Opinion ID: 2518337
Heading Depth: 1
Heading Rank: 1

Heading: The BOTA Decision

Text: The BOTA majority ultimately found that the cumulative appraised value for CIG property for 1997 to 2003 was approximately $11 million higher than it would have been if CIG were an intracounty gas gathering system and its property classified as commercial or industrial rather than public utility. The corresponding higher tax impact was approximately $900,000. The BOTA majority stated the following among its paragraphs of ANALYSIS AND FACTUAL CONCLUSIONS: [18] . . . . . . . . (b) The Taxpayer introduced evidence demonstrating that as an interstate gas gathering company, [it is] adversely affected by the different tax treatment accorded intra-county gas gathering companies under K.S.A. 79-5a01.. . . Taxpayer has made a showing that it was unfavorably affected vis-a-vis a higher tax impact. (c) In many significant respects, the Taxpayer is similarly situated with intra-county gas gathering companies. (i) According to a witness for the Department, because most intra-county gas gathering systems interconnect with an inter-county/interstate gas gathering system, `virtually all' of the natural gas produced in Kansas is transported by inter-county/interstate gas gathering systems . . . . This would tend to acknowledge that most gas gathering systems in Kansas are similarly situated. (ii) [N]atural gas gathering systems are not regulated differently by the KCC based on mileage of pipe; volumes of throughput; the number of wells connected to particular systems; or their geographic location . . . . There are no functional differences between a natural gas gathering system located and operating in a single county and one that crosses state lines . . . . Furthermore, natural gas systems are not required to seek KCC approval to serve particular wells or geographic areas . . . . (iii) As acknowledged by . . . a witness for the Department, whether gathering systems cross either county or state lines is more a product of where producing wells may be located ( i.e., a matter of `happenstance') than a matter of design . . . . As further embellished by a witness for the Taxpayer, all such systems  whether single county, multi-county or interstate  consist of pipes collecting natural gas and moving it from the wellhead to more centralized locations such as processing plants or pipelines. . . . (iv) With regard to the degree of competition within the natural gas gathering business in Kansas, according to a witness for the Department, there is virtually no competition within the natural gas gathering business in Kansas because: (i) gas gathering services are existent to handle all producing wells; (ii) the construction of new facilities when existing gas gathering contracts expire is expensive and not cost effective . . . ; and (iii) there is little evidence of gas gatherers losing customers to other gas gatherers. . . . However, according to a witness for the Taxpayer, although small gas gathering companies have some barriers to entry into the Kansas gas gathering market, which include capital requirements and management. . ., there are a number of alternatives available to the purchasers of natural gas gathering services ( i.e., producers) in the Kansas natural gas gathering market. These alternatives include: (1) purchasing gathering services from an inter-county-interstate provider; (2) purchasing gathering services from an intercounty/intrastate provider; (3) purchasing gathering services from an intra-county provider; or (4) self providing those gathering services. The Department's claim that intra-county systems are customers and not competitors with interstate systems fails to recognize one of the most basic, and fundamental conditions of competition in all infrastructure industries (pipelines, power transmission, telecommunications) over the past 20 years: open access and interconnectivity into physical infrastructure systems. In the case of natural gas gathering and transmission systems, the open season/open access requirement of [Federal Energy Regulatory Commission] Order 636 [requiring interstate pipelines to unbundle transportation and sales and provide transportation to buyers from other sources] is a key component of pipeline transmission competition. . . . There are various degrees of market competitiveness depending upon whether the market structure is monopoly, oligopoly, monopolistic competition, or pure competition . . . . Of these four broad market structure classifications, only one form of market structure entirely precludes all competition  a monopoly market structure. In a monopoly, there is only one firm and the firm is the market. However, the other three market structures represent, to varying degrees, some form of competition. In response to questioning from the Department's counsel regarding competitive factors affecting natural gas gatherers, . . . a witness for the Taxpayer . . . testified that he was aware of several instances where producers had changed natural gas gatherers and that contracts between producers and gatherers are generally short term, with some contracts having a duration of five years or less . . . . In 1997, the four largest gas-gathering companies in Kansas . . . accounted for 72% of all pipeline connections in Kansas . . . . By the end of calendar year 2002, the four largest gas-gathering companies in Kansas. . . accounted for 67% of the well connections in Kansas. . . . This apparent loss by the four largest gas-gathering companies in Kansas of approximately 7% of the Kansas well/pipeline connections to smaller gas gatherers would tend to indicate increasing competition and declining concentration for such connections among Kansas gas gatherers from 1997 through 2002. [I]ntra-county systems account for 12% of the total natural gas volume in Kansas, while the inter-county systems account for 88% to 89% of the volume . . . . [A]t the end of calendar year 2002, the four largest gas gathering companies in Kansas . . . accounted for 67.5% of the total gathering volume in 2002 . . . . Therefore, the other 32 inter-county systems accounted for only 21% of the total volume in the state, an average of less than 2/3 of 1% of the total volume per system. Consequently, the vast majority (nearly 90%) of the intercounty operators are responsible for relatively small volumes of natural gas, much like the intra-county operators. Thus, the inter-county systems are generally similarly situated to the intra-county systems. . . . . (d) . . . . (i) [T]he method of valuing and assessing single county natural gas gathering systems is not contingent upon and does not differ as a result of: the geographic location of such systems; the rural or urban character of the counties where such natural gas gathering systems are located; the economic characteristics of such counties; the throughput volumes of such gathering systems; the length of such systems; the number of wells connected to such systems; the financial size or strength of such system owners; or, the number of employees utilized in operating such systems. [Citations omitted.] Based on all of its findings and conclusions, the BOTA majority decided interstate and intercounty gas gathering systems were competitive with intracounty systems: In sum, the record establishes that natural gas gathering systems in Kansas, whether single-county, multi-county or interstate, operate in a relatively competitive market environment and may compete with one another. As an interstate natural gas gatherer, the Taxpayer frequently competes in the same market with some multi-county and single-county natural gas gathering systems. The majority also characterized the Kansas statutory scheme as discriminatory and unsupported by any rational basis, but it recognized that it was not free to find K.S.A. 79-5a01 unconstitutional. [I]n order for this Board to make any determination regarding whether such discriminatory taxation contravenes the Commerce Clause of the United States Constitution and/or the Equal Protection Clauses of the United States and Kansas Constitutions, the Board would be required to opine about the constitutionality of K.S.A. 79-5a01. As noted herein, it is not within the purview of the Board's authority to render such conclusions. Accordingly, the Board must conclude that the Department's valuation and assessment of the Taxpayer's property in Kansas should be sustained in its entirety for all the years at issue herein. In a concurring and dissenting opinion, BOTA Chair David L. Patton disagreed with the majority's finding that CIG and other interstate and intercounty gas gathering systems were competitive with or similarly situated to intracounty systems. Patton focused on testimony distinguishing the types of wells served by the various gas gathering systems and detailing the economic disincentives for interstate and intercounty systems to build lines to marginal wells. He also emphasized CIG's greater access to investment, distant markets, capital markets, and economics of scale, when compared with intracounty gatherers; and he read Smith's testimony to say that there was virtually no competition within the gas gathering business in Kansas. In particular, he stressed that there was no evidence . . . that the Taxpayer has ever lost a contract to an intra-county gas gathering company and no evidence . . . that the Taxpayer has ever lost revenue or business opportunities because of any tax differences between inter-county/interstate gas gathering systems and intra-county gas gathering systems. Patton also perceived several possible state interests that could qualify as rational bases for the differential tax treatment at issue: an interest in assuring gas gathering services for marginal wells, an interest in retaining small businesses within individual counties, an interest in protecting the tax bases of individual counties, and an interest in fostering the creation of jobs in nonmetropolitan areas. He finally concluded that the differential tax treatment was not part of a legislative scheme designed to discriminate against inter-county/interstate gas gathering systems in favor of intra-county gas gathering systems and that it did not result in intentional systematic unequal treatment.