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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. BP Pipelines (Alaska) Inc. v. State, Dept. of Revenue (2/19/2014) sp-6867

BP Pipelines (Alaska) Inc. v. State, Dept. of Revenue (2/19/2014) sp-6867

        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                                 )       Supreme Court Nos. S-14095/14116/14125  

TRANSPORTATION ALASKA,                         )  

INC., EXXONMOBIL PIPELINE                      )       Superior Court No. 3AN-06-08446 CI  

COMPANY, KOCH ALASKA                           )  

PIPELINE COMPANY, LLC,                         )  

UNOCAL PIPELINE COMPANY,                       )       O P I N I O N  

and ALYESKA PIPELINE SERVICE                   )  

COMPANY,                                       )  

                                               )      No. 6867 - February 19, 2014  

        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.                   )  

                                               )  


----------------------- Page 2-----------------------

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 &  

                                                       



                                                    -2-                                              6867
  


----------------------- Page 3-----------------------

                  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).  



                                                        -3-                                                     6867  


----------------------- Page 4-----------------------

                                                                                                                1  

Valdez.    This  appeal  involves  a  dispute  between  the  Owners   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  



                                                   2  

                                                        Alaska  Statute  43.56.060  controls  the  Department  of  

true  value"  of  that  property. 



                                        3  

                                                                                                                                  

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



                                                                                       4  

                                                                                                

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

                                                                                                                              5  In this case,  

                                                                                                                                  

an appeal of the Assessment Review Board's decision in a trial de novo.  



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.  



                                                                        -4-                                                                  6867
  


----------------------- Page 5-----------------------

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  Trans- 



Alaska  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  



          6  

                                                                                          

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

Borough, and the North Slope Borough.  



                                                              -5-                                                            6867  


----------------------- Page 6-----------------------

reconsideration.  The superior court issued an amended decision upon reconsideration  



                          7  

in October 2010.   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  



                       8  

                                                                                                             

Review Board.   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.  



                                                               -6-                                                         6867
  


----------------------- Page 7-----------------------

                                                                                           

                   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  



                                               9 

                                                                                                         

that of the administrative agency.   We review the superior court's factual findings under  



                                                                                                               

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



                                                                                                                    10 

                                                                                                                        On  

the firm and definite conviction on the entire record that a mistake has been made." 



                                                                                           11 

                                                                                               "Our duty is to adopt  

questions of law, we are not bound by the lower court's decision. 



                                                                                                                   12  

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



          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.  



                                                            -7-                                                      6867
  


----------------------- Page 8-----------------------

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  



                         14  

                                                            

assessment year."            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,  



                                                                                                     15  

economically, and legally deliverable into the transportation facility."                                 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).  



                                                           -8-                                                        6867  


----------------------- Page 9-----------------------

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  

                                                                           [16] 

                     that neither is under undue duress.  



                                                                                                                  

"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).  



                                                                 -9-                                                               6867  


----------------------- Page 10-----------------------

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  

                  17   The Owners point out that AS 43.56, which sets the assessment standard  

both cases."                                                                    



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  

                                           



                                                                                                                      19  

AS 29.45, but "under AS 43.56 as assessed by the Department of Revenue."                                                   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).  



                                                               -10-                                                         6867
  


----------------------- Page 11-----------------------

                                                 

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  



                                                                                 20  

                                                                                     The "full and true value" of  

definition is explicitly limited to exploration property.                                                  



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  

                                                                                                      

                               22  Thus  there is no global definition of "full and true value" in  

date of assessment."                         



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  

                                        



                                                  23  

bill that would become AS 43.56.                      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...)  



                                                             -11-                                                       6867
  


----------------------- Page 12-----------------------

"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  

                                                         [25] 

                    physical life is different.  



                                                                                  

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  



           26  

                                                                                

value."       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).  



                                                              -12-                                                         6867
  


----------------------- Page 13-----------------------

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  

                                                                             



                                                             28  

that doesn't have a fair market value."                          He explained  that he "didn't think the fair  

                                                                                         



                                                                                                 29  

market value was appropriate" for valuing production property.                                       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  



                                30  

                                     We need not answer this question.  After giving due deference  

additional 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...)  



                                                               -13-	                                                         6867
  


----------------------- Page 14-----------------------

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  



                                                                                                              32  

that  "has  relatively  few  potential  buyers  at  a  particular  time."                                           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.  



                                                                       -14-                                                                 6867
  


----------------------- Page 15-----------------------

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  



                          33  

originally  built."             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  



          33        Id. at 28.  



                                                               -15-                                                             6867  


----------------------- Page 16-----------------------

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



         34  

Slope.          



                                                                                                

                    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 Non- 

                    Trans-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  



                35 

                                                                                                                

separately.         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."  



                                                             -16-	                                                       6867
  


----------------------- Page 17-----------------------

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."  



                                                              -17-                                                         6867
  


----------------------- Page 18-----------------------

                                                                                                             

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  



                 37  

                                                                                          

approach.             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  



          38  

                                                             

value.           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
  


----------------------- Page 19-----------------------

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  



                                        40  

governmental regulations.' "                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)).  



                                                         -19-                                                      6867  


----------------------- Page 20-----------------------

"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  



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



                                                                                                                                     (continued...)  



                                                                           -20-	                                                                          6867  


----------------------- Page 21-----------------------

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



                                                      

determined that higher tariffs  on  a  replacement pipeline would not make the Trans- 



Alaska 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  



                                                                                            42  

                                                                                                Hoffbeck determined  

based on earning capacity after reproduction is not appropriate. 



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).  



                                                             -21-	                                                      6867
  


----------------------- Page 22-----------------------

                                                                                               

                    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  



                                                             -22-	                                                      6867
  


----------------------- Page 23-----------------------

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  



                                                               -23-                                                          6867
  


----------------------- Page 24-----------------------

                       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 [Trans- 

                       Alaska 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  

                      



       44  

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

                                                      45    The  superior  court  found  that  the  record  "amply"  

deliverable"  into  the  pipeline.  

                                                                                                                            



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.  



                                                                        -24-	                                                                  6867
  


----------------------- Page 25-----------------------

                                                                                                   

"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  

                                            46 that requires the oil in question to be "recoverable based  

reserves" is a technical term                                                                     



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

                                                                                                 

                                                                     47   In the report, the Director of the Oil and  

on the bill that eventually became AS 43.56.                                                    



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
  


----------------------- Page 26-----------------------

                                                                                                              49  

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



                                                                                                                   

indicated that "the State's information" concerning proven reserves would be "as good  



                                                   50  

as any company's in the industry."                     The committee did not discuss the meaning of the  



                                51  

phrase in more detail.               



                    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).  



                                                             -26-                                                       6867
  


----------------------- Page 27-----------------------

                                                                                          

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
  


----------------------- Page 28-----------------------

                                                                   

                   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."  



                                                            -28-                                                      6867
  


----------------------- Page 29-----------------------

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  



                                                                                                         55  

                                                                                                              Therefore, the  

economic reasons, the inutility is caused by economic obsolescence." 



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 Trans- 



Alaska  Pipeline  System  operates  below  capacity  does  not  justify  a  deduction  for  



          55                                                          M .  SOC 'Y OF APPRAISERS , supra note 39,  

                    The superior court was quoting A 

at 98.  



                                                              -29-	                                                            6867  


----------------------- Page 30-----------------------

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  



                                                                                                                               56  

                            

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



                                                         

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  



          56  

                                             

                    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)).  



                                                             -30-                                                            6867  


----------------------- Page 31-----------------------

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  



                                                              -31-                                                         6867
  


----------------------- Page 32-----------------------

                                                                                                              

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.  



                                         57 

                                                                      

                    The Boroughs            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  



          57  

                                                               

                    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."  



                                                             -32-                                                           6867  


----------------------- Page 33-----------------------

                                      58  

Review Board's findings.    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).  



                                                             -33-                                                           6867  


----------------------- Page 34-----------------------

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  



                                                                  60  

                                                                                                               

when using the economic age-life method.                              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.  



                                                                -34-                                                              6867  


----------------------- Page 35-----------------------

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  



                                                        61  

                                                               We  therefore  find  that  the  superior  court's  

from  the  superadequacy  that  exists.                                                            



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  



                                                                                  62  

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



                                     63  

date to be June 30, 2006.                The interest rate was set at the statutory rate of eight percent  

                              



              64  

per year.         



                    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 . S   OC '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.  



                                                              -35-	                                                        6867
  


----------------------- Page 36-----------------------

                                                                                      

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  



                                                                                                              65  

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



                                                                                                   66  

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



                                                    

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



                                                                                                               67  

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



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



                                    68  

                                                                                                  

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



                                                                  69  

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



                                                                                                         70  

                                                                                                             Rather, interest  

"[t]he assessment of interest for late payment has no punitive element." 



          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...)  



                                                              -36-                                                         6867
  


----------------------- Page 37-----------------------

"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  



                                                               72  

                                                                               

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



                                                          73  

or assess the property for several years.                     



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



Alascom 's rationale "is not applicable where the municipality makes an assessment of  



                                                                                                                             74  

                                                                              

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



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.  



                                                             -37-                                                       6867
  


----------------------- Page 38-----------------------

                                                                                         

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.  



                                                                     -38-                                                               6867
  


----------------------- Page 39-----------------------

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 Thomson 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
  


----------------------- Page 40-----------------------

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  



                                                         3  

                                                            But at no point during the underlying litigation,  

factors affecting the entire business. 



                                                                       

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...)  



                                                                 -40-                                                           6867
  


----------------------- Page 41-----------------------

                   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.  



                                                            -41-                                                       6867
  


----------------------- Page 42-----------------------

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.  



                                                                              -42-	                                                                       6867
  


----------------------- Page 43-----------------------

          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  



                                                                        9  

                                                                                 

of  the  entire  production-transportation  business.     In  short,  the  Owners'  integrated  



          7        AM . S   OC '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 B                                                                  

                                                         LACK '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
  


----------------------- Page 44-----------------------

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 Thomson oil and gas reserves to advance  



                                              10  

their  own  internal  interests.                    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
  


----------------------- Page 45-----------------------

                            

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 Thomson 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  



                                                                                                         12  

excess capacity and therefore require different threshold determinations.                                    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  



                     14  

                                                                                  

consequence."              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.  



                                                            -45-                                                       6867
  


----------------------- Page 46-----------------------

                                                                                                    

                   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-throughput- 

based 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  



                17  

arguments. 



          15	       Op. 33.  



          16       See AM .  SOC 'Y OF APPRAISERS , supra note 7, at 98 (explaining that cost-to- 



capacity 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
  


----------------------- Page 47-----------------------

                                                                                                               

                    We have held that we may affirm "on any basis supported by the record,  



                                                                                                                                 18  

                                                                     

even if that basis was not considered by the court below or advanced by any party." 



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  



                                                                                                                 19  

if doing so were to make different outcome-determinative facts relevant."                                             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  



                                                                                         20  

                                                                                             The Boroughs also argue  

quantity of economic obsolescence due to low throughput. 



                                      

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
  


----------------------- Page 48-----------------------

            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                             



                                                                                                                    21  

of  a  property's  effective  age  to  its  economic  life  expectancy.                                                   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  



                                                                                                                                                 22  

all  forms  of  depreciation,  including  functional  and  economic  obsolescence,                                                                    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  


----------------------- Page 49-----------------------

                    23  

obsolescence.             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  



                                            25  

economic age-life calculation.                  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
  


----------------------- Page 50-----------------------

                   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
  

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