Opinion ID: 2509156
Heading Depth: 1
Heading Rank: 19

Heading: The Preliminary Issue Letter and Williams' Response

Text: 32. On April 17, 2002, the DOA sent its Preliminary Issue Letter to Williams. [Exhibit 101]. The purpose of the letter was to identify preliminary findings, and to give the audited party a chance to address the findings. [Transcript Vol. IV, p. 847]. The letter identified only two issues. The first issue was incorrect calculation of new gas well tax incentives. [Exhibit 101]. Williams accepted this audit finding. [Transcript Vol. II, p. 392]. 33. The second issue was the transportation deduction claimed by Williams. The auditors stated that: After careful review of the transportation/gathering information provided by Barrett Resources Corporation during the audit, we have determined that the allowable transportation charge is $0.14/MCF. Barrett Resources Corporation may wish to furnish additional information regarding the breakdown of all charges incurred to move the gas from the wellhead to the ultimate sales point. [Exhibit 101]. The letter stated that a response was due by May 17, 2002. [Exhibit 101]. 34. When Williams received the Preliminary Issue Letter, Storts took over as the audit contact for Williams. [Transcript Vol. II, p. 400]. 35. By the time the DOA sent the Preliminary Issue Letter, the auditors had concluded that the correct point of valuation was in the outlet of Western's glycol dehydrator. [Transcript Vol. IV, p. 850]. The auditors were prepared to allow a deduction for the portion of the Western charges associated with Western's pipeline connection from the glycol dehydrator outlet to the inlet of the MIGC or Fort Union pipeline. The auditors had not made such an allowance because they had no information about those costs. [Transcript Vol. IV, p. 852]. 36. Williams responded to the DOA by letter of May 16, 2003. Margo Sabec, outside counsel for Williams, wrote the response. [Exhibit 503]. The letter is significant because it states additional details of fact; it ties those details to a legal position; and it conflicts with facts and positions later taken by Williams. The letter proceeds on the premise that the Department has disallowed fees related to the services provided by Western. [Exhibit 503]. 37. Sabec asserted the following facts, among others, and in doing so supplemented the positions previously taken by Barrett employees: a. Gas from individual wells was gathered from the wellhead to a central delivery point (CDP) in Barrett's separate and individual pipelines....The CDP is sometimes referred to as the pod house. b. At the CDP, the commingled gas flowed through a separator that allowed the gas to separate from the water it was produced with. c. The commingled gas was transported in Barrett's pipelines downstream from the CDP to a custody meter, where custody and possession of the gas was transferred to a third party transporter (Western). d. ....Western charged Barrett a fee of $0.32/MCF, including fuel, to transport and process its gas on Western's pipeline system. e. ....The inlet of the initial screw compressor was located immediately downstream of the custody transfer meter.... f. ....Fort Union and MIGC charged Barrett a fee or rate of $0.14/MCF to transport and process its gas from the inlet of their pipeline systems downstream to the interstate transportation hub. g. ....Barrett did not sell its natural gas at or prior to the point of valuation by bona fide arm's length sale during production year 1999. [Exhibit 503]. In reference to paragraph d above, we find that $0.32/MCF referred to the $0.294/MCF fee for services provided only by Western, to which Sabec added a maximum fuel charge. In reference to paragraph f above, we find that $0.14/MCF referred imperfectly to the fact that Western provided Barrett a rebate of $0.21/MMBTU of gas to provide a pipeline rate to Barrett that was essentially the same no matter which one of the two pipelines was used to move Barrett's gas to Glenrock. [Transcript Vol. III, p. 434]. Referring to paragraph g above, we note that Sabec said nothing to repudiate the point of sale previously represented by Barrett's employees. 38. Sabec also asserted positions that mixed facts with statutory characterizations: a. On its pipeline system, Western performed processing functions to Barrett's and other third party gas at screw compressors (boost the pressure of the gas to approximately 80 psi), reciprocating compressors (boost the pressure to approximately 1,400 psi), and dehydrators.... b. ....The inlets to the Fort Union or MIGC pipeline systems are located downstream of Western's processing facility (where compression and dehydration are performed). c. ....Barrett reported that its production process was completed at the inlet to the initial transportation related compressor (the screw compressor).... d. ....Barrett's gas had been extracted and severed from the ground and gathered from multiple wells via Barrett's separate pipelines to a central point of accumulation (CDP), where separation and water removal occurred. There was no dehydration, as it is defined in the statutes, performed by Barrett in the production process. ...(emphasis supplied) [Exhibit 503]. 39. Williams' key point was that the Barrett gas was dehydrated within a processing facility that belonged to Western. Like Storts individually, Williams concluded that Barrett had correctly selected the inlet of the initial transportation related compressor as the point of valuation. Williams cast its lot with the definition of point of valuation found in the second sentence of Wyo. Stat. Ann. ง 39-14-203(b)(iv): Where no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first. Williams accordingly concluded that it was entitled to deduct all of the fees charged by Western. [Exhibit 503]. 40. The auditors were not persuaded by this statement of position. For a variety of reasons, Simmons disagreed that the Barrett gas was processed. [Transcript Vol. IV, p. 859]. Barrett had not reported a processing deduction on its state tax forms. [Transcript Vol. IV, p. 860]. In a federal royalty audit, Barrett had reported the gas as unprocessed, and claimed no processing allowance. [Transcript Vol. IV, p. 860]. The engagement letter had requested documentation of processing costs, but none was provided. [Transcript Vol. IV, p. 860]. Barrett never provided any processing agreements or plant statements, nor were the auditors advised of a plant name or facility at which the gas was processed. [Transcript Vol. IV, p. 860]. Simmons did not receive any construction and operating agreements. She did not receive settlement statements to indicate the segregation and sale of liquid natural gas products, or byproducts such as sulfur. [Transcript Vol. IV, pp. 861-862]. Simmons had previous experience with gas processing facilities such as Whitney Canyon. See Union Pacific Resources Company et al, Docket No. 2000-147, 2003 WL 21774603 (Wyo. St. Bd. Eq.). She had an understanding of typical gas processing facilities, and she saw no evidence of such facilities in this case. [Transcript Vol. IV, p. 861]. 41. Williams sought and received an audit conference. [Transcript Vol. II, p. 403]. The conference was held on June 13, 2002. [Transcript Vol. IV, p. 853]. At this conference, the auditors stated their position that the point of valuation was at the outlet of the initial dehydrator [Transcript Vol. IV, pp. 851-852]; we find the testimony of Simmons more credible than contrary testimony of Storts that the auditors did not do so. [Transcript Vol. II, p. 405]. Williams discussed its view about the existence of a processing facility, and about what processing functions occurred at Western's facilities. [Transcript Vol. II, p. 404]. During the conference the auditors asked for a breakdown of the $0.294 Western charges, in order to allow a portion of the charges. [Transcript Vol. IV, p. 852]. 42. On June 25, 2002, Simmons spoke again with Storts about a breakdown of the Western fee. [Exhibit 510]. Storts told her that Williams did not have a way to break the fee down. [Exhibit 510]. On July 9, 2002, Storts reiterated this position in an e-mail to Simmons, stating that, Since this is a 3rd party, arms-length contract, Williams has no information regarding any breakdown of the fixed charge, as it relates to separate functions performed or segments of the Western Gas Resources system. [Exhibit 513]. However, Storts concedes that Williams did nothing to see if a breakdown was available from Western. [Transcript Vol. III, p. 508]. Williams management chose not to contact Western. [Transcript Vol. III, p. 509]. We find that Williams has offered no evidence in this proceeding that would enable the Department of Revenue or Department of Audit to disaggregate the Western fee.