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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. State, Dept. of Revenue v. BP Pipelines (Alaska) Inc. (8/28/2015) sp-7039

State, Dept. of Revenue v. BP Pipelines (Alaska) Inc. (8/28/2015) sp-7039

        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@akcourts.us.  



                 THE SUPREME COURT OF THE STATE OF ALASKA  



STATE OF ALASKA,                                 )  

DEPARTMENT OF REVENUE,                           )        Supreme Court Nos. S-14696/14705/  

                                                 )        14706/14716/14725  

                Appellant and                    )  

                 Cross-Appellee,                 )        Superior Court No. 3AN-06-08446 CI  

                                                 )  

        v.                                       )        O P I N I O N  

                                                 )  

BP PIPELINES (ALASKA) INC.,                      )       No. 7039 - August 28, 2015  

CONOCOPHILLIPS                                   )  

TRANSPORTATION ALASKA, INC.,  )  

EXXONMOBIL PIPELINE                              )  

COMPANY, KOCH ALASKA                             )  

                                         

PIPELINE COMPANY, LLC,                           )  

UNOCAL PIPELINE COMPANY,                         )  

ALYESKA PIPELINE SERVICE                         )  

COMPANY, NORTH SLOPE                             )  

                                        

BOROUGH, FAIRBANKS NORTH                         )  

STAR BOROUGH, and CITY OF                        )  

VALDEZ,                                          )  

                                                 )  

                Appellees,                       )  

                 Cross-Appellants, and           )  

                 Cross-Appellees.                )  

_______________________________ )  



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

                 Judicial District, Anchorage, Sharon Gleason and Andrew  

                 Guidi, Judges.  



                Appearances:      Kenneth   J.   Diemer,   Assistant   Attorney  

                 General,    Anchorage,  and  Michael  C.  Geraghty,  Attorney  

                                                   

                 General,  Juneau,  for  Appellant/Cross-Appellee   State   of  

                                                                                


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

                  Alaska, Department of Revenue.  Leon T. Vance, Faulkner  

                                                                           

                  Banfield, P.C., Juneau, and Alexander O. Bryner, Feldman  

                                                     

                   Orlansky   &   Sanders,   Anchorage,   for   Appellees/Cross- 

                                                                       

                  Appellants/Cross-Appellees   BP   Pipelines   (Alaska)   Inc.,  

                   ConocoPhillips  Transportation  Alaska,  Inc.,  ExxonMobil  

                  Pipeline Company, Koch Alaska Pipeline Company, LLC,  

                  Unocal  Pipeline  Company,  and  Alyeska  Pipeline  Service  

                   Company.    Jessica  Dillon  and  Mauri  Long,                       Dillon  &  

                                                                                        

                  Findley,          PC,      Anchorage,            for      Appellee/Cross- 

                  Appellant/Cross-Appellee North Slope Borough.  A. Rene  

                  Broker, Borough Attorney, Fairbanks, and Robin O. Brena,  

                  Kevin G. Clarkson, Anthony Guerriero, and Laura S. Gould,  

                                                                                          

                  Brena, Bell & Clarkson, PC, Anchorage, for Appellee/Cross- 

                                                     

                  Appellant/Cross-Appellee  Fairbanks  North  Star  Borough.  

                  William   M.   Walker,   Craig   W.   Richards,   and   Jon   S.  

                                                                    

                  Wakeland,   Walker   &   Richards,   LLC,   Anchorage,   for  

                  Appellee/Cross-Appellant/Cross-Appellee City of Valdez.  



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

                                                           

                  Bolger, Justices.  



                   STOWERS, Justice.  



I.       INTRODUCTION  



                   This is an appeal of the superior court's de novo valuation of the Trans- 



Alaska Pipeline System (TAPS) for tax assessment years 2007, 2008, and 2009.  In  



February 2014 we issued a decision affirming the superior court's de novo valuation of  

                                                                                  

TAPS for the 2006 assessment year.1  The parties introduced considerably more evidence  



                        

during  trial  for  the  2007,  2008,  and  2009  years,  but  the  operative  facts  remained  



substantially the same and the superior court applied similar standards and methods for  



valuation.  Many of the issues raised on appeal are similar or identical to issues raised  



         1  

                                                                   

                  BP Pipelines (Alaska) Inc. v. State, Dep't of Revenue , 325 P.3d 478 (Alaska  

2014) (BP Pipelines I).  



                                                          -2-                                                    7039  


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

in  the   2006  appeal  and  thus  are  partially  or  wholly  resolved  by  our  prior  opinion.  



Because the superior court did not clearly err or abuse its discretion with regard to any         



of  its  findings  or  its  methodology,  and  because  it  committed  no  legal  error  in  its  



conclusions, we affirm.  



II.          FACTS AND PROCEEDINGS  



             A.          Facts  



                         TAPS is an 800-mile-long oil pipeline system that connects the Alaska  



North Slope oil reserves to a shipping terminal in Valdez.   The pipeline was constructed  



between 1974 and 1977 at a cost of approximately $8 billion.  This appeal involves a  

                                                                                                        



dispute over the value of TAPS for property tax purposes during the assessment years                                       



2007, 2008, and 2009.  Because this is our second appeal involving TAPS, we provide  

                                                                                                                                              



only a brief overview of the facts.  



                                                                                       

                         Under Alaska law municipalities "may levy and collect a tax on the full and  



                                                                      

true value" of oil and gas property, including pipelines, but only the Department of  

                                                                                      2  Alaska Statute 43.56.060(e)(2) requires  

                                                                                          

Revenue may assess the value of that property. 



an assessor to determine the "the full and true value" of oil and gas production and  

                             



transportation facilities "with due regard to the economic value of the property based on  

                                                                                                                           



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



economically,  and  legally  deliverable  into  the  transportation  facility."  A  party  may  

appeal the Department's valuation to the State Assessment Review Board.3  The Board's  



             2           AS 29.45.080(b); AS 43.56.060(a).  



             3           AS 43.56.120(a).  



                                                                              -3-                                                                             7039  


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

                                                      

decision is, in turn, appealable to the superior court, which reviews the Board's decision  

in a trial de novo.4  



                                                                 

                       Before 2001 there were no administrative or court challenges involving the  



                                                                                                                                    5 

value of TAPS.  The Department had previously used an income method  to assess  



                                              

TAPS's value, relying on tariff income as the primary source of value, and the ultimate  



valuation was reached in a negotiated settlement between the Department and TAPS's  



               6                                                                                                             7  

                                                                                                                                

Owners.             For  the  2001  tax  year  the  Owners  and  the  Municipalities   appealed  the  



Department's valuation of $2.75 billion to the Board.  The Board adjusted the valuation  



                8 

to $3.017  billion and suggested that accurately valuing the pipeline was difficult because 



                                                                      

there had never been a replacement cost study for TAPS.  For the 2002 to 2004 tax years  



                                                                                                                         

the Department, Owners, and the Municipalities stipulated to a value of $3.017 billion.  



                                                                   

For the 2005 tax year the Department used the replacement-cost-new-less-depreciation  



            4          AS 43.56.130(i).  



            5          Under the income approach, "[t]he appraiser determines the present value           



of the future economic benefits of owning the property."  AM .   SOC 'Y OF APPRAISERS ,  

V                                                                              

   ALUING           MACHINERY               AND        EQUIPMENT :              THE       FUNDAMENTALS                    OF      APPRAISING  



                                

MACHINERY AND TECHNICAL ASSETS 571 (2d ed. 2005).  



            6          The  Owners  refer  to  themselves  as  "Taxpayers"  in   their  briefing.    For  



consistency with the superior court's decision and our decision in the 2006 appeal, we       

refer to them as the  Owners.  The Owners of TAPS 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 is the operating agent for the  

                                                        

Owners and is also an appellee/cross-appellant/cross-appellee.  



            7          We refer to the North Slope Borough, the Fairbanks North Star Borough,  



and the City of Valdez collectively as the Municipalities.  



            8          The precision of values given in the record varies. For consistency, we  



round all values to three decimal places, or the nearest $1 million.  



                                                                         -4-                                                                  7039
  


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

            9 

                                                                                                      

                                                                                                                   

method,  also called the cost approach, and arrived at a value of $3 billion.  The Owners 



                                                                                   

and Municipalities appealed the 2005 assessment; the Board affirmed the valuation and  



                    

agreed with the Department's conclusion that the income method was unreliable and  



TAPS should be valued using a cost approach.  



                    For the 2006 tax year the Department again relied on the replacement-cost- 



                                                                                                               

new-less-depreciation methodology and determined an assessed value of $3.641 billion.  



Both the Owners and the Municipalities appealed to the Board, which, using the same  



                            

methodology but rejecting certain deductions the Department made, adjusted the value  



                           10                                                                          11 

to $4.306 billion.             The parties then appealed to the superior court.  



                    In the 2006 appeal the superior court concluded that the Department and  



                                                                                                           

the  Board  correctly  used  a  replacement-cost-new-less-depreciation  method  to  value  



          12 

                                                                    

TAPS.          In October 2010 the superior court issued its decision following a trial de novo.  



The  superior  court  found  that  the  Municipalities'  cost  study  was  more  reliable  and  



                                                                                                       13  

                                                                                                              The  court  also  

accurate  than  those  relied  on  by  the  Department  and  the  Board. 



                                                        14 

                                                                                                                          

determined that a scaling adjustment                       for excess capacity should be made as a form of  



          9         Under the replacement-cost-new-less-depreciation or cost approach, "[t]he  



appraiser starts with the current replacement cost new of the property being appraised  

and  then  deducts  for  the  loss  in  value  caused  by  physical  deterioration,  functional  

obsolescence, and economic obsolescence." AM .   SOC 'Y OF APPRAISERS , supra note 5,  

at 561.  



          10        BP Pipelines I , 325 P.3d 478, 481 (Alaska 2014).  



          11        Id.   



          12        Id.   



          13  

                          

                    Id.  



          14  

                                                                                                     

                     Scaling, also called an inutility penalty, measures the decrease in value due  

                                                                                                                (continued...)  



                                                                -5-                                                         7039
  


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

economic obsolescence rather than functional obsolescence.                        15  The superior court's final  



valuation for the 2006 year was $9.978 billion.                 16  In our opinion issued in February 2014  



we  affirmed  the  superior  court's  decision,  finding  no  error  in  the  superior  court's  

valuation decision or its specific deductions made to account for depreciation.17  



                   For the 2007 assessment year, the Department assessed TAPS's value at  



$4.578 billion, which the Board adjusted to $4.589 billion.  For the 2008 assessment  



year,  the  Department  valued  TAPS  at  $7.166  billion,  relying  for  the  first  time  on  a  



ProPlus cost study provided by the Municipalities.  The Board, utilizing the same study  



but making some adjustments, concluded that the value of TAPS in 2008 was $6.154  



                                                                  

billion.  Finally, for the 2009 assessment year, the Department valued TAPS at $7.715  



billion, and the Board concluded that the value was $9.046 billion.  



         B.        Proceedings  



                                                                                         

                   The superior court considered the appeals for the assessment years 2007,  



2008,  and  2009  together  in  a  trial  de  novo  that  lasted  approximately  nine  weeks  



beginning on September 6, 2011.  



                                                                              

                   The Municipalities asserted that the value of TAPS for each of the years in  



                                    

question should be about $14 billion, while the Owners asserted that the value should be  



                                                         

little more than $1 billion.  The reason for the difference in these values was that the  



Owners continued to argue for the income approach to valuation, which would limit  



         14(...continued)  



to   operation   below   rated   or   design   capacity.   See   AM .                 SOC 'Y     OF   APPRAISERS ,  

supra  note  5,  at  97;  BP  Pipelines  I ,  325  P.3d  at  499  &  n.16  (citing  A                      

                                                                                                      M . SOC 'Y  OF  

APPRAISERS , supra note 5, at 97, for scaling analysis).  



         15       BP Pipelines I , 325 P.3d at 481.  



         16       Id.  



         17       Id. at 496.  



                                                          -6-                                                    7039
  


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

TAPS's value based on its tariff income, while the Municipalities advocated for a cost       



approach using the replacement-cost-new-less-depreciation method.  



                                                                                

                          Both the Municipalities and the Owners relied upon different replacement- 



                                                                                                                

cost-new (RCN) surveys than they did in the 2006 trial - the Municipalities submitted  



                                                                                                                    

a ProPlus RCN that replicated the existing pipeline diameter and capacity of TAPS, and  



                                                                                      

the Owners submitted a Stantec RCN with a much smaller pipeline diameter to account  



for the low volume of oil then flowing through the pipeline.  The Owners' appraiser  



                                                                                           

applied the "breakdown method" to account for depreciation, which quantifies each type  



                                                       18  

of depreciation individually.                               The Municipalities argued for continued application of  



                                                           19  

the economic age-life method,                                  as in the 2006 case.  All parties submitted substantial  



                                                                                                                                       

evidence relating to TAPS's proven reserves, including expert reports from each party.  



                                                        

And  the  Municipalities  and  the  Owners  submitted  voluminous  evidence  relating  to  



possible minimum flow rates for TAPS.  



                                                                               

                         Although in the 2006 case there was disagreement regarding whether a  



                                                                        20 

                                                                                                               

deduction for economic obsolescence                                         had actually been litigated, it was exhaustively  



                                                                                     

litigated for the 2007, 2008, and 2009 years.  The Municipalities argued strenuously that  



             18           The breakdown method "identifies specific elements of depreciation and  



treats  each  element  separately."  APPRAISAL  INST .,   THE  APPRAISAL  OF  REAL  ESTATE  

410 (13th ed. 2008).                     It "segregates total depreciation into individual component parts:         

Physical deterioration[,] Functional obsolescence[, and] External obsolescence."                                                                           Id.  at  

424.  



             19  

                                                                                                                                            

                          "In  the  economic  age-life  method,  total  depreciation  is  estimated  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." Id. at 420.   



             20  

                                                                              

                          Economic obsolescence is defined as "[a] form of depreciation or loss in  

                                           

value or usefulness of a property caused by factors external to the property." AM .  SOC 'Y  

OF APPRAISERS , supra note 5, at 565.  



                                                                                -7-                                                                         7039
  


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

                                                                                                     

any deduction for economic obsolescence was unwarranted, or if it was warranted, it was  



                                                                               

outweighed by positive external economic factors.  They submitted evidence regarding  



                                                                               

the Owners' profitability and the then-high price of oil.  The Municipalities also offered  



evidence  that  the  mechanical  limit  of  TAPS  without  using  drag  reducing  agents  is  



                                                                

760,000 barrels (bbl) per day, and argued that this limit should be used as TAPS's "full  



capacity" if the court chose to account for low throughput.  The parties also contested  



                                                                                                                     

whether only the pipeline should be scaled for low throughput or whether all TAPS  



                                                                                                          

property - including the Valdez Marine Terminal and the pumps - should be scaled.  



                                                                                                         

                    As  it  did  in  the  2006  case,  the  superior  court  found  that  TAPS  was  a  



limited-market,  special-purpose  property.                           The  court  again  determined  that  the  



replacement-cost-new-less-depreciation  method  was  the  most  accurate  method  for  



                                                             

valuing TAPS. The court found that the ProPlus replacement cost study provided by the  



Municipalities was more accurate than the Stantec study provided by the Owners.  It  



                                                         

further found that TAPS's status as a regulated pipeline did not result in any further  



                                                         

diminution of its value and rejected the Owners' attempts to apply either an income  



                                                                   21  

approach  or  an  income  shortfall  approach                          in  order  to  account  for  governmental  



regulation of TAPS.  



                                                                                          

                    The court again applied the economic age-life method as an approximation  



of  physical,  functional,  and  economic  obsolescence,  and  it  rejected  the  Owners'  



                                                                         

argument for the breakdown method. The court was unpersuaded by the Municipalities'  



                                                                                       

arguments against an economic obsolescence deduction, and it deducted for additional  



                                                                                                                

obsolescence not captured by the economic age-life method.  In deducting for economic  



          21        The   Owners   also   argued   for   this   methodology   in   the   2006   case.  



BP  Pipelines  I ,  325  P.3d  at  488-89.    The  "income  shortfall"  approach  involves  

comparing the tariffs that could be charged on a new pipeline with the tariffs currently  

                                                  

charged. Id.  

                    



                                                               -8-                                                         7039
  


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

                                                 

obsolescence, it agreed with the Municipalities that the number to use as TAPS's full  



capacity should not be its maximum capacity achievable only with drag reducing agents,  



but the court disagreed that it should use TAPS's mechanical limit.  Instead, the court  



                                                                               

scaled TAPS using TAPS's original design basis, after finding that the ProPlus RCN had  



               

the same design capacity as the original TAPS.  And the court scaled all TAPS property,  



not just the pipeline.  



                   The superior court determined that TAPS's value was $8.941 billion in  



                                                                                              

2007, $9.644 billion in 2008, and $9.249 billion in 2009.  All of the parties now appeal  



various aspects of the superior court's decision.  



III.      STANDARD OF REVIEW  



                                                                                         

                   In an appeal from the superior court's review of an administrative decision  



                                                                                                22  

                                                                                                       "We  review  the  

in  a  trial  de  novo  we  review  only  the  superior  court's  decision. 



superior  court's  factual  findings  under  the  clearly  erroneous  standard  and  will  not  

                                                                             



overturn a factual finding unless 'left with the firm and definite conviction on the entire  



                                                          23                                                         24 

record that a mistake has been made.' "                       We review questions of law de novo,                       and  



"[o]ur  duty  is to adopt the rule of law that is most persuasive in light of precedent,  

                   



          22       Id.  at 482 (citing  City of Nome v. Catholic Bishop of Northern Alaska,  



707  P.2d  870,  875  (Alaska  1985)).                   Because  we  review  only  the  superior  court's  

                                                                                        

decision, we cannot apply a substitution of judgment or rational basis standard to the  

                                                                                                

Board's decision. See id. at 485.  



          23       Id. at 482 (quoting City of Nome, 707 P.2d at 876).  



          24       Nash v. Matanuska-Susitna Borough , 239 P.3d 692, 698 (Alaska 2010).  



                                                             -9-                                                      7039
  


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

                             25  

reason, and policy."             Whether the superior court itself applied the correct standard for  



                                                                                                              26  

reviewing the Board's decision is a question of law that we review de novo.                                       



                   We review the superior court's decision to apply collateral estoppel for  



                            27  

                                                                                                                

abuse of discretion.            "We will find an abuse of discretion when the decision on review  

is manifestly unreasonable."28  



IV.	      DISCUSSION  



          A.	       The Superior Court Did Not Err By Requiring Public Disclosure Of  

                    Taxpayer Information.  



                                                                                 

                   During the trial de novo the Municipalities moved to introduce exhibits that  



the Department argued contained confidential information.  Among the exhibits were  



                                                         

production  reports  provided  by  the  Department's  expert,  and  also  references  to  



                                                        

communications  with  operators  and  field-by-field  forecasts.    The  Department  was  



worried that the under-development and under-evaluation totals for different fields could  



be extrapolated from the information contained in the documents.  The superior court  



eventually admitted the documents in redacted form.  



                   The  Department  asserts  that  the  superior  court  erred  by  admitting  the  



                                     

documents.            It   argues   that   under   AS   40.25.100(a)   all   "information   designated  



                                                                      

confidential by the taxpayer, or the Department, or confidential taxpayer information the  



                                                                                             

Department used in preparing its own documents" is not public record and must not be  



          25	      BP Pipelines I , 325 P.3d at 482 (quoting                  Guin v. Ha      , 591 P.2d 1281, 1284  



n.6 (Alaska 1979)) (internal quotation marks omitted).  



          26       Smith v. Weekley, 73 P.3d 1219, 1222 (Alaska 2003) (quoting Barrett v.  



Alguire , 35 P.3d 1, 5 (Alaska 2001)).  



          27       See Misyura v. Misyura, 242 P.3d 1037, 1040 (Alaska 2010).  



          28  

                                   

                   Ranes  &  Shine,  LLC  v.  MacDonald  Miller  Alaska,  Inc. ,  __  P.3d  __,  

Op. No. 7003 at 7, 2015 WL 1958657, at *3 (Alaska May 1, 2015).  



                                                            -10-	                                                     7039
  


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

                              29  

                                                                                                        

publicly  disclosed.                 But  AS  40.25.100(a)  expressly  does  not  apply  to  information  



                                           

required to be produced in court proceedings.  It allows release of information "when its  



production is required in an official investigation, administrative adjudication under  



                                                                             30  

                                                                                                                                

AS 43.05.405-43.05.499,  or court proceeding."                                     The superior court did not err by  



concluding that AS 40.25.100(a) did not prevent public disclosure of the exhibits and  



production forecasts, as redacted.  



           B.	       The  Superior  Court  Did  Not  Err  By  Applying  The  "Use  Value  

                     Standard" To Value TAPS.  



                                                                                                             31 

                                                                                                                 the Owners still  

                     Despite our decision in BP Pipelines I holding otherwise, 



                                                                     

argue that the application of a "use value" standard was improper.  They mainly argue  



        

that  the  superior  court  failed  to  account  for  the  legal  restrictions  on  TAPS,  thereby  



valuing  the  pipeline  at  a  use  that  it  cannot  actually  fulfill:    an  unregulated  pipeline  



                                                                                                                             

moving the Owners' oil to market.  And they argue that the court should have used the  



           29        The Department argues that it should prevail because there is a reasonable   



basis to support its interpretation of AS 40.25.100(a). The superior court's order did not                                     

mention AS 40.25.100(a).  Instead, the court referenced its reasoning in an earlier order   

on the confidentiality of documents, which focused on the common law right of access                        

to court records and trade secret law.  It is thus not clear what weight, if any, the superior  

court  gave  to  the  Department's  interpretation  of  AS  40.25.100(a).    But  even  if  the  

Department's interpretation was entitled to some deference, the superior court would  

have been correct to reject the Department's interpretation.  



           30	       AS 40.25.100(a) (emphasis added).  



           31  

                                                     

                     In the 2006 appeal we held that AS 43.56.060 does not require a market  

                                                                                                               

value standard and that the superior court permissibly applied the use value standard to  

                                                

value TAPS.  BP Pipelines I , 325 P.3d 478, 483-86 (Alaska 2014) ("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." Id. at 483).  

Initially, the Owners again argued that AS 43.56.060 required valuing TAPS at market  

                                                                                                                              

value, but they have since recognized in their supplemental briefing to this court that our  

decision in the 2006 appeal forecloses that contention.  



                                                                 -11-	                                                           7039
  


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

income  method  of  valuation  or  applied  the  "income  shortfall  technique"  to  the  



                                                                                                     

replacement-cost-new-less-depreciation method to account for the fact that tariffs are the  



                                                         32  

pipeline's only certain economic value.                      Each of these arguments is a variant of the  



Owners' claim that the superior court erred by not using an income approach to value  



TAPS.  



                   1.        "Use value" does not value TAPS based on an unlawful use.  



                   The Owners argue that the only legally permissible use of TAPS is as a  



                                                                                        

regulated common-carrier pipeline available to all shippers.  They contend the superior  



                                                       

court erred by finding that TAPS was a "non-investment property within each Owner's  



                 

integrated system" and determining that its "highest and best use was to transport oil  



from the North Slope to Valdez for [Owners'] affiliates in an integrated system."  But  



there is no authority supporting the Owners' position that the value of TAPS for tax  



                  

assessment purposes must be based only on the tariff income it generates.  And the  



          32       The  Owners  also  argue  that  by  considering  any  value  other  than  tariff  



income, the superior court improperly valued non-TAPS property, specifically the North  

                                                                 

Slope oil reserves.  They argue that new testimony in this case "demonstrat[es] that the  

goal  of  the  valuation  was  to  capture  the  value  of  non-taxable  property."    This  new  

testimony - from a Municipality expert - is that TAPS's value is in monetizing the  

                                                             

North  Slope  reserves.    This  testimony  is  consistent  with  the  testimony  in  the  2006  

appeal - that TAPS's value is in moving the Owners' oil to market; it is not new.  The  

                                                                                    

superior  court  was  not  "captur[ing]"  the  value  of  the  North  Slope  reserves;  it  was  

examining what drove TAPS's value in order to choose the appropriate valuation method  

                                                                 

for the pipeline property. The superior court made clear that the taxable property did not  

                                      

include oil and gas reserves:  it explained that "TAPS'[s] taxable property includes only  

the tangible real and personal property from Pump Station 1 through the [Valdez Marine  

Terminal]."  As in the 2006 appeal, 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."  BP Pipelines I , 325 P.3d at 486.  



                                                           -12-                                                      7039
  


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

                                                                                                      

superior court's decision to value TAPS based on its actual use - transporting oil and  



gas from the Alaska North Slope for affiliated producers - is well supported. 



                                                                   

                     The superior court found that TAPS is a special-purpose property that was  



                                                                              

"specifically  designed,  constructed,  and  adapted  for  its  particular  use  -  to  move  



affiliated crude oil from the [Alaska North Slope] to Valdez."  The court also found that  



"TAPS is a limited-market property," with no real market for ownership interests in  



TAPS outside of the Alaska North Slope oil producers.  The court found that four of the  



                                                                                                            

five TAPS owners are vertically integrated oil companies that ship their own oil through  



                                                                                          

TAPS, and the fifth, Koch Alaska Pipeline company, "has an affiliate [whose] contract  



                                                                             

with the State provides it with oil for delivery to the largest refinery connected to TAPS."  



                                                                                                     

The superior court relied in part on the Owners' appraisal expert's testimony - that the  



                                                    

owners of TAPS would not sell TAPS even for $20 billion if the sale were "for the  



                                   

expressed purpose of shutting TAPS down" - to find that there was "no market for  



                                                     

TAPS as a stand-alone investment based solely on its tariff income."  The superior court  



                                                                 

also found that TAPS's highest and best use was its current use - "the transport of  



[Alaska North Slope] oil to market."  



                    Based on these findings, the superior court concluded that the Board's use  



                                                                         

value standard, which based the value of TAPS "on the economic value of its continued  



use  in  transporting  [Alaska  North  Slope]  proven  reserves  to  market,  has  not  been  



demonstrated   to   constitute   a   fundamentally   wrong   principle   of   valuation."      In  



                                                                                                                    

conformance with our decision in the 2006 appeal, and based on the court's findings in  

the current case, it was not error to assess TAPS under a use value standard.33  



          33        See   BP  Pipelines  I ,  325  P.3d  at  486  (holding  that  "[i]n   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").  



                                                              -13-                                                         7039
  


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

                                                                                                                      

                    2.        Legal regulation does not cause economic obsolescence in TAPS.  



                                                                                                34 

                                                                                                           

                    The Owners argue, as they did in the 2006 appeal,                               that even if the court  



properly   applied   a   use-value   standard   and   used   the   replacement-cost-new-less- 



                                                            

depreciation method to value TAPS, it erred by failing to reduce the value of TAPS due  



                                                                                                                         

to legal restrictions on its use.  The Owners argue that the legal restrictions are a form of  

external obsolescence.35  The Owners' appraisers again applied this deduction using what  



is termed an "income shortfall" method.  



                                                                                      

                    We again agree with the superior court that "if the income shortfall method  



was  applied  based  on  tariff  income,  the  [replacement-cost-new-less-depreciation]  



                                                                                                                        

valuation would no longer reflect the 'full and true' economic value of TAPS as a critical  



component  of  the  integrated  [Alaska  North  Slope]  production  and  transportation  



                                       

system."  And we again express our scepticism with the income shortfall method of  



               36  

valuation.            But,  as  in  the  2006  case,  the  record  simply  does  not  reflect  that  the  



                                                             

regulation  adversely  affects  the  value  of  the  pipeline.    The  facts  have  not  changed.  



                                                                                    

Relying on similar, and at times identical, evidence, the superior court again rejected the  



                                                                                   

income shortfall method and found that "[t]he record does not support the proposition  



          34        In the 2006 appeal we held that "the superior court did not err by refusing                    



to treat tariff regulations as a form of economic obsolescence."  BP Pipelines I , 325 P.3d  

at 489.  In reaching that conclusion we observed that "the superior court heard ample  

                                

testimony that [the Owners' income shortfall method] of calculating depreciation is not  

                                                                                       

a widely accepted appraisal practice, nor does it appear in any widely accepted appraisal  

                                                         

manuals." Id.  But we ultimately rested our conclusion on the superior court's finding  

that tariff regulation is simply not a source of external obsolescence. Id.  



          35  

                                                                       

                    The Owners suggest that "[l]egal regulation in general, and tariff regulation  

                                                                

in particular, make TAPS less valuable to own than a newly constructed property would  

be, requiring a deduction for external obsolescence."  



          36        See  BP  Pipelines  I,  325  P.3d  at  489.  The  superior  court  referenced  



significant evidence that the income shortfall method is not widely accepted.  



                                                              -14-                                                         7039
  


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

that the regulatory status of TAPS negatively affects its economic value."  The superior  



                                                                      

court's determination that economic regulation does not affect the pipeline is not clearly  



                                                                                

erroneous.  We hold that the superior court did not err by refusing to apply an economic  



obsolescence deduction based on tariff regulations.  



          C.	       The Superior Court Did Not Err In Calculating The Total Proven  

                    Reserves For 2007-2009 And Estimating The Economic Life Of TAPS.  



                                              

                    The Department, Owners, and Municipalities each challenge the superior  



                                                    

court's end-of-life determination.  The Department argues that the court wrongly relied  



                                                            

on production forecasts produced by the Municipalities' expert, Dudley Platt, which the  



                                                                                  

Department claims are less reliable than the production forecasts provided by its expert,  



                                                                                             

Frank Molli.  The Municipalities challenge the court's use of a 100,000 bbl/d minimum  



                                                                                                             

mechanical throughput for TAPS, arguing that no minimum should have been applied.  



                           

And  the  Owners  argue  that  the  minimum  throughput  should  have  been  higher  than  



100,000 bbl/d.  



                                                              

                    1.	      The  superior  court  did  not  clearly  err  in  relying  on  Platt's  

                             production forecasts.  



                                                                                                            

                    The superior court concluded that production forecasts and economic life  



estimates prepared by Platt were more reliable than those prepared by the Department's  



                                  

and Owners' experts.  Platt's forecast used a "decline curve analysis at the pool level, as  



opposed to a well-by-well analysis" (used by the Department and the Owners), and the  



superior court found that "a pool-based analysis is generally preferable to a well-based  



                                

analysis."  The court consequently found that Platt's forecasts were more reliable than  



those prepared by the Department and the Owners.  



                                                             -15-	                                                      7039
  


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

                      A decline curve analysis is a required component of forecasting the life of  

                                                                                                               

proven reserves.37  One component of a decline curve is the "b-factor," which determines  



                                                                                                              38  

                                                                                                                  In his report Platt  

the shape of the curve of predicted  future reservoir production. 



                                                                                                                                        

included some b-factors that were one or greater.  The superior court found that "[a] b- 



                                                                                                                                            

factor greater than [one] projects infinite production over an infinite period of time."  But  



                 

the court noted that "forecasters use economic tests to terminate production at some point  



                                                                                                          

several decades in the future," making the concern regarding a b-factor greater than one  



irrelevant.  



                                                                                                             

                       The Department suggests that its expert, Molli, was better credentialed and  



                                                                     

used more accepted methods than Platt.  And the Department criticizes Platt's use of b- 



                                                   

factors greater than one.  The Department argues that it is well accepted that a b-factor  



greater  than  one  represents  an  infinite  or  unbounded  reserve,  which  is  technically  



impossible.  



                                                                                                           

                       In this case the superior court reviewed enormous amounts of evidence on  



oil- and gas-field production forecasts generally and the use of b-factors specifically.  



                                                              

The superior court found that "Platt is one of the preeminent production forecasters in  



                                                                                 

the  state,"  and  his  estimates  of  economic  life  correlated  well  with  the  estimates  BP  



                       

submitted to the United States Securities and Exchange Commission in connection with  



other proceedings unrelated to assessing the value of TAPS.  And the superior court  



           37          Decline curve analysis is a means of predicting future oil well or gas well              



production based on past production history.  See J.J. Arps, Analysis of Decline Curves ,  

160 TRANSACTIONS OF THE AIME  228, 228-229 (Dec. 1945).  



           38          The b-factor controls the amount of curvature on the decline curve.                                                A b- 



factor of zero will produce a straight line, and as the b-factor increases, more curvature  

is apparent.  Thus, a higher b-factor will result in a longer forecasted production.  See id.  

                                                                                                                   

at 242.  



                                                                     -16-                                                                7039
  


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

found  that  Platt's  economic  testing  was  reliable  and  that  "[overall]  .  .  .  Mr.  Platt's  

                           



production forecast and economic testing [was] persuasive."  



                   The record does not show that Platt's use of a b-factor greater than one had  



                              

a material effect on TAPS's projected end of life.  The fact that projected production  



                                                                                      

continues for an infinite time period using one b-factor, but only for billions of years  



                                 

using another, is not in any way instructive on which projection more accurately predicts  



pool decline over the relevant period - the next several decades.  While there appears  



                                                    

to be legitimate debate regarding the methods used by each of the expert forecasters, no  



         

party has presented evidence sufficient to show that the superior court clearly erred in  



choosing the production forecast it relied on to predict TAPS's end of life.  



                   2.	      It was not  error as a matter of law for the superior court to  

                            apply a minimum throughput, and the minimum flow rate it  

                            chose was not clearly erroneous.  



                   The  Municipalities  argue  that  the  court  erred  by  applying  a  minimum  



throughput  limitation  for  TAPS  when  determining  the  life  of  the  estimated  proven  



reserves  under  AS  43.56.060.    The  Owners  argue  that  the  court  correctly  applied  a  



minimum  throughput  limitation,  but  that  the  court's  minimum  throughput  limit  of  



100,000 bbl/d was too low.  



                            a.	      Applying  a  minimum  throughput  limitation  was  not  

                                     error.  



                   The superior court held that AS 43.56.060(e)(2) "does not expressly require  



                

the [c]ourt to consider the transportation facility's hydraulic, mechanical, or operational  



capacity to transport all of those proven reserves."  Nevertheless, the court concluded  



that  the  Board's  interpretation  that  the  statute  requires  a  minimum  throughput  



                                                                                            

determination  was  reasonable,  and  the  court  deferred  to  that  interpretation.                              The  



Municipalities  argue  that  the  superior  court  erred  by  deferring  to  the  Board's  



interpretation        because      it   is   not    consistent       with     the    Board's       application       of  



                                                         -17-	                                                   7039
  


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

AS 43.56.060(e)(2) to other pipelines in the state.  They further argue that there is no  

                                                                                                                    



evidence  in  the  record  of  a  specific  minimum  mechanical  throughput  limitation  for  



TAPS.  



                    Alaska Statute 43.56.060(e)(2) provides that the full and true value of an  



                                                               

oil or gas transportation facility must be determined "with due regard to the economic  



               

value  of  the  property  based  on  the  estimated  life  of  the  proven  reserves  of  gas  or  



                 

unrefined   oil   then   technically,   economically,   and   legally   deliverable   into   the  



                                                                       

transportation facility."  As the superior court correctly explained, the statute nowhere  



                                                            

mandates consideration of a "facility's hydraulic, mechanical, or operational capacity."  



But neither does it prohibit consideration of those factors.  To the extent that a facility  



does have a minimum throughput capacity, failing to account for that minimum capacity  



                                 

would overvalue the facility by attributing value to transporting oil that is not physically  



capable of being transported.  



                                                                        

                    The superior court noted that "[a]t trial, many expert witnesses testified that  



                                                                                                                     

they were unaware of any pipeline that had suspended transportation service for oil that  



                                                                                            

was  otherwise  economic  to  produce  due  to  mechanical,  hydraulic  or  operational  



limitations of the pipeline."  But in this case the record supports the superior court's  



                             

finding that TAPS has a minimum mechanical throughput limitation.  The superior court  



                                                                                             

reviewed multiple studies that discussed minimum operating levels from 300,000 bbl/d  



                                               

to  as  low  as  50,000  bbl/d.                It  mainly  relied  on  a  2010  study  that  BP  Pipelines  



                                                          

commissioned that set TAPS's lowest operational level at 70,000 to 80,000 bbl/d.  Thus,  



                                                                                                

the  superior  court  did  not  err  when  it  applied  a  minimum  throughput  limit  in  its  



                  39  

assessment. 



          39        The Municipalities also argue that the superior court erred by applying a  



minimum throughput limitation to TAPS without actually determining that there was a  

                                                                            

                                                                                                               (continued...)  



                                                              -18-                                                         7039
  


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

                            b.	       The  superior  court  did  not  clearly  err  in  choosing  

                                      100,000 bbl/d as the minimum throughput.  



                   After  considering  extensive  evidence,  the  superior  court  found  that  



                                                                                                             

evidence supported a minimum throughput of 100,000 bbl/d.  The Owners argue that  



evidence  suggests  "serious  operational  problems  associated  with  lower  levels  of  



throughput, particularly for throughput levels below 300,000 [bbl/d]."  



                                                                                                      

                   The evidence supports the superior court's determination that TAPS can  



                                                                

effectively operate with a throughput as low as 100,000 bbl/d.  Several experts testified  



                                                                                          

that there is no hydraulic constraint that would prevent TAPS from operating even at  



                                                                                         

levels  near  zero  throughput.              A  BP  analyst,  John  Haines,  suggested  that  TAPS's  



                                                                                                  

operational limit is about 100,000 bbl/d.  A study conducted for BP in 2004 suggested  



                                                                                                      

a low-flow  limit for the existing pipeline of 135,000 bbl/d.   In 2010 Phil Carpenter  



                                                                                                        

conducted a low-flow study for BP Pipelines and concluded that TAPS could operate  



effectively at throughputs between approximately 70,000 and 100,000 bbl/d and possibly  



                                             

down  to  50,000  bbl/d.    The  Carpenter  study  also  suggested  that  there  could  be  



technological options for reducing flow even further.  



         39(...continued)  



minimum  limit,  citing  the  court's  statement  that  "TAPS  can  effectively  transport  

throughputs at least down to a minimum flow rate of 100,000 bbl/d." (Emphasis added.)  

                                                                                                 

The  court's  statement  acknowledged  uncertainty  regarding  whether  the  minimum  

                                                                                                      

mechanical throughput for TAPS is lower than 100,000 bbl/d.  But it is not inconsistent  

with that uncertainty to set the minium throughput at the lowest level the court found  

with  reasonable  certainty  at  which  TAPS  could  continue  to  operate.    The  court's  

suggestion that TAPS may be able to operate at an even lower throughput may support  

an  argument  100,000  bbl/d  is  a  conservative  estimate,  but  it  does  not  negate  the  

estimate's validity or mandate a lower minimum throughput determination.  



                                                          -19-	                                                    7039
  


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

                      Based on this evidence, the superior court did not clearly err by finding that  

                                                                                                                              

TAPS's minium throughput capacity was at least 100,000 bbl/d.40  



           D.	        The       Superior           Court         Did      Not       Err      By      Making           An      Economic  

                                                                                                                     

                                                  

                      Obsolescence Deduction For Low Throughput.  



                      The replacement-cost-new-less-depreciation valuation method requires an  



assessor to deduct for three types of depreciation:  physical deterioration, functional  



                                                                                                                          

obsolescence, and economic obsolescence.  Physical deterioration is the "loss in value  



                                                                                                                    

or usefulness . . . due to the using up or expiration of [the property's] useful life caused  

                                                                41  Functional obsolescence is defined as "the loss  

by wear and tear" and other like causes.                                                                                       



in  value  or  usefulness  of  a  property  caused  by  inefficiencies  or  inadequacies  of  the  



                          42  

                                                                                                              

property itself."              Economic obsolescence is "the loss in value of a property by factors  



                                                                                                                 

external  to  the  property,"  such  as  a  decrease  in  demand,  loss  of  labor  or  materials,  



                                                                                                     43  

increased costs of raw materials, new legislation, or the like.                                          



                      The  superior  court  applied  the  economic  age-life  method  to  estimate  

                                              



depreciation, which "[i]n its simplest form . . . considers all three forms of depreciation  

                                                                                                             



using a single calculation." But the economic age-life method is limited by depreciating  

                                               



all  property  on  a  straight  line  basis;  the  court  concluded  that    "[w]ithout  a  scaling  

                            



           40         The 2011 Alyeska Low Flow Impact Study, which suggested that TAPS's     



lower operational capacity limit is between 300,000 and 350,000 bbl/d, is insufficient to   

offset the large amount of evidence offered to the contrary. As we have said many times,            

"the  superior  court,  not  this  court,  judges  the  credibility  of  witnesses  and  weighs  

conflicting evidence." See, e.g., 3-D & Co. v. Tew's Excavating, Inc., 258 P.3d 819, 824  

                                                                                                                   

(Alaska 2011) (quoting Josephine B. v. State, Dep't of Health & Social Servs., Office of  

                                                                                           

Children's Servs., 174 P.3d 217, 222 (Alaska 2007)) (internal quotation mark omitted).  

                                                        



           41         AM .   SOC 'Y OF APPRAISERS , supra note 5, at 67.  



           42         Id.  



           43         Id.  



                                                                     -20-	                                                             7039
  


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

                                                       

adjustment, the approach can lead to an overestimation of the value of pipeline property  



that transports declining proven reserves."  



                                                                                                               

                    The court recognized that low throughput decreased the value of TAPS but  



                                                                                                             44 

                                                                                                                because, in  

declined to make a functional obsolescence adjustment for superadequacy 



                                                                                                   45  

                                                                                                       Instead, the court  

part, it found that TAPS's excess capacity was required by contract. 



                                                                                    

deducted for the low throughput as a form of economic obsolescence, finding, as it did  



                                                                                                         

in 2006, that "while TAPS is required to have a design capacity of at least 1.1 million  



                                                                                             

bbl/d, the fact that capacity is not all being used to transport affiliated oil reduces the  

utility and value of TAPS as of the lien date."46  



                    The Municipalities argue that if an adjustment were legally allowable, the  

superior court erred by miscalculating it.47  They allege that the court erred by (1) scaling  

                                                                                        



          44        A superadequacy occurs when "some aspect of the subject property exceeds  



market norms;" "[i]t represents a cost without any corresponding increment in value or  

                                                                     

a cost that the increment in value does not meet." APPRAISAL  INST ., supra note 18,  

at 434-35.  



          45        The  Amended  Capacity  Settlement  Agreement,  an  agreement  reached  



among the Owners and the State, "assure[d] the State of a certain level of excess capacity  

                                                                                               

to optimize the development of its natural resources." BP Pipelines I , 325 P.3d 478, 501  

                                                

n.53 (Alaska 2014).  The agreement set TAPS's capacity at 1.1 million bbl/d for the  

                                                         

duration of the agreement.   The superior court found that it required the Owners to  

                                                                                                           

maintain that capacity during the years on appeal.  



          46        We  conclude  that  the  superior  court  did  not  clearly  err  in  this  finding.  



                                  

Evidence presented at trial again showed that TAPS was operating below its maximum  

                                                                                 

throughput capacity.  No party disputes this fact.  And we again agree that the continued  

                                   

low throughput makes TAPS less valuable as an asset. A 

                                                                                  M . SOC 'Y OF APPRAISERS , supra  

note 5, at 97 ("Whenever the operating level of a plant or an asset is significantly less  

                     

than its rated or design capability, and the condition is expected to exist for some time,  

                                    

the asset is less valuable than it would be otherwise.").  



          47        As in BP Pipelines I , 325 P.3d at 493-95, the Municipalities also argue that  



                                                                                                            (continued...)  



                                                             -21-                                                        7039
  


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

                                                                           

all TAPS property rather than just the pipeline; (2) scaling based on a capacity of 1.42  



                                                 

million  bbl/d  rather  than  the  currently  required  1.1  million  bbl/d  capacity  or  the  



                                                                

mechanical capacity (760,000 bbl/d); (3) failing to consider the value of excess capacity;  



                                               

and (4) failing to account for positive external factors that would negate the deduction  



for low throughput.  



                                                                                                      

                     Because the superior court's decision is supported by the evidence, we hold  



                                                                                    

that the superior court's scaling calculations were not clearly erroneous.  However, we  



                                                                                                             

note that in the future it would be helpful to see more detailed findings and reasoning in  



the superior court's decision on some of these issues.  



          47(...continued)  



(1) the superior court erred by failing to defer to the Board; (2) economic obsolescence  

                                                                                            

was already counted in the economic age-life method; and (3) a scaling adjustment is  

inappropriate  because  the  Owners  are  required  to  maintain  the  capacity.    But  these  

                                          

questions have all been resolved by our opinion in the 2006 case, as outlined below.   



          The Municipalities seek to apply the standard of review under which the Board  

                                                                                                  

reviews a Department decision, but the superior court reviews the Board's action de novo  

                                                                                                    

and   need   not   give   deference   to   the   Board's   decision.   See   id.   at   493   (citing  

                                                                                                             

AS 43.56.130(i)).  Second, we held in BP Pipelines I that the economic age-life method  

                                                                                  

did not result in any double counting because "when operating level is significantly less  

                                                                                                 

than design capacity, 'the asset is less valuable than it would otherwise be,' and that drop  

                                                                                                                  

in  value  comes  not  just  from  the  decline  in  operating  level,  but  also  from  the  

superadequacy  that  exists."  Id.   at  494-95  (quoting  A 

                                                                                          M .   SOC 'Y   OF   APPRAISERS ,  

supra  note  5,  at  97).  This  is  intuitive  because  the  economic  age-life  method  only  

                   

measures the economic obsolescence due to the fact that the North Slope reserves will  

                                                                                                                  

be exhausted before the end of TAPS's useful life.  It does not account for the fact that  

                                                                                                              

during this time TAPS will be underutilized. Finally, we held that "whether a deduction  

                                                                                        

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

                                                                                              

may have to maintain a certain capacity." Id.   Whether the low throughput decreases  

                                                                         

TAPS's value is a question of fact, id. at 493, but this argument - that as a matter of law  

                                                                                                     

no economic obsolescence deduction may be taken for required capacity - was already  

                                           

considered and decided in the 2006 appeal. Id. at 494-95.  



                                                               -22-                                                          7039
  


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

                    1.	       The  superior  court  did  not  clearly  err  by  scaling  all  TAPS  

                              property.  



                    The  Municipalities  argue  that  even  if  the  superior  court  appropriately  



considered excess capacity as economic obsolescence, it erred by scaling all TAPS asset  

                                                                                                                  



categories because all other categories are assumed to be efficient at current volumes.  



They  suggest  that  "[t]he  court  did  not  explain  its  rationale  for  deviating  from  the  

                                                                                                     



Assessor's and the Board's approaches in scaling only the pipeline."  



                    The Municipalities cite evidence that the Department and the Board scaled  

                                                                             



only the pipeline for the years 2008-2010, based on the Assessor's conclusion that other  

                                                                                                                     



TAPS facilities and property may not be sensitive to low throughput.  But the evidence  

                                                                                                                



also shows that the Assessor applied a scaling adjustment to the entire system in 2006  

                                                                                         



and began doing so again in 2011 in response to the superior court's decision in the 2006  

                                                                                          



assessment appeal that scaling was external rather than functional obsolescence.  The  



Department's assessor, Greeley, explained that "starting in 2007, in considering the  



obsolescence as a functional issue, I had only been scaling the pipeline portion   . . .  



because functional obsolescence emanates from within the property and can only affect   



pieces and parts of the property."  But he testified that after the superior court's decision  



                                

in  the  2006  appeal  he  thought  it  was  "pretty  obvious  .  .  .  that  the  source  of  the  



obsolescence  is  external,  .  .  .  and  the  obsolescence  does  affect  the  entirety  of  the  



                                                                                                               

property."   He then elaborated that it is a "tenet of appraisal theory . . . that external  



obsolescence affects the property in its entirety."  



                                              

                    And  it's  really  important  .  .  .  to  not  confuse  functional  

                                          

                    obsolescence  with  external  obsolescence.    For  instance,  if  

                                                            

                    you've cured a functional issue with the pumps by replacing  

                                                                       

                    the pumps . . . with pumps that can vary their throughput  

                    efficiently  through  different  bandwidths,  you've  cured  a  

                                                                                         

                    functional   issue.            But   what   you   haven't   cured   is   the  

                                       

                    diminution in value due to declining reserves that's reflected  



                                                              -23-	                                                        7039
  


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

                    that [sic] the pumps are now anticipated to be only operating  

                    at 600,000 barrels a day instead of the 1.1-million-barrel-a- 

                    day upper limit on the pumps.  

                    The superior court heard testimony and reviewed appraisal literature48 that  



counseled that if the obsolescence emanates from factors outside of the property, the  



                                                                                                      

entire property should be scaled.  The superior court did not clearly err by scaling the  



entire property.   



                    2.	      The superior court did not clearly err by using TAPS's design  

                             basis of 1.42 million bbl/d in its scaling calculation.  



                                                                

                    The Municipalities argue that the superior court erred by using the original  



                        

design basis of 1.42 million bbl/d in its scaling calculation.  The Municipalities contend  



                                                                                             

that  the  court  should  have  used  the  mechanical  capacity  of  TAPS  (the  throughput  



                                                                                                            

achievable without use of drag reducing agents), 760,000 bbl/d, or at least the 1.1 million  



                                                                                                       

bbl/d design basis of the ProPlus Replacement Cost New (RCN). And they contend that  



                                       

it was inconsistent for the superior court to reject the Owners' argument that the pipeline  



                                                                                                           

should be scaled to 2.1 million bbl/d because this throughput could be achieved only  



                                                         

using  drag  reducing  agents  but  then  choose  to  scale  to  another  number  that  is  also  



achievable only using drag reducing agents.  



                           

                    The  superior  court  found  that  the  design  capacity  of  the  replacement  



pipeline  was  the  same  as  the  existing  pipeline,  1.42  million  bbl/d.    But  the  court  



                                                                                         

determined that the pumps should be scaled at a 1.1 million bbl/d capacity because that  



is the capacity of the existing pumps.  The court explained that while ProPlus RCN's  



          48        See  AM .  SOC 'Y OF APPRAISERS , supra  note 5, at 99-100 (scaling the whole     



property  in   example  12);  APPRAISAL  INST .,   supra  note  18,  at  435,  442  (compare  

definition of superadequacy - describing a "property component that exceeds market  

requirements" - with economic obsolescence, which "frequently affect[s] both the land  

                                                                      

and building components of a property's value").  



                                                             -24-	                                                      7039
  


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

design basis is only 1.1 million bbl/d, the actual design capacity is based on the number         



of installed pumps and the tank capacity at the Valdez Marine Terminal and that "[t]he     



[replacement] 48-inch mainline pipe has exactly the same capacity as the existing TAPS   



48-inch  pipeline."    In  contrast,  in  the  2013   tax   year  the  Board  began  to  "use  the  



mechanical  capacity  of  the   replacement  TAPS,  not  augmented  by  the  use  of  drag  



reducing agents . . . because, to the extent that there is any super-adequacy, it is in the     



actual capacity of the TAPS itself, not in any extra capacity that could be created by  



external efforts that involve increased operating expenses."  



                                             

                      The superior court's finding - that although ProPlus RCN's design basis  



                                                                                                                        

is  1.1  million  bbl/d,  its  design  capacity  is  that  of  the  existing  TAPS  pipeline  -  is  



supported by the record.  ProPlus, which designed the hypothetical replacement pipeline  



                                                                                               

for the Municipalities, estimated a maximum capacity of up to 1,382,000 bbl/d without  



                                                                                                                

drag reducing agents.  The Municipalities' expert testified that this capacity is the same  



as the existing TAPS capacity, but that higher throughput can be achieved using drag  



                                                             

reducing agents.  He also suggested that the design included expandable capacity to 1.8  



                                                                                                   

million bbl/d.  In other words, the capacity of the existing pipeline and a hypothetical  



replacement pipeline can be increased well beyond a 1.1 million bbl/d design basis by  



adding or enhancing pumps and/or by using drag reducing agents.  



                                                                                                               

                      One of the treatises relied upon by the parties states that unused utility is  

                                                                                                                    49  It explains that  

present when a plant is operating below its "rated or design capability." 



the scaling "measures the loss in value by reducing the capital investment from rated  



           49         AM .   SOC 'Y OF APPRAISERS , supra note 5, at 97.  



                                                                     -25-                                                                   7039  


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

                                                                                             50  

capability to the actual operating level to 'balance' the plant."                                It also uses "rated or  



                                                                                                                         51  

design capacity" as the full capacity in the denominator of the scaling calculation.                                         



                    While we believe that the Board's decision to use a mechanical limit is  



                                                                      

reasonable, the superior court's decision to use design capability is not clearly erroneous  



                                                                                    

considering  that  using  design  capability  is  one  of  the  approaches  advocated  by  the  



valuation treatises relied upon by the parties.  Because the superior court permissibly  



                                                                            

chose to use the design capability, we hold that it did not clearly err in choosing 1.42  



million bbl/d as its scaling denominator.  



                    3.	       The superior court did not fail to account for the utility of excess  

                              capacity.  



                    The Municipalities argue that the superior court should not have made a  



                                                                                                                        

deduction for economic obsolescence because TAPS's extra capacity has value.  They  



                              

argue that the extra capacity gives the Owners flexibility to ramp up production and has  



                                                                                        

"day-to-day operational utility."  The Owners respond that the excess capacity does not  



          50	       Id. (emphasis added).  



          51        Id.  at 98.      This  treatise  also  states  that  scaling  is  applicable  when  "the  



operating  level  of  a  plant  or  an   asset  is  significantly  less  than  its  rated  or  design  

capability,"  id.  at  97  (emphasis  added),  implying  that  the  appraiser  must  find  the  

operating   level   to   be   significantly   less   than   capacity.      See   also   CAL .                        BD .   OF  



                                                                              

EQUALIZATION , GUIDELINES  FOR  SUBSTANTIATING  ADDITIONAL  OBSOLESCENCE  FOR  

PER SO N A L         PR O PE R T Y       A N D      F IX TU RE S       20      (May        2010),         available          at  

www.boe.ca.gov/proptaxes/pdf/10-003.pdf (using the "rated or design capacity" as the  

full capacity but stating that "[i]f the expected capacity of the user differs from the rated  

                          

capacity of the manufacturer, it may be valid to use the expected capacity instead of the  

                                                                             

rated or design capacity when the expected capacity is less than the rated or design  

                                                                                            

capacity").  In the future if this issue arises again, we would expect to see more findings  

                                                       

and analysis regarding what constitutes a "significant" drop if the court continues to  

deduct for economic obsolescence.  



                                                             -26-	                                                       7039
  


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

                                                                          

have utility because there is no predicted increase in throughput that such capacity would  



be useful to accommodate.  



                   The Municipalities are correct that excess capacity that has functional utility  



                                                                                        52  

should not be deducted as a form of functional obsolescence.    An example would be  



excess capacity used to handle regular or expected spikes in production or expected  



           53 

                                                      

growth.        But those situations do not apply here. There may be variations in a pipeline's  



throughput, but the evidence shows that the throughput is not subject to the same type  



                                                                                                            

of immediate and unexpected increases in use that characterize telephone and electric  



power utilities.  The Municipalities' argument that the excess capacity is valuable to  



"ramp up production" fails when the evidence shows there is no expectation of that  



                                                           

happening.  The Municipalities have not established that the superior court clearly erred  



by not reducing TAPS's economic obsolescence based on utility.  



                   4.	       The superior court did not err by declining to adjust for other  

                             external factors.  



                   The Municipalities argue that the superior court erred by failing to consider  



                                                                                                

positive external factors in its economic obsolescence analysis.   The Municipalities'  



          52       See In the Matter of Onondaga Cnty. Water Dist. v. Bd. of Assessors of the                        



Town of Minetto, 350 N.E.2d 390, 391-92 (N.Y. 1976) (excess capacity for future needs  

should not be deducted as a form of functional obsolescence).  



          53       C f .     C A .      B D .      O F     E Q U A L I Z A T I O N  ,       G U I D E L I N E S       F O R   



                               

SU B S T A N T IA T IN G        A D D IT IO N A L        O B S O L E S C E N C E      F O R    ST A T E -A S S E S S E D   

T E L E C O M M U N IC A T IO N S         P R O P E R T IE S     5-6       (Apr.       2009),         available          at  

www.boe.ca.gov/proptaxes/pdf/Obsolescence_Guidelines.pdf   (explaining   that   "the  

purported excess capacity [cannot be] spare capacity the market typically builds into the  

property to handle peak demands, growth, planned redundancy, or that required by law"  

                                                                                                      

when  "local  exchanges  typically  design  and  build  their  systems  to  handle  the  high  

volume of calls on holidays or emergencies"); Onondaga Cnty. Dist., 350 N.E.2d at 392  

                                                                                                    

(holding  no  excess  capacity  when  water  system  was  "[d]eliberately  planned  and  

constructed to meet the future needs" in an area with increasing water usage).   



                                                           -27-	                                                     7039
  


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

                                                                                             

argument suggests that there are many positive external factors derived from the fact that  



                                                                                                                                  

TAPS is part of a valuable broader enterprise that is very profitable and that oil prices  



                                   54  

are likely to increase,   which may spur additional development.  The Owners argue that  



                                                                                    

none  of  these  factors  change  the  amount  of  oil  flowing  through  the  pipeline.    The  



superior  court  implicitly  rejected  the  Municipalities'  argument  by  not  adjusting  the  

economic obsolescence deduction.55  



                                                                                        

                      The superior court's implicit rejection of these arguments was not clearly  



                     

erroneous.  According to the testimony of the Department of Revenue appraiser, James  



                                                                                                                             

Greeley, a high price of oil alone does not decrease the underutilization of the pipeline:  



he explained that with increased oil prices the value of oil flowing through the pipeline  



                                                           

would be higher, but the quantity of oil would not change; the pipeline would still be  



                                                                               

underutilized.  And it is the low quantity of oil flowing through the pipeline that makes  



a  deduction  for  economic  obsolescence  warranted,  not  the  price  of  the  oil.    As  the  



                                                                                                      

Owners note, a higher price of oil might make more reserves economically recoverable,  



resulting in a later end of life for TAPS, but an increased price would not, on its own,  



                                                                                                        

increase the amount of oil in the pipeline.  The price of oil or the Owners' profitability  



           54         We take notice that the price of oil has collapsed from a high of $145 a  



barrel in July 2008 to its current value of approximately $45 a barrel in August 2015.  

Spot  Prices  for  Crude  Oil  and  Petroleum  Products,  U.S.  E 

                                                                                                           NERGY   INFO .    ADMIN .,  

www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=D                                                                (last      visited  

Aug. 17, 2015).  



           55         Contrary to the Municipalities' suggestion, we take notice that the value of                      



oil and production projections were accounted for in determining the end of life for the   

pipeline, and in fact were the subject of considerable discussion in the superior court's                    

decision.  We infer that the superior court's omission of any other deduction meant that       

it considered and rejected these arguments.  If this issue arises in the future, explicit                         

findings and analysis should be provided.  



                                                                     -28-                                                               7039
  


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

does not change the amount of inutility the pipeline experiences from the decreased  



amount of oil flowing through it.  



                                                                                   

                   We conclude that the superior court did not clearly err by not adopting the  



Municipalities' argument that the proffered positive factors should offset the court's  



economic obsolescence deduction for low throughput.  



          E.	      The Superior Court Did Not Abuse Its Discretion By Declining To  

                   Apply Collateral Estoppel.  



                                                                                                   

                   Before  the  trial  began  the  superior  court  issued  an  order  precluding  



                                                                                         

relitigation of many of the issues tried in the 2006 appeal. But the superior court vacated  



that  order  at  trial.    The  Municipalities  argue  that  the  court  abused  its  discretion  by  



                                                                               

vacating its order and not applying collateral estoppel to preclude relitigation of issues  



decided in the 2006 appeal.  



                   Collateral estoppel prohibits relitigation of issues actually decided in earlier  



proceedings where:  



                                                  

                   (1) the party against whom the preclusion is employed was a  

                                                                      

                   party to or in privity with a party to the first action; (2) the  

                   issue  precluded  from  relitigation  is  identical  to  the  issue  

                                    

                   decided in the first action; (3) the issue was resolved in the  

                                                                        

                   first action by a final judgment on  the merits; and (4) the  

                   determination   of   the   issue   was   essential   to   the   final  

                                  [56] 

                   judgment.           



But "the existence of [these] elements provides only the underlying basis for the trial  



                                                               

court's exercise of discretion to apply  or  not apply collateral estoppel, and . . . this  



          56       Ahtna,  Inc.  v.  State,  Dep't  of  Transp.  &  Pub.  Facilities ,  296  P.3d  3,  8  



(Alaska  2013)  (quoting  Matanuska  Elec.  Ass'n  v.  Chugach  Elec.  Ass'n ,  152  P.3d  

460, 468 (Alaska 2007)).  



                                                           -29-	                                                     7039
  


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

discretion must be tempered by principles of fairness in light of the circumstances of  



                                   57  

each particular case."                 



                      The superior court expressed legitimate concerns about applying collateral  



                                                                                                                             

estoppel in this case given the complexity of the issues and potential for some change in  



the  relevant  facts,  and  we  conclude  this  was  a  permissible  exercise  of  the  court's  

discretion.58  



V.         CONCLUSION  



                      We AFFIRM the superior court's decision in all respects.  



           57        McAlpine v. Pacarro , 262 P.3d 622, 627 (Alaska 2011) (quoting Misyura v.  



Misyura , 242 P.3d 1037, 1040 (Alaska 2010)) (internal quotation marks omitted).  



           58         The Owners argued in their initial briefing to this court - as they did in the                  



2006 appeal - that the superior court erred by imposing interest based on the tax's   

original  due  date.    We  addressed  and  rejected  this  contention  in  the  2006  appeal.  

BP Pipelines I , 325 P.3d 478, 495-96 (Alaska 2014).  



                                                                  -30-                                                             7039
  

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