Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER. 

Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts, 

303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email 

corrections@appellate.courts.state.ak.us. 

THE SUPREME COURT OF THE STATE OF ALASKA 

BP PIPELINES (ALASKA) INC., ) 

CONOCOPHILLIPS ) 

TRANSPORTATION ALASKA, ) 

INC., EXXONMOBIL PIPELINE ) 

COMPANY, KOCH ALASKA ) 

PIPELINE COMPANY, LLC, ) 

UNOCAL PIPELINE COMPANY, ) 

and ALYESKA PIPELINE SERVICE ) 

COMPANY, ) 

) 

Appellants and ) 

Cross-Appellees, ) 

) 

v. ) 

) 

STATE OF ALASKA, ) 

DEPARTMENT OF REVENUE, and ) 

STATE ASSESSMENT REVIEW ) 

BOARD, ) 

) 

Appellees and ) 

Cross-Appellees, ) 

) 

NORTH SLOPE BOROUGH, ) 

FAIRBANKS NORTH STAR ) 

BOROUGH, and CITY OF ) 

VALDEZ, ) 

) 

Appellees, Cross-Appellants, ) 

and Cross-Appellees. ) 

Supreme Court Nos. S-14095/14116/14125 

Superior Court No. 3AN-06-08446 CI 

O P I N I O N 

No. 6867 – February 19, 2014 

) 
CITY OF VALDEZ, 

Cross-Appellant/Appellee, 

v. 

BP PIPELINES (ALASKA) INC., 

CONOCOPHILLIPS 

TRANSPORTATION ALASKA, 

INC., EXXONMOBIL PIPELINE 

COMPANY, KOCH ALASKA 

PIPELINE COMPANY, LLC, 

UNOCAL PIPELINE COMPANY, 

ALYESKA PIPELINE SERVICE 

COMPANY, STATE OF ALASKA 

DEPARTMENT OF REVENUE, 

STATE ASSESSMENT REVIEW 

BOARD, NORTH SLOPE 

BOROUGH, FAIRBANKS NORTH 

STAR BOROUGH, 

Cross-Appellees/Appellants. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

Appeal from the Superior Court of the State of Alaska, Third 

Judicial District, Anchorage, Sharon Gleason, Judge. 

Appearances: Leon T. Vance, Faulkner Banfield, P.C., 

Juneau, Alexander O. Bryner, Feldman Orlansky & Sanders, 

Anchorage, Michael R. Garatoni, Garatoni Breen & Malone, 

Inc., San Antonio, Texas, for Appellants/Cross-Appellees. 

William Walker, Craig Richards, Sara Rishko, Walker & 

Levesque, LLC, Valdez, for Cross-Appellant/Appellee City 

of Valdez. Robert M. Johnson, Law Office of Robert M. 

Johnson, Anchorage, and Kenneth J. Diemer, Assistant 

Attorney General, Anchorage, and Richard Svobodny, Acting 

Attorney General, Juneau, for Appellees/Cross-Appellees 

State of Alaska Department of Revenue and State Assessment 

Review Board. Mauri Long and Jessica Dillon, Dillon & 

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Findley, P.C., Anchorage, for Appellee North Slope 

Borough. Robin Brena and Laura S. Gould, Brena, Bell & 

Clarkson, P.C., Anchorage, for Appellee Fairbanks North 

Star Borough. 

Before: Fabe, Chief Justice, Winfree, Stowers, and Maassen, 

Justices, and Senior Justice Matthews.* [Carpeneti, Justice, 

not participating.] 

FABE, Chief Justice.
 

WINFREE, Justice, with whom STOWERS, Justice, joins, dissenting in
 

part.
 

I. INTRODUCTION 

This case involves the assessed value of the Trans-Alaska Pipeline System 

for property tax purposes. On appeal from the Alaska State Department of Revenue and 

the State Assessment Review Board, the superior court conducted a trial de novo to 

assess the value of the pipeline by calculating its replacement cost and then accounting 

for depreciation. The parties dispute the method used to assess the pipeline’s value as 

well as the specific deductions made for functional and economic obsolescence. We 

affirm the superior court’s valuation. 

II. FACTS AND PROCEEDINGS 

The Trans-Alaska Pipeline System is an 800-mile-long oil pipeline that 

connects oil reserves in Alaska’s North Slope to a shipping terminal in the City of 

* Sitting by assignment made under article IV, section 11 of the Alaska 

Constitution and Alaska Administrative Rule 23(a). 

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Valdez. This appeal involves a dispute between the Owners1 of the pipeline and 

government entities about the assessed value of the pipeline for tax purposes. 

Alaskan municipalities may levy and collect a tax on oil and gas property, 

including pipeline property, but the State Department of Revenue assesses the “full and 

true value” of that property.2 Alaska Statute 43.56.060 controls the Department of 

Revenue’s assessment.3 A party may appeal the Department of Revenue’s valuation to 

the five-member State Assessment Review Board.4 In turn, the superior court reviews 

an appeal of the Assessment Review Board’s decision in a trial de novo. 5 In this case, 

the Owners of the Trans-Alaska Pipeline System appeal the superior court’s valuation 

of the pipeline for 2006 property tax assessment purposes. 

In 2006 the Department of Revenue valued all pipelines in Alaska through 

a mass appraisal process, meaning that it used “standardized approaches and 

standardized adjustments” for them all. When deciding how to assess these pipelines, 

the Department of Revenue considered the three primary methods for calculating a 

property’s value: (1) the income method, measuring the property’s earning power 

1 The Owners and their ownership percentages of the Trans-Alaska Pipeline 

System are BP Pipelines (Alaska) Inc. (46.9%), ConocoPhillips Transportation Alaska, 

Inc. (28.3%), ExxonMobil Pipeline Company (20.3%), Koch Alaska Pipeline Company 

(3.1%), and Unocal Pipeline Company (1.4%). The Alyeska Pipeline Service Company, 

also an appellant, “is the operating agent for the Owners and operates [the Trans-Alaska 

Pipeline System], and additionally holds title to some of the taxable property that is part 

of the 2006 [Trans-Alaska Pipeline System] assessment.” 

2 AS 29.45.080(b). 

3 AS 43.56.060(e). 

4 AS 43.56.120. 

5 AS 43.56.130. 

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through the capitalization of its income; (2) the cost method, measuring the cost of 

acquiring a substitute property of equivalent utility; and (3) the sales comparison method, 

analyzing the sales price of comparable property. The Department of Revenue decided 

that the most reliable method was to estimate the replacement cost of the pipeline less 

depreciation. After conducting this “replacement cost new” analysis for the TransAlaska Pipeline System, the Department of Revenue’s assessor, Randy Hoffbeck, 

determined that the pipeline’s 2006 value was $3.641 billion. 

6 Both the Owners and the Municipalities seeking to levy and collect tax on

the Trans-Alaska Pipeline System appealed the Department of Revenue’s valuation to 

the State Assessment Review Board. After a three-day hearing in May 2006, the 

Assessment Review Board rejected the Owners’ argument that the pipeline should be 

valued using the income approach rather than the cost approach. The Assessment 

Review Board agreed with the Municipalities that the Department of Revenue made 

certain inappropriate deductions when assessing the value of the property. Thus the 

Assessment Review Board raised the valuation of the Trans-Alaska Pipeline System to 

$4.3062718 billion. 

The Owners and Municipalities appealed the Assessment Review Board’s 

decision to the superior court. The Owners argued that the 2006 assessed value of the 

Trans-Alaska Pipeline System should be reduced to $850 million, and the Municipalities 

argued that the assessed value should be raised to $11.570 billion. After a five-week trial 

de novo in August and September of 2009, Superior Court Judge Sharon Gleason issued 

a decision in May 2010 finding the value to be $9.98 billion for the 2006 tax year. The 

Owners, Municipalities, and the Department of Revenue all filed motions for 

The Municipalities are the City of Valdez, the Fairbanks North Star 

Borough, and the North Slope Borough. 

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6 
 

 

 

 

 

 

 

reconsideration. The superior court issued an amended decision upon reconsideration 

in October 2010.7 That decision forms the basis of this appeal. 

The superior court determined that the Department of Revenue and the 

State Assessment Review Board’s reliance on the cost approach to valuation, rather than 

an income approach as proposed by the Owners, was not improper, unsupported by the 

record, or fundamentally wrong. But the superior court agreed with the Municipalities 

that the Assessment Review Board’s valuation was improper in certain respects. 

The superior court found the Municipalities’ cost study to be more credible 

and accurate than any of the other cost studies in the record, including that presented by 

the Owners and that relied upon by the Department of Revenue and the Assessment 

Review Board.8 Based on this study, the superior court determined that the valuation’s 

scaling adjustment for excess capacity should be larger and should be characterized as 

economic or external rather than functional obsolescence. The superior court arrived at 

a final valuation of $9.977934 billion for the 2006 tax year, more than twice the 

Assessment Review Board’s valuation. 

In its final judgment, the superior court directed the Department of Revenue 

to issue a supplemental certified assessment roll based on the superior court’s valuation 

of the Trans-Alaska Pipeline System that would form the basis of the supplemental taxes 

owed by the Owners. The superior court ruled that interest owed on the supplemental 

taxes would begin to run on June 30, 2006, when the taxes would have been due in 2006. 

7 The amended decision clarified or revised various factual findings and 

made “editing/errata type corrections.” Most significantly, the superior court remanded 

the case to the Department of Revenue instead of the Assessment Review Board. The 

assessed value of the pipeline remained the same. 

8 The Owners do not appeal the superior court’s decision to rely on the 

Municipalities’ cost study. 

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The Owners appeal the superior court’s decision, arguing that the pipeline 

should have been assessed at fair market value as measured by tariff income rather than 

use value as measured by replacement cost. The Owners also argue that the superior 

court’s assessment improperly reached non-taxable property, that the superior court 

misconstrued a settlement agreement, and that the superior court’s imposition of interest 

dating from 2006 was in error. The Municipalities cross-appeal, arguing that the 

superior court erred in applying a scaling deduction for economic obsolescence. 

III. STANDARD OF REVIEW 

When parties appeal the superior court’s review of an administrative 

agency’s decision in a trial de novo, we review only the superior court’s decision, not 

that of the administrative agency.9

 We review the superior court’s factual findings under 

the clearly erroneous standard and will not overturn a factual finding unless “left with 

the firm and definite conviction on the entire record that a mistake has been made.”10 On 

questions of law, we are not bound by the lower court’s decision.11 “Our duty is to adopt 

the rule of law that is most persuasive in light of precedent, reason, and policy.”12 

9 City of Nome v. Catholic Bishop of N. Alaska, 707 P.2d 870, 875 (Alaska 

1985) (citing Kott v. City of Fairbanks, 661 P.2d 177, 180 n.1 (Alaska 1983)). 

10 Id. at 876 (quoting Stanton v. Fuchs, 660 P.2d 1197, 1198 (Alaska 1983)) 

(applying the clearly erroneous standard to the superior court’s findings of fact when 

reviewing the superior court’s de novo review of an administrative agency decision). 

11 Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979). 

12 Id. 

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IV. DISCUSSION
 

A.	 The Superior Court Did Not Err By Assessing The Use Value Of The 

Trans-Alaska Pipeline System. 

1.	 Alaska Statute 43.56.060 does not require pipeline property to 

be assessed at its “fair market value.” 

The Alaska Constitution provides that “[s]tandards for appraisal of all 

property assessed by the State . . . shall be prescribed by law.”13 Consistent with this 

commandment, AS 43.56.060 provides that the Department of Revenue shall assess 

“property used . . . for the pipeline transportation of gas or unrefined oil or for the 

production of gas or unrefined oil at its full and true value as of January 1 of the 

assessment year.”14 It also specifies that the full and true value of pipeline property is 

“determined . . . with due regard to the economic value of the property based on the 

estimated life of the proven reserves of gas or unrefined oil then technically, 

economically, and legally deliverable into the transportation facility.”15 The parties 

dispute the meaning of this “full and true value” appraisal standard. The Owners contend 

that the “full and true value” of the pipeline can only be assessed by looking at its fair 

market value. The Municipalities agree with the Department of Revenue and the 

Assessment Review Board that “full and true value” may be measured by any one of 

several assessment standards, including fair market value or use value. 

The superior court determined that the Department of Revenue and the 

State Assessment Review Board assessed the value of the Trans-Alaska Pipeline System 

by looking at the “use value” of the pipeline, defined as “the value that [the pipeline] has 

13 Alaska Const. art. IX, § 3. 

14 AS 43.56.060(a) (emphasis added). 

15 AS 43.56.060(e)(2). 

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for its specific use in an integrated system in transporting [Alaska North Slope] products 

from the Owners’ affiliates from the Alaska North Slope to market.” The superior court 

found that the use value premise had “not been demonstrated to constitute a 

fundamentally wrong principle of valuation.” The superior court found that “economic 

value” has “no generally accepted definition in the appraisal profession,” and the Owners 

do not dispute this finding. The superior court further concluded that “neither the term 

‘full and true value’ nor the term ‘economic value’ as used in [AS 43.56.060(e)] 

mandates, as a matter of law, the exclusive reliance on the regulated tariff income stream 

to derive a value of [the Trans-Alaska Pipeline System] for property tax purposes.” 

The Owners argue on appeal that the legislature intended the phrase “full 

and true value” to mean “fair market value” and contend that market value should be 

assessed by calculating the value of the pipeline’s income from tariffs. 

The Appraisal of Real Estate defines “market value” as 

[t]he most probable price, as of a specified date . . . for which 

the specified property rights should sell after reasonable 

exposure in a competitive market under all conditions 

requisite to a fair sale, with the buyer and seller each acting 

prudently, knowledgeably, and for self-interest, and assuming 

[ ] that neither is under undue duress. 16

“Market value” differs from “use value,” which “focuses on the value the real estate 

contributes to the enterprise of which it is a part, without regard to the highest and best 

use of the property or the monetary amount that might be realized from its sale.” 

The Owners contend that the superior court erroneously gave the 

Department of Revenue and the State Assessment Review Board the discretion to select 

an assessment standard when in fact the statute compels the use of the “fair market 

value” standard. The Owners’ primary argument is that “full and true value” is defined 

16 APPRAISAL INST., THE APPRAISAL OF REAL ESTATE 23 (13th ed. 2008). 

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elsewhere by the legislature as “fair market value,” and analyzing the statutory scheme 

as a whole indicates that “full and true value” should be defined as “fair market value” 

under AS 43.56.060(e)(2) as well. 

Thus the question for this court is whether AS 43.56.060 compels the use 

of a “fair market value” standard and prohibits the use of a “use value” standard. The 

plain text and history of AS 43.56.060 indicate that the legislature did not intend for “fair 

market value” to be the only allowable standard for the assessment of pipeline property. 

“When the legislature uses the same term in two closely related statutes, we 

will normally presume that the legislature intended that term to mean the same thing in 

both cases.” 17 The Owners point out that AS 43.56, which sets the assessment standard 

for oil and gas property, operates in conjunction with AS 29.45, which allows 

municipalities to tax property, including oil and gas properties. Alaska 

Statute 29.45.110(a) defines “full and true value” as “market value,” or “the estimated 

price that the property would bring in an open market and under the then prevailing 

market conditions in a sale between a willing seller and a willing buyer both conversant 

with the property and with prevailing general price levels.”18 But AS 29.45.110(a) refers 

to property that the municipality, not the state, assesses. And that chapter explicitly 

provides that the full and true value of pipeline property is determined not under 

AS 29.45, but “under AS 43.56 as assessed by the Department of Revenue.”19 Thus, 

17 Tesoro Alaska Petroleum Co. v. Kenai Pipe Line Co., 746 P.2d 896, 906 

(Alaska 1987) (quoting Matanuska-Susitna Borough v. Hammond, 726 P.2d 166, 180 

(Alaska 1986)). 

18 AS 29.45.110(a). 

19 AS 29.45.080(c). 

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AS 29.45.110’s definition of full and true value is not relevant to the assessment standard 

used by the Department of Revenue. 

The Owners note that the legislature also defined “full and true value” as 

“market value” in certain sections of AS 43.56.060. But AS 43.56.060 defines “full and 

true value” differently for each type of oil and gas property the statute covers. For 

exploration property, “full and true value” is defined as “market value,” but that 

definition is explicitly limited to exploration property.20 The “full and true value” of 

production property, on the other hand, is “determined . . . on the basis of replacement 

cost less depreciation based on the economic life of proven reserves.”21 The value of 

under-construction production and pipeline property in the first year of assessment is 

measured by “the actual cost incurred or accrued with respect to the property as of the 

date of assessment.” 22 Thus there is no global definition of “full and true value” in 

AS 43.56.060, and there is no definition of “full and true value” specific to pipeline 

property. 

The legislative history of AS 43.56.060 supports the Municipalities’ 

position that the legislature did not intend “full and true value” to have the uniform 

meaning of “market value” throughout the property tax statutes. In 1973 the Director 

of the Alaska Oil and Gas Division testified to the House Finance Committee about the 

bill that would become AS 43.56.23 He noted that the phrase “full and true value” was 

20 AS 43.56.060(c) (specifying that “[t]he full and true value of taxable 

property . . . for use in the exploration for gas or unrefined oil . . . is [market value]” 

(emphasis added)). 

21 AS 43.56.060(d)(2). 

22 AS 43.56.060(d)(1), (e)(1). 

23 Minutes, H. Fin. Comm. Hearing on H.B. 1, 8th Leg., 1st Spec. Sess. 49 

(continued...) 

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“a problem” because there were “many different methods of assessment” and that “he 

defied a tax assessor to determine ‘full and true value.’ ”24 The Director then went down 

the list of types of oil and gas property covered under AS 43.56.060: 

Under Sec. 60 of the Governor’s bill, sub-section (a) is a 

provision for what is assessed. . . . (b) Deals only with 

exploration equipment, based on market value. . . . 

(c) Cover[s] production equipment. The tax assessor would 

check the equipment, old and new, and tax accordingly, using 

actual cost less depreciation. . . . (d) Pipeline and pipeline 

equipment. It starts with the actual cost as a basis, but is 

depreciated on the economic life except in the event the 

[ ] physical life is different. 25

The Director’s testimony indicates that “full and true value” was construed differently 

for each subsection, that “market value” was thought to be the standard only for 

exploration property, and that the cost approach was considered to be a definition of 

“full and true value” distinct from market value. 

The testimony of former Attorney General John Havelock also supports the 

Municipalities’ view that “full and true value” is not synonymous with “fair market 

value.”26 The Attorney General was asked whether it would “make much difference” for 

production property to be valued at “fair market value” as opposed to the method laid out 

23(...continued) 

(Oct. 22, 1973) (comments of Homer Burrell, Director, Division of Oil and Gas). 

24 Id. at 49-50. 

25 Id. at 51. 

26 Minutes, H. Fin. Comm. Hearing on H.B. 1, 8th Leg., 1st Spec. Sess. 21 

(Oct. 20, 1973) (comments of John Havelock, Attorney General). 

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in the draft bill.27 Havelock responded that “it would be a considerable change” because 

“[t]he fair market value method would introduce an element of uncertainty in property 

that doesn’t have a fair market value.”28 He explained that he “didn’t think the fair 

market value was appropriate” for valuing production property.29 While Havelock was 

referring to production rather than pipeline property, his testimony shows that fair market 

value was not considered the common standard for valuing all property under 

AS 43.56.060 and that the standard used for both pipeline and production property was 

considered distinct from fair market value. 

We therefore conclude that the statutory language of AS 43.56.060 does not 

compel the Department of Revenue to use a fair market valuation standard. But although 

the use of a fair market standard is not always required, we must also examine whether 

the superior court erred in this case by assessing the Trans-Alaska Pipeline System under 

a use value standard. 

2.	 The superior court did not err by applying a use value standard 

in this case. 

The parties dispute whether the Assessment Review Board’s decision to 

evaluate the pipeline under a use value standard implicates agency expertise such that the 

superior court — and by extension, this court — should treat that decision with 

additional deference.30 We need not answer this question. After giving due deference 

27	 Id. 

28	 Id. 

29	 Id. 

30 See Tesoro Alaska Petroleum Co. v. Kenai Pipe Line Co., 746 P.2d 896, 

903 (Alaska 1987) (noting that the “rational basis test is used where the questions at 

issue implicate special agency expertise or the determination of fundamental policies 

(continued...) 

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to the superior court’s factual findings, we conclude that its decision to apply a use value 

assessment standard stands on its own merits. The superior court made ample findings 

to support its conclusion that, because there is no market from which to calculate fair 

market value for the Trans-Alaska Pipeline System or for shipping capacity on the 

pipeline, the use value standard was appropriate. 

The superior court found that the Trans-Alaska Pipeline System’s primary 

value is its utility in transporting North Slope oil reserves. The court estimated the 

reserves to be “worth $350 billion, to market.” Because “[t]he value of those proven 

reserves cannot be realized without [the pipeline], as it constitutes the only viable means 

of transporting [Alaska North Slope] product to market,” the superior court ruled that 

valuing the pipeline based on the market value of its tariff income stream31 alone would 

fail to capture its full and true value. 

The superior court found that the Trans-Alaska Pipeline System is a 

limited-market and special-purpose property. A limited-market property is a property 

that “has relatively few potential buyers at a particular time.”32 The superior court 

further found that all but one pipeline owner has a corporate affiliate Alaska North Slope 

oil producer and that there is a limited market for the sale of an individual ownership 

interest in the Trans-Alaska Pipeline System. Historically when such a sale has taken 

place, it has included an interest in transporting oil production. The superior court 

recognized that the three largest owners of the pipeline had a combined 95% ownership 

30(...continued) 

within the scope of the agency’s statutory function”). 

31 Tariff income is revenue generated from charging a tariff to transport oil 

through the pipeline. 

32 APPRAISAL INST., supra note 16, at 27. 

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interest in the pipeline and their corporate affiliates had a combined 91.4% share of the 

estimated Alaska North Slope oil production. Thus the superior court found the 

production of oil and ownership of the Trans-Alaska Pipeline System to be inextricably 

linked. 

The superior court took into account an affidavit from an economic expert, 

Adam Jaffe, who had testified for the Owners before the Federal Energy Regulatory 

Commission in a previous matter. Jaffe testified at trial that the Trans-Alaska Pipeline 

System was distinct from “most other oil pipelines” because it was “largely a closed 

system in which the vast majority of business is transacted among affiliated buyers and 

sellers.” Thus the market for the Trans-Alaska Pipeline System is “very different from 

‘textbook’ markets.” The superior court noted that while the Owners presented evidence 

that there were markets for investors in some crude oil pipelines in the Lower 48 based 

on tariff income alone, those pipelines are distinguishable from the Trans-Alaska 

Pipeline System. It observed that the Owners had not presented evidence that there was 

a market for ownership interest in the pipeline based on tariff income. 

The superior court also determined that the Trans-Alaska Pipeline System 

was a special-purpose property, or a property with “unique designs, special construction 

materials, or layouts that restrict their functional utility to the use for which they were 

originally built.”33 Jaffe’s affidavit notes that “all of the carriers entered into the 

construction of the pipeline primarily for the purpose of ensuring a means of transporting 

their own oil.” The superior court found that the Owners gave priority to the capacity 

demands of their affiliated producers and “are almost completely dependent upon their 

affiliate and parent companies.” Thus valuing the pipeline using its tariff income, 

according to the superior court, would ignore the Owners’ interests in transporting their 

Id. at 28. 

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33 
 

 

 

 

 

 

 

 

 

corporate affiliates’ oil to market and monetizing the oil reserves of the Alaska North 

Slope.34 

In light of these unchallenged factual findings, we cannot conclude that it 

was error to assess the Trans-Alaska Pipeline System under a use value standard. 

B.	 The Use Value Assessment Standard Does Not Improperly Tax NonTrans-Alaska Pipeline System Property. 

The Owners argue that even if the “full and true value” assessment standard 

does not compel the calculation of the pipeline’s market value, the use value assessment 

standard is inappropriate in this case because it results in the improper taxation of items 

that are not taxable under AS 43.56. Alaska Statute 43.56.210(5), which defines taxable 

oil and gas property, does not include actual reserves of oil and gas, which are taxed 

separately.35 The Owners’ argument implies that because the superior court assessed the 

pipeline’s value as a vessel for transporting oil reserves to market, the superior court 

improperly imposed a tax on the actual value of those oil reserves. 

But the Owners have not shown that the superior court considered the value 

of Alaska North Slope oil reserves for any other reason than to support the conclusion 

that the Trans-Alaska Pipeline System has a unique use value distinct from its tariff 

income. The superior court calculated the replacement cost of the pipeline — before 

adjusting for depreciation — at $18.7 billion. It also found that the Owners and their 

34 See, e.g., Tenneco, Inc.-Tenn. Gas Pipeline Div. v. Town of Cazenovia, 479 

N.Y.S.2d 587, 589 (N.Y. App. Div. 1984) (affirming use of the “replacement cost new” 

method rather than capitalized income method to value pipeline because the pipeline 

property was “unique and specially built . . . there is no market for the type of property 

and there are no sales of property for such use . . . and it is an appropriate improvement, 

which if destroyed, would be reasonably expected to be replaced or reproduced”). 

35 AS 43.55.017(a) provides that “neither the state nor a municipality may 

impose a tax on (1) producing oil or gas leases; (2) oil or gas produced or extracted in 

the state.” 

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affiliates would reconstruct the Trans-Alaska Pipeline System not for its tariff income 

but in order to monetize the Alaska North Slope’s $350 billion worth of oil reserves. But 

the superior court did not include the $350 billion figure as part of its replacement cost 

calculation. Instead, the superior court used the presence of those reserves to explain its 

determination that tariff income could not adequately capture the pipeline’s value as a 

special-purpose property. 

The Owners further argue that when it assessed the value of the pipeline, 

the superior court improperly included the value that the Owners’ affiliate shippers 

receive by paying below-market regulated tariff rates to transport oil through the 

pipeline. The Owners argue that this “shippers’ interest” is not “real and tangible 

personal property” taxable under AS 43.56.210(5)(A).36 

The Department of Revenue defines shippers’ interest as “the economic 

interest transferred to the shipper through the regulatory process which allows them to 

ship oil at tariff rates below those of an open and competitive market.” The State’s 

witness noted that a producer would “receive a benefit through shipping because of the 

lower-than-market rate.” The witness acknowledged under cross-examination that this 

interest could only be “monetized” by a shipper actually using the pipeline to transport 

oil. 

But in rejecting the tariff income approach, the superior court did not 

attempt to measure the value of shippers’ interest or add any such measure to the value 

of the pipeline, nor did it even mention the shippers’ interest concept. It merely 

36 AS 43.56.210(5)(A) provides that “taxable property” under AS 43.56 

“means real and tangible personal property used . . . within this state primarily in the 

exploration for, production of, or pipeline transportation of gas or unrefined oil . . . or in 

the operation or maintenance of facilities used in the exploration for, production of, or 

pipeline transportation of gas or unrefined oil.” 

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concluded that tariff income cannot fully capture the value that the pipeline contributes 

to the integrated system of which it is a part. The Owners have not shown that the 

superior court valued non-pipeline property. They have merely demonstrated that it took 

the pipeline’s role in transporting Alaska North Slope oil reserves into account in 

concluding that the pipeline’s full and true value is not captured by the tariff income 

approach.37 We therefore find no basis to conclude that the superior court erroneously 

considered the value of non-taxable property in its assessment. 

C.	 The Superior Court Did Not Err In Deducting For Physical, 

Functional, And Economic Obsolescence. 

Notwithstanding their objection to the superior court’s assessment of the 

Trans-Alaska Pipeline System’s use value instead of its fair market value, the Owners 

concede that calculation of the replacement cost of the pipeline is a permissible method 

of measuring the “full and true value” of the pipeline because “replacement cost less 

depreciation” is one of several standard appraisal methods used to determine market 

value.38 This valuation method involves determining the cost of constructing a 

37 The Owners also briefly state that the superior court’s attempt to reach the 

value of non-pipeline property violated the Due Process and Commerce Clauses because 

non-Trans-Alaska Pipeline System property is “owned by other entities and . . . taxable 

by other jurisdictions,” and therefore cannot be taxed without apportionment. The 

Owners’ briefing on this point is confined to a single sentence, and is not sufficiently 

developed to allow us to evaluate it. In any case, as discussed above, the Owners have 

not shown that the superior court assessed the value of non-pipeline property. 

38 See 15 Alaska Administrative Code (AAC) 56.110(c) (2013) (“[T]he full 

and true value of pipeline property in operation is its economic value based upon the 

estimated life of proven reserves of the gas or oil then technically, economically and 

legally deliverable into the transportation facility. Economic value is determined by the 

use of standard appraisal methods such as replacement cost less depreciation, 

capitalization of estimated future net income, analysis of sales, or other acceptable 

methods.”). 

-18-	 6867
 
 

 

 

 

replacement property of equivalent utility to the Trans-Alaska Pipeline System, then 

deducting any necessary amounts for all three traditionally recognized forms of 

depreciation: physical, functional, and economic.39 The superior court made depreciation 

adjustments for physical and other types of depreciation (using the economic age-life 

method), for functional obsolescence (based on the anticipated costs of the Owners’ 

strategic reconfiguration plan), and for economic obsolescence (a scaling deduction for 

excess capacity). Both the Owners and the Municipalities contend that the superior court 

erred when making these deductions for obsolescence. The Owners claim that the 

superior court did not deduct enough; the Municipalities claim it deducted too much. 

1.	 The superior court was not required to treat tariff regulations 

as a form of economic obsolescence. 

“ ‘Economic obsolescence’ is diminution in the value or usefulness of 

property’ that ‘results from external factors, such as decreased demand or changed 

governmental regulations.’ ”40 The Owners argue that the superior court erred by not 

making a deduction for economic obsolescence based on the effect of government 

regulation of the tariffs the Owners are allowed to charge shippers for transportation of 

oil. This argument is based on the theory that the Trans-Alaska Pipeline System is worth 

less than a new pipeline because, under existing regulations, a new pipeline would be 

allowed to charge higher tariffs for transporting oil. They argue that by not making an 

obsolescence deduction for tariff regulation from the replacement cost of the pipeline, 

the superior court assessed the value not of the Trans-Alaska Pipeline System, but of a 

39 AM. SOC’Y OF APPRAISERS, VALUING MACHINERY AND EQUIPMENT 66 (2d 

ed. 2005). 

40	 Horan v. Kenai Peninsula Borough Bd. of Equalization, 247 P.3d 990, 996 

n.39 (Alaska 2011) (quoting BLACK’S LAW DICTIONARY 1107 (8th ed. 2004)). 

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“hypothetical pipeline” that is “free from the actual legal restrictions affecting the value 

of [the Trans-Alaska Pipeline System].” 

a.	 The State’s appraisal did not treat tariff regulation as a 

form of depreciation. 

At trial, the State’s appraiser, Randy Hoffbeck, explained his decision not 

to make a deduction for economic obsolescence based on tariff regulation. He testified 

that there are three primary ways appraisers measure economic obsolescence: capitalized 

rent or income loss (comparing a property’s income to that of another property without 

the perceived deficiency), paired sales analysis (comparing a property’s sales price to 

that of another property without the perceived deficiency), and market extraction (taking 

the sale of a property and breaking its sales price down into physical, functional, and 

economic obsolescence). Hoffbeck testified that he was unable to perform any of those 

tests because they all require market data that does not exist for the Trans-Alaska 

Pipeline System due to “the lack of comparable income streams or comparable sales.” 

The Owners’ appraiser agreed that, assuming that a market for the Trans-Alaska Pipeline 

System does not exist, a capitalized income loss approach “would not apply.” 

Because Hoffbeck found those three tests to be inapplicable, he came up 

with his own method to determine whether tariff regulation had a significant impact on 

the pipeline’s use value. Hoffbeck’s test asked two questions: first, whether tariff 

regulation is “a hindrance to production or [whether it would] make the oil 

uncompetitive,” and second, whether tariff regulation would prevent the Trans-Alaska 

Pipeline System from being constructed today if the pipeline did not exist. 

Hoffbeck concluded that for a newly constructed replacement pipeline with 

a higher rate base,41 the higher allowable tariffs would nonetheless not be so high that 

A rate base is defined as “[t]he investment amount or property value on 

(continued...) 

-20-	 6867 

41 
 

 

 

 

 

 

 

 

producers could not “get the product to market profitably.” Similarly, Hoffbeck 

determined that higher tariffs on a replacement pipeline would not make the TransAlaska Pipeline System less competitive compared to the existing Cook Inlet Pipeline. 

Finally, Hoffbeck looked at a New York case that held that if a property is worth the cost 

of replacement then, under the cost approach, a deduction for economic obsolescence 

based on earning capacity after reproduction is not appropriate.42 Hoffbeck determined 

that the Trans-Alaska Pipeline System is worth the cost of replacement because the 

potential revenue to be gained compared to the cost of construction is comparable to the 

equivalent figures when the pipeline was first constructed in 1977. He testified that “the 

usefulness of [the pipeline] right now is similar to the usefulness of [the pipeline] . . . at 

the time it was constructed.” Based on those tests, Hoffbeck “concluded that there was 

no external obsolescence to be calculated for [the pipeline].” 

b.	 The Owners argue that tariff regulation is a form of 

depreciation. 

On appeal, the Owners do not dispute or even discuss Hoffbeck’s treatment 

of economic obsolescence, nor do they specify the nature or amount of their argued-for 

economic obsolescence adjustment. Instead, they generally argue that the superior 

court’s replacement cost measure should be adjusted downward because the hypothetical 

new property would have a greater allowable tariff than the Trans-Alaska Pipeline 

System and thus would generate more tariff income for the Owners. 

41(...continued) 

which a company, esp[ecially] a public utility, is allowed to earn a particular rate of 

return.” BLACK’S LAW DICTIONARY 1375 (9th ed. 2009). 

42 Tenneco, Inc.-Tenn. Gas Pipeline Div. v. Town of Cazenovia, 479 N.Y.S.2d 

587, 590 (N.Y. App. Div. 1984). 

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At trial, the Owners’ appraiser used an “income shortfall” approach to 

support the conclusion that tariff regulations reduce the value of the Trans-Alaska 

Pipeline System. The appraiser compared the tariff income actually allowed to the tariff 

income from a hypothetical, newly constructed pipeline. The Owners’ appraiser testified 

that because the rate base for a newly constructed property would be higher, the new 

property would be allowed to charge higher tariffs. The Owners’ appraisal expert 

characterized this difference as economic obsolescence due to “income shortfall” and 

valued it at $1.3 billion. On appeal, the Owners again argue that “replacing the entire 

pipeline system would produce a tariff far different from the current [Trans-Alaska 

Pipeline System] tariff.” 

c.	 The superior court did not err by refusing to make a 

deduction for tariff regulation. 

The superior court found that the State gave “due consideration” to whether 

a deduction for tariff regulation should be made, and that the Owners “failed to establish 

that the [Department of Revenue and the State Assessment Review Board] erred in 

refusing to apply [their suggested] income shortfall method to determine economic 

obsolescence.” We find no error in the superior court’s conclusion. 

The superior court heard testimony that the “income shortfall” method 

differs from the established method of calculating capitalized income loss because, 

instead of comparing similar properties — one regulated and one unregulated — in an 

established market, it compares the existing property to a hypothetical new one, both 

subject to current regulations. But the superior court heard ample testimony that this 

method of calculating depreciation is not a widely accepted appraisal practice, nor does 

it appear in any widely accepted appraisal manuals. The superior court concluded that 

the two appraisal manuals that the Owners cited as supporting the income shortfall 

technique were not authoritative, one because it was unpublished and not peer-reviewed 

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and the other because a newer edition of the same text omitted any mention of the 

income shortfall technique. One witness also testified that the Owners’ estimate of the 

tariffs that a hypothetical new pipeline would be allowed to charge was not reliable. 

Even if the income shortfall method were an accepted appraisal technique 

in some cases, it would be improper here. The bedrock assumption of that technique is 

that the Trans-Alaska Pipeline System is less valuable than a hypothetical new pipeline 

because the new pipeline would be allowed to charge higher tariffs. But in this case, the 

primary value of the pipeline is its ability to monetize Alaska North Slope oil reserves 

because the companies collecting tariffs are closely affiliated with the companies paying 

tariffs. So the fact that a new pipeline could charge higher tariffs does not imply that the 

new pipeline would be more valuable to its Owners. 

The highly integrated nature of the Trans-Alaska Pipeline System means 

that the companies paying to transport oil through the pipeline are closely affiliated with 

the companies collecting those tariffs. Several witnesses testified that, due to this 

integration, the value of the pipeline is completely divorced from the Owners’ ability to 

charge tariffs. One witness testified that the tariff the Owners are allowed to charge has 

no effect on value because the same entity is levying and paying the tariff: “[W]hatever 

. . . the tariff might be, it is either benefiting the pipeline Owner . . . or it’s benefiting the 

shipper, or some combination of that. And so . . . it doesn’t make any difference what 

[the tariff] is.” Relying on this evidence, the superior court found that tariff regulation 

is not a source of external obsolescence because such regulation is irrelevant to the value 

of the pipeline: 

[The pipeline’s] highest and best use is not as a stand-alone 

investment property, but as an essential component of the 

integrated production and transportation system from the 

Alaska North Slope. The evidence has persuasively 

demonstrated that [the pipeline’s] value lies in that use — a 

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use which is distinct from whatever tariff revenue [the 

pipeline] may generate. As such, there is no additional 

economic obsolescence caused by the fact that the [TransAlaska Pipeline System] is a regulated pipeline. 

We conclude that the superior court did not err by refusing to treat tariff regulations as 

a form of economic obsolescence. 

2.	 The superior court did not improperly consider unproven 

reserves of oil when calculating the economic life of the pipeline. 

One measure of depreciation, called economic age-life, is the age of the 

property in comparison to its economic life.43 Alaska law requires that the measure of 

a pipeline’s economic life be based on the estimated life of “proven” reserves of oil and 

gas.44 Proven reserves are those reserves “then technically, economically, and legally 

deliverable” into the pipeline. 45 The superior court found that the record “amply” 

demonstrated that adequate proven reserves existed to allow the Trans-Alaska Pipeline 

System to operate until 2047. The Owners argue that in determining the reserves 

available for delivery into the pipeline, the superior court took into account reserves that 

do not constitute “proven reserves” as specified by statute. 

When deciding which reserves were “then technically, economically, and 

legally deliverable” into the pipeline, the superior court found that it was not necessary 

for production facilities delivering the resources to the pipeline to currently exist for 

reserves to be “proven” as long as the technology to deliver those reserves existed. The 

superior court considered oil fields categorized by the State as “under development” and 

43 Depreciation is calculated from estimated economic life by “calculating the 

ratio of the effective age of the property to its economic life expectancy and applying this 

ratio to the property’s total cost.” APPRAISAL INST., supra note 16, at 420. 

44 AS 43.56.060(e)(2). 

45	 Id. 

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“under evaluation” to be “proven reserves.” A State’s witness explained that oil “under 

development” means oil where facilities to transport the oil to the Trans-Alaska Pipeline 

System were in the process of being developed, and oil “under evaluation” means oil that 

has been discovered and determined to be technically recoverable. 

The Owners argue that oil reserves under development and under 

evaluation are not “proven reserves.” They contend that the statutory term “proven 

reserves” is a technical term46 that requires the oil in question to be “recoverable based 

on existing conditions.” For support, the Owners cite a House Finance Committee report 

on the bill that eventually became AS 43.56. 47 In the report, the Director of the Oil and 

Gas Division told the legislature that “reserves means the amount recoverable at today’s 

technology and today’s prices.”48 

It is unclear from the Owners’ briefing why this statement supports their 

reading of the statute. The statement appears consistent with the superior court’s 

definition of “proven reserves” as those reserves theoretically recoverable with today’s 

technology even if the facilities to recover the oil are not actually in place. Moreover, 

the complete legislative history indicates confusion as to the meaning of the phrase 

“proven reserves.” A member on the Finance Committee remarked that “no matter what 

46 Under Alaska law, statutory words and phrases that are “technical” and 

“those that have acquired a peculiar and appropriate meaning, whether by legislative 

definition or otherwise, shall be construed according to the peculiar and appropriate 

meaning.” AS 01.10.040(a). 

47 Minutes, H. Fin. Comm. Hearing on H.B. 1, 8th Leg., 1st Spec. Sess. 

(Oct. 22, 1973). 

48 Id. at 52 (comments of Homer Burrell, Director, Division of Oil and Gas). 

-25- 6867
 
 

 

 

 

 

 

 

 

 

 

is done in this area, proven reserves will become a matter of litigation.”49 Another 

indicated that “the State’s information” concerning proven reserves would be “as good 

as any company’s in the industry.”50 The committee did not discuss the meaning of the 

phrase in more detail.51 

The Owners also cite an industry definition of “proven reserves.” The 

Society of Petroleum Engineers defines the term as “[t]he quantities of crude oil, natural 

gas and natural gas liquids which geological and engineering data demonstrate with 

reasonable certainty to be recoverable in the future from known oil and gas reservoirs 

under existing economic and operating conditions.” The definition goes on to include 

several types of proven reserves, including “[p]roved developed reserves behind the 

casing of existing wells or at minor depths below the present bottom of such wells which 

are expected to be produced through these wells in the predictable future,” as well as 

“[p]roved [u]ndeveloped [r]eserves” which are “[p]roved reserves to be recovered from 

new wells on undrilled acreage or from existing wells requiring a relatively major 

expenditure for recompletion or new facilities for fluid injection.” The superior court 

concluded from this definition that “proven reserves” include undeveloped reserves 

without the current infrastructure for delivery. We agree. The Owners have not shown 

49 Minutes, H. Fin. Comm. Hearing on H.B. 1, 8th Leg., 1st Spec. Sess. 64 

(Oct. 23, 1973) (comments of Representative Keith Specking). 

50 Id. (comments of J.H. Hogan, staff member of the House Finance 

Committee). 

51 A now-repealed Alaska statute, codified in 1975, dealing with property tax 

on oil and gas reserves also supports the superior court’s interpretation of the term. That 

statute defined “proven reserves” as “the volumes of oil and gas in a known deposit 

which geological and engineering information indicate will be recoverable in the future 

under prevailing economic conditions and technology.” Former AS 43.58.190(8) 

(1975). 

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that the superior court’s definition of “proven reserves” is inconsistent with the statute 

or any widely accepted industry definition of the term. 

3.	 The superior court did not err in reducing the assessed value of 

the pipeline to account for excess capacity. 

At trial, the superior court heard evidence that the Trans-Alaska Pipeline 

System’s actual throughput is lower than its maximum capacity. The Owners urged the 

superior court to make a downward scaling adjustment to the assessed value of the 

pipeline to account for this excess capacity as economic or functional obsolescence. 

Such an adjustment is appropriate to account for features that would be expensive to 

replace but that add little or no value to the property. The superior court provided the 

example of a feature that costs more than the value it adds to the property, such as a 

building with ceilings that are too high. In this case, while it would be expensive to build 

a new pipeline with the Trans-Alaska Pipeline System’s current carrying capacity, such 

“superadequacy” adds little value over a smaller, less expensive pipeline. The superior 

court found that the Trans-Alaska Pipeline System’s excess capacity was a form of 

economic, not functional, obsolescence.52 

52 The dissent argues that “at no point during the underlying litigation . . . did 

anyone argue for an economic obsolescence deduction based on excess capacity” and 

that “[t]he Owners argued to the superior court that excess capacity warranted a 

deduction for functional obsolescence, not economic obsolescence.” Dissent at 40. 

But the issue of economic obsolescence was squarely before the superior 

court in this case. The Owners sought deductions of all varieties, arguing in their points 

on appeal in the superior court that the Assessment Review Board “Failed to Apply All 

Forms of Obsolescence in its Cost Approach Considerations” and that “[i]t is a 

fundamentally wrong application of valuation principles not to apply all three forms of 

depreciation (physical, functional, and economic).” The Owners specifically argued that 

the Assessment Review Board “Failed to Properly Consider Economic Obsolescence 

with Regard to the [Trans-Alaska Pipeline System].” Contrary to the dissent’s assertion, 

(continued...) 

-27-	 6867
 
 

 

 

 

 

 

 

 

 

 

In explaining its choice not to deduct for functional obsolescence, the 

superior court found that the Trans-Alaska Pipeline System is legally required to 

maintain a physical capacity of 1.1 million barrels per day by the terms of the Amended 

53 54 Capacity Settlement Agreement and by AS 42.06.290(a). The superior court also 

found that “maintaining [the pipeline’s] ability to operate in a broad range of throughputs 

52(...continued) 

nothing in the points on appeal indicates that the Owners limited their argument for an 

economic obsolescence deduction to considerations of tariff regulations. The Owners 

argued broadly for deductions of every type. And they argued broadly for economic 

obsolescence deductions, stating simply, “Valuation standards require consideration of 

economic obsolescence.” 

When the Owners argued in their points on appeal to the superior court that 

there should be a deduction for “declining. . . production” in “the North Slope Oil Fields” 

leading to less “crude oil being shipped through [the Trans-Alaska Pipeline System] 

every year,” the Owners argued broadly that the Assessment Review Board “either 

entirely disregarded” that factor “and/or failed to give adequate consideration” to that 

factor “in determining the assessed value.” Similarly, the Owners argued in their points 

on appeal to the superior court that the Assessment Review Board “fail[ed] to properly 

calculate obsolescence” when it ignored the “excess capacity” resulting from 

“deplet[ing]” oil fields. In neither excess-capacity argument did the Owners restrict 

themselves to seeking a deduction for functional obsolescence; rather, the Owners argued 

as broadly as possible that the Assessment Review Board erred more generally by 

refusing to take account of this excess capacity as any form of obsolescence. 

Thus, we cannot agree with the dissent that the superior court made an 

economic obsolescence deduction based on excess capacity “without any prior notice to 

the parties.” Dissent at 40. 

53 The Amended Capacity Settlement Agreement “assure[s] the State of a 

certain level of excess capacity to optimize the development of its natural resources.” 

54 AS 42.06.290(a) provides that “[a] pipeline carrier may not abandon or 

permanently discontinue use of all or any portion of a pipeline . . . without the permission 

and approval of the commission [after] a finding by the commission that continued 

service is not required by public convenience and necessity.” 

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enhances the value of the pipeline,” because the pipeline “is the only viable means of 

transportation for an entire oil region that includes vast proven reserves.” The superior 

court found that the value of maintaining a flexible carrying capacity was demonstrated 

in part by the Owners’ $600 million strategic reconfiguration project to ensure that the 

Trans-Alaska Pipeline System has the ability “to efficiently operate at throughputs 

between 200,000 [barrels per day] and 1.14 million [barrels per day].” For these reasons, 

the superior court found a functional obsolescence deduction to be improper. 

Notwithstanding these findings and conclusions, the superior court went on 

to make a deduction for economic obsolescence based on the superadequacy of the 

pipeline. The superior court found that production in “most North Slope fields” is 

declining significantly, and that the pipeline’s average 2006 throughput was significantly 

lower than capacity. It also found that “[i]f a plant is not operating at capacity for 

economic reasons, the inutility is caused by economic obsolescence.”55 Therefore, the 

superior court found that “[w]hile [the Trans-Alaska Pipeline System] is required to have 

a design capacity of at least 1.1 million [barrels per day], the fact that capacity is not all 

being used to transport affiliated oil reduces the utility and value of [the pipeline] as of 

the lien date.” 

The Owners appeal these decisions, and the Municipalities cross-appeal on 

a number of grounds. 

a.	 There was sufficient evidence to support the superior 

court’s decision that excess capacity is a form of 

obsolescence. 

In their cross-appeals, the Municipalities argue that the fact that the TransAlaska Pipeline System operates below capacity does not justify a deduction for 

The superior court was quoting AM. SOC’Y OF APPRAISERS, supra note 39, 

at 98. 

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55 
 

 

 

 

 

 

economic obsolescence from the assessed value of the pipeline. Specifically, the 

Municipalities argue that the superior court’s finding that the Owners are legally 

obligated to maintain a capacity of 1.1 million barrels per day, and its subsequent refusal 

to deduct for functional obsolescence, is incompatible with its decision to use a scaling 

deduction for economic obsolescence. The Owners and the State maintain that the 

deduction was appropriate. For their part, the Owners appeal the superior court’s finding 

that the pipeline’s excess capacity is legally compelled, arguing that the parties to the 

Amended Capacity Settlement Agreement did not intend for it to have the effect of 

requiring them to maintain a physical capacity of 1.1 million barrels per day. 

Whether the Trans-Alaska Pipeline System’s excess capacity reduces its 

value is a question of fact, and we will not disturb the findings of the superior court 

unless we are left with a “firm and definite conviction” that a mistake has been made.56 

We conclude that there was sufficient evidence to support the superior court’s ruling that 

a deduction for economic obsolescence was appropriate based on the superadequacy of 

the pipeline. 

Both the State and the Owners agree that the Trans-Alaska Pipeline System 

operates below its projected maximum throughput capacity and that the resulting 

“superadequacy” is a type of functional obsolescence. At trial the State’s appraiser 

discussed scaling, which he originally performed as part of the functional obsolescence 

deduction. He concluded that “[a]t this point in time, there’s no real thought that they 

would ever recover back up to their design capacity, so we need to be able to adjust for 

that, because somebody that’s going to acquire the property isn’t going to spend money 

on capacity that it doesn’t need or isn’t required to have.” The superior court accepted 

City of Nome v. Catholic Bishop of N. Alaska, 707 P.2d 870, 876 (Alaska 

1985) (quoting Stanton v. Fuchs, 660 P.2d 1197, 1198 (Alaska 1983)). 

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56 
 

 

 

 

 

 

 

 

 

 

 

the substance of this view and found that “[w]hile [the Trans-Alaska Pipeline System] 

is required to have a design capacity of at least 1.1 million [barrels per day], the fact that 

capacity is not all being used to transport affiliated oil reduces the utility and value of 

[the pipeline] as of the lien date.” We conclude that there is no error in the superior 

court’s decision to give credence to the appraiser’s assessment, even if it did so under the 

label of economic instead of functional obsolescence. 

Both the Owners and the Municipalities urge us to reach the merits of 

whether the Owners are legally obligated, by statute or by contract, to maintain a 

capacity above average throughput. We decline to do so because whether a deduction 

for economic obsolescence is appropriate does not depend on any obligation the Owners 

may have to maintain a certain capacity. 

Any obligation the Owners may have to maintain excess capacity does not 

make an economic obsolescence deduction for superadequacy improper. If there were 

no requirement to maintain excess capacity then, according to the State’s own appraiser, 

a deduction for superadequacy would be appropriate because the too-large pipeline is no 

more valuable than a smaller, less expensive pipeline. The addition of a legal 

requirement to maintain a certain operating capacity does not change that analysis. Such 

an obligation cannot make the pipeline worth more; if anything, this constraint would 

make the pipeline less valuable than before. A deduction for superadequacy, therefore, 

is still appropriate. We conclude that it was not clear error for the superior court to find 

that excess capacity was a type of obsolescence even if the Owners had an obligation to 

maintain a certain capacity. 

We recognize that the superior court’s finding on this point — that a 

deduction for functional but not economic obsolescence was improper because of the 

Owners’ legal obligations to maintain a certain capacity — may reflect a certain degree 

of internal inconsistency. But it may also be that the superior court’s discussion of the 

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Owners’ legal obligations was merely an attempt to explain why excess capacity is a 

form of economic, not functional, obsolescence. And whether the superior court’s 

deduction was labeled as functional or economic obsolescence is of no consequence. 

After reviewing the superior court’s ultimate decision to deduct for excess capacity, we 

conclude that it was well supported by the evidence and legally sound. 

b. The matter was fully litigated below. 

The Boroughs57 argue that it was error to make an economic obsolescence 

adjustment for excess capacity because the parties did not directly litigate the issue 

below. The Boroughs argue that the superior court’s decision was improper and based 

on “little to no guidance,” first because the superior court did not apply the appropriate 

standard of review to the Assessment Review Board’s decision finding no such 

depreciation, and second because the Owners had the burden to show economic 

obsolescence and they did not make such a showing. 

The Boroughs’ first assertion is contrary to statute. The Boroughs argue 

that “the trial court was required to find that the Board’s decision finding no additional 

economic obsolescence was unequal, excessive, or improper under AS 43.56.130(f).” 

But that provision controls the Assessment Review Board’s hearings on appeal from the 

Department of Revenue, not the superior court’s de novo review of the Assessment 

The City of Valdez does not join in this argument, stating that it “does not 

object to the superior court, in a de novo review with new evidence, making its own 

conclusions on appraisal theory so long as appropriate deference is afforded the Board’s 

expertise.” 

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57 
 

 

 

 

 

 

 

Review Board’s findings. 58 The same statute provides that the superior court on appeal 

conducts a trial de novo of the Assessment Review Board’s decision.59 

The Boroughs’ second claim also fails. The arguments for and against 

applying a scaling deduction for excess capacity were raised and fully litigated at trial. 

In their statement of points on appeal to the superior court, the Owners expressly argued 

that the Assessment Review Board had erred by failing to adequately account for the fact 

that production was declining as oil fields were depleted: 

The super adequacy of the property increases as the 

throughput of unrefined oil continues to decline over time (as 

the oil fields feeding the line continue to deplete) and the 

capacity of the TAPS is significantly underutilized. This 

excess capacity has associated significant costs of operation 

which can not be ameliorated or reduced and thereby 

significantly and negatively impact the property. The 

[Assessment Review Board]’s failure to properly calculate 

obsolescence constitutes the application of a fundamentally 

wrong principle of appraisal and acts to create an excessive 

valuation. 

And according to treatises submitted into evidence, the scaling procedure is similar for 

both types of obsolescence calculation. Therefore, the superior court’s decision to label 

excess capacity as economic rather than functional obsolescence is not reversible error. 

c.	 The superior court did not count economic obsolescence 

from excess capacity twice. 

Finally, the Boroughs argue that the superior court counted depreciation 

due to excess capacity twice by using both the economic age-life method and applying 

an additional scaling deduction for excess capacity. They cite various parties’ witnesses 

and treatises acknowledging that the economic age-life method is a measure of total 

58 AS 43.56.130(a) (referencing AS 43.56.120(a)). 

59 AS 43.56.130(i). 

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depreciation. Therefore, they argue, a second adjustment for the excess capacity of the 

pipeline double-counts economic obsolescence. 

The superior court characterized its economic life calculation as a measure 

of how far into the future the Trans-Alaska Pipeline System could continue operating at 

a rate of at least 200,000 barrels per day, its minimum capacity. The superior court 

acknowledged that the related economic age-life measure captures more than just 

physical depreciation. But at trial, the State’s appraiser testified — and the superior court 

recognized — that while economic age-life captures more than just physical depreciation, 

it also allows for a “separate look” at other types of obsolescence. The Appraisal of Real 

Estate similarly indicates that other deductions for obsolescence may be appropriate 

when using the economic age-life method.60 It was therefore not error for the superior 

court to examine other types of obsolescence that may not have been accounted for in 

the economic age-life calculation. 

The question, then, is whether the superior court’s calculation of economic 

life accounted for obsolescence caused by declining throughput such that an independent 

deduction for excess capacity would be double counting. The Owners argue that the 

end-of-life estimate does not account for such obsolescence because, while it takes into 

account the projected level of reserves to be transported through the Trans-Alaska 

Pipeline System, it does not take into account the fact that the pipeline has a greater 

physical capacity than that projected level of reserves would demand. 

Both the Department of Revenue and the superior court took into account 

projections for declining throughput in determining economic life. The external 

production forces that mean less oil is being delivered to the pipeline were factored into 

the economic age-life equation. But the economic age-life calculation did not take into 

60 APPRAISAL INST., supra note 16, at 421-22. 

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account the fact that the design capacity of the pipeline — and therefore the cost of a 

hypothetical replacement — is considerably greater than necessary to handle projected 

throughput. As noted in Valuing Machinery and Equipment, when operating level is 

significantly less than design capacity, “the asset is less valuable than it would otherwise 

be,” and that drop in value comes not just from the decline in operating level, but also 

from the superadequacy that exists.61 We therefore find that the superior court’s 

deduction for economic obsolescence due to excess capacity was not improper. 

D.	 Interest On The Owners’ Supplemental Taxes Runs From The 

Original 2006 Due Date. 

After assessing the value of the Trans-Alaska Pipeline System, the superior 

court directed the Department of Revenue to issue a supplemental certified assessment 

roll “reflecting the 2006 value of [the pipeline] within 30 days” of the issue of final 

judgment. That supplemental roll was to be the basis for the Municipalities to assess tax 

bills and for the State to assess tax credits. The superior court ruled that interest due on 

the additional taxes owed would run from “the due date in the year of the original 

assessment rather than from the date of reassessment.”62 The superior court found that 

date to be June 30, 2006.63 The interest rate was set at the statutory rate of eight percent 

per year.64 

The Owners appeal, arguing that the superior court’s decision improperly 

imposed interest on taxes before they were assessed and payment was due. According 

61	 AM. SOC’Y OF APPRAISERS, supra note 39, at 97. 

62 The superior court was quoting Cool Homes, Inc. v. Fairbanks North Star 

Borough, 860 P.2d 1248, 1258 (Alaska 1993) (internal quotation marks omitted). 

63 15 AAC 56.065 provides that taxes levied under AS 43.56 are due by 

June 30. 

64 AS 43.56.160. 

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to the Owners, interest runs only on unpaid or delinquent taxes; because they paid all the 

taxes they owed in 2006 and no obligation was owing until the supplemental assessment 

was issued in 2010, the Owners argue that taxes could not be delinquent until the 

assessment date in 2010. 

We addressed a similar issue in Cool Homes, Inc. v. Fairbanks North Star 

Borough, where we held that “interest on a tax assessment runs from the due date in the 

year of the original assessment rather than from the date of reassessment.”65 In that case, 

the property lessor did not pay its property taxes for three years.66 The lessor sought 

review of the assessment, and the superior court upheld the Borough’s right to levy the 

tax in question but remanded for recalculation of the assessment amount.67 The lessor 

argued that interest and penalties “could not begin to accrue” until a valid assessment 

was made after remand. 68 We held that determining the interest and penalties due were 

separate questions with separate standards.69 While penalties are considered punitive, 

“[t]he assessment of interest for late payment has no punitive element.”70 Rather, interest 

65 860 P.2d at 1258. 

66 Id. at 1253. 

67 Id. 

68 Id. at 1255. 

69 Id. at 1258. 

70 Id. at 1257 n.12 (quoting N. Slope Borough v. Sohio Petroleum Corp., 585 

P.2d 534, 546 (Alaska 1978), superseded by statute, Ch. 23, §§ 2-3, SLA 1991, as 

recognized in State, Commercial Fisheries Entry Comm’n v. Carlson, 270 P.3d 755 

(Alaska 2012)). We recently held in Carlson that interest was punitive where the 

legislature raised the statutory interest rate from 8% to 11% compounded quarterly. 270 

P.3d at 761 n.38. But the text quoted from Sohio Petroleum still applies in this context 

where the interest rate is 8% and the legislature has taken no steps to impose a punitive 

(continued...) 

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“is intended to compensate the party to whom the sum is owed for the use of the money 

during the period of nonpayment [and does not] depend[] on which party is at fault for 

the delay.”71 

The Owners contend that Cool Homes is distinguishable because it dealt 

with past-due and not retrospectively assessed taxes. For support, they cite our holding 

in Alascom v. North Slope Borough that “[u]ntil the borough has exercised its right to 

demand real property taxes in the manner provided by statute there can be no valid tax 

and hence no delinquency within the meaning of AS 29.53.180, which authorizes 

penalties and interest on delinquent taxes.” 72 In that case the municipality failed to list 

or assess the property for several years.73 

But our opinion in Cool Homes expressly limited Alascom, stating that 

Alascom’s rationale “is not applicable where the municipality makes an assessment of 

the real property in question, but makes a mistake as to the amount of the assessment.”74 

And we explicitly held that “Alascom does not stand for the proposition that interest on 

taxes imposed on property which is timely assessed should not relate back to the original 

due date.”75 Here, the superior court’s judgment was not a new assessment but instead 

a reassessment of the original, mistaken assessed value of the pipeline. We agree with 

70(...continued) 

element. 

71 Cool Homes, 860 P.2d at 1257. 

72 Alascom, Inc. v. N. Slope Borough, Bd. of Equalization, 659 P.2d 1175, 

1180 (Alaska 1983). 

73 Id. at 1177. 

74 860 P.2d at 1257. 

75 Id. at 1258. 

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the superior court that interest on the additional taxes owed runs from the due date in the 

year of the original assessment.76 

V. CONCLUSION 

We find no error in the superior court’s standard or method of valuation of 

the Trans-Alaska Pipeline System, nor in the specific deductions it made to account for 

depreciation. And we conclude that the superior court did not err by finding that interest 

on the supplemental taxes owed runs from June 30, 2006. We therefore AFFIRM the 

superior court’s decision. 

76 While we recognize that interest is meant to compensate for lost use of 

money without regard to fault, we also understand that the 8% annual return may not 

reflect the reality of today’s interest rates and that the Municipalities would have 

struggled to make anything close to an 8% annual return on this money had they received 

it in 2006. For evidence of this we need look no further than the related Rule 67 appeal 

in this matter, in which neither party wished to hold the disputed money while this appeal 

was pending for fear of being liable for compensatory interest if they did not prevail. But 

the 8% interest rate is mandated by statute, and any reform should be sought from the 

legislature, not the courts. 

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WINFREE, Justice, with whom STOWERS, Justice, joins, dissenting in part. 

I. OVERVIEW 

Today the court implicitly decides a long-standing dispute between the 

State of Alaska, Department of Natural Resources, and the companies controlling North 

Slope oil production and distribution through their related companies’ Trans-Alaska 

Pipeline System (TAPS) and oil tankers. This dispute is: Why has North Slope oil 

production and TAPS input declined so that TAPS has excess capacity? Is it because the 

oil companies are warehousing proven reserves for their own internal business reasons, 

notwithstanding that the reserves are technically and economically available for 

1 production, or is it because external factors limit current production of proven reserves?

The dispute arose in a matter before this court in 2012, when we considered certain 

superior court rulings in a legal battle over development of Point Thompson oil and gas 

reserves, but that battle was settled.2 

The dispute again arises, this time indirectly from a legal battle over the 

2006 TAPS property tax valuation and the concept of depreciation for obsolescence, a 

battle in which the Department of Revenue, and not the Department of Natural 

Resources, is a participant. In the superior court proceedings, the parties contested 

whether there should be a depreciation deduction for functional obsolescence due to 

TAPS’s excess capacity — a functional obsolescence deduction is appropriate when an 

asset has become less useful due to its flawed or outdated physical characteristics. The 

1 The superior court found that there are adequate proven reserves to allow 

TAPS to operate at least until 2047 and that North Slope reserves contain billions of 

barrels of “technically and economically recoverable oil.” We affirm this finding, 

Op. 24-27, noting that the superior court estimated the reserves to be worth $350 billion, 

Op. 14. 

2 State, Dep’t of Natural Res. v. ExxonMobil Corp., No. S-13730 (Alaska, 

filed May 10, 2011). 

-39- 6867
 
 

 

 

 

 

 

 

superior court rejected depreciation for functional obsolescence. However, after trial and 

without any prior notice to the parties, the superior court determined that TAPS’s excess 

capacity warranted an economic obsolescence deduction — an economic obsolescence 

deduction is appropriate when an asset has become less useful due to external causal 

factors affecting the entire business.3 But at no point during the underlying litigation, 

either before the State Assessment Review Board (SARB) or the superior court, did 

anyone argue for an economic obsolescence deduction based on excess capacity or 

present evidence demonstrating external causes of production decline and ensuing 

throughput decline.4 

3 The superior court stated that “the fact that external economic factors, and 

specifically the decreased availability of North Slope oil, may preclude the full use of 

TAPS’ capacity, does form a basis for a scaling adjustment based on economic 

obsolescence.” 

4 The court incorrectly states that the Owners urged the superior court to find 

that TAPS’s excess capacity warranted a deduction for “economic or functional 

obsolescence.” Op. 27. The Owners argued to the superior court that excess capacity 

warranted a deduction for functional obsolescence, not economic obsolescence. The 

Owners’ argument for an economic obsolescence deduction was limited to the assertion 

that tariff regulations were a form of economic obsolescence, which both the superior 

court and this court correctly rejected. Op. 19-24. 

The Owners do not even contend on appeal that they argued in the superior 

court for an economic obsolescence deduction for low throughput — in their brief to us 

they describe the Department of Revenue’s original characterization of the obsolescence 

factor as functional, and then simply state that the superior court addressed the 

obsolescence factor “from a different perspective.” At oral argument before us the 

Owners’ attorney expressly described what happened as follows: 

Everybody analyzed it in the past as functional, the State, the 

SARB, taxpayer, were treating it as functional. But it was the 

same facts, it was the same condition of excess capacity, that 

was being addressed. And so all Judge Gleason did was 

(continued...) 

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By affirming the superior court’s determination that an economic 

obsolescence deduction is warranted for the 2006 TAPS valuation, the court necessarily 

holds that TAPS’s throughput decline is caused by external factors outside the oil 

companies’ control. That issue was not litigated in the superior court, neither the 

superior court nor the court today explains exactly what factors external to the oil 

4

(...continued)
 

change the way she named the adjustment she made for
 

excess capacity of TAPS. Instead of calling it functional, she
 

called it external. But she was analyzing those same facts
 

and just calling it another name.
 

The Department of Revenue is even more direct in a heading in its brief: 

“The superior court properly determined that lower available throughput in TAPS is a 

basis for economic obsolescence despite that point not being specifically advocated at 

trial.” 

In response to my dissent the court asserts that because the Owners 

(1) stated in their notice of appeal to the superior court that SARB failed to apply all 

forms of depreciation, and (2) argued economic obsolescence to the superior court, the 

issue was squarely before the superior court. Op. 27 n.52. The broad sweep of the 

notice of appeal is irrelevant — what is relevant is the precise nature of the economic 

obsolescence argument the Owners actually presented to the superior court. The 

economic obsolescence argument presented to the superior court was based on tariff 

regulations, not low throughput. If the Owners presented evidence to support a claim of 

economic obsolescence based on low throughput, then the court should be able to 

identify and quote at least one trial expert witness who testified that low throughput 

should result in a depreciation deduction for economic obsolescence. The court did not, 

because it cannot. If the Owners presented and proved their entitlement to an economic 

obsolescence depreciation deduction based on low throughput, the court should be able 

to identify and quote from at least one trial expert witness who testified about factors 

external to the integrated enterprise that have caused the declining production and 

delivery of oil to TAPS. The court did not, because it cannot. Both the Department of 

Revenue and the Owners conceded that the question of an economic obsolescence 

depreciation deduction for low throughput was not specifically raised at trial — the court 

is in error on this point. 

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companies are causing TAPS’s throughput decline, and the determination likely will 

have an impact far beyond TAPS’s 2006 property tax valuation. I would vacate the 

superior court’s determination that an economic obsolescence deduction is warranted for 

the 2006 tax year and remand for further trial proceedings on the question; I therefore 

dissent on this aspect of the court’s decision. 

II.	 DISCUSSION 

A.	 A Separate Functional Obsolescence Deduction Was Correctly 

Rejected By The Superior Court. 

The superior court found that a separate functional obsolescence 

depreciation deduction5

 is improper because the Owners have obligations to maintain 

TAPS’s physical capacity at 1.1 million barrels per day. This capacity requirement 

makes a functional obsolescence deduction inappropriate because TAPS’s excess 

capacity provides value by meeting minimum capacity requirements; TAPS’s best and 

most cost-effective design would have to incorporate this required capacity — it 

therefore is not physically flawed or outdated. I agree with the court that this aspect of 

the superior court’s decision is correct.6 

5 Functional obsolescence is defined as “a flaw in the structure, materials, or 

design that diminishes the function, utility, and value of the improvement.” APPRAISAL 

INST., THE APPRAISAL OF REAL ESTATE 331 (13th ed. 2008). 

6 In my view this same reasoning should preclude a depreciation deduction 

for economic obsolescence, as well. The court concedes that there is “a certain degree 

of internal inconsistency” in the superior court’s ruling, but brushes it aside without any 

explanation. Op. 31. As part of the remand I would order for further trial proceedings, 

the superior court would be directed to explain this inconsistency. 

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B.	 A Separate Economic Obsolescence Deduction May Be Appropriate 

But Was Not Adequately Litigated In The Superior Court. 

1.	 Depreciation for economic obsolescence relies on a different 

threshold determination than for functional obsolescence. 

Because depreciation for functional obsolescence was correctly rejected, 

a separate obsolescence depreciation deduction could be warranted only under an 

economic obsolescence theory. Economic obsolescence is “the loss in value or 

usefulness of a property caused by factors external to the asset,” including increased 

costs, reduced demand, increased competition, regulation, or similar factors.7 

“[E]conomic obsolescence is usually a function of outside influences that affect an entire 

8 business . . . .” Therefore, a separate economic obsolescence deduction for TAPS would

be appropriate only if loss in value were caused by external factors beyond the control 

of the integrated enterprise of which TAPS is a part. 

It is here that the court’s analysis falters — the court, like the superior court, 

relies on the declining oil supply to TAPS as an external factor supporting a depreciation 

deduction for economic obsolescence. But the court is affirming the superior court’s 

determination that to properly value TAPS, it must be considered as an integrated part 

of the entire production-transportation business.9 In short, the Owners’ integrated 

7 AM. SOC’Y OF APPRAISERS, VALUING MACHINERY AND EQUIPMENT 96-97 

(2d ed. 2005); see also Horan v. Kenai Peninsula Borough Bd. of Equalization, 247 P.3d 

990, 996 n.39 (Alaska 2011) (quoting BLACK’S LAW DICTIONARY 1107 (8th ed. 2004)). 

8	 AM. SOC’Y OF APPRAISERS, supra note 7, at 97. 

9 The superior court found that TAPS is part of an integrated economic 

enterprise in which the TAPS owners are closely affiliated with companies producing 

Alaska North Slope oil, and that “TAPS was built . . . because of the overwhelming 

economic value arising from its highly integrated use for transporting [Alaska North 

Slope] production from affiliated producers.” As the court notes, these findings are 

(continued...) 

-43-	 6867
 
 

 

 

 

 

enterprise controls TAPS’s supply — therefore declining supply warrants an economic 

obsolescence depreciation deduction only if it is caused by factors external to the 

Owners’ integrated enterprise. The court, like the superior court, identifies no relevant 

external factors causing declining oil supply to TAPS. 

If low throughput is the result of factors external to the integrated 

enterprise, then it may be appropriate to apply an economic obsolescence deduction. But 

if low throughput is the result of factors within the integrated enterprise’s control — for 

example, if affiliated production companies failed to utilize productive fields or delivered 

less oil to TAPS for the integrated enterprise’s internal purposes — then an economic 

obsolescence deduction may be inappropriate or at least limited. As alluded to earlier, 

in State, Department of Natural Resources v. ExxonMobil Corp. the Department of 

Natural Resources argued that oil companies, in derogation of lease obligations, were 

deliberately stalling production of the Point Thompson oil and gas reserves to advance 

their own internal interests.10 More recently, Alaskans have been inundated with 

political commentary regarding a referendum to overturn the legislature’s latest 

restructuring of Alaska’s oil-tax framework,11 including spirited debate whether oil 

production has been limited by excessive taxation or oil companies have delayed 

production to leverage legislative action lowering oil taxes. 

Let me be clear: I raise these issues simply to make my point about the 

necessary threshold determination for an economic obsolescence deduction. I have no 

9

(...continued) 

unchallenged. 

10 Brief for Appellant at 2-3, State, Dep’t of Natural Res. v. ExxonMobil 

Corp., No. S-13730 (Alaska, filed May 10, 2011). 

11 See Ch. 10, § 13, SLA 2013; Veto Referendum for Senate Bill (S.B.) 21 

(2014). 

-44- 6867
 
 

 

 

 

 

 

view on the actual cause of TAPS’s low throughput and would look to the development 

of a full evidentiary record, rather than public commentary or the State’s briefing in the 

Point Thompson matter, as the factual basis for a reasoned decision. And I also note that 

delaying oil production to serve the integrated enterprise’s internal business purposes 

would not necessarily be an inappropriate business decision; but such a decision might 

be incompatible with a depreciation deduction for economic obsolescence due to TAPS’s 

declining throughput. 

This threshold issue is unique to economic obsolescence and highlights the 

important distinction between economic and functional obsolescence, which the court 

clearly misunderstands. Even if both forms of obsolescence might be used to calculate 

a loss in TAPS’s value due to excess capacity, they focus on different reasons for the 

excess capacity and therefore require different threshold determinations.12 The court is 

incorrect in stating, contrary to indisputable appraisal theory,13 that “whether the superior 

court’s deduction was labeled as functional or economic obsolescence is of no 

consequence.”14 Because the Owners did not argue for low-throughput economic 

obsolescence, the threshold issue — whether factors external to the integrated enterprise 

caused the low throughput and resulting excess capacity — was not litigated at trial. 

12 See AM. SOC’Y OF APPRAISERS, supra note 7, at 98 (“If the plant is not 

operating at capacity for economic reasons, the inutility is caused by economic 

obsolescence. If there is an imbalance in the productive capacity (e.g., a production 

bottleneck), the inutility is caused by functional obsolescence.”). 

13 See supra notes 5, 7, 8, 12, and accompanying text. 

14 Op. 32. This statement also is inconsistent with our affirmance of the 

superior court’s determination that a functional obsolescence deduction was not 

warranted. 

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2.	 As a matter of procedural fairness, the parties should be allowed 

to litigate whether a separate economic obsolescence deduction 

is appropriate. 

The North Slope Borough and the Fairbanks North Star Borough (the 

Boroughs) rightfully contend that the superior court erred by allowing the economic 

obsolescence deduction for low throughput when “[n]o one argued or presented evidence 

. . . that TAPS should be scaled as a result of a lack of supply.” The court nonetheless 

rejects this contention, reasoning that because the claim for “a scaling deduction for 

excess capacity” was litigated and because the scaling calculation is similar for both 

types of obsolescence, the parties adequately litigated the substance of a low-throughputbased economic obsolescence deduction.15 

Although the scaling calculation may be used to measure either functional 

or economic obsolescence,16 as discussed above the two forms of obsolescence stem 

from different sources and litigating one did not adequately prepare the superior court 

to rule on the other. Although some arguments and testimony touched on the issue of 

oil field decline, low throughput was raised only tangentially to functional obsolescence 

arguments.17 

15	 Op. 33. 

16 See AM. SOC’Y OF APPRAISERS, supra note 7, at 98 (explaining that cost-tocapacity calculation may be used to calculate impact of inutility from either functional 

or economic obsolescence sources). 

17 For example, the Owners argued for an underutilization deduction due to 

declining oil fields but characterized this as functional obsolescence and focused on 

resulting increased operating costs. This begged the question of the low throughput’s 

cause. 

-46-	 6867
 
 

 

 

 

 

 

 

We have held that we may affirm “on any basis supported by the record, 

even if that basis was not considered by the court below or advanced by any party.”18 

But we also have held that “[b]ecause basic fairness requires an opportunity to present 

relevant evidence, applying an unanticipated body of law could be an abuse of discretion 

if doing so were to make different outcome-determinative facts relevant.”19 Here the 

Boroughs argue that to receive a separate economic obsolescence deduction, the Owners 

had (but failed to meet) the burden of raising the issue and proving the cause and 

quantity of economic obsolescence due to low throughput.20 The Boroughs also argue 

that if the Owners had advanced a claim for economic obsolescence based on low 

throughput, the Boroughs would have had an opportunity to present evidence and 

arguments rebutting it. I agree — because the threshold factor for an economic 

obsolescence deduction was not directly litigated, a remand on this issue is necessary as 

a matter of procedural fairness. 

18 Powercorp Alaska, LLC v. Alaska Energy Auth., 290 P.3d 1173, 1183 n.25 

(Alaska 2012) (quoting Smith v. Stafford, 189 P.3d 1065, 1070 (Alaska 2008)). 

19 Frost v. Spencer, 218 P.3d 678, 682 (Alaska 2009); see also Powercorp, 

290 P.3d. at 1193 (Winfree, J., dissenting) (disagreeing with ruling on issue not litigated 

before the superior court because parties had not submitted evidence on issue); Crowley 

v. State, Dep’t of Health & Soc. Servs., 253 P.3d 1226, 1232 n.31 (Alaska 2011) 

(declining to consider arguments not raised before trial court if issue is dependent on new 

or controverted facts). 

20 See AS 43.56.130(e); N. Star Alaska Hous. Corp. v. Fairbanks N. Star 

Borough Bd. of Equalization, 844 P.2d 1109, 1110-12 (Alaska 1993). 

-47- 6867
 
 

 

 

C.	 There May Have Been Double Counting Of Economic Obsolescence, 

But It Also Was Not Adequately Litigated Below. 

Economic age-life is a method of measuring depreciation based on the ratio 

of a property’s effective age to its economic life expectancy.21 The superior court 

concluded that TAPS’s physical life “is virtually unlimited if properly maintained,” but 

TAPS’s proven economic life will not extend past 2047 when decreased production due 

to declining reserves will make TAPS no longer technically and economically viable. 

The superior court recognized that economic age-life calculations measure 

all forms of depreciation, including functional and economic obsolescence,22 and 

determined that SARB’s and the Department of Revenue’s characterizations of economic 

age-life depreciation as capturing only physical depreciation was improper. But the 

superior court then categorized its own economic age-life analysis as measuring only 

physical depreciation and made its separate deduction for economic obsolescence due 

to declining throughput. Assuming that the superior court’s application of a separate 

economic obsolescence deduction was correct, it may have double counted economic 

depreciation. 

The court, citing State Assessor Randall Hoffbeck’s testimony and The 

Appraisal of Real Estate, concludes that the superior court did not double count 

economic obsolescence because “while economic age-life captures more than just 

physical depreciation” the court is allowed to take a second look at other types of 

21	 APPRAISAL INST., supra note 5, at 420-22. 

22 See id. at 420 (describing the economic age-life method as measuring “total 

depreciation”); see also AM. SOC’Y OF APPRAISERS, supra note 7, at 39-40 (recognizing 

age-to-life ratios may be used to estimate total depreciation). 

-48-	 6867 
 

 

 

 

 

 

obsolescence.23 The court acknowledges that “the superior court took into account 

projections for declining throughput in determining economic life” but states that “the 

economic age-life calculation did not take into account the fact that the design capacity 

of the pipeline . . . is considerably greater than necessary to handle projected 

throughput.”24 

This is an incorrect analysis. The Appraisal of Real Estate provides for 

additional economic obsolescence depreciation only when it is not included in the 

economic age-life calculation.25 But no witness, including Hoffbeck, testified that the 

superior court’s age-life calculation excluded economic obsolescence. In fact, economic 

obsolescence was not excluded in the superior court’s age-life calculation — because the 

superior court’s economic age-life calculation was based entirely on declining 

throughput due to dwindling reserves, it already took economic obsolescence into 

account. And, as discussed above, TAPS’s excess capacity itself does not cause a loss 

in value — any economic obsolescence must be due to external factors causing low 

throughput. Therefore the separate economic obsolescence deduction due to declining 

production, over and above the economic age-life depreciation deduction, may have been 

an erroneous double counting. 

23 Op. 34. 

24 Op. 34-35. 

25 APPRAISAL INST., supra note 5, at 423 (“[I]f external obsolescence is 

affecting the subject property and there are no sales in the subject market similarly 

affected, the appraiser can estimate total depreciation and economic life without the 

external obsolescence using the . . . economic age-life method and then estimate external 

obsolescence using techniques from the breakdown method.”). 

-49- 6867
 
 

 

 

 

This issue was not fully presented or argued because the superior court 

applied its separate economic obsolescence deduction sua sponte after trial and without 

notice to the parties. This issue should be remanded to the superior court for further trial 

proceedings to determine the appropriateness of deducting for economic obsolescence 

based on decreased throughput after already accounting for decreased throughput when 

determining TAPS’s economic life. 

III. CONCLUSION 

In affirming the superior court’s determination that the Owners are entitled 

to a depreciation deduction for economic obsolescence due to TAPS’s low throughput, 

the court leaves two critical questions unanswered. If the Owners are legally and 

contractually required to maintain the current capacity, how can there be any form of 

obsolescence depreciation? And if there could be economic obsolescence based on 

TAPS’s low throughput, what factors external to the integrated enterprise are causing the 

declining production and delivery to the pipeline? 

I would vacate the superior court’s determination that the Owners are 

entitled to an economic obsolescence deduction based on TAPS’s excess capacity and 

remand for a new trial on that issue. Therefore, I respectfully dissent. 

-50- 6867