, we conclude that Western's booster compressors and glycol 
dehydrator are not a processing facility.  

 
 

130.         
We 
also conclude that the Department's interpretation does not conflict with 
legislative intent, and defer to the Department's conclusion that Western's 
booster compressor and glycol dehydrator are not a processing facility.  Board of County Commissioners, Sublette County, v. State 
Board of Equalization, id., ¶16 ( Wyo. 2001).

 
 

131.         
Our 
ruling is complicated by a concession from Bolles that there may be a "little 
ambiguity" in the definition of "processing facility."  We conclude that 
any such ambiguity can be resolved in the same manner that we have resolved the 
ambiguity with respect to the definition of "dehydrator." Supra., ¶116.  The definition of "processing" and the 
valuation methods that employ the definition were enacted in 1990.  1990 Wyo. Sess. Laws, Ch. 54. The universe of natural 
gas processing facilities for conventional natural gas production was certainly 
known to the legislature in 1990, and provides a paradigm for construction of 
the statute.  
In contrast, we conclude that the facilities related to coalbed methane 
were not similarly known and could not have been a premise for the statutes 
enacted by the legislature.

 
 

The initial transportation related 
compressor

 
 

132.         
In 
light of our disposition of the processing facility issue, we need not address 
Williams' characterization of the screw compressor as the initial transportation 
related compressor.  
This issue only arises if the point of valuation is determined under the 
second sentence of Wyo. Stat. Ann. § 39-14-203(b)(iv).  We have concluded 
that the point of valuation is determined under the first sentence.

 
 

C. The Board's decision in Docket No. 
2001-117

 
 

133.         
Williams argues that the Board's Findings of Fact and 
Conclusions of Law in this case are controlled by Findings made in In the Matter of the Appeal of Lance Oil & Gas Company, 
SBOE Docket No. 2001-117, 2002 WL 31256340 (Wyo. St. Bd. Eq. )(Lance Oil & Gas).  In Lance Oil & 
Gas, the Board determined that a sales tax was due on services performed for 
the installation of underground gathering lines between coalbed methane wells 
and the pod, because the services were part of "equipping for production" within 
the meaning of Wyo. Stat. Ann. §39-15-103(a)(i)(K). 

 
 

134.         
Williams directs our attention to ¶22 of the Findings of 
Fact.  
Paragraph 22 appears in a section of the Board's opinion entitled, 
Gathering Lines are Part of Equipping for Production:

 
 
22.  The Wyoming Statutes specify that when 
valuing natural gas for severance and ad valorem purposes, production is 
complete when gas travels through the gathering lines and enters the custody 
transfer meter.  
Wyo. Stat. Ann. §39-14-203(b)(iv).

 
 

Lance Oil & Gas, ¶22.  

 
 

135.         
The 
Finding of Fact was accompanied by a related Conclusion of Law, which appears in 
a section of the Board's opinion entitled, The Services Performed on the 
Gathering Lines Were Taxable Because They Were Services That Were "Equipping for 
Production":  

 
 
49.  The placement of the [custody transfer] meter 
as the physical point when "equipping for production" ceases to be taxable is 
reasonable given the surrounding facts is consistent with Wyoming Statute 
§39-2-208(b)(ii) (recodified as Wyo. Stat. §39-14-203(b)(iv)).

 
 

Lance Oil and Gas, ¶49.

 
 

136.         
The 
point of valuation statute contemplates four different valuation points, 
depending on the facts in hand: the outlet of the initial dehydrator; or, the 
inlet to the initial transportation related compressor, custody transfer meter 
or processing facility.  Wyo. Stat. Ann. 
§39-14-203(b)(iv).  Williams argues that the precedent of Lance Oil & Gas binds the Department to select the 
custody transfer meter as the valuation point for coalbed methane production. 
[Petitioners' Hearing Brief, pp. 9-12].  We note that this argument asks us to exalt 
Lance Oil & Gas above the plain language of the 
statute, which directs attention to the circumstances of each taxpayer.

 
 

137.         
Williams neglects to account for a significant distinction 
of fact between Lance Oil & Gas and the case at 
hand.  In Lance Oil & Gas, there is no mention of a 
dehydrator, much less a processing facility.  In the absence of a dehydrator, and assuming 
that the equipment train is otherwise the same as the equipment train at issue 
in this case, the point of valuation must be the custody transfer meter.  This is a direct 
consequence of the second sentence of Wyo. Stat. Ann. §39-14-203(b)(iv).  Both the Department 
and this Board were obliged to so find under the circumstances then 
presented.  In 
light of this difference, we conclude that Lance Oil 
& Gas cannot and does not control this case.

 
 

138.         
There 
are other practical distinctions between this case and Lance Oil & Gas. The Findings of Fact in Lance Oil & Gas focus on gathering lines between 
the wellhead and the pod.  The existence of a point of valuation beyond 
the custody transfer meter was of no practical interest for sales tax 
purposes.  Even 
if the taxpayer instead had procured the installation of lines to a point beyond 
the custody transfer meter, the taxpayer would have had no reason to dispute the 
results of its audit by taking a position that extended the point of valuation 
further from the wellhead.  Doing so would only have increased the 
taxpayer's exposure to sales taxes.

 
 

139.         
Although the facts of Lance Oil 
& Gas turned on the treatment of services related to gathering lines, 
sales tax issues so predominated that the Board had not reason to cite the 
statutory definition of "gathering" for any purpose.  See Wyo. Stat. Ann. §39-14-201(a)(ix).  This proceeding 
was different.  
Williams presented evidence to demonstrate that any gathering in the 
statutory sense ended at the CDP, or pod.  Transcript Vol. III, p. 422.  We note that the 
statutory definition of gathering does not coincide with the terminology of 
Barrett's Gas Gathering Agreement with Western.  Compare Findings of 
Fact, ¶8.

 
 

140.         
Williams next argues that we must bind the Department to a 
point of valuation at the custody transfer meter by application of the doctrine 
of collateral estoppel.  We begin with a statement of the principles 
involved:

 
 
The doctrines of res judicata and collateral estoppel 
incorporate a universal precept of common-law jurisprudence' * * * that a 
right, question or fact put in issue, and directly determined by a court of 
competent jurisdiction, cannot be disputed in a subsequent suit by the same 
parties or their privies....While the interests of finality served by this 
doctrine are the same, this court has carefully distinguished between the two: 
[A]lthough many cases speak of res 

judicata in the administrative context, they actually apply 
collateral estoppel. * * * Collateral estoppel....bars relitigation of 
previously litigated issues. * * * Res judicata on 
the other hand bars relitigation of previously litigated claims or causes of action.

 
 

Tenorio v. State ex rel. Wyoming Workers' Compensation 
Division, 931 P.2d 234, 238 (Wyo. 1997)(emphasis in original). 

 
 

141.         
The 
Wyoming Supreme Court has identified four factors that we must consider:

 
 
Generally, four factors are considered when determining 
application of collateral estoppel: (1) whether the issue decided in the prior 
adjudication was identical to the issue presented in the present action; (2) 
whether the prior adjudication resulted in a judgment on the merits; (3) whether 
the party against whom collateral estoppel is asserted was in a party or in 
privity with a party to the prior adjudication; and (4) whether the party 
against whom collateral estoppel is asserted had a full and fair opportunity to 
litigate the issue in the prior proceeding.  

 
 

Tenorio, 931 P.2d  at 238-239.  

 
 

142.         
Williams claims that the issue decided in Lance Oil & Gas was "where the production process 
for CBM gas is completed."  Petitioner's Hearing Brief, p. 16.  Its arguments for 
application of the four elements of collateral estoppel stem from that principal 
point. We conclude that the doctrine of collateral estoppel does not apply, for 
at least three reasons.

 
 

143.         
First, the issue decided in Lance 
Oil & Gas was whether "a sales tax was due on services performed for the 
installation of underground gathering lines between coalbed methane wells and 
the pod."  This 
case does not involve a sales tax.  We conclude not only that the issue differed, 
but also that there was not a judgment on the pertinent merits in the prior 
proceeding.

 
 

144.         
Second, the Board had no occasion in Lance Oil & Gas to examine the application of the 
definitions on which the point of valuation depends.  There is no 
reference in Lance Oil & Gas to either a 
dehydrator or a processing facility.  We conclude not only that the issue differed, 
but also that there was not a full and fair opportunity to litigate the issues 
of this case in the prior proceeding.

 
 

145.         
Third, because the parties in Lance 
Oil & Gas were interested in sales tax related to gathering lines 
between the wellhead and the CPD, the ancillary references to Wyo. Stat. Ann. 
§39-14-203(b)(iv) had no direct impact on the decision.  That is, there was 
no 

  
practical impetus for a careful examination of the factual 
premises on which the point of valuation depends.  We conclude not only that the issue differed, 
but also that there was not a full and fair opportunity to litigate the issues 
in this case in the prior proceeding.

 
 

146.         
We 
believe our conclusion is even clearer when broadly considered in light of the 
common law policy concern for relitigation.  Williams did not come to us as a petitioner 
that has taken a consistent position over time on either the facts or the 
application of those facts under the statute.  This is a very different dispute than that 
presented to us in Docket No. 2001-117, and one made considerably more complex 
by the Petitioner's own shifting positions.  We conclude that the concern for relitigation 
is groundless.

 
 

147.         
Despite our ruling, there may be some value in clarifying 
the intent of our ruling in Lance  Oil & 
Gas.  The 
Finding in ¶22 might be more correctly stated as, "The Wyoming Statutes specify 
a number of alternatives for valuing natural gas for severance and gross 
products tax purposes, depending on specific circumstances.  Wyo. Stat. Ann. §39-14-203(b)(iv).  One of those 
alternatives is the custody transfer meter."  The Conclusion of Law in ¶49 might be more 
correctly stated as, "The custody transfer meter is a convenient line of 
demarcation between the ownership of the gas producer and the gas gatherer.  Even when it is not 
the point of valuation for severance and gross products tax purposes, it remains 
convenient and useful for excise tax purposes."  To the extent that this clarification may be 
characterized as a departure from our opinion in Lance 
Oil & Gas, it is one that is necessary "to vindicate plain obvious 
principles of law...."  Goodrich v. 
Stobbe, 908 P.2d 416 (Wyo. 1995), 
quoting Gueke v. Board of County Commissioners, 728 P.2d 167, 171 (Wyo. 
1986). 

 
 

Transportation deduction calculations

 
 

148.         
Williams mounts three attacks on the Department's 
determination of a transportation deduction.  (1) Williams contends that the Department's 
calculation for an allowance of a portion of the fees paid to Western was 
arbitrary.  (2) 
Williams contends that the Department failed to accurately calculate the fees 
charged for transportation on the Fort Union and MIGC pipelines.  (3) Williams 
contends that the Department failed to allow for pipeline transportation expense 
downstream from (beyond) Glenrock. 

 
 

149.         
Our 
disposition of these three issues relies on the burdens of proof.  Williams bears the 
burden of going forward and the ultimate burden of persuasion, and must meet 
those burdens by a preponderance of the evidence.  The burden shifts to the Department "If 
Petitioner provides sufficient evidence to suggest the Department determination 
is incorrect..."  
Supra., ¶88.  For each of the three issues, Williams relied 
exclusively on the testimony of Greg Storts to meet its burden of going 
forward.

 
 

A. Allocation of the Western fee

 
 

150.         
Of 
the total fees paid to Western of $.434/MCF, the auditors allowed a total 
deduction of $.224/MCF.  This allowance was comprised of $.14/MCF for 
pipeline fees between Western's facilities and Glenrock, plus $.084/MCF of the 
$.294/MCF of fees attributed to Western's services.  The $.084/MCF was 
an estimate of costs from the outlet of the glycol dehydrator to the inlet of 
the MIGC or Fort Union pipeline.  Storts correctly surmised that auditors 
disallowed $.21/MCF based on a relation to Western's rebate of $.21/MMBTU 
against the MIGC tariff, in effect giving Barrett something like a double 
allowance. 

 

151.         
At 
the same time, Williams provided no evidence of what a reasonable allocation of 
the Western fees should be.  To the contrary, Williams consciously avoided 
an enquiry to Western that might have yielded a more accurate basis for an 
allocation.  Findings of Fact, ¶43.

 
 

152.         
The 
Board has accepted the Department's selection of a point of valuation, and 
therefore must decide the dispute between the parties concerning the deductions 
which result from the point of valuation.  Williams did nothing to support an allocation 
of the fee for Western's services.  On review of the evidence presented at the 
hearing, we conclude that there is no further information available to the 
Department that would enable the Department to prepare a better estimate of the 
allocation of Western costs even if we were to contemplate remanding the case to 
the Department for more thorough review.  The auditors rejected the alternative of 
denying any allowance, and we cannot conclude that the denial of any allowance 
would have been more reasonable.

 
 

153.         
With 
its allocation, the Department has determined that approximately 70% of the fees 
charged by Western are associated with services between the custody transfer 
meter and the outlet of the glycol dehydrator.  Storts did nothing to demonstrate that this 
allocation was unreasonable or incorrect, other than question the logic of the 
Department's estimate.  Under the circumstances of this case, we 
conclude that Williams failed to carry the burden of showing that the Department 
determination is incorrect.  The burden of proof remained with 
Williams.

 
 

154.         
In 
our Findings of Fact, we determined that the auditors reached an allowance of 
$.084/MCF of the Western fees based on two premises.  We conclude that 
this matter should be decided as the Department has done.  First, some amount 
of allowance was fair.  Second, the costs, including fuel costs, 
associated with Western services from the custody transfer meter to the outlet 
of the glycol dehydrator were greater than the corresponding costs from the 
outlet of the glycol dehydrator to the inlets of the Fort Union and MIGC 
pipelines.  Findings of Fact, ¶43. We note that the auditors had 
toured representative field facilities. Findings of 
Fact, ¶¶21-23. We conclude that the judgment of the auditors was supported 
by first-hand field knowledge in the form of the site visit granted by Barrett 
under the guidance of Nathan Lopez, Barrett's operations supervisor.  We conclude that 
the auditors made a reasonable estimate based on the best information 
available.

 
 

155.         
We 
have concluded that the Department had some reasoned basis for the 
transportation allowance of $.084/MCF, and that Williams offered no evidence of 
what such an allowance should be.  We therefore conclude that Williams has 
failed to carry the ultimate burden of persuasion by a preponderance of the 
evidence.

 
 

B. The calculation of pipeline fees

 
 

156.         
Williams stated its request for relief from the 
Department's calculation of pipeline fees by presenting a spreadsheet 
calculation of its position on the correct calculation of taxes due. [Transcript 
Vol. III, pp. 483-494; Exhibit 155].  In this presentation and other testimony, 
Williams criticized various aspects of the auditors' calculations, including 
calculations of pipeline fees for MIGC and Fort Union.  A statement of the 
taxpayer's position is not a demonstration that the Department's determination 
was incorrect.  
We conclude that the burden of proof remained with Williams.

 
 

157.         
In 
our Findings of Fact, we found that the auditors adjusted their calculations of 
the charges of MIGC to account for the MMBTU/MCF conversion.  Findings of Fact, ¶73.  We found that the monthly fixed fee 
schedule of Fort Union was not in effect in 1999.  Findings of Fact, 
¶80.  We 
found that all parties accounted for pipeline fuel expense by deductions from 
gross volumes.  
Findings of Fact, ¶75.  On the specific 
issues raised by Williams regarding the calculation of the transportation 
deduction, we conclude that Williams failed to carry the ultimate burden of 
persuasion by a preponderance of the evidence.

 
 

C. Transportation fees downstream from 
Glenrock

 
 

158.         
Williams did not raise this issue of transportation 
deductions downstream from Glenrock until after the issuance of the final audit 
letter.  Findings of Fact, ¶¶77-78.  In doing so, Williams reversed Barrett's 
original and consistent position that the point of sale was Glenrock.  Findings of Fact, ¶19.  Barrett represented Glenrock as the point 
of sale at the commencement of the audit, and the auditors accepted this 
representation as fact.  Findings of Fact, 
¶19. By not shifting its position until its appeal was filed on September 
23, 2002, Williams deprived the auditors of any reasonable opportunity to 
investigate the claim prior to issuing either preliminary or final audit 
findings.

 
 

159.         
In 
presenting its case at the hearing, Williams relied entirely on testimony from 
Storts regarding inconsistencies between the results of a state mineral royalty 
audit and the audit in this case.  Findings of Fact, 
¶79.  

 
 

160.         
However, Storts was unable to provide satisfactory evidence 
of the relationship between sales prices purportedly received downstream and the 
claimed transportation costs.  Findings of Fact, 
¶79.  In 
fact, Storts testified exclusively from his own inferences based on purported 
Barrett records; Williams produced no witness who could knowledgeably testify 
about the records from which Storts drew his inferences.  Findings of Fact, ¶¶21, 77.  Further, Williams did not call any 
witness to explain why Barrett had initially used Glenrock as its point of sale 
to determine both sales price and transportation costs.  We conclude that 
Williams failed to carry the burden of showing that the Department determination 
is incorrect.  
The burden of proof remained with Williams.

 
 

161.         
During the Department's case, Simmons testified that the 
state royalty audit was  conducted under different instructions than 
the tax audit.  
Specifically, the Office of State Lands and Investments gave the auditors 
different instructions than the Department of Revenue for the treatment of 
transportation expense beyond Glenrock.  Findings of Fact, 
¶78.  
Williams provided no rebuttal to Simmons' explanation, which we add 
to the matters of fact that lead us to conclude that Williams did not meet its 
burden of persuasion.   We also conclude as a matter of law 
that the policies of the Office of State Lands and Investments regarding royalty 
calculations cannot determine the application of the tax statutes.  See Kerr-McGee v. Wyo. Oil & Gas Conservation Commission, 
903 P.2d 537, 544-545 (Wyo. 1995).

 
 

162.         
The 
Board has been wary of taxpayer claims made too late to allow the Department to 
investigate before final taking action. See Airtouch 
Communications, Inc., et al v. Department of Revenue, State of Wyoming, - 
P.3d -, 2003 WY 114, ¶¶52-55.  A complete picture 
of natural gas transactions is essential if we are to reach the correct 
conclusions regarding application of Wyoming's tax statutes.  E.g., In the Matter of EOG Resources, Inc., Docket No. 
2000-71 (2002 WL 1998583) (Wyo. St. Bd. Eq.).  A taxpayer must come forward with full and 
satisfactory documentation of transactions supporting its claims.  Williams has 
not.  We 
conclude that Williams failed to carry its burden of persuasion by a 
preponderance of the evidence.

 
 

Accrued Exempt Royalties

 
 

163.         
Williams contends that the Department failed to allow a 
deduction for certain exempt state royalties.  Williams accrued certain exempt state 
royalties on its general ledger in a long-term liability account.  Findings of Fact, ¶82.  The Departments of Revenue and Audit 
refused to allow a deduction for those royalties because they are in 
dispute.  Findings of Fact, ¶83.

 
 

164.         
Williams relies on a definition found in the Department 
regulations:

 
 
"Exempt royalty" means royalty expense, as determined on 
the accrual basis accounting in accordance with generally accepted accounting 
principles, for interests owned by the United States, the State of Wyoming, or 
an Indian tribe.

 
 

Rules, Wyoming Department of Revenue, Chapter 6, Section 
4(o). 

 
 

165.         
Williams points to its accrual, and contends that the 
definition dictates a deduction for Barrett.  At a minimum, this ignores the word 
"expense," which contemplates more than a contingent obligation or an amount in 
dispute.  Since 
the Department's construction is not either clearly erroneous or inconsistent 
with the plain meaning of the rule, we defer to the Department's 
construction.  
Pinther v. State, Department of Administration 
and Information, 866 P.2d 1300, 1302 (Wyo. 1994).  We therefore conclude that, as a matter of 
law, the Department was not obliged to allow a deduction for the exempt state 
royalties which have not been paid due to in dispute.

 
 

166.         
If 
the dispute is eventually resolved against Williams, and the exempt royalties 
are paid, Williams will have the remedy of a refund.  Wyo. Stat. Ann. §39-14-209(c); Atlantic Richfield Company 
v. Board of County Commissioners of Sweetwater County, 569 P.2d 1267 (Wyo. 
1977).  

 
 

Interest

 
 

167.         
Williams contends that "Barrett did not know and could not 
have known the tax liability was not paid in full when due."  Amended Case 
Notice, ¶A.8.  
The statute requires the payment of interest on delinquent taxes.  Wyo. Stat. Ann. §39-14-208(c)(iv).  Taxes are 
delinquent "when a taxpayer or his agent knew or reasonably should have known 
that the total tax liability was not paid when due."  Wyo. Stat. Ann. §39-14-208(c)(ii).

 
 

168.         
On 
review the words and phrases used by Barrett personnel to describe their own 
facilities and those of Western, we find no grounds for the positions later 
taken by Williams, and by Storts.  No Barrett employee characterized the booster 
compressor and glycol dehydrator as a processing facility, and no Barrett 
employee identified more than one dehydrator.  Findings of Fact, 
¶¶12-23.  
Barrett simply failed to apply the plain language of the 
statute.  

 
 

169.         
No 
employee of Barrett or Williams requested of the Department either a written 
interpretation of the statute or a value determination.  Both were available 
as a matter of right.  
Wyo. Stat. Ann. §39-14-209(a).  Instead, Storts 
was content to justify to himself Barrett's selection of a point of 
valuation.  Findings of Fact, ¶¶27-31.

 
 

170.         
Williams has failed to carry its burden to show that the 
Department incorrectly required the payment of interest, or that Barrett did not 
know and could not have known the tax liability was not paid in full when 
due.

 
 
 
 
                                                                       
ORDER

 
 

WHEREFORE, IT IS HEREBY ORDERED that: the determination of the Department of Revenue is 
hereby affirmed.

 
 
Pursuant to Wyoming Statute Section 16-3-144 and Rule 12, 
Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected 
inn fact by this decision may seek judicial review in the appropriate district 
court by filing a petition for review within 30 days of the date of this 
decision.

 
 
 
 

Dated this ____ day of November, 2003.

 
 
 
 

STATE BOARD OF EQUALIZATION

 
 
 
 
_______________________________________

Roberta A. Coates, Chairman

 
 
 
 
 
 
_______________________________________

Alan B. Minier, Vice-Chairman

 
 
 
 
 
 
_______________________________________

Thomas R. Satterfield, Board Member

ATTEST:

 
 
 
 
 
 
_________________________________

Wendy J. Soto, Executive Secretary

  
 
 
                                                    
CERTIFICATE OF SERVICE

 
 
I hereby certify that on the _____ day of November, 2003, I 
served the foregoing FINDINGS OF FACT, CONCLUSIONS OF 
LAW, DECISION AND ORDER by placing a true and correct copy thereof in the 
United States Mail, postage prepaid, and properly addressed to the 
following:

 
 


 
 
Margo Harlan Sabec

Scott P. Klosterman

Williams, Porter, Day & Neville, PC

PO Box 10700

Casper WY 82602-3902

 
 
Martin Hardscog

Karl D. Anderson

Senior Assistant Attorneys General

123 Capitol Building

Cheyenne WY 82002

 
 
 
 
 
 
______________________________________

Jana R. Fitzgerald 

Executive Assistant

State Board of Equalization

P.O. Box 448

Cheyenne, WY 82003

Phone:  (307) 777-6989

Fax:  (307) 777-6363 

 
 
cc:       SBOE

Edmund J. Schmidt, Director, Department of Revenue

Randy Bolles, Minerals Division, Department of Revenue

Assessor/Commission/Attorney/Treasurer - CampbellCounty

DOA

CCH

ABA State and Local Tax Reporter

Tax Analysts

Lexis-Nexis

State Library

File

 
 

FOOTNOTES

  
1Appendix A does not contain the Board's 
signatures or the district court's file stamp because it was obtained 
electronically.

  
2The Board also relied upon the testimony of 
witnesses from the DOA and the Department as to characteristics of processing 
facilities and the lack of those characteristics in the Western facilities.  The "common 
understanding" of these witnesses was that there was "an identifiable universe 
of processing plants, such as WhitneyCanyon, Painter, and CarterCreek."  Clearly, within the 
industry, the term "processing facility" has a specialized meaning beyond a 
collection of disparate pieces of equipment.  The Board gave "heavier weight" to the fact 
that neither Barrett nor the DOA had referred to Western's facilities as a 
"processing facility," and further found this consistent with customary usage in 
the industry.

  
3Although Western took possession of the CBM at 
the custody transfer meters, Barrett identified a location at Glenrock, Wyoming, as being the "point of 
sale."

4There is some mixing of apples and oranges here.  While the argument 
largely is presented as one of substantial evidence, Williams also argues that 
the Board acted arbitrarily and capriciously in finding that Williams had failed 
to meet its burden of proving the Department's computation was incorrect.  Because both 
parties submitted evidence, we have treated the issue primarily as being one of 
substantial evidence.