BEFORE THE STATE BOARD OF EQUALIZATION

FOR THE STATE OF WYOMING

IN THE MATTER OF THE APPEAL OF             )

UNION PACIFIC RESOURCES COMPANY     )

FROM A CHANGE OF VALUATION METHOD )         Docket No. 2000-147

DECISION BY THE MINERALS DIVISION OF  )

 THE DEPARTMENT OF REVENUE                  )

(Whitney Canyon Plant/Whitney Canyon field)  )

IN THE MATTER OF THE APPEAL OF             )

CHEVRON U.S.A., INC., FROM A CHANGE    )

OF VALUATION METHOD DECISION BY        )         Docket No. 2000-151

THE MINERALS DIVISION OF THE                  )

DEPARTMENT OF REVENUE                          )

(Whitney Canyon)                                              )

IN THE MATTER OF THE APPEAL OF             )

AMOCO PRODUCTION COMPANY FROM A  ) 

CHANGE OF VALUATION METHOD                )         Docket No. 2000-154

DECISION BY THE MINERALS DIVISION OF  )

THE DEPARTMENT OF REVENUE                  )

(Whitney Canyon Field)                                      )

IN THE MATTER OF THE APPEAL OF             )

CHEVRON U.S.A., INC., FROM A                     )

NOTICE OF VALUATION FOR TAXATION       )         Docket No. 2001-114

PURPOSES DECISION OF THE MINERALS   )

DIVISION OF THE DEPARTMENT OF              )

REVENUE(Production year 2000,                     )

Whitney Canyon)                                               )

IN THE MATTER OF THE APPEAL OF             )

AMOCO PRODUCTION COMPANY FROM A  )

NOTICE OF VALUATION FOR TAXATION       )         Docket No. 2001-149

PURPOSES DECISION OF THE MINERALS   )

DIVISION OF THE DEPARTMENT OF              )

REVENUE(Production year 2000,                     )

Whitney Canyon)                                               )

FINDINGS OF FACT, CONCLUSIONS OF LAW, DECISION AND ORDER

JUNE 9, 2003

APPEARANCES

Mr. Jesse R. Adams, III, and Ms. Nicole Crighton of Oreck, Bradley, Crighton, Adams & Chase, for Petitioner BP Amoco (Amoco).

Mr. William J. Thomson, II, and Mr. John Kuker of Dray, Thomson & Dyekman, P.C., for Petitioner Chevron U. S. A., Inc. (Chevron).

Mr. Walter F. Eggers, III, of Holland & Hart, and Mr. Russell W. Miller, Assistant General Counsel of Anadarko Petroleum Company for Petitioner Union Pacific Resources Company, now known as RME Petroleum (UPRC).

Mr. Martin L. Hardsocg and Mr. Karl D. Anderson for the Wyoming Department of Revenue (Department).

Mr. Bruce A. Salzburg of Herschler, Freudenthal, Salzburg & Bonds for Intervenor Unita County. 

DIGEST

This matter came on for hearing on August 19, 2002, by the State Board of Equalization (Board), consisting of Chairman Edmund J. Schmidt, Vice Chairman Roberta A. Coates (Chairman at the time of the Decision and Order), Board Member Sylvia Lee Hackl, and Gayle R. Stewart, Hearing Officer. Chairman Schmidt and Member Hackl resigned from the Board prior to the Decision and Order. Vice Chairman Alan B. Minier and Board Member Thomas R. Satterfield have considered the matter by reviewing the file, hearing transcript, and exhibits, and participated in the Decision and Order. This appeal arises from the Department’s selection of the “comparable value method” for the valuation of gas products processed through the Whitney Canyon gas processing facility located in Uinta County, Wyoming, for production year 2000, and Notices of Valuation for the same year.

JURISDICTION

As required by Wyo. Stat. Ann. § 39-14-203(b)(vi), the Department selected the method it intended to apply to calculate the fair cash market value of taxpayers’ production, then duly notified them of selection of the comparable value method on August 31, 1999. All taxpayers appealed this selection of method to the Board pursuant to Wyo. Stat. Ann. § 39-14-203(b)(viii). The Board accordingly has jurisdiction to consider the taxpayers’ appeals of the selection of the comparable value method.

In the late spring of 2001, taxpayers Amoco, Chevron, and UPRC filed annual reports related to their year 2000 gas production processed through the Whitney Canyon gas processing plant, but used the proportionate profits method to calculate fair cash market value of their production. After reviewing the annual reports, the Department issued each taxpayer a Notice of Valuation, and in each instance redetermined the production valuation using the comparable value method. This meant applying a 25% processing deduction against the total revenues reported by the taxpayers in their annual reports. Taxpayers Amoco and Chevron filed timely appeals of the Notices of Valuation received by them, pursuant to Wyo. Stat. Ann. §39-14-209(b). These appeals challenged the Department’s application of the comparable value method. Under Wyo. Stat. Ann. §39-14-209(b)(iv), the Board may hear objections to the Department’s determination of the fair market value of natural gas production, and accordingly has jurisdiction to consider the appeals of Amoco and Chevron. Union Pacific Resources Company did not file a timely appeal of the Department’s Notice of Valuation.

DISCUSSION

The Department is responsible for determining the fair market value of natural gas production each year. In Wyoming, these taxes are computed on the basis of fair market value after production of gas from the well is completed. This case involves the determination of a value for gas which cannot be sold when production is completed, but instead can only be sold after it has been processed to remove hydrogen sulfide.

Where gas is sold after processing, Wyoming law authorizes the Department to select one of four alternative methods to make its determination of value. The Department selected the comparable value method. The taxpayers insist that, for a variety of reasons, the comparable value method cannot and should not be used. They request that we set aside the Department’s selection. The parties agree that the result of a ruling in favor of the taxpayers will be determination of value for production year 2000 using the proportionate profits method, which is the method that had been used in recent years to value production from the Whitney Canyon facility.

Generally speaking, the object of the comparable value method is to determine a processing fee. This fee is then subtracted from the value of the actual sales of processed gas, thereby reaching a fair market value for the gas after production is complete, but before processing. To use the comparable value method, the Department must draw inferences based on reliable information about processing fees paid by other persons in similar circumstances.

Among other things, the taxpayers dispute the propriety of (1) the Department’s selection of information concerning similar processing fees, in light of the specific statute authorizing the method; (2) the general reliability of the inferences drawn, in light of sound appraisal practice; and (3) whether the Department’s determination accurately reflects the fair market value of the year 2000 production. The taxpayers also raise a number of other concerns based in law, including a concern that use of the selected method violates a state constitutional requirement that all minerals be uniformly valued. Due to the many issues raised by the parties, and the importance of placing those issues in the context of the evidence presented to us, we believe a further summary would not be helpful. The issues are nonetheless addressed in detail below, together with the facts and arguments that were presented to the Board from August 10 to August 19, 2002.

This proceeding is somewhat unusual in that the parties have agreed it will serve as a lead case for several others raising similar questions.

We resolve the dispute in favor of the Department.

FINDINGS OF FACT

Overview

1.       The three taxpayers in this case are producers of sour natural gas who also jointly own interests in a facility that processes the gas for sale. The parties have assumed that this circumstance has the effect of limiting the methods available to the Department for the determination of the fair market value of the gas, and represent to the Board that, out of five statutory possibilities, the only two available methods for determining fair market value are the comparable value method and the proportionate profits method. The role of the Board in the first instance is to determine whether the Department properly selected the comparable value method. If not, the taxpayers contend that the proportionate profits method is the only method by which a value can be determined for the gas.

History and background

2.       Amoco discovered the Whitney Canyon field in 1977. [Tr. Vol. IV, p. 654]. Because the gas contained substantial percentages of hydrogen sulfide, there were no processing facilities that could condition the gas into a marketable state. [Tr. Vol. IV, p. 655]. In 1980, the four working interest owners in the field began negotiations for the construction of a suitable gas processing facility. [Tr. Vol. IV, p. 657]. These owners were Amoco Production Company, Champlin Petroleum Company, Gulf Oil Corporation, and Apache Petroleum Company. [Exh. 120]. In the production year at issue in this case, 2000, the successors in interest to these entities were Amoco Production Company, Union Pacific Resources Company, Chevron U.S.A., and Forest Oil Company, respectively. [Tr. Vol. 1, p. 106]. Forest Oil Company is not a party to these proceedings.

3.       The original four working interest owners entered into an agreement for the joint Construction, Ownership and Operation of the Whitney Canyon Gas Processing Plant, Uinta County, Wyoming (“the C&O Agreement”), dated March 3, 1980. [Tr. Vol. IV,p. 657; Exh. 120]. The C&O Agreement identifies Amoco as both the “Operator” and an “Owner”, and identifies the other three parties as both “Non-Operators” and “Owners”. [Exh. 120, p. W0050]. Under the C&O Agreement, the owners of working interests in the Whitney Canyon gas field dedicated their production to the Gas Plant. [Exh. 120, Exhibit A (Exhibit 120 includes attached exhibits lettered A through G)]. Working interest percentages in the Gas Plant were based on average working interest percentages in the Whitney Canyon field, with the Operator, Amoco, having the largest percentage at 62.9456%. [Exh. 120, Exhibit A].

4.       By executing the C&O Agreement, the parties also executed a Gas Processing Agreement attached to the C&O Agreement as Exhibit F. The execution by each party was “as a producer in mineral leases owned by it and as a processor as to all such agreements made by it and by other parties owning an interest in the Plant.” [Exh. 120, Section 23.1]. The Gas Processing Agreement is a separate agreement with separate terms. Under the Gas Processing Agreement, each party to the C&O Agreement is identified both individually as a Producer, and collectively as one of the Owners of the Gas Processing Plant. [Exh. 120, Section 23.1, Exhibit F; see also Section 1(d) of Exh. 120].

5.       The Exhibit F Gas Processing Agreement obliges each Producer to pay, to the Owner[s], an in-kind processing fee of 25% of the plant production which is recovered during each monthly settlement period, and which is attributable to that Producer. [Exh. 120, Exhibit F, Section 12.1]. The Owners are responsible for all operating costs of the Gas Processing Plant. [Exh. 120, Exhibit F, Section 12.2]. The Gas Processing Agreement further recites that the compensation percentage in the in-kind fee “can be readjusted to provide a discounted cash flow rate of return of 25% after Federal Income Taxes” if the anticipated capital investment of slightly less than $340 million is exceeded. [Exh. 120, Exhibit F, Section 12.3]. Up to the time of the hearing in this matter, the 25% in-kind fee has never been changed. [Exh. 120, Exhibit F; Tr. Vol. VI, p.1115]. It continues to govern the fees paid by the original parties to the C&O Agreement and their successors in interest.

6.       The 25% in-kind fee paid for processing is distributed to the Plant Owners based upon each company’s working interest percentages in the Gas Plant. The C&O Agreement provides that, “Each Plant Owner receives an undivided interest in Plant products received as compensation for services rendered in proportion to its plant ownership percentage.” [Exh. 120, Section 12.1]. Each Owner is responsible for selling its share of the plant products. [Tr. Vol. I, p. 65-66; Tr. Vol. V, pp. 921-922]. With respect to costs of operation of the plant, the C&O Agreement provides that “all costs incurred in the acquisition, construction, installation, maintenance, operation, enlargement, alteration, supervision, and management of the Plant” are to be shared by the Owners “in proportion to their interest in the Plant.” [Exhibit 120, Section 11.1]. The sale of this in-kind plant production is reasonably viewed as being available to each of the Owners to defray its respective share of the plant operating expenses billed monthly by Amoco, in its capacity as Plant Operator. [Exh. 120, Article XI; Tr. Vol. III, p. 538; Tr. Vol. V, p. 938].

7.       The only expense paid by any Producer under a Gas Processing Agreement is the 25% in-kind fee. Producers pay the fee. Plant Owners receive the fee. Plant Owners pay Gas Plant expenses. Testimony offered during the course of the hearing of this matter raised a concern that the taxpayers paid for processing costs twice – once as Producers, in the form of the in-kind fee, and once again as Owners, in the form of the monthly billing. [E.g., Tr. Vol. I, p. 74]. We find that the only payment for processing costs by any Producer is the 25% in-kind processing fee. There is no duplicate payment for processing costs.

8.       According to the C&O Agreement, “The Owners hereto recognize that this Agreement creates a partnership for tax purposes.” [Exh. 120, Section 16.4 and Exhibit G]. Although the definition of a partnership for federal income tax purposes is broader than the state law definition of a partnership, compare 26. U. S. C. §761(a) with Wyo. Stat. Ann. §17-21-201, we find that the C&O Agreement created a business organization distinct from the Producers individually. In some respects, the characterization of the Plant Owners as a partnership, venture, or association is less important that the separate and distinct identity of the Plant Owners as a business entity. Nonetheless, we find that the C&O Agreement, including Exhibit G, established an entity which we characterize as a partnership. Each Plant Owner taxpayer received a share of the profits that result when the value of the revenue from the in-kind fee exceeds the value of the plant costs, and received a share of the losses that result when the value of the revenue from the in-kind fee is less than the value of the plant costs. See Wyo. Stat. Ann. §17-21-201(c)(iii). This conclusion is supported by other evidence in the record, such as testimony that the plant makes money by charging “a fee over and above .... expenses” [Tr. Vol. III, pp. 471-472], and in view of the benefits received by the Plant Owners from processing gas for Anschutz and Merit. Infra.,¶80. We find that the Plant Owners have operated the business of the plant as co-owners, sharing in the profits and losses according to their respective interests. This is so even if an individual taxpayer does not choose to identify the Gas Processing Plant as a profit center for accounting purposes other than the tax accounting referenced in Section 16.4. [E.g., Tr. Vol. IV, p. 669-670; Tr. Vol. III, pp. 534, 577]. We acknowledge the recital in Section 16.3 of the C&O Agreement, that liabilities are “not joint or collective” [Exh. 120, Section 16.3, first sentence], but find on examination of the C&O Agreement that liabilities are in fact shared through such mechanisms as allowing the Operator to recover the amount any indebtedness or claim from all parties to the C&O Agreement. [E.g., Exh. 120, Section 16.3, second sentence, Section 3.3, Article XI, Article XIII, Article XIV, Article XV].

9.       We find that the taxpayers, as sophisticated business entities, chose to carefully structure the relationship by which individual Plant Owners could utilize a common asset, the gas processing plant. While the taxpayers have often referred to themselves as related parties for the purposes of arguing against the comparable value method [ e.g., Tr. Vol II, p. 431], it is nonetheless true that the C&O Agreement defines how they are actually related. In the event of a dispute between the Plant Owners and one Owner, the C&O Agreement and its attachments would be the principal basis for resolving that dispute. See Wyo. Stat. Ann. § 17-21-406. In ascertaining the intentions of the parties to the C&O Agreement, we give considerable weight to the Agreement and its attachments, and relatively little weight to testimony concerning the supposed contractual motivations of the parties [e.g., Tr. Vol. V, pp. 866-869], particularly because no witnesses testified to the motivations of the parties from the first-hand knowledge based on personal participation in the negotiation of the C&O Agreement.

10.     As examples of significant rights and responsibilities between and among the Plant Owners, the C&O Agreement includes provisions which enable the Plant Operator to enforce the payment of financial obligations of the Owners [Exh. 120, Sections 13.1 and 13.2]; allocate liabilities in accordance with ownership percentages [Exh. 120, Section 3.3]; and memorialize of the right of an Owner to audit the Plant Operator’s records. [Exh. 120, Section 16.2]. We also note that the witnesses testified to certain practical dimensions of the C&O Agreement, such as the exercise of audit rights. [Tr. Vol. II, pp. 318-319; Tr. Vol. IV, p. 765]. Further, we learned of Amoco’s desire to be the plant operator because “generally it is a good thing to be more in control of your own destiny than otherwise. And there are some intangible values associated with being operator related to selection of drilling locations and really controlling the pace of development.” [Tr. Vol. IV, p. 666]. The operator can also initiate and conduct projects below an expenditure authorization limit, and is solely responsible for certain engineering, design, and construction functions. [Tr. Vol. IV, p. 724]. We find this testimony to be credible support for the lasting significance of the business relationships established by the C&O Agreement.

11.     Construction of the plant was completed in 1983. [Tr. Vol. IV, pp. 658-659].

12.     When the plant began operating, gas from the Whitney Canyon field and two other wells, the Champlin 505B1 well and the Cummings Federal No. 1 well, supplied all of the gas to the plant. [Tr. Vol. II, pp. 259-260]. In 2000, the working interest owners in the Champlin 505B1 well were Amoco, UPRC, and Merit Energy. [Tr. Vol IV, p. 660]. In 2000, the working interest owners in the Cummings Federal No. 1 well were Amoco and Chevron. [Tr. Vol. IV, p. 661]. The working interests in the wells in the Whitney Canyon field vary from well to well, but most interests are held by the parties to the C&O Agreement.

13.     The C&O Agreement specifically addressed the terms of gas processing agreements with third parties. [Exh. 120, Section 23.1]. All processing for third parties was to be under agreements similar to those of the C&O Agreement parties, but without any right to take plant products in kind. [Exh. 120, Section 23.1]. The C&O Agreement also established three levels of priority for utilization of plant capacity, such that the gas of third parties received the lowest priority. [Exh. 120, Article IV].

14.     For the year at issue, 2000, these priorities for utilization of plant capacity are of no practical consequence because the average Whitney Canyon production was well below plant capacity. [Tr. Vol. II, pp. 312, 325]. In addition, it appears that there are instances in which gas coming from a single well was subject to different priorities due to mixed working interests, further reducing the priority distinction. [Tr. Vol II, p. 436]. Moreover, when curtailments were required in 2000, the practical factor of proximity of wells to the Gas Plant was more important than priority in determining which wells were shut in. [Tr. Vol. IV, p. 761].

15.     The gas produced and processed for Merit Energy from Champlin 505B1 was processed pursuant to a Gas Processing Agreement dated March 1, 1994, between Texaco Exploration and Production Company and the owners of the processing plant (“the Merit Agreement”). [Exh. 127]. Merit acquired Texaco’s interest after March 1, 1994. [Tr. Vol IV, p. 721]. The Merit Agreement provides for a 25% in-kind processing fee for the plant production recovered during each settlement period, and attributable to Merit; the language of the Merit Agreement tracks the language of Section 12.1 of the Exhibit F Gas Processing Agreements of the taxpayers, except insofar as the plant owners take 100% of the sulfur produced under the Merit Agreement. [Exh. 127, Section 12.1].

16.     The gas produced and processed for Chevron from Cummings Federal No. 1, and certain other wells in the Whitney Canyon field, was processed pursuant to a Gas Processing Agreement dated April 1, 1995, between Chevron U. S. A, Inc., and the plant owners. [Exh. 551]. This Agreement addresses production from interests held by Chevron before it acquired the C&O Agreement interest of Gulf Oil Corporation. [Exh. 125, at W0204, 0210]. This 1995 Chevron Agreement provides for a maximum 25% in-kind processing fee for the plant production recovered during each settlement period and attributable to Chevron, with reduced monthly percentages as daily average residue volume increases beyond 11 MMCFD (million cubic foot per day). [Exh. 551, Section 12.1, Attachment 1]. Chevron recognizes the significance of the differing origins of its production interests by reporting a 25% processing deduction to the state for gas production under this 1995 Agreement, as opposed to a nearly 62% processing deduction for production associated with the interests acquired from Gulf through the C&O Agreement. [Tr. Vol. II, pp. 378-380].

17.     In 2000, the Whitney Canyon Gas Processing Plant also processed gas for the Anschutz Corporation and its predecessors in interest. The Anschutz gas was produced from locations outside the Whitney Canyon field, and delivered to the Gas Processing Plant through the Wahsatch Gathering System. The gas processed for Anschutz from the Wahsatch Gathering System was processed pursuant to a Gas Processing Agreement “completed” June 22, 1994, between Union Pacific Resources Company and the Plant Owners. [Exh. 123]. Anschutz acquired its interest in September 2000. [Tr. Vol IV, p. 697]. In 2000, this Gas Processing Agreement provided for a maximum 25% in-kind processing fee on the gas covered under the Agreement, with reduced monthly percentages as daily average residue volume increases beyond 11 MMCFD. [Exh. 123, Section 12.1, Attachment 1; Tr. Vol.IV, p. 699]. Anschutz used the 25% in-kind processing fee to value its 2000 production. [Tr. Vol. VI, pp. 1130-1131].

18.     There is one gas processing agreement which does not follow the general form prescribed by Section 23.1 the C&O Agreement. This is a letter agreement of March 17, 1993, by which the Plant Operator of the Whitney Canyon Gas Processing Plant agreed with the Plant Operator of the Carter Creek Gas Processing Plant to provide mutual back-up gas processing services. [Exh. 126]. The base processing fee under this Mutual Back-up Agreement is an in-kind 20 per cent of residue gas and plant products, with an additional 2 per cent when the processing plant’s inlet compression is used. [Exh. 126].

19.     All sales of gas are from the tailgate of the plant, that is, after processing is completed. [Tr. Vol VI, p. 1058]. In other words, there were no sales of gas at the statutory point of valuation.

20.     All gas processed at the plant is commingled with the gas of other producers as it is processed. The products of commingled gas are what is sold from the tailgate of the plant. [Tr. Vol. I, p. 170]. Commingling occurs without regard to the location of the production wells or the contract under which the gas is produced, although the gas accepted for processing may be of somewhat different composition, and may enter the plant through different inlets. [Exh. 185].

21.     In June 2002, the inlet volumes of the plant were approximately 53 percent Amoco, 17 percent UPRC, 14 percent Chevron under its Exhibit F Gas Processing Agreement, 3 percent Forest, 11 percent Anschutz, and the remainder all others, including Merit and Chevron under the 1995 Chevron Agreement. [Tr. Vol. IV, p. 742]. These volumes were also representative of 2000. [Tr. Vol. IV, p. 743].

22.     In 2000, after being in operation since 1983, the overall situation of the plant has changed from the early years. It is now an older plant facing declines in the Whitney Canyon field, it requires some investment to keep running, and it is considered to have many “fixed sunk costs.” [Tr. Vol. III, p. 465]. The plant also has a finite life governed in part by how much gas is going through the plant, so “there’s a certain minimum flow rate that below which the plant won’t rate”, which in turn defines the life of the plant. [Tr. Vol. IV, p. 696]. Amoco has forecast that plant operations will cease around 2008. [Tr. Vol. IV, p. 710]. At the hearing of this matter, although broad anecdotal evidence was admitted regarding these aspects of the overall life of the plant, no documented financial or technical analysis was offered by the taxpayers. Similar anecdotal evidence was admitted with respect to the Wahsatch Gathering System production. Internal Amoco assessments anticipated that the Wahsatch production would be “zero point going forward after the end of [2002].” [Tr. Vol. IV, p. 706].

Selection and Application of the Comparable Value Method

23.     By Memorandum of August 31, 1999, Randy Bolles, Administrator of the Minerals Tax Division of the Wyoming Department of Revenue, advised all Wyoming oil and gas producers that the Department elected the Comparable Value Method of valuation for all

instances where oil and gas production is not sold at or prior to the point of valuation. [Exh. 100]. Generally speaking, the point of valuation for gas occurs when the gas is extracted from the well prior to processing, while all sales in this case are from the tailgate of the Gas Processing Plant. This Memorandum satisfied a statutory obligation of the Department found in Wyo. Stat. Ann. §39-14-203(b)(vi), and applied to the taxpayers. The Memorandum recited the statutory definition of the Comparable Value Method:

Comparable Value – The fair cash market value is the arms-length sales price less processing and transportation fees charged to other parties for minerals of like quantity, taking into consideration the quality, terms and conditions under which the minerals are being processed or transported.

The Memorandum obliged the taxpayer to notify the Department if the “taxpayer has made a determination that a representative Comparable Value does not exist for a specific mineral property....” [Exh. 100].

24.     At the hearing on this matter, Bolles explained the options available to him when considering his selection of the comparable value method. Bolles said the statute provides for four valuation methods, with a fifth alternative of selection of method by consensus of the Department and taxpayer. [Tr. Vol. VI, p. 1059]. He described comparable value as being a situation in which you have a known sale, and are trying to find a comparable processing fee charged to other parties. [Tr. Vol. VI, p. 1060]. He said the netback method is not available for producer-processors, which he considered the taxpayers to be. [Tr. Vol. VI, pp. 1060-1061]. He correctly recited the proportionate profits formula from the statute, and stated that proportionate profits determinations were always appealed, due to disputes regarding the classification of costs. [Tr. Vol. VI, pp. 1062-1063]. He went on to observe that the three taxpayers in this case classify costs differently, resulting in large disparities. [Tr. Vol. VI, p. 1064]. The comparable sales method is not applicable under the facts in this case. [Tr. Vol. VII, p. 1230]. A method using actual expenses is not available under the statute. [Tr. Vol. VII, p. 1232]. Bolles said that the Department had always selected comparable value, which he generally considers to provide results closest to netback and to fair market value. [Tr. Vol. VI, pp. 1066-1067].

25.     On October 11, 1999, Paul Syring of Amoco replied to Bolles’ Memorandum. [Exh. 101]. Syring stated that, to the best of his knowledge, no Comparable Values existed for specified properties that included Amoco’s Whitney Canyon interests, and requested use of the “....‘Proportionate Profits’ methodology as set out under Wyoming Statutes 39-14-203(b)vi)(D).” [Exh. 101]. That statutory definition states that fair market value is:

(I) The total amount received from the sale of the minerals minus exempt royalties, nonexempt royalties and production taxes times the quotient of the direct cost of producing the minerals divided by the direct cost of producing, processing and transporting the minerals; plus

(II) Nonexempt royalties and production taxes.

26.     On October 15, 1999, Donald Welch replied to the Bolles Memorandum on behalf of Union Pacific Resources Company. [Exh. 102]. He stated that the Company “does not believe the ‘Comparable Value’ method accurately reflects fair cash market value....and therefore requests the opportunity to utilize the ‘Proportionate Profits’ method to value plant products processed through the following plants: Whitney Canyon (Whitney Canyon Field), Whitney Canyon (Yellow Creek Field)....” [Exh. 102]. The words chosen by Welch – “accurately reflects fair market value” – track the statutory language authorizing appeal of the Department’s selection of method found in Wyo. Stat. Ann. §39-14-203(b)(viii). Welch did not testify at the hearing. UPRC was instead represented by senior financial analyst Greg Ostroff. Ostroff stated that UPRC’s decision not to use comparable value “was made before [he] came.” [Tr. Vol. I, p. 491].

27.     On October 28, 1999, Christopher Chambers, manager of upstream property tax for Chevron Texaco, replied to the Bolles Memorandum on behalf of Chevron U.S.A., Inc. [Exh. 103]. He said that, “Chevron attests to the best of its knowledge, no appropriate comparables exist for [the production at issue in this case]. Any review of the comparable methodology is inclusive of the like-quantity, like-quality, and antitrust and confidentiality tests. The Proportionate Profits method that Chevron intends to utilize is provided for in W. S. Sec. 39-14-203(b)(vi)(D) – recodified statutes.” [Exh. 103]. Like UPRC, Chevron chose language foreshadowing a legal challenge to the use of comparable value.

28.     At the time the taxpayers wrote these letters, the Department was aware of the C&O Agreement, in part because from 1983 through 1988 Amoco had reported a 25% processing cost in performing a netback calculation. [Tr. Vol. VI, p. 1112; see Tr. Vol. VIII, pp. 1521-1530]. See Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668, 670-671 (Wyo. 2000).

29. The existence of the Wahsatch Gathering System Agreement first came to the state’s attention during an audit performed for the years 1993 through 1995. [Tr. Vol. VIII, p. 1586]. During this audit, Department of Audit personnel realized that the discovery of the Wahsatch Gathering System Agreement opened the door to valuation based on comparable processing fees. However, the Department determined that it could not change the proportionate profits method of valuation that had been already accepted for the purposes of the audit. [Tr., Vol. VIII, p. 1586-1587].

30.     By 1999, Bolles says the Department determined that it needed more information to evaluate the claims of taxpayers who justified their request for use of the proportionate profits method on the grounds that there were no available comparables. [Tr. Vol. VI, p. 1068]. The Department wanted to verify this claimed absence of comparables. [Tr. Vol. VI, p. 1072].

31.     On November 16, 1999, Bolles sent each of the three taxpayers a letter seeking specific documentation related to the requests to use the Proportionate Profits Valuation Method. [Exhs. 104; 105; 106]. Letters to the three taxpayers included the same words, changing the name for each specific taxpayer. The Amoco letter stated:

In order to verify your claim of the non-existence of a comparable value and /or your believe [sic] that comparable value does not represent fair market value of the referenced properties, the DOR requests that BP Amoco provide all arms-length and/or non-arms length processing agreements/contracts between BP Amoco, as a plant owner, and the producer/operator (including BP Amoco), working interest owners, royalty owners or any other parties delivering or selling natural gas to each processing plant for which BP Amoco has an ownership interest and, agreements/contracts where BP Amoco is not a plant owner and contracts to have its gas production processed by a third party.

[Exhs. 104; 105; 106; Tr. Vol. VI, p. 1080].

32.     Chambers replied for Chevron on November 30, 1999. [Exh. 108]. Chambers generally referred the Department to agreements that had been in place during audits. There were a number of specific references to Chevron contracts related to properties in Wyoming, including the statement, “Carter Creek also has an agreement with Whitney Canyon for short-term processing during Whitney Canyon turnarounds that does not meet like quality.” [Exh. 108; Tr. Vol. II, pp. 364-365]. There is no specific reference to the 1995 Chevron Agreement. Chambers says he relied on Amoco, as the operator, to produce the Whitney Canyon contracts, although he seems to have understood that the Department only knew of the C&O Agreement and the Wahsatch Gathering System Agreement. [Tr. Vol. II, p. 360].

33.     Despite the breadth of the request from Bolles, and despite Amoco’s capacity as the Plant Operator acting on behalf of all Plant Owners with respect to contracts for processing, when Syring replied to Bolles on December 16, 1999, he provided only two documents: the C&O Agreement and the Wahsatch Gathering System Agreement. [Tr. Vol. 1, p. 95]. Amoco apparently justified withholding the Merit Agreement and 1995 Chevron Agreement by internally taking the position that they could not be comparables. [Tr. Vol. I, pp. 128-129]. One effect of this decision is that the existence of the Merit Agreement and 1995 Chevron Agreement was not disclosed until after the commencement of litigation. [Tr. Vol. VI, p. 1078].

34.     We find as of the date Amoco transmitted the two contracts to the Department, the taxpayers were actively committed to opposing the Department’s use of the comparative value method. This presents difficult problems for the Board as it endeavors to ascertain the facts upon which a decision must rest. Much of the testimony presented in this proceeding was heavily colored by the advocacy role of the witnesses. The testimony of Syring offers some examples. Syring initially reacted to the request to use comparable value in the Bolles Memorandum of August 31, 1999, as “a nonissue”. [Tr. Vol. I, pp. 126-127]. Syring resisted the idea that an appropriate pool of comparables might exist. [Tr. Vol. I, p. 80]. Syring advocated an interpretation of a ruling of the Wyoming Supreme Court which states Amoco’s position. [Tr. Vol. I, p. 85] see Conclusions of Law, ¶¶161-168. Syring expressed willingness to use comparable value only when the results approximate his favored method, proportionate profits. [Tr. Vol. I, p. 110-111]. Syring threatened to amend the in-kind fee on the assumption that this would modify the valuation results. [Tr. Vol. I, p. 75]. We see similar advocacy in the testimony of the other taxpayer witnesses, just as we see advocacy in the testimony of witnesses called by the Department of Revenue and the Department of Audit. For example, Department witness Grenvik stated an express position that 25% fee “is intended to cover all costs of the plant owners as well as a return on investment.” [Tr. Vol. VII, p. 1376].

35.     In making this finding, we do not impugn the integrity of any witness. However, where witnesses are plainly advocates for the cause of their employers, testimony can more easily fall short of “the type of evidence commonly relied upon by reasonably prudent men in the conduct of their serious affairs.” Wyo. Stat. Ann. §16-3-108(a). A reasonably prudent person would, for example, be careful to reach an understanding of a twenty year old contract by relying heavily upon the testimony of a representative of one party to that contract who purports to speak to the motivations of all parties to the same contract. In contrast, we find that contracts which are regular on their face are a reliable source of information about the intentions of the parties to those contracts.

36.     Under the circumstances, the Board accordingly has taken pains to evaluate the testimony of all witnesses in a way that offers some assurance of reliability. For example, first hand involvement tends to be more reliable. Testimony about a company’s position may be helpful even when the position itself may be a subject of dispute. We have looked for admissions against interest. We have looked for supporting documentary evidence. We make this general comment because it is not possible or necessary to list the specific considerations that affected how we weighed all of the testimony and other evidence admitted over nine days of hearing.

37.     By letters dated February 4, 2000, the Department informed each taxpayer that it had reviewed the agreements provided, and reiterated the requirement that the taxpayer determine taxable value using the Comparable Value Method. [Exhs. 110; 111; 112]. After further correspondence from Chevron and Amoco, the Department identified two comparables that could be used in letters dated March 30 and March 31, 2000. [Exh. 115; 116]. These were the Gas Processing Agreement which was Exhibit F to the C&O Agreement, and the Wahsatch Gathering System Agreement. [Exh. 115; 116]. Bolles further stated that:

The fact that the processing fee in Yellow Creek [Wahsatch] can never exceed twenty-five percent (25%) is certainly comparable to the Whitney Canyon C&O agreement and, in fact, is the exact processing fee that is being reported by one of the Whitney Canyon Plant owners for severance and ad valorem tax purposes. Hence, the DOR will not allow a processing fee of more than 25% for Whitney Canyon production....

[Exh. 115; 116]. The referenced Plant Owner is Forest Oil, which did not object to the Comparable Value Method. [Tr. Vol. VI, p. 1147; Tr. Vol. VII, p.1354].

38.     This statement of the Department’s position was communicated nearly a year before annual reports for 2000 were due from the taxpayers, Wyo. Stat. Ann. §39-14-207(a)(I), and more than a year in advance of the date the annual reports were actually filed, taking into account the extensions to about April 25^th customarily given to these taxpayers. [Tr. Vol. VI, p. 1054]. Despite the transparency of the Department’s intentions, some taxpayer witnesses have complained that they were handicapped in the application of the comparable value method by the absence of rules and regulations. [E.g., Tr. Vol. I, pp. 78-79; Tr. Vol. II, p. 376]. These complaints are largely an expression of litigation posture, and we give them no weight. We further note that Chambers denied he was unable to determine whether a comparable value existed, instead making the milder complaint that the absence of rules “hampers the decision-making process.” [Tr. Vol. II, p. 376]. Taxpayers’ appraisal expert, Thomas Brown, stated he could prepare his evaluation without the need for rules and regulations to define such statutory terms as “other parties,” “like quantity,” and “terms and conditions.” [Tr. Vol. V, pp. 1038-1039]. Taxpayer expert Lesa Adair agreed that the concept of comparable value “is not that hard to understand.” [Tr. Vol. V, p. 945].

39.     We find that Amoco, Chevron, and UPRC were so opposed to the use of the comparable value method that the promulgation of rules would not have forestalled the dispute we decide today. We consider it revealing that Adair’s suggested rules would only have had the effect of prohibiting the use of the comparable value method in this case. [Tr. Vol. V, p. 945]. For example, she suggests limiting the use of the method “where you don’t have a lot of competition at the wellhead.” [Tr. Vol. V, p. 945]. This suggestion is being made in the context of a county in which “the bulk if not nearly the total gas production” is owned by Amoco, UPRC, and Chevron. [Tr. Vol. IV, p. 745].

40.     We take a similar view with respect the taxpayers’ complaint that the Department ignored an earlier statement of the comparable value method, entitled “Determinative Formula for Computation of Comparable Value,” dated July 9, 1992. [Exh. 150; Tr. Vol. II, pp. 353-355]. The main point here is that in 1992 the Department did not have the advantage of knowing of the existence of the Wahsatch Gathering System Agreement, nor did it know of the existence of other agreements. We find the taxpayers do not point to the existence of the Determinative Formula for the sake of advocating a viable alternative to the comparable value method used by the Department for production year 2000. They and we are aware of the legal defects of the Determinative Formula, which were one of the subjects of Amoco Production Company v. Wyoming State Board of Equalization, 882 P.2d 866 (Wyo. 1994)(compare 886 P.2d at 871, and Exhibit 150, pp. 1-2); see Conclusions of Law, ¶¶161-168. We find that the taxpayers’ purpose of invoking the 1992 approach is to frustrate the selection of any method but proportionate profits. We accord their complaints no weight, particularly insofar as the taxpayers suggest that they were in some way hampered in the preparation of annual reports using comparable value.

41.     The taxpayers each filed an annual report using the proportionate profits method, thereby disregarding the Department’s repeated directive to use the comparable value method. [Tr. Vol. I, p. 212; Tr. Vol. II, p. 424; Tr. Vol. III, p. 491]. Only six oil and gas taxpayers in Wyoming, out of approximately eight hundred, reported using a method other than comparable value; five reported using proportionate profits, and one reported using a formula reached in settlement of litigation. [Tr. Vol. VIII, pp. 1341-1342].

42.     The proportionate profits calculations filed by Amoco and Chevron did not include taxes and royalties in the direct cost ratio, contrary to a decision of this Board issued after the annual reports were filed. [Tr. Vol. 1, p. 212; Tr. Vol. II, p. 424; Tr. Vol. VI, p. 1155]. Appeal of Amoco Production Company, 2001 WL 770800 (Wyo. St. Bd. Eq., June 29, 2001); on reconsideration, 2001 WL 1150220 (September 24, 2001). That decision was appealed to the Wyoming Supreme Court. A ruling on the appeal is pending.

43.     Bolles explained how the Department applied the Comparable Value Method to Whitney Canyon production following receipt of the taxpayers’ annual reports. Bolles and Craig Grenvik, a manager/supervisor in the Department’s Mineral Tax Division, decided that comparable value should be used after reviewing the contracts available to them. [Tr. Vol. VII, p. 1344]. The C&O Agreement was one source of comparables. [Tr. Vol. VII, p. 1286]. The Wahsatch Gathering System Agreement was another. [Tr. Vol. VI, p. 1077]. Bolles testified to his application of the requirements of the statute in light of the facts known to him. He noted that there was no arm’s length requirement pertaining to the identification of other parties. [Tr. Vol. VI, p. 1091]. He noticed that the in-kind processing fee was 25% regardless of quantity processed, and concluded that quantity was not an issue that would cause adjustment to the fee. [Tr. Vol. VI, pp. 1092-1093]. Similarly, he concluded that gas quality did not affect the fee, and that all of the gas processed at the plant was “commingled and run through the same process.” [Tr. Vol. VI, p. 1094]. With regard to terms and conditions, he noticed that the contracts were almost identical, and considered priority to be of little concern because gas not produced is not subject to taxation. [Tr. Vol. VI, pp. 1095-1097].

44.     Bolles states that his judgment was influenced by the fact that Amoco had reported the 25% fee as its processing cost from 1983 to 1988, when using the netback method. [Tr. Vol VI, p. 1112-1115]. He was influenced by his view that the proportionate profits method did not return fair market value for these taxpayers. [Tr. Vol. VI, pp. 1158-1160]. Comparable value, he decided, gets as close to fair market value as the methods authorized by statute allow. [Tr. Vol. VII, p. 1328].

45.     The Department calculated value for each of the three taxpayers by applying the 25% in-kind processing fee against the gross value of the Whitney Canyon gas sales reported by each taxpayer, less exempt royalties. [Tr. Vol. VI, pp. 1090; Tr. Vol. VIII, p. 1512]. To reach these valuations, the Department changed only the processing fee claimed by each taxpayer (no transportation costs were claimed). [Tr. Vol. VI, p. 1090]. For each taxpayer, the Department accepted the taxpayer’s statement of gross revenues. [Tr. Vol. VII, p. 1330].

46.     The Department issued Notices of Valuation reflecting its calculation for each taxpayer, dated May 2001. [Exhs. 544; 545; 546].

47.     Having learned of the Merit Agreement and the 1995 Chevron Agreement through this litigation, Bolles states that he considers them to be comparables. [Tr. Vol. VI, p. 1078]. Bolles was not as clear about the Mutual Back-up Agreement. When asked whether it was a comparable, he said, “It certainly is a contract .... that indicates that the processing fee doesn’t exceed 25 percent. Seems to be a general theme there.” [Tr. Vol. VI, p. 1210].

48.     The selection of method has dramatic consequences because the difference in processing deductions resulting from the two methods is very large. Our ability to be precise is somewhat limited by the confidentiality accorded to the cost information of each taxpayer. However, Syring testified that Amoco claims a processing deduction of about 62%. [Tr. Vol. I, p. 181]. Chambers acknowledged that 62% would be Chevron’s deduction “for a particular year”, without stating the year. [Tr. Vol. II, p. 380]. Chambers also testified that the processing deduction allowed to Chevron at its Lost Cabin facility was 68.55%, and the expenses incurred at Whitney Canyon, which would be used to make a proportionate profits calculation, were “very similar”. [Tr. Vol. III, p. 480]. If we use the Amoco figure for the sake of illustration, the difference between the two methods is the difference between an obligation to pay tax on 75% of gross revenues using the comparable value method, and an obligation to pay tax on about 38% of gross revenues using the proportionate profits method. So, the difference is about 37% of each dollar of valuation.

49.     The Department calculated alternative aggregate Whitney Canyon valuations for 2000. (These aggregate figures were admitted without confidentiality constraints.) The total valuation certified to the three taxpayers by the Department, using the comparable value method, was $116,048,716. [Tr. Vol. VIII, pp. 1459-1460; Exh. 535]. The total value actually reported by the three taxpayers using the proportionate profits method was $64,670,621. [Tr. Vol. VIII, pp. 1459-1460; Exh. 535].

50.     As a further and separate basis for comparison, and again using only figures reported by the taxpayers, the Department tallied gross revenues, then subtracted all reported processing costs and all federal and state royalties. The result was $130,357,969. [Tr. Vol. VIII, pp. 1459-1460; Exh. 535].

51.     The large differences in processing deduction percentages have prompted all parties to direct our attention to certain practical consequences for the uniform treatment of similarly situated taxpayers. The Department’s practical valuation concern arises if the comparable value method is rejected and proportionate profits is allowed for these taxpayers. Because there are several instances of diverse ownership in individual wells producing gas for processing at Whitney Canyon, the same gas produced from a single well can be subject to widely disparate processing deductions – roughly speaking, 62% against 25%. We find that this is would occur in the Champlin 505B1 well, where Amoco and Merit hold the largest interests. [Exh. 146; Tr. Vol. III, p. 616; Tr. Vol. I, pp. 178-182]. We find that the same variation in available deductions arises for Chevron itself, because Chevron’s interests under the 1995 Chevron Agreement are not held through assignment under Exhibit F to the C&O Agreement. [Tr. Vol. II, pp. 379-380]. We find that the situation also occurs where interests are held by Forest Oil, which did not contest the comparable value method. For Merit, for Chevron under the 1995 Chevron Agreement, and for Forest Oil, the allowable deduction would therefore differ from a deduction based on the proportionate profits method.

52.     The taxpayers point to the valuation for production from certain other facilities, the most prominent being Lost Cabin, a field and facility that the taxpayers characterize as being similar to Whitney Canyon because it has gas processing contracts calling for in-kind processing fees. [Tr. Vol. II, p. 368-371]. The Department has authorized use of the proportionate profits method for Lost Cabin production. The taxpayers assert that, if the proportionate profits method is not allowed for Whitney Canyon production, the Lost Cabin production will enjoy a vastly higher processing deduction. The Department answered interrogatories directed to the reasons for granting other taxpayers use of the proportionate profits method. [Exh. 198]. Based on information available to the Department and information “available in the ordinary course of its business”, the Department examined contracts, particularly with respect to processing fees; considered whether gas was being processed from any wells not dedicated to the plant; and considered whether gas from the dedicated field had been processed at any other plant. [Exh. 198] In each instance, the Department found circumstances that distinguished Whitney Canyon from the facilities of interest to the taxpayers. We find the Department’s distinctions reasonable, although we, like the Department, are not in a position to fully weigh the accuracy of the facts reported by the other taxpayers to the Department.

53.     We also find that the there are reasons to distinguish Whitney Canyon from the other facilities to which the taxpayers have directed our attention. The C&O Agreement stands alone as expressly creating a partnership for tax purposes. Supra., ¶8-10. Four agreements were introduced by the taxpayers in support of their claim. None of the four agreements creates a partnership for tax or any other purpose. [Exhibit 188]. Section 16 of the Construction and Operation Agreement for the Lost Cabin Plant states that “nothing in the Agreement is intended to or should be constructed as a manifestation of any intent to create a partnership or joint venture.” [Exh. 188, p. W1422]. The Garland Agreement is a first and foremost a settlement agreement. [Exh. 188, p. W1469]. Article XVI of the JT agreement contains a disclaimer of partnership, specifically asserting that “this Agreement does not intend to create a tax partnership for federal income tax purposes...” [Exh. 188, pp. W1648-W1649]. Article XVI of the Oregon Basin agreement contains language which is identical to Article XVI of the JT agreement. [Exh. 188, pp. W1689-W1690]. In addition, the taxpayers acknowledge certain factual differences between Whitney Canyon and Lost Cabin [Tr. Vol. II, p. 425], including the absence of an agreement by the Lost Cabin producers to pay a specific percentage of production. [Tr. Vol. III, p. 487]. Given the ostensible differences in business structure between Whitney Canyon and the other four locations, one would not be surprised to find differences in financial arrangements including the payment of fees. The taxpayers, however, were content to confine themselves to the cross-examination of Bolles on this subject, rather than calling witnesses with first hand knowledge. The taxpayers produced no evidence to shed light on the difference in cost structures at these locations, nor on the comparative advantages and disadvantages that result from operating Whitney Canyon as a partnership for tax purposes. On the evidence presented to us, and without prejudging the findings and conclusions that we might make on other evidence in proceedings directly involving the other named facilities and the testimony of witnesses with knowledge, we find that there is ample reason to distinguish the operation of the Whitney Canyon facility from the other facilities to which the taxpayers have directed our attention.

54.     As we turn now to the factual findings which relate directly to the use of the Comparable Value Method, it is appropriate to reiterate the bounds of our authority. By statute and case law, this Board is limited to a review of the Department’s actions, in the context of the facts presented for the year at issue.

55.     The Department has correctly identified the statutory definition of the comparable value method, which is:

Comparable Value – The fair cash market value is the arms-length sales price less processing and transportation fees charged to other parties for minerals of like quantity, taking into consideration the quality, terms and conditions under which the minerals are being processed or transported.

Wyo. Stat. Ann. §39-14-203(b)(vi)(B).

56.     For all taxpayers, the arms-length sales price in this case is the price charged at the tailgate of the Whitney Canyon Gas Processing Plant, after processing is completed.

The Gas Processing Agreements attached as Exhibit F to the C&O Agreement

57.     Under the Gas Processing Agreement attached to the C&O Agreement as Exhibit F, Amoco is a Producer and a separate and distinct entity from the Plant Owners collectively identified in the same Gas Processing Agreement. [Exh. 120].The Plant Owners are likewise an entity separate and distinct from Amoco as a Producer. As a further and separate finding, the Board finds that Amoco is a partner contracting with a partnership. Amoco’s rights and responsibilities as Producer, with respect to the business entity of Plant Owners, are established by the Gas Processing Agreement.

58.     Under the Gas Processing Agreement attached to the C&O Agreement as Exhibit F, Chevron is a Producer and a separate and distinct entity from the Plant Owners collectively identified in the same Gas Processing Agreement. [Exh. 120]. The Plant Owners are likewise an entity separate and distinct from Chevron as a Producer. As a further and separate finding, the Board finds that Chevron is a partner contracting with a partnership. Chevron’s rights and responsibilities as Producer, with respect to the business entity of Plant Owners, are established by the Gas Processing Agreement.

59.     Under the Gas Processing Agreement attached to the C&O Agreement as Exhibit F, UPRC is a Producer and a separate and distinct entity from the Plant Owners collectively identified in the same Gas Processing Agreement. [Exh. 120]. The Plant Owners are likewise an entity separate and distinct from UPRC as a Producer. As a further and separate finding, the Board finds that UPRC is a partner contracting with a partnership. UPRC’s rights and responsibilities as Producer, with respect to the business entity of Plant Owners, are established by the Gas Processing Agreement.

60.     Under the Gas Processing Agreement attached to the C&O Agreement as Exhibit F, Forest Oil is a Producer and a separate and distinct entity from the Plant Owners collectively identified in the same Gas Processing Agreement. [Exh. 120]. The Plant Owners are likewise an entity separate and distinct from Forest Oil as a Producer. As a further and separate finding, the Board finds that Forest Oil is a partner contracting with a partnership. Forest Oil’s rights and responsibilities as Producer, with respect to the business entity of Plant Owners, are established by the Gas Processing Agreement.

61.     With respect to Amoco as a Producer under its Exhibit F Gas Processing Agreement, we find that the Exhibit F Gas Processing Agreement of Chevron, as a Producer, is a reliable source of information, or a comparable, from which we may infer and impute a reasonable processing fee which would be paid by another party for processing of gas of like quantity, taking into consideration the quality, terms and conditions under which the gas was processed. The same is true of the Exhibit F Gas Processing Agreements of UPRC, as a Producer, and Forest Oil, as a Producer. That fee is an in-kind processing fee of 25% of the plant production recovered during each settlement period, and attributable to the Producer in question. Sufficient similarity in quantity is assured by the fact that the fee provided in the comparable Exhibit F Gas Processing Agreements does not vary with respect to production. Sufficient similarity in quality is assured by the fact the gas processed in the plant is commingled, and the measure of the fee is the product(s) recovered after processing. Sufficient similarity of terms and conditions is assured by the identical terms and conditions of the Exhibit F Gas Processing Agreements.

62.     With respect to Chevron as a Producer under its Exhibit F Gas Processing Agreement, we find that the Exhibit F Gas Processing Agreement of Amoco, as a Producer, is a reliable source of information, or a comparable, from which we may infer and impute a reasonable processing fee which would be paid by another party for processing of gas of like quantity, taking into consideration the quality, terms and conditions under which the gas was processed. The same is true of the Exhibit F Gas Processing Agreements of UPRC, as a Producer, and Forest Oil, as a Producer. That fee is an in-kind processing fee of 25% of the plant production recovered during each settlement period, and attributable to the Producer in question. Sufficient similarity in quantity is assured by the fact that the fee provided in the comparable Exhibit F Gas Processing Agreements does not vary with respect to production. Sufficient similarity in quality is assured by the fact the gas processed in the plant is commingled, and the measure of the fee is the product(s) recovered after processing. Sufficient similarity of terms and conditions is assured by the identical terms and conditions of the Exhibit F Gas Processing Agreements.

63.     With respect to UPRC as a Producer under the Exhibit F Gas Processing Agreement, we find that the Exhibit F Gas Processing Agreement of Amoco, as a Producer, is a reliable source of information, or a comparable, from which we may infer and impute a reasonable processing fee which would be paid by another party for processing of gas of like quantity, taking into consideration the quality, terms and conditions under which the gas was processed. The same is true of the Exhibit F Gas Processing Agreements of Chevron, as a Producer, and Forest Oil, as a Producer. That fee is an in-kind processing fee of 25% of the plant production recovered during each settlement period, and attributable to the Producer in question. Sufficient similarity in quantity is assured by the fact that the fee provided in the comparable Exhibit F Gas Processing Agreements does not vary with respect to production. Sufficient similarity in quality is assured by the fact the gas processed in the plant is commingled, and the measure of the fee is the product(s) recovered after processing. Sufficient similarity of terms and conditions is assured by the identical terms and conditions of the Exhibit F Gas Processing Agreements.

Objections to the Exhibit F Gas Processing Agreements as Comparables

A. Other parties

64.     Several witnesses objected to the “use of your own contract on yourself” as the source of a comparable value. [Tr. Vol. I, p. 100; Tr. Vol. III, pp. 462-463]. This concern does not apply to the findings of fact we have made. The comparable for each Producer is the Gas Processing Agreement of another Producer, not the Producer’s own Gas Processing Agreement. Similarly, we have considered the opinion of expert Adair that the Exhibit F Gas Processing Agreements and Wahsatch Gathering System Agreement do not represent agreements with “other parties”, as required by the statute. [Exh. 170, p. W1139, W1152]. In view of Adair’s two sentence explanation of this position (at W1152), unaccompanied by cogent argument or any demonstration of expertise in this regard [see Tr. Vol V, p. 902] (“....my expertise is limited to valuation of assets in the energy industry...”), we find that this opinion is not entitled to any weight. We reach the same conclusion with respect to Mr. Brown’s dismissal of the C&O Agreement as a comparable, without specific attention to the Gas Processing Agreements, simply because it is “between related parties.” [Tr. Vol. V, p. 983]. Not all taxpayer testimony was inconsistent with our findings of fact. For example, Syring characterized Amoco as being “both a producer and we have an interest in the plant as a processor.” [Tr. Vol. I, p. 64].

B. The existence of a reliable measure of costs

65.     The taxpayers presented a variety of evidence intended to question the continued utility of the 25% fee as a measure of processing costs. For example, Clyde Miller, lead assurance engineer for the overthrust asset team of Amoco, testified that the parties who entered into the C&O Agreement did so on the basis of price projections and field productivity that did not come to pass. [Tr. Vol. IV, pp. 667-668]. Adair elaborated on the theme that there are significant differences between the market environments of 1982 and 2000, such that the 1982 value can no longer be representative. [Tr. Vol. V, pp. 865-868]. Without first hand personal knowledge, Adair went on to discuss the motivations of the parties to the various gas processing agreements, for the apparent purpose of raising the same question. [Tr. Vol. VIII, pp. 1459-1460; Exh. 535]. We do not find this testimony to be a reliable basis for reaching a determination with respect to tax year 2000.

66.     The question that must be answered is whether the 25% processing fee is a processing deduction value which yields an accurate reflection of fair market value for the year 2000. We find that it does. Moreover, we find no credible evidence that the 25% processing deduction does not yield a reasonable value. In contrast, there is evidence that the proportionate profits method yields a distorted and inaccurate value.

67.     There is ample support in the testimony for a finding that the in-kind processing fee, as originally negotiated, was intended to be adequate to compensate for operating costs, together with a return of the capital investment, and a return on capital [Tr. Vol. III, p. 536], or as Adair phrased it, “the full meal deal.” [Tr. Vol. V, p. 932]. This conclusion is supported by the language of Section 12.3 of the Gas Processing Agreements incorporated into the C&O Agreement, which allowed adjustment of the fee in the event of capital cost overruns, using a “discounted cash flow rate of return of 25% after Federal Income taxes”. [Tr. Vol. V, p. 932; Exh. 120, Exhibit F]. There was never any adjustment to the fee, from which we infer the absence of substantial capital cost overruns. Further, Amoco claimed 25% as processing cost for tax purposes during a portion of the 1980's. [Tr. Vol. VI, p. 1112]. So, at least during the early years of the project, the 25% processing fee was conceded to be a relatively sound measure of processing costs. Moreover, the C&O Agreement has remained in place despite the highs and lows of gas prices over two decades.

68.     We also find indications that the 25% in-kind processing would continue to bear some relationship to costs over time. From 30% to 50% of the operating cost of the plant is associated with the plant’s electrical compressors. [Tr. Vol. II, p. 280]. A reasonable inference is that, as energy costs to the plant rise, the revenue value of the gas taken in-kind by the Plant Owners also rises, and vice-versa. Further, Amoco, as operator, bills an overhead charge of 20% on all operating costs. [Tr. Vol. IV, p. 672]. It is a reasonable inference that the size of the billings to the Plant Owners would likewise rise and fall with the principal expenses, such as energy. This self-adjusting feature of the in-kind processing fee, depending on gas pricing, suggests why the Plant Owners chose a percentage fee in the first instance. It is relatively easy to administer, tends to have an averaging effect on the Operator’s compensation over time and, because costs tend to fluctuate with gas prices, makes more common sense than a fixed fee. Our inference is further supported by Miller’s testimony that “the operator always believed the rates [for the operator’s overhead] to be inadequate and the nonoperators always believed the rates to be excessive.” [Tr. IV, p. 750]. This would not be true if the 25% fee had strayed too far from the mark. We find that the 25% fee is reasonably related to actual costs over time and reflects sound business judgment of continuing validity.

69.     The taxpayers made no effort to support their doubts about the relationship of the processing fee and actual 2000 costs with documented cost information. For example, Miller testified that in 2002 the fee revenue “does not cover operating expenses nor capital recovery nor any return on investment.” [Tr. Vol. IV, p. 669]. Miller testified on August 22, 2002, so his assessment was undoubtably premature for the full year of 2002. In the absence of a full and substantiated comparison of 2002 with 2000, Miller’s statement about 2002 provides no insight for production year 2000. Indeed, Miller acknowledged that there had been no formal determination to support his testimony. [Tr. Vol. IV, p. 739]. Chambers likewise testified that he had done no analysis of what portion of costs and investment expense was covered by the processing fee. [Tr. Vol. III, p. 479].