Opinion ID: 2520907
Heading Depth: 1
Heading Rank: 3

Heading: General Findings

Text: 7. The Taxpayer is a natural gas company providing production, gathering, processing, storage, transportation, and sales of natural gas from the Montana-Wyoming border through Utah, Colorado, Kansas, Oklahoma, and into Texas. The Taxpayer has tangible property located in seven different states in the Rocky Mountain region and its vicinity. 8. The Taxpayer is regulated by the Federal Energy Regulatory Commission (`FERC') which exercises preemptive jurisdiction over nearly all of Taxpayer's interstate natural gas transmission, storage and gathering business activities. However, production, merchant, processing, and gathering functions are essentially unregulated. 9. FERC regulates the Taxpayer's rates by establishing through adversary proceedings (rate cases) the amount Taxpayer is allowed to charge for each unit of service. 10. As defined by FERC, `rate base' is the original cost of assets minus depreciation and deferred federal income taxes (DFIT). 11. Effective October 1, 1993, FERC Order 636 changed the business environment for the Taxpayer by unbundling the several functional operations of the Taxpayer and providing for increased competition. . . . . Intangibles 26. Intangible property was included in the Taxpayer's unit value only to the extent that it enhanced the unit value of the Taxpayer's property. No specific amount of the unit valuation can be directly attributed to intangible components of the unit. As required by K.S.A. 79-3109c, money, mortgages, and other evidence of debt were not included in the unit valuation of the Taxpayer's property. 27. Interest and overhead are not intangible assets, but are a capitalized part of the operating property of the Taxpayer. Ifflander, Transcript, pp. 859-860. Therefore, interest and overhead are appropriately included in the Taxpayer's unit value. Inventory 28. PVD included inventory items in the unit valuation of the Taxpayer's property. The Taxpayer did not identify any of its inventory that has been inappropriately valued, assessed, and taxed in Kansas. Allocation of Unit Valuation to Kansas 29. The process of dividing up the unit value of a company among the states where it has a presence is called allocation. The process of dividing up the allocated state value among the taxing jurisdictions within a state is called apportionment. 30. PVD used original cost to allocate all public utility unit values to Kansas for the tax years in question. This includes all pipeline companies subject to state assessment and all other companies whose values are required to be apportioned by K.S.A. 79-5a25. 31. There are twenty-eight states that use various allocation factors to allocate public utility unit values. Of these, nine states, including Kansas, use original cost as the sole allocation factor. Ten states use original cost along with other factors to allocate unit value. 32. Original cost is used by FERC to allocate expenses, plant, and intangibles. 33. The taxpayer used original cost to allocate deferred federal income taxes to the states in which they operate. 34. Allocation factors are not designed to determine the fair market value of assets in a particular location, but are designed to determine a reasonable apportionment of a unit's value to such assets. All allocation processes are arbitrary and may import or export value to a state. However, even though allocation processes may be arbitrary in nature, the process used to allocate value must have some relation to the assets whose value is being allocated. Allocation is not an appraisal process. 35. Original cost as an allocation factor accounts for the amount of investment made throughout the utility system, the quantity of utility property at different locations, the age of the utility property and has a high correlation with income. 36. Michael W. Goodwin, PVD's expert witness, compared PVD's original cost allocation factors for the subject tax years with allocation factors obtained by the use of other generally recognized allocation methodologies, such as inch miles and MCF miles of transmission lines, as well as horsepower hours of compressors, and he concluded that PVD's original cost allocation factors for the tax years in question were reasonable. 37. No state uses rate base to allocate unit value either alone or in conjunction with other factors. Rate base is not recognized as a generally accepted appraisal methodology for allocating unit value. 38. Fully depreciated assets receive no allocated value when rate base is used as an allocation factor. The Taxpayer has assets in service in Kansas which have been fully depreciated for purposes of FERC's rate base determination. The Taxpayer has 28.4% of its assets in Kansas fully depreciated. A fully depreciated pipeline is not part of the rate base and therefore, is not part of the rates. However, such pipeline can still transmit volumes of gas. Once the rate is approved by FERC, that rate is multiplied times the volume of gas transmitted to generate income for the Taxpayer. Therefore, fully depreciated assets generate income for the Taxpayer, even though they are not included in the rate base. 39. No evidence was presented establishing that the use of original cost as the sole allocation factor imported or exported value to Kansas. However, it is uncontested that the use of original cost as a sole allocation factor may import or export value. The parties disagree about the significance of BOTA's factual findings. CIG contends that those facts relied upon by BOTA distort the overall picture and fail to support BOTA's conclusions of law. The PVD cites additional facts in the record to support the legal conclusions of BOTA. Before examining the allegations of the parties we first address CIG's contention that BOTA again failed to apply the correct standard of review. Equally important to our own decision is the identification of our standard of review of the BOTA decision.
CIG contends that BOTA paid only lip service to our mandate and again deferred to the PVD's judgment. Resolution of this issue necessarily requires consideration of what we said in Colorado Interstate Gas, regarding BOTA's standard of review. In our reversal of BOTA's prior decision, we concluded that BOTA erred by paying deference to the PVD. BOTA's appropriate standard of review is as follows: The law in Kansas is clear. It is the duty of BOTA, in reviewing a valuation by the PVD, to exercise its judgment anew based on the evidence presented to it at the hearing and without giving deference to the PVD's valuation. K.S.A. 1996 Supp. 74-2438. 270 Kan. at 318. We rejected the PVD's argument that BOTA exercised its judgment anew in light of the language used by BOTA that the taxpayer had a duty to show that the PVD had intentionally and grossly disregarded the standards in order to prevail. 270 Kan. at 318-19. In an attempt to demonstrate that BOTA again applied an incorrect standard of review, CIG points to language in the BOTA decision which stated that CIG failed to establish by a preponderance of the evidence that the PVD's unit valuation and apportionment to Kansas was in error. CIG points to the following language in the BOTA decision which it claims supports its contention that BOTA again yielded to the PVD's determination: 46. The Taxpayer has the burden of proof to show by a preponderance of the evidence that the Director has not appropriately valued and allocated the valuation as prescribed by K.S.A. 79-5a04. . . . . 49. The Board finds that PVD used appropriate methodologies and came to a rational conclusion in its determination of the appropriate capitalization rate for large gas transmission companies for the tax years in question. The Taxpayer has not provided sufficient evidence to show that PVD's rates are in error. Based on the foregoing, the Board finds that the appropriate capitalization rate for tax year 1993 was 11%, for tax year 1994 was 11% and for tax year 1995 was 11.5%. . . . . 56. While the Board does not agree with the Director that he is `required' to allocate public utility unit valuation to Kansas by use of original cost, the director may use original cost if it is a generally accepted appraisal procedure and it results in the taxpayer's property located in Kansas being valued at fair market value. As noted previously, K.S.A. 79-5a25 requires that the apportionment of the assessed valuation to the various taxing jurisdictions in Kansas is to be in proportion to original cost. K.S.A. 79-5a04 and 79-5a25, read in pari material, provide a two-step process to first allocate, and then apportion, unit valuation to Kansas. Testimony was that PVD for the years at issue herein did perform the two-step process. However, as contended by the Director in his brief on pages 14-15 and by Mr. Badenoch in his testimony, the process of allocation and apportionment need not be a two step process if each taxing jurisdiction's share of the whole can be directly determined, as it can in Kansas. The Board concludes that the Director's interpretation is reasonable, has a rational basis, and should be upheld. . . . . 68. The Board finds that the Taxpayer has not shown by a preponderance of the evidence that PVD's unit valuation and apportionment to Kansas is in error. After considering the standards prescribed by K.S.A. 79-5a04, the Board concludes that the correlated unit value of the Taxpayer's property for 1993 is $525,000,000, for 1994 is $465,000,000 and for 1995 is $430,000,000. The Board further concludes that the fair market value of the Taxpayer's property allocated to Kansas for 1993 is $50,820,480, for 1994 is $48,041,475, and for 1995 is $44,549,720. (Emphasis added.) CIG argued that the above language makes clear that BOTA once again gave deference to the PVD and required that CIG shoulder the burden of providing that the PVD erred. CIG noted that it should have no burden to show that the PVD erred or to negate the contentions of the PVD but argued that its burden is limited to showing by a preponderance of evidence that its proposed values are correct. We agree that CIG's burden before BOTA was to establish by a preponderance of evidence that its proposed values are correct. We, however, disagree that the above language in the BOTA decision provided a basis for concluding that BOTA gave deference to the PVD in its decision on the fair market value of CIG's property in Kansas. Following remand, the proceeding continued with an agreement by the parties to consider the matter based upon the existing record. At that point, the record contained the PVD's determinations as to CIG's value, together with all supporting evidence. CIG's value, together with its supporting evidence, was also before BOTA. In order to prevail before BOTA, the burden fell upon CIG to establish by a preponderance of the evidence the accuracy of its valuation. BOTA recognized its role when it said that CIG has the burden of proof to show by a preponderance of the evidence that the [PVD] has not appropriately valued and allocated the valuation as prescribed by K.S.A. 79-5a04. In other words, CIG's burden was to show that the PVD was wrong and the value it asserted was supported by substantial competent evidence. Thus, BOTA was giving no deference to the PVD except to say that when the PVD established evidence that its valuation was accurate, CIG must necessarily attack and undermine the PVD's valuation. It is up to BOTA which side presents the most compelling case. CIG argues that Paragraph 46, quoted above, shows how BOTA deferred to the PVD's judgment. Within this context, BOTA's statement that the taxpayer has the burden of proof to show by a preponderance of the evidence that the director has not appropriately valued and allocated the valuation, as prescribed by K.S.A. 79-5a04, is another way of saying that the burden lies with CIG. In order for CIG to prove its valuation, it would be required to prove that the PVD valuation was incorrect. CIG also complains that evidence of BOTA deference is found in Paragraph 49, where BOTA said that the PVD came to rational conclusions. However, BOTA also said in the same sentence that the PVD's methodologies were appropriate. Consistent with exercising judgment anew, it would be logical for BOTA to adopt conclusions reached by appropriate methodologies. BOTA determined anew that the original cost was the appropriate method to determine fair market value of CIG properties in Kansas. This method was advanced by the PVD and rejected by CIG, providing BOTA with a choice among the many methods set forth in K.S.A. 79-5a04. BOTA selected the most appropriate method, which was also the method used by the PVD CIG argued that BOTA erred by using language in Paragraph 56 when it said that the PVD's interpretation is reasonable, has a rational basis, and should be upheld. We do not believe BOTA's language indicates that it ignored its standard of review. BOTA is faced with a decision between two competing positions as to value. Key to its decision is the process used by each in ascertaining such value. The allocation process used by each party is key to its final decision. In determining that the PVD's interpretation is reasonable, BOTA has determined that the evidence as a whole supports the determination made by the PVD, not that deference must be given to the PVD. The language used by BOTA demonstrates to this court that BOTA understood the role it was required to play in its determination of value. In Paragraph 68, when BOTA said in its original order on remand that CIG has not showed by a preponderance of the evidence that the PVD's unit valuation and apportionment of value to Kansas is in error, it was also saying that the PVD had shown by a preponderance of evidence that its valuation was correct. In its brief on appeal, CIG failed to offer a complete quotation of Paragraph 68, which indicates BOTA's conclusions with respect to the unit value and the allocation of that value to Kansas. Unlike the previous appeal, there is no indication that BOTA relied on an intentional and gross disregard standard of review or deferred to the PVD in determining fair market value in Kansas. See Colorado Interstate Gas, 270 Kan. at 315. BOTA understood the mandate of this court in Colorado Interstate Gas. BOTA applied a correct standard of review as demonstrated in its order denying CIG's motion for reconsideration: 5. The Taxpayer asserts that the Board did not exercise its judgment anew, but instead, found that the Taxpayer did not meet its burden to show that the Director has not appropriately valued and allocated the valuation. The Taxpayer further argues that the Board's standard of review inherently gives deference to the Director's valuation in direct contravention of the Supreme Court's remand. The Board believes the Taxpayer has misinterpreted the Board's findings and conclusions. 6. The Board is well aware that the standard of review requires that the Board exercise its judgment anew based on the evidence presented and without giving deference to the Director's valuation. The Taxpayer's argument in these matters is basically that the Director has excessively valued and allocated the valuation of the Taxpayer's property. The Taxpayer must provide evidence to show that the Director's valuation is in error and the Director must provide evidence in support of his valuation. The Board must review the evidence provided and by applying the factors enumerated in K.S.A. 79-5a04 determine the appropriate valuation and allocation of the Taxpayer's property. In these matters, the Board gave no deference to the Director's valuations, but rather reviewed the evidence presented and concluded by the weight of the evidence that the appropriate unit valuation for 1993 is $525,000,000 (now corrected to $510,000,000), $465,000,000 for 1994 and $430,000,000 for 1995, which are the same as determined by the Director. The Board further concluded that the fair market value of the Taxpayer's property allocated to Kansas for 1993 is $50,820,480, for 1994 is $48,041,475, and for 1995 is $44,549,720, which are the same as determined by the Director. Nevertheless, CIG argues that a decision on whether BOTA applied the correct standard of review should be determined by considering the record as a whole, not by considering what BOTA said in its order denying reconsideration. Further, CIG argues that BOTA's order denying reconsideration does not negate the admissions of deference in BOTA's original order since BOTA's figures matched those of the PVD's despite the subjective nature of the judgment exercised by the PVD. The fact that BOTA's figures matched those of the PVD's provides little if any evidence that BOTA applied a deferential standard of review. CIG is right that this determination must be made from the record as a whole. If BOTA is to be believed, it gave no deference to the PVD in its determination of value. However, we must point out that initially it was the responsibility of the PVD to value CIG's property for ad valorem taxation in Kansas. It did so based upon the judgment of its experts and all of the factors which are now before this court. The proceeding before BOTA started with the PVD's determination of value and its contention before BOTA that fair market value in Kansas was established. The assessment had been made by the PVD. Before BOTA, the PVD presented its testimony and CIG presented its testimony and its determination of fair market value in Kansas. CIG had the burden to establish that the determination by the PVD was invalid based upon the record as a whole. Based upon all evidence presented, BOTA concluded that CIG failed to meet its burden, thus providing a basis for concluding that the valuation determined by the PVD was correct. Instead of giving deference to the PVD by adopting its valuation, BOTA determined that the record supported the determination made by the PVD. To say that BOTA adopted the PVD's values without any consideration of the evidence ignores the record as a whole as well as BOTA's expressed conclusion that its determination was made anew based upon all the evidence presented.
In reviewing a BOTA decision, several well-established principles govern. BOTA is a specialized agency and is considered to be the paramount taxing authority in this state. Wirt v. Esrey, 233 Kan. 300, 314, 662 P.2d 1238 (1983). BOTA is a specialized agency that exists to decide taxation issues. Hixon v. Lario Enterprises, Inc., 257 Kan. 377, 378-79, 892 P.2d 507 (1995). Its decisions are given great weight and deference when it is acting in its area of expertise. In re Tax Appeal of Boeing Co., 261 Kan. 508, 515, 930 P.2d 1366 (1997). The party challenging BOTA's decisions has the burden to prove that the action taken was erroneous. Board of Ness County Comm'rs v. Bankoff Oil Co., 265 Kan. 525, 537, 960 P.2d 1297 (1998). However, if BOTA's interpretation of law is erroneous as a matter of law, appellate courts will take corrective steps. In re Tax Appeal of Family of Eagles, LTD, 275 Kan. 479 Syl. ¶ 1, 66 P.3d 858 (2003). Orders of BOTA are subject to judicial review under the Act for Judicial Review and Civil Enforcement of Agency Actions. See K.S.A. 77-601 et seq. ; K.S.A. 74-2426(c); In re Appeal of Topeka SMSA Ltd. Partnership, 260 Kan. 154, 162, 917 P.2d 827 (1996). In reviewing BOTA decisions, this court determines whether relief is warranted under the provisions of K.S.A. 77-621(c), which provides: (1) The agency action, or the statute or rule and regulation on which the agency action is based, is unconstitutional on its face or as applied; (2) the agency has acted beyond the jurisdiction conferred by any provision of law; (3) the agency has not decided an issue requiring resolution; (4) the agency has erroneously interpreted or applied the law; (5) the agency has engaged in an unlawful procedure or has failed to follow prescribed procedure; (6) the persons taking the agency action were improperly constituted as a decision-making body or subject to disqualification; (7) the agency action is based on a determination of fact, made or implied by the agency, that is not supported by evidence that is substantial when viewed in light of the record as a whole, which includes the agency record for judicial review, supplemented by any additional evidence received by the court under this act; or (8) the agency action is otherwise unreasonable, arbitrary or capricious. Arbitrary or capricious may be established under K.S.A. 77-621(c)(8) where an administrative order is not supported by substantial evidence. Kansas Racing Management, Inc. v. Kansas Racing Comm'n, 244 Kan. 343, 365, 770 P.2d 423 (1989). Substantial evidence is evidence which possesses both relevance and substance so as to form a basis of fact from which the issues can be reasonably resolved. [Citation omitted.] Dalmasso v. Dalmasso, 269 Kan. 752, 758, 9 P.3d 551 (2000).
With these principles firmly in mind, we recognize that the primary dispute between the parties in this case centers upon allocation. CIG argued allocation by original cost was error because the Kansas assets are relatively depreciated when compared to CIG's system-wide assets. The PVD argued that original cost allocation was the best measure of the fair market value of CIG's Kansas assets. Contrary to the arguments of CIG, the questions presented with reference to allocation are factual and not legal questions. The method used by the PVD and adopted by BOTA to partially determine the fair market value of CIG's property in Kansas is one identified by Kansas statute, K.S.A. 79-5a04(a). The fundamental issue involves BOTA's selection of an original cost allocation factor in valuing CIG's Kansas property. CIG contends that BOTA erred because it disregarded its mandate from this court in the prior appeal to determine the fair market value of CIG's operating property in Kansas. More specifically, CIG argues that BOTA erred (1) as a matter of law in failing to determine whether original cost allocation achieved fair market value, (2) in failing to address the issue of whether any allocation technique was capable of achieving market value, and (3) in finding original cost allocation reasonable or rational as a matter of fact without substantial competent evidence to support such factfinding. As demonstrated by the facts, the PVD first valued all of CIG's property for the years in question, thereby arriving at the unit value. In order to ascertain the unit value for the years in question, the PVD used an income approach, a cost approach, and the market approach to arrive at a correlated unit value of CIG's property for 1993 of $510,000,000, for 1994 of $465,000,000, and for 1995 of $430,000,000. BOTA examined these values, and based upon the evidence concluded that these unit values accurately reflected CIG's unit values for the years in question. Although unit valuation was a significant issue before BOTA, on appeal CIG takes no issue with unit values and accepts the PVD's correlated unit values for the years in question. The question of how much of the unit value is represented in Kansas to reach the fair market value of public utility property in Kansas is a question addressed in K.S.A. 79-5a04, which provides: The division of property valuation in determining the fair market value of public utility property shall, where practicable, determine the unit valuation, allocated to Kansas, and in doing so shall use generally accepted appraisal procedures developed through the appraisal process and may consider, including but not by way of exclusion, the following factors: (a) Original cost. (b) Original cost less depreciation or reproduction cost less depreciation, or both, or replacement cost new less depreciation, except that where either method is used proper allowance and deduction shall be made for functional or economic obsolescence and for operation of nonprofitable facilities which necessitate regulatory body approval to eliminate. (c) The market or actual value of all outstanding capital stock and debt. (d) The utility operating income, capitalized in the manner and at such rate or rates as shall be just and reasonable. (e) Such other information or evidence as to value as may be obtained that will enable the property valuation department to determine the fair market value of the property of such public utility. BOTA considered the provisions of K.S.A. 79-5a04, the PVD's use of original cost and the evidence supporting original cost, together with CIG's objections to original cost and the evidence offered by CIG. BOTA concluded that original cost allocation was a reasonable method of arriving at the fair market value of CIG's property in Kansas. In its review of PVD's use of original cost allocation, BOTA noted that [the PVD] may use original cost if it is a generally accepted appraisal procedure and it results in the taxpayer's property located in Kansas being valued at fair market value. In its findings, BOTA set forth the appropriate formulas for arriving at an allocation factor in order to determine the portion of the unit value attributable to Kansas as required by K.S.A. 79-5a04 and discussed at length in the record: 40. The original cost, net book, rate base, and income allocation formulas are as follows: (OC = Original Cost; Dep. = Depreciation; DFIT = Deferred Federal Income Taxes) Original Cost: ------------- Kansas allocation % = Original Cost of Kansas Assets ------------------------------ Original Cost of System Assets Net Book: -------- KS allocation % = OC of KS Assets  Dep. on KS Assets ----------------------------------------- OC of System Assets  Dep. on System Assets Rate Base: --------- KS allocation % = OC of KS Assets  Dep. on KS Assets  DFIT ------------------------------------------------------ OC of System Assets  Dep. on System Assets  DFIT Income Based: ------------ KS allocation % = Income from Kansas Assets ------------------------- System Income 41. As shown in the above formulas, a net book allocation formula and a rate base allocation formula are cost-based. The difference between the original cost formula and net book is that net book is original cost minus FERC approved depreciation. The difference between the original cost formula and rate base is that rate base is original cost minus FERC approved depreciation and Deferred Federal Income Taxes. 42. An income based allocation formula may theoretically be the best formula. However, no income based formula was introduced into evidence in this matter; therefore, an income based allocation formula is not an option for the Board to adopt. Further, such a formula would require the income that the taxpayer earned from its Kansas property. There is no evidence of such income in these matters. Thus, according to BOTA only cost-based formulas were available to allocate the unit value to reach the fair market value of CIG's property in Kansas. CIG disagreed and contended that BOTA erred in finding no income-based allocation factors were available. CIG argued that since unit value was determined principally by an income approach, income contribution would then be the most logical approach to allocation. CIG suggested that the record is replete with income-based formulas and immediately launched into the benefits of using rate base or net book cost for allocating system values to Kansas because of their relationship to income. It is difficult to follow this argument, for rate base and net book cost are both cost-based formulas. BOTA rejected an income-based formula because no data supporting an income-based formula was introduced into evidence. The record supports this conclusion. While rate base and net book cost may relate to income, neither are income formulas. To obtain an income allocation factor, one must have evidence of the income CIG generates from its Kansas assets. The record does not contain such evidence, and BOTA correctly concluded that based upon the evidence presented only cost-based formulas are available to determine the fair market value of CIG's property in Kansas. BOTA adopted allocation by original cost as noted above and determined the unit value for 1993 ($510,000,000). The original cost of CIG's Kansas assets is divided by the original cost of CIG's system-wide assets in order to obtain the factor (0.099648), which is then multiplied by CIG's unit value for 1993, to obtain the fair market value of CIG's Kansas property ($50,820,480) for ad valorem tax purposes in Kansas. The same process was used to determine the fair market value of CIG's property allocated to Kansas for 1994 and 1995. The factor used for 1994 was 0.103315 and for 1995 was 0.103604. After each factor was multiplied by the unit value, the fair market value of CIG's property allocated to Kansas for 1994 and 1995 was determined to be $48,041,475 and $44,549,720 respectively. Relying on its experts and the net book cost method of allocation, CIG advocated a factor of 0.0591 for 1993, 0.0598 for 1994, and 0.0617 for 1995, which resulted in value allocated to Kansas of $30,141,000 for 1993, $27,807,000 for 1994, and $26,531,000 for 1995. CIG attacks the original cost method as a method that will never result in a fair market value of its Kansas property. CIG argues that rate base, because it is more closely tied to CIG's income in Kansas, is a far superior allocation method. The same may be said of net book cost according to CIG.
Consistent with our standard of review we conclude that BOTA's decision to use the original cost allocation method is supported by substantial evidence. For BOTA, this was the primary issue to be resolved. Thus, we believe it helpful to set forth those conclusions in the BOTA decision relating to this issue.