BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
BURLINGTON RESOURCES OIL & GAS CO. ) Docket No. 2002-49
FROM A NOTICE OF VALUATION BY THE )
MINERAL DIVISION OF THE DEPARTMENT )
OF REVENUE )
IN THE MATTER OF THE APPEAL OF )
LOUISIANA LAND & EXPLORATION CO. ) Docket No. 2002-123
FROM A NOTICE OF VALUATION CHANGE )
BY THE DEPARTMENT OF REVENUE )
(NOVC 2002-431) )
IN THE MATTER OF THE APPEAL OF )
LOUISIANA LAND & EXPLORATION ) Docket No. 2003-14
FROM A NOTICE OF VALUATION CHANGE )
BY THE DEPARTMENT OF REVENUE )
(NOVC 2003-0062) )
_____________________________________________________________________
FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER
________________________________________________________________________
APPEARANCES
Lawrence J. Wolfe and Walter F. Eggers, III, Holland & Hart LLP, for Burlington Resources Oil & Gas Co. and Louisiana Land & Exploration Co., Petitioner.
Karl D. Anderson, Senior Assistant Attorney General, for the Wyoming Department of Revenue (Department), Respondent.
Terrance R. Martin, Deputy Fremont County and Prosecuting Attorney, for the Board of County Commissioners for the County of Fremont (Fremont County), Intervenor.
DIGEST
These consolidated appeals involve the valuation of 1998, 1999 and 2001 gas production processed through the Lost Cabin Gas Plant in Fremont County, Wyoming. Docket Number 2002-49 is an appeal of the Department’s 2002 valuation of Petitioner’s 2001 mineral production for assessment purposes. Docket Numbers 2002-123 and 2003-14 are appeals from Department notices of valuation change issued to Fremont and Natrona Counties following Petitioner’s amendment of oil and gas production tax returns for 1998 and 1999 production. In each instance, the Department included royalties and production taxes as direct costs of producing in the direct cost ratio of the proportionate profits method used to value Petitioner’s production. On appeal, Petitioner challenges the Department’s inclusion of royalties and production taxes, or in the alternative royalties, as direct costs of producing.
On August 28, 2003, the parties entered into a stipulation of facts, knowingly and voluntarily waived their rights to a contested case hearing and requested these consolidated appeals be stayed or in the alternative be considered by the Board as a expedited case pursuant to the Board’s rules. [Joint Stipulation of the Parties; Joint Motion to Stay or in the Alternative for Reconsideration of State Board of Equalization’s Order Denying Joint Motion to Assign Cases to Expedited Docket]. The Board granted the parties’ request to assign the cases to the expedited docket and set a briefing schedule by order dated September 2, 2003. Thomas R. Satterfield, Board Member, recused himself from consideration of these consolidated matters. Petitioner filed its opening brief with the Board on September 23, 2003; the Department and Fremont County filed their Joint Response Brief on October 13, 2003; and the Petitioner filed its Reply Brief on October 23, 2003. Roberta A. Coates, Chairman, and Alan B. Minier, Vice Chairman, considered the consolidated appeals based on the Board record, the parties’ stipulation of facts and the parties’ briefs.
JURISDICTION
The Department valued Petitioner’s gas production as provided by law and notified Petitioner of its final decision in each of these appeals. In each case the Petitioner appealed the Department’s valuation in a timely manner. Therefore, the Board has jurisdiction to consider the Petitioner’s appeals of the Department’s valuation decisions. Wyo. Stat. Ann. §§39-11-102.1(c); 39-14-209(b)(i).
DISCUSSION
These three consolidated appeals concern the valuation of Petitioner’s gas production from the Madden Deep Unit processed through the Lost Cabin Gas Plant in Fremont County, Wyoming. Docket Number 2002-49 is an appeal of the Department’s valuation of Petitioner’s 2001 production for 2002 tax purposes. Docket Number 2002-123 is an appeal of the Department’s revaluation of Petitioner’s 1998 production following Petitioner’s filing of amended tax returns. Docket Number 2003-14 is an appeal of the Department’s revaluation of Petitioner’s 1999 production following Petitioner’s filing of an amended tax return. In each case, the Department included production taxes and royalties as direct costs of producing in the direct cost ratio used to value Petitioner’s production consistent with prior decisions of this Board. In the Matter of the Appeal of Amoco Production Company, Board Docket No. 96-216, 2001 WL 770800 (June 29, 2001), and decision on
reconsideration, 2001 WL 1150220 (September 24 2001) (hereinafter: Amoco 96-216); In the Matter of the Appeal of Fremont County from a Production, Board Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003); In the Matter of the Appeal of RME Petroleum Company, Board Docket No. 2002-52, 2003 WL 22814612 (November 20, 2003); In the Matter of the Appeal of Amoco Production Company, Board Docket No. 2001-56, 2003 WL 23164222 (December 30, 2003).
Petitioner raises two issues in these consolidated appeals. The first issue is whether or not production taxes and royalties must be included in the direct cost ratio of the proportionate profits formula as direct production costs. [Joint Stipulation of the Parties ¶ 21]. The second issue is whether or not the Board’s order allowing the Board of County Commissioners for Fremont County (Fremont County) to intervene in these appeals is proper. [Petitioner’s Brief, p. 16].
The Board finds and concludes, for the reasons set forth below, that the Department did not err in including production taxes and royalties as direct costs of producing in calculating the taxable value of Petitioner’s gas processed through the Lost Cabin Plant for the production years and properties at issue in these appeals. The Board further concludes that allowing the Board of County Commissioners for Fremont County to intervene was proper.
FINDINGS OF FACT
1. The Madden Deep Unit and the Lost Cabin Gas Plant are located 100 miles west of Casper, Wyoming. The Madden Deep Unit was approved by the Bureau of Land Management in 1967 as a federal exploratory unit consisting of nearly 70,000 acres. [Joint Stipulation of the Parties ¶ 9].
2. The first wells were drilled under a farm-out agreement between eight working interest owners at the lower Fort Union formation (at 10,000 feet). An additional well was drilled at the Cody formation (at 19,000 feet). [Joint Stipulation of the Parties ¶ 9]. Between 1973 and 1983, a great deal of activity took place in the center of the Madden Deep Unit at various levels to 19,000 feet, which gave the working interest owners some idea of what the structure held. During this time frame, the working interest owners found mostly sweet gas, also called shallow gas. The shallow gas required no processing because it does not contain any appreciable quantities of hydrogen sulfide. [Joint Stipulation of the Parties ¶ 10].
3. The Big Horn 1-5 well was drilled in 1983 and completed in 1985 to a depth of 25,200 feet in the Madison formation, nearly a mile below previous production from the Cody formation. The gas composition of the Big Horn 1-5 well is very different from the shallow gas; it is made up of 11% H2S, 19% CO2 and 69-70% methane. With no way to process this gas to remove H2S, working interest owners shut-in this well as soon as it was
completed. [Joint Stipulation of the Parties ¶ 11]. A second well, the Big Horn 2-3, was drilled in 1988, but it was also shut-in upon completion. [Joint Stipulation of the Parties ¶ 12].
4. Because the wells cost over $35 million each to drill and complete, the owners began to look for ways to process this gas. [Joint Stipulation of the Parties ¶ 12]. The owners had many technical concerns regarding processing this gas. There were only a handful of wells in the world drilled as deep as the two Big Horn wells, with only a few of these actually producing gas from this depth. The temperatures at the bottom of the hole exceed 400 degrees and the gas is highly corrosive with deadly H2S gas present. The gas also contains ammonia, which complicates the removal of the water from the gas and the subsequent disposal of this ammonia contaminated water. [Joint Stipulation of the Parties ¶ 13].
5. In October 1990, Burlington was elected the operator and with the other working interest owners began plans to build a processing plant. [Joint Stipulation of the Parties ¶ 12]. In 1993, the working interest owners agreed to construct and operate the Lost Cabin Gas Plant. Construction of a pilot plant for the two shut-in wells began in 1994. The plant, capable of processing 50 million cubic feet a day, was completed in March 1995 at a cost of 86 million dollars. [Joint Stipulation of the Parties ¶ 14]. The owners expanded the Plant in approximately 1997 increasing the capacity of the Plant to 66 million cubic feet of gas a day. [Joint Stipulation of the Parties ¶ 15].
6. The function of the Lost Cabin Gas Plant is to remove H2S gas, ammonia, water and other contaminants to leave residue gas, which is primarily methane. H2S is converted into molten sulfur, which Burlington sells. [Joint Stipulation of the Parties ¶ 16].
7. As the operator of the Lost Cabin Gas Plant, Burlington reported 100% of the volumes and values of gas produced from the wells of the Madden Deep Unit relevant to this appeal. It filed all tax reports and paid all taxes on behalf of the working interest owners who own both an interest in the wells and the Plant. [Joint Stipulation of the Parties ¶ 17].
8. For each year at issue in these appeals the Department identified the comparable value method as the method it intended to use to value oil and gas production in Wyoming. See: Wyo. Stat. Ann. §39-14-203((b)(iv). Petitioner requested the use of the proportionate profits method stating that no comparables were available for its production. Therefore, the 1998, 1999 and 2001 production from Big Horn wells 1-5, 2-3, 4-36 and 5-6 processed through the Lost Cabin Gas Plant was valued using the proportionate profits methodology. [Joint Stipulation of the Parties ¶¶ 15, 17, 19].
9. Using the proportionate profits method, taxable value is calculated as follows:
Taxable Value = ((Total Sales Revenue - (exempt and nonexempt royalties and production taxes)) X Direct Cost Ratio)) + nonexempt royalties and production taxes.
The Direct Cost Ratio is calculated by dividing the direct costs of producing by the direct costs of producing, processing and transportation.
Wyo. Stat. Ann. §39-14-203(b)(vi)(D)).
10. In applying the proportionate profits method, Petitioner subtracted the production taxes and royalties from its total revenues at the beginning of the formula. Petitioner then multiplied the resulting net revenue figure by the direct cost ratio. In calculating the direct cost ratio, Petitioner did not include taxes and royalties in the direct cost ratio as direct costs of producing the minerals. Petitioner then added production taxes and nonexempt royalties to arrive at its reported taxable value. [Joint Stipulation of the Parties ¶ 19].
11. By Notice of Valuation dated May 3, 2002, the Department valued Petitioner’s 2001 mineral production in Fremont and Natrona Counties for 2002 assessment purposes. [Petitioner’s Exhibit 101]. In calculating the taxable value of Petitioner’s 2001 production, the Department included production taxes and royalties as direct costs of producing in the direct cost ratio of the proportionate profits method. On May 24, 2002, Petitioner filed an appeal of the Department’s annual valuation with the Board. [Board Record, Docket No. 2002-49; Petitioner’s Exhibit 102].
12. On February 5 and February 8, 2002, Petitioner filed amended returns for 1998 production in Fremont and Natrona Counties. The amendments decreased reported gross production and sales volumes, decreased the reported Exempt Federal Royalty deduction, added a processing deduction and increased the reported unit price. In processing the amended returns, the Department revalued Petitioner’s production by including production taxes and royalties as direct costs of producing in the direct cost ratio of the proportionate profits method. The Department issued Notice of Valuation Change 2002-431 on September 9, 2002, advising Petitioner of the valuation change. [Petitioner’s Exhibit 104]. On October 8, 2002, Petitioner filed an appeal of the Department’s Notice of Valuation Change 2002-431 with the Board. [Board Record Docket No. 2002-123; Petitioner’s Exhibit 105].
13. On August 20, 2002, Petitioner filed an amended return for 1999 production in Fremont and Natrona Counties. The amendment decreased the reported gross production and sales volumes and increased the reported unit price. In processing the amended return, the Department revalued Petitioner’s production by including production taxes and royalties as direct costs of producing in the direct cost ratio of the proportionate profits method. The Department issued Notice of Valuation Change 2003-0062 on January 31, 2003, advising Petitioner of the valuation change. [Petitioner’s Exhibit 107]. On February 28, 2003, Petitioner filed an appeal of the Department’s Notice of Valuation Change 2003-0062 with the Board. [Board Record, Docket No. 2003-14; Petitioner’s Exhibit 108].
14. Petitioner presented confidential taxable value calculations using the proportionate profits method. The calculations included the taxable value of its production both with and without the inclusion of royalties and production taxes as direct costs of producing in the direct cost ratio. The calculations show the allowed deduction for processing decreases if production taxes and royalties are included in the proportionate profits calculation, but that for each of the years at issue in these cases the processing deduction allowed under the proportionate profits method exceeded its reported processing expenses. [Petitioner’s Confidential Exhibit 124].
15. The Petitioner’s calculations reflect that its calculated return on investment is lower when production taxes and royalties are included as direct costs of producing in the direct cost ratio of the proportionate profits method. Petitioner’s calculations also reflect that as the price of gas increases, both the calculated return on investment and the processing deduction allowed using the proportionate profits method are higher. Where the expenses incurred by the producer/processor remain relatively constant, the return on investment is governed by the market and the sales price of its products, not the deduction for post production expenses. [Petitioner’s Confidential Exhibit 124].
16. No stipulation was presented concerning how a third party processor would calculate a processing fee or what return on investment a third party processor would use in setting its processing fee.
17. Included in the exhibits in this matter was a portion of the transcript from Amoco 96-216, supra, and the transcript of In the Matter of the Appeal of Fremont County, Board Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003). [Petitioner’s Exhibits 117, 118 and 119]. In deciding these matters, we have relied on the specific stipulations of fact for the relevant years presented by the parties in deciding this case. To the extent they may be relevant, we incorporate our findings of fact and conclusions of law from those cases herein by this reference.
CONCLUSIONS OF LAW
18. Each of Petitioner’s notices of appeal was timely filed within thirty days of the Department’s final administrative decision and the Board has jurisdiction to decide these matters. Wyo. Stat. Ann. §§39-11-102.1(c), 39-14-209(b)(i) & (iv); Rules, Wyoming State Board of Equalization, Chapter 2, § 5(e).
19. In deciding these matters, the role of this Board is strictly adjudicatory:
It is only by either approving the determination of the Department, or by disapproving the determination and remanding the matter to the Department, that the issues brought before the Board can be resolved successfully without invading the statutory prerogatives of the Department.
Amoco Production Company v. Wyoming State Board of Equalization, 12 P.2d 668, 674 (Wyo. 2000).
20. The Board’s duty is to adjudicate the dispute between the taxpayer and the Department. In performing its adjudicatory role, the Board is required to “[d]ecide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes, . . .." Wyo. Stat. Ann. § 39-11-102.1(c)(iv).
21. “The burden of proof is on the party asserting an improper valuation.” Amoco Production Company v. Wyoming State Board of Equalization, 899 P. 2d 855, 858 (Wyo. 1995); Teton Valley Ranch v. State Board of Equalization, 735 P. 2d 107, 113 (Wyo. 1987); Hillard v. Big Horn Coal Co., 549 P.2d 293, 294 (Wyo. 1976). The Board’s rules provide that “. . . the Petitioner shall have the burden of going forward and the ultimate burden of persuasion, which burden shall be met by a preponderance of the evidence. If Petitioner provides sufficient evidence to suggest the Department determination is incorrect, the burden shifts to the Department to defend its action . . ..” Rules, Wyoming State Board of Equalization, Chap. 2, § 20.
22. Under the analysis which follows, we conclude Petitioner has not met its burden.
Valuation Methodology
23. The Department is required to annually value oil and gas at fair market value. Wyo. Stat. Ann. §39-14-202(a)(i). The Department may also rely on final audit findings, taxpayer amended returns or department reviews of value in valuing oil and gas production. Wyo. Stat. Ann. §39-14-208(b)(iii).
24. By statute the Department is authorized to rely on one of four methods to determine the taxable value of oil and gas. Wyo. Stat. Ann. §39-14-203(b)(vi)(A) through (D). Where the production is not sold prior to the point of valuation by a bona fide arms-length sale, the Department is required to identify the method it intends to apply under that section. Wyo. Stat. Ann. §39-14-203(b)(vii). In addition, if the Department and taxpayer agree that none of the four listed methods produce a representative fair cash market value, they may agree to the use of an alternate valuation methodology. Wyo. Stat. Ann. §39-14-203(b)(vi).
25. For production years at issue in these appeals, 1998, 1999 and 2001, the proportionate profits method was used to value Petitioner’s production processed through the Lost Cabin Gas Plant. Wyo. Stat. Ann. §39-14-203(b)(vi)(D).
26. Using the proportionate profits method, fair cash market value is defined by the Wyoming law as:
(A)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
(B)Nonexempt royalties and production taxes.
Wyo. Stat. Ann. §39-14-203(b)(vi)(D).
27. The “quotient of the direct cost of producing the minerals divided by the direct cost of producing, processing and transporting the minerals,” Id., is commonly referred to as the “direct cost ratio.”
Prior Board Decisions
28. We have considered the issue of whether or not production taxes and royalties must be included as direct costs of producing in the direct cost ratio of the proportionate profits method in four prior decisions. In the Matter of the Appeal of Amoco Production Company, Board Docket No. 96-216, 2001 WL 770800 (June 29, 2001) and decision on reconsideration, 2001 WL 1150220 (September 24 2001); In the Matter of the Appeal of Fremont County, Board Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003); In the Matter of the Appeal of RME Petroleum Company, Board Docket No. 2002-52, 2003 WL 22814612 (November 20, 2003); and In the Matter of the Appeal of Amoco Production Company, Board Docket No. 2001-56, 2003 WL 23164222 (December 30, 2003).
29. In the first of these four decisions, Amoco 96-216, supra, we held that production taxes and royalties must be included as direct costs of producing in the direct cost ratio of the proportionate profits calculation. As we explained:
88.The major issue in this matter is whether royalties and production taxes should be included as a direct cost of producing in calculating the direct cost ratio. Support for the conclusion that those components must be included comes from a review of Wyoming Statute § 39-2-208 [currently Wyo. Stat. Ann. § 39-14-203(b)(vi)(D)] We find this statute to be unambiguous. In interpreting a statute we follow the same guidelines as a court.
We read the text of the statute and pay attention to its internal structure and the functional relationship between the parts and the whole. We make the determination as to meaning, that is, whether the statute’s meaning is subject to varying interpretations. If we determine that the meaning is not subject to varying interpretations, that may end the exercise, although we may resort to extrinsic aids to interpretation, such as legislative history if available and rules of construction, to confirm the determination. On the other hand, if we determine the meaning is subject to varying interpretations, we must resort to available extrinsic aids.
General Chemical v. Unemployment Ins. Comm’n, 902 P.2d 716, 718 (Wyo. 1995).
89.In determining whether royalties and production taxes are to be included as direct production costs in calculating the direct cost ratio, we consider the omission of certain words intentional on the part of the legislature, and we may not add omitted words. Parker v. Artery, 889 P.2d 520 (Wyo. 1995); Fullmer v. Wyoming Employment Security Comm’n., 858 P.2d 1122 (Wyo. 1993). Particularly, when the language appears in one section of a statute but not another, we will not read the omitted language into the section where it is absent. Matter of Voss’ Adoption, 550 P.2d 481 (Wyo. 1976). Wyoming Statute §39-2-208(d)(iv) is clear and unambiguous. It does not require statutory interpretation to understand that royalties and production taxes are not specifically excluded as a direct cost. The legislative intent is clear. Considering that inclusion of royalties and production costs in the direct cost formula reaches the closest calculation to what are actual costs, the clear reading of the statute is the most realistic result and there is no need to resort to legislative intent.
90.The legislature specifically excluded royalties and production taxes from the definition of direct costs to be used for purposes of the direct cost ratio used in valuing coal under the proportionate profits methodology. Wyo. Stat. § 39-2-209(d)(iv). Likewise, the legislature specifically excluded royalties and production taxes as direct costs to be used in the formula calculation for valuation of bentonite. Wyo. Stat. § 39-2-211(d)(i)(c). By excluding these costs in the other mineral valuation statutes, the legislature clearly evidenced its understanding that royalties and production taxes are direct costs of production. Because the legislature did not exclude royalties and production taxes from the direct cost of production of oil and gas, we conclude they must be included.
In the Matter of the Appeal of Amoco Production Company, Board Docket No. 96-216 (Decision on reconsideration September 24, 2001).
30. In each succeeding case, we have been invited, based on varying arguments, to reverse our decision in Amoco 96-216, and in each case we have declined the invitation. In the Matter of the Appeal of Fremont County, Board Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003); In the Matter of the Appeal of RME Petroleum Company, Board Docket No. 2002-52, 2003 WL 22814612 (November 20, 2003); In the Matter of the Appeal of Amoco Production Company, Board Docket No. 2001-56, 2003 WL 23164222 (December 30, 2003).
Inclusion of Royalties and Production Taxes
31. In these cases, Petitioner asks that we reverse our four prior decisions based on: A) The Wyoming Supreme Court’s federal coal lease bonus decision, Powder River Coal Co. v. Wyo. State Board of Equalization, 2002 WY 5, 38 P.3d 423 (Wyo.2002); B) An Interim Legislative Committee report; C) A 1996 memorandum issued by the former director of the Department; and D) A discussion of return on investment.
A) Powder River Coal Decision.
32. Petitioner first asks us to reverse our decision in Amoco based on the reasoning of the Wyoming Supreme Court in Powder River Coal Co. v. Wyo. State Board of Equalization, 2002 WY 5, 38 P.3d 423 (Wyo.2002). In that case the Court held that federal lease bonus payments were not to be included as direct costs of mining in the in the proportionate profits calculation for coal. Applying the doctrine of ejusdem generis, the Court concluded the federal lease bonus payments were not direct mining costs. Id. at ¶ 19.
33. Unlike the situation in Powder River Coal Co., id., where there was no statutory reference to federal lease bonus payments, the legislature has recognized production taxes and royalties as direct costs of production. Wyo. Stat. Ann. §§39-2-209(d)(iv); 39-2-211(d)(i)(c). See: Amoco 96-216, supra at ¶ 90, quoted in ¶ 29 above. Therefore, it is not necessary to resort to an intrinsic aid, ejusdem generis, to resolve an issue of statutory construction. 2A Norman J. Singer, Statutes and Statutory Construction §47.22 (6th ed., 2000 Revision). We conclude the Court’s reasoning in Powder River Coal, supra., is not applicable here.
34. In support of its position, the Petitioner’s calls our attention to the Department’s rule defining “‘direct costs of producing” which does not include specific reference to royalties and taxes. The Department of Revenue Rules, Chapter 6, § 4(b), mirrors the legislative definition of “direct mining costs” in the coal valuation statute. Compare: Rules, Wyoming Department of Revenue Chapter 6, § 4(b) with Wyo. Stat. Ann. §39-2-209(d)(ii) (Michie 1990). Since these are the same sort of costs listed by the legislature for coal, we cannot conclude that there was a specific intent to exclude other recognized direct costs of production. Our analysis of the significance of the legislature’s failure to specifically exclude production taxes and royalties for oil and gas while doing so for coal applies here. Amoco 96-216, supra at ¶¶ 88-90, quoted in ¶ 29 above.
B) Interim Legislative Committee Report
35. Petitioner also cites to a Mineral Taxation Report presented to Legislative members and the Governor by Dan Sullivan, Chairman of the Joint Revenue Committee wherein he stated the Joint Revenue Interim Committee intended the proportionate profits methodology for oil and gas to be “basically the same” as the proportionate profits methodology for coal. [Petitioner’s Exhibit 113]. While that may have been the intent of the Interim Committee, the statement does not explain why the specific references to production taxes and royalties found in the coal valuation statutes are absent in the oil and gas valuation statutes. Rather, the use of the adjective “basically” suggests that there are differences, including the specific reference to the treatment of production taxes and royalties in the coal valuation statutes which is absent in the oil and gas valuation statutes. Compare: Wyo. Stat. Ann. §39-14-103(b)((vii) with Wyo. Stat. Ann. §39-14-203(b)(vi)(D).
36. Additionally, we cannot accept the proffered statements describing an interim committee’s work on a bill as an indication of the Legislature’s intent. Even testimony of those involved in the enactment of a statute is not a proper source of legislative history. Independent Producers Marketing Corp. v. Cobb, 721 P.2d 1106, 1108 (Wyo. 1986). As the Wyoming Supreme Court has noted:
With respect to legislative history as an extrinsic aid to statutory interpretation, such history “is nearly totally unavailable for understanding the actions of the Wyoming State Legislature.” Moncrief v. Harvey, 816 P.2d 97, 111 (Wyo.1991) (Urbigkit dissenting). See also Pisano v. Shillinger, 835 P.2d 1136, 1139 (Wyo.1992); State v. Denhardt, 760 P.2d 988, 990 (Wyo.1988); and State v. Stovall, 648 P.2d 543, 546 (Wyo.1982) (Brown, J., “Because of the sparse legislative history kept in this state, peering into the past, even the very recent past, becomes as difficult as predicting the future.”.)
Parker Land & Cattle Co. v. Wyo. Game & Fish Comm’n, 845 P.2d 1040, 1044 (Wyo. 1993).
It may be more honest if we are straightforward about what the legislature intended and simply say we do not know. There is no useful legislative history in Wyoming.
Board of County Comm’rs v. Laramie School District No. 1, 884 P.2d 946, 956 (Wyo. 1994).
37. Legislative intent must be ascertained initially and primarily from the words used in the statute. Allied-Signal, Inc. v. Wyo. State Board of Equalization, 813 P.2d 214, 219 (Wyo. 1991). Based on our conclusions in Amoco 96-216, supra, we conclude that royalties and production taxes are direct costs of producing which must be included in the direct cost ratio of the proportionate profits formula. See ¶ 29, supra.
38. We find additional support for the inclusion of royalties and production taxes as direct costs of producing in the Wyoming State Legislature’s actions following the issuance of our decision in Amoco 96-216, supra. Senate File 69, introduced during the 2002 Legislative session, provided in pertinent part for the following amendment to Wyo. Stat. Ann. §39-14-203(b)(iv)(D)(II):
(II) Nonexempt royalties and production taxes. Exempt and nonexempt royalties, ad valorem production taxes, severance taxes, conservation taxes and indirect costs shall not be included in the computation of the quotient set forth in subdivision (I) of this subparagraph. Indirect costs include, but are not limited to, allocations of corporate overhead, data processing costs, accounting, legal and clerical costs and other general and administrative costs which cannot be specifically attributed to an operation function without allocation. . . . (emphasis in original).
39. Senate File 69 is the first evidence of an intent by the Legislature to exclude production taxes and royalties from the direct cost ratio of the proportionate profits valuation method used for oil and gas. The bill did not pass during the 2002 Legislative session.
40. Legislative inaction following a contemporaneous and practical interpretation is evidence that the legislature intends to adopt such an interpretation. “Where action upon a statute or practical and contemporaneous interpretation has been called to the legislature’s attention, there is more reason to regard the failure of the legislature to change the interpretation as presumptive evidence of its correctness.” 2B Singer, Sutherland Statutory Construction, §49:10, pp. 117-118, fn. 6 (6th ed.). We conclude the Legislature’s failure to enact Senate File 69 is presumptive evidence of the correctness of our interpretation reflected in Amoco 96-216, supra. We note that the amendment itself is consistent with our decision that the statutory definition of indirect costs did not include royalties and production taxes.
C) The 1996 Burton memorandum
41. Petitioner next argues that the inclusion of royalties and production taxes in the direct cost ratio would cause more than 100% of royalties and taxes to be included in the taxable value. In support of its argument Petitioner cites a 1996 memorandum from Johnnie Burton, the former Director of the Department, which stated: “If 100% of the production taxes are set aside (subtracted) in the first step of the formula, and 100% of those taxes are brought back in (added) in the third and last step, they cannot in any way be included in the second step or else you end up with a taxable value that includes somewhat more than 100% of taxes.” [Petitioner’s Exhibit 110 at p. BR 0076].
42. Interpretive rules or general statements of policy such as the Burton 1996 memorandum “. . . do not establish binding norms which are finally determinative of anyone’s rights.” Wyoming Mining Assoc. v. State, 748 P.2d 718, 724 (Wyo. 1988). Such interpretative rules or general statements of policy are only valid to the extent they correctly construe the statute, and are subject to review. Battlefield, Inc. v. Neely, 656 P.2d 1154, 1159-1160 (Wyo. 1983).
43. In this case, the Department has included royalties and production taxes in valuing Petitioner’s production using the proportionate profits method. [Petitioner’s Exhibit 101, p. BR 0020; Petitioner’s Exhibit 104, p. BR 0043; Petitioner’s Exhibit 107, p. BR 0058]. Therefore we conclude, as clearly evidenced by the actions of the Department in these three consolidated cases, the former Director’s memorandum has been abandoned by the Department. It is no longer accepted by the Department as a valid policy statement or interpretation.
44. This Board has the statutory duty to decide all questions concerning the construction of any statute affecting the assessment, levy or collection of taxes. Wyo. Stat. Ann. §39-11-102.1(c)(iv). On four separate occasions we have rejected the position stated in the 1996 memorandum as an erroneous interpretation of the applicable statutes. In the Matter of the Appeal of Amoco Production Company, Board Docket No. 96-216, 2001 WL 770800 (June 29, 2001) and decision on reconsideration, 2001 WL 1150220 (September 24 2001); In the Matter of the Appeal of Fremont County, Board Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003); In the Matter of the Appeal of RME Petroleum Company, Board Docket No. 2002-52, 2003 WL 22814612 (November 20, 2003); In the Matter of the Appeal of Amoco Production Company, Board Docket No. 2001-56, 2003 WL 23164222 (December 30, 2003).
45. Therefore, for the reasons set forth in those decisions and this decision, we conclude the 1996 Burton memorandum did not correctly construe the applicable statutes and must be rejected.
D) Return on Investment
46. Next Petitioner asks us to re-evaluate our prior four decisions based on a calculated return on its investment in the Lost Cabin Gas Plant. [See: Confidential Attachment A to Petitioner’s Exhibit 124]. To support its argument, Petitioner relies on the netback method, a method the Department is specifically prohibited from using in valuing Petitioner’s production, and a rate of return allowed by the Mineral Management Service (MMS) for federal royalties to argue for exclusion of royalties and taxes. See: Wyo. Stat. Ann. §39-14-203(b)(vi)(C). It argues that whatever method is used to value gas processed prior to sale must allow the producer/processor an equivalent return on investment.
47. In constructing its argument, Petitioner first calls our attention to the processing deduction allowed to a producer whose gas is processed by a third party. Wyo. Stat. Ann. §39-14-203(b)(vi)(C). Petitioner argues that a third party processor would set its processing fee high enough to recover a return on its processing plant investment and the producer would be allowed a deduction for the fee, including the processor’s return on investment, under the netback method. Therefore, Petitioner argues producer/processor must be allowed to recover a return on its investment analogous to that charged by a third party processor.
48. Petitioner then calls our attention the return on investment deduction allowed to producer/processors, such as Petitioner, by the MMS in calculating federal mineral royalties. Petitioner compares its calculated return on investment with and without the inclusion of royalties and production taxes to the BBB bond rate allowed by the MMS, and concludes its average return on investment over an 8 year period is closer to the BBB bond rate when royalties and production taxes are not included in the direct cost ratio of the proportionate profits method.
49. The Board is troubled by the way Petitioner presented this issue because it requires us to accept the assumptions used by Petitioner in constructing its argument without supporting evidence. We are mindful of the Wyoming Supreme Court’s decision in Amoco Production Co. v. Wyo. State Board of Equalization, 7 P.3d 900 (Wyo. 2000) where the Court cautioned the Board on the use of our expedited procedure when addressing factual issues without giving the parties notice of our intent to consider the issue and an opportunity to present evidence and argument in support of its position. However, a party may by its actions knowingly waive its right to a contested case hearing. In re Worker’s Compensation Claim of Wright, 983 P.2d 1227, 1231-1233 (Wyo. 1999).
50. The Board has twice set hearings in these matters. In each instance, the Petitioner, Department and Fremont County have requested that we consider these matters using our expedited procedures based on the parties’ stipulations and briefs. After the Board granted the parties’ first request, Petitioner filed an affidavit with its reply brief. The Board then reset the matter for a contested case hearing so the parties could fully develop the facts raised by the affidavit. The parties responded to our decision to hold a contested case hearing by again asking the Board to consider the matter based on new stipulations and briefs. The second stipulation included the affidavit filed by Petitioner with its prior reply brief.
51. In this case, the issue was raised by Petitioner and supported by the affidavit filed with its first reply brief. When we then reset the matter for a contested case hearing, the parties, including Petitioner, renewed their joint request that the Board decide these matters without a contested case hearing. At that time of the second request, Petitioner was aware of the issue, and of the evidence in the record supporting its position. Petitioner also knowingly, voluntarily and unequivocally waived its right to a contested case hearing. [Board Record, Joint Motion to Stay or in the Alternative for Reconsideration of the State Board of Equalization’s Order Denying Joint Motion to Assign Cases to Expedited Docket, Stipulation of the Parties]. Therefore, we conclude that it is proper for the Board to consider the issue in this expedited manner based solely on the evidence before us.
52. In crafting its argument, Petitioner constructs a hypothetical processing plant, sets a hypothetical fee including an assumed return on investment and then draws a comparison between the fee the hypothetical processing plant would charge and its processing deductions. However, the parties’ stipulation does not include evidence concerning how a third party processor would set its fee, the components of the fee, or the return on investment it would require. Nor is there evidence from which we can compare the hypothetical third party fee with the deduction allowed Petitioner by the proportionate profits method. Petitioner has not cited us to any evidence of the return on investment expected or actually received by any third party sour gas processor in Wyoming from which we can evaluate Petitioner’s claim. Therefore, we conclude that Petitioner has failed to meet its burden of proof. We are not willing to conclude the Department’s valuation is in error based solely on Petitioner’s assumptions.
53. To be entitled to the use of the netback method, the producer must pay a third party a fee to process its gas. A producer processing its own gas is not entitled to use the netback method. “The netback method shall not be utilized in determining the taxable value of natural gas which is processed by the producer of the natural gas.” Wyo. Stat. Ann. §39-14-203(b)(vi)(C). Therefore, Petitioner’s argument rests on an assumed component of a processing fee it is specifically prohibited from using and must be rejected on this distinct legal basis.
54. Petitioner’s argument also relies on return on investment allowed by the MMS for federal royalty purposes. However, no specific rate of return on investment is provided for by the terms of the proportionate profits method. Wyo. Stat. Ann. §39-14-203(b)(vi)(D). In the proportionate profits method, the return on investment is not calculated separately but is determined by operation of the proportionate profits method. Powder River Coal, Co., 38 P.3d 423, 427 (Wyo. 2002). “The objective of the proportionate profits method of computation is to ascertain gross income from mining by applying the principle that each dollar of the total costs paid or incurred to produce, sell and transport the first marketable product . . . earns the same percentage of profit.” Powder River Coal Co. citing 26 C.F.R. § 1.613-4(d)(4).
55. The fact that the valuation method applied in these cases did not return the same return on investment as that allowed by the MMS is not relevant. The evidence presented only shows that what the legislature intended by its passage of the proportionate profits methodology occurred in this case. The State does not stand as a guarantor of any particular return on investment in any given year. Petitioner’s evidence does not warrant reversal of our prior decisions.
56. Finally, we note that by structuring its argument under the netback method, Petitioner avoids a discussion of the comparable value method. We agree with the observation of the Department and Fremont County that a producer/processor, including the Petitioner, may deduct a processing fee equal to the fee charged to other parties for processing of production of a like quantity, taking into consideration the quality, terms and conditions under which the production is being processed. Wyo. Stat. Ann. §39-14-203(b)(vi)(B). A discussion of the application of the comparable value method to other sour gas production in Wyoming may be found in the following recent Board decisions: In the Matter of the Appeals of Union Pacific Resources Company, et al. (Whitney Canyon), Docket No. 2000-147 2003 WL 21774603 (June 19, 2003); In the Matter of the Appeals of Union Pacific Resources Co., et al. (Painter Plant/Painter field), Docket No. 2000-149, 2003 WL 22321611 (September 30, 2003); In the Matter of the Appeals of Chevron U.S.A., Inc. (Carter Creek), Docket No. 2000-152, 2003 WL 22422677 (October 15, 2003).
Treatment of Royalties
57. Petitioner next argues that royalties should be treated differently than production taxes based on the Court’s discussion of whether a federal lease bonus payment is a federal royalty. Powder River Coal Co., 2002 WY 5 ¶¶ 11-17. In determining what meaning the legislature intended by the use of the term royalty, the Court concluded:
We assume the legislature was well aware of the accepted legal definition and usage of the term royalty and cannot conclude it intended anything other than the well accepted meaning of the term royalty when it provided for federal royalties to be deducted as exempt royalties for the sales value of coal mined within the this state.
Powder River Coal Co., 2002 WY 5 ¶ 17.
58. In support of its argument Petitioner relies on portions of a petroleum accounting text, Petroleum Accounting: Principles, Procedures & Issues, by Dennis R. Jennings, Joseph Fieten and Horace R. Brock. [Excerpts, Petitioner’s Exhibit 115]. That text adopts the definition of production costs from the Securities and Exchange Commission rules for filing financial statements. Securities and Exchange Commission, Reg. S-X, 17 C.F.R. Part 210 (1999). [Petitioner’s Exhibit 115, p. BR 0138]. That definition includes property taxes and severance taxes in its definition of production costs but does not does not include royalties.
59. Our obligation in this matter is to determine whether royalties should be included as direct costs of producing in the direct cost ratio of the proportionate profits method. We are not persuaded that a general textbook definition which relies on a Securities and Exchange Commission definition should be accepted in lieu of our analysis of Wyoming tax laws. The legislature knew the definition of the term royalty when it chose to exclude royalties as direct costs of production for coal and bentonite but not for oil and gas. Wyo. Stat. §§ 39-2-209(d)(iv); 39-2-211(d)(i)(c); 39-2-208(d)(iv). They must be included as direct costs of production in valuing oil and gas.
60. For the reasons set forth above and at paragraphs 29 through 34, we conclude that royalties must be included as direct costs of producing in the proportionate profits method.
Uniform and Equal Treatment
61. Petitioner’s opening brief anticipates that the Department and Fremont County will concede that the proportionate profits method does not result in equal and uniform treatment of similarly situated taxpayers. It then singles out two lines of the joint brief of the Department and Fremont County in its reply brief as support for that assumption.
62. We have reviewed the single sentence Petitioner has directed us to, an observation from a 1991 Board decision. [See Petitioner’s Reply Brief p. 2; Department and Fremont County Reply Brief p. 25]. Based on our review of the brief of the Department and Fremont County, we conclude they do not concede that there is a constitutional issue with the application of the proportionate profits method. Rather it appears that Petitioner seeks to challenge the constitutionality of the proportionate profits methodology through a straw man it created.
63. In order for a constitutional issue to arise, Petitioner must first show that it is situated similarly to other taxpayers which are being treated in a way that gives rise to the concern for lack of uniformity. “Equal protection in Wyoming requires a law to operate alike upon all persons or property under the same circumstances and conditions.” W. W. Enterprises, Inc., v. City of Cheyenne, 956 P. 2d 353, 356 (Wyo. 1998)(Emphasis in original). The taxpayer has failed to carry this burden. This is enough to dispose of the constitutional claim.
64. As we said in Whitney Canyon, supra at ¶¶ :
“[T]here are inherent difficulties in complaining about the treatment of other taxpayers when the Department is dependent on the self-reporting of all taxpayers. Since the reliability of information submitted by other taxpayers . . . granted the use of the proportionate profits method cannot be directly tested in this proceeding, there are threshold concerns about meeting the evidentiary standard of a contested case proceeding: “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).
In our Findings of Fact, we stated that we are not now prejudging the possibility that facts may later come to light which might serve to clarify the circumstances of other gas processing facilities. Those additional facts might in turn give rise to well grounded and specific concerns regarding the constitutional requirement for uniformity. Those facts can best be developed in the context of an audit of taxpayers that have been authorized to use the proportionate profits method for 2000. If the use of the proportionate profits method were disallowed on audit due to existence of valid comparables, the uniformity concerns would be addressed. If the Department remained satisfied that the use of the proportionate profits method was appropriate, there would be an audit record to help us consider constitutional objections. Further, the Board would likely be relieved of the possibility that there would be “more to be accomplished” by way of development of the pertinent facts. See Board of County Commissioners for Sublette County, Wyoming v. Exxon Mobil Corporation, 2002 WY 151, ¶36, 55 P.3d 714, 723-724 (Wyo. 2002). As an alternative to audits, the Board has the power to initiate an investigation at a later date, should circumstances warrant. Wyo. Stat. Ann. §39-12-102.1(c)(x).
65. We also conclude, under the specific circumstances in this case, that Petitioner has failed to show that it is situated similarly to other taxpayers which are being treated in a way that gives rise to the concern for lack of uniformity. Petitioner has failed to come forward with meaningful evidence to support its constitutional argument.
Fremont County Intervention
66. Petitioner has urged us to reverse our order authorizing the intervention of Fremont County under certain terms and conditions relying on Board of County Commissioners for Sublette County, Wyoming v. Exxon Mobil Corp., 2002 WY 151, 55 P.3d 714 (Wyo. 2002). In that case, the Wyoming Supreme Court recognized, inter alia, limits on a county’s authority to file a contested case appealing ad valorem tax decisions, and on a county’s authority to raise certain types of issues in such an appeal. In this proceeding, the county neither filed the contested case proceeding nor defined the issues that comprise the subject matter of the proceeding; the initiative was seized by the taxpayer.
67. Under Wyo. Stat. Ann. §18-3-504(a)(v), a board of county commissioners may “[r]epresent the county, care for the county property and manage the business and concerns of the county in all cases where no provision is made by law . . ..” This language is directly contrary to the inference that Petitioner would have us draw from Board of County Commissioners for Sublette County, Wyoming , i.e., that it is incumbent upon the Board of County Commissioners of Fremont County to direct our attention to a statute which specifically authorizes the commissioners to intervene. The statute grants authority under circumstances “where no provision is made by law,” but Petitioner insists that we should infer the absence of authority instead. We do not accept Petitioner’s inference, and decline the taxpayer’s invitation to declare the Board’s rule on intervention invalid with respect to counties.
68. As we recently observed:
Perhaps we will receive further express guidance from the Wyoming Supreme Court when it decides Amoco Production Company v. Department of Revenue, et al., No. 02-171. In the absence of that guidance, we believe our Order on Intervention, and the positions articulated in that Order, should stand. There is no question that intervention was granted with express recognition of the commissioners’ status as representatives with legitimate concerns for Fremont County. In fact, we are concerned that Petitioner’s arguments logically demand that we deny intervention to any person or entity seeking to intervene in a proceeding like the one we decide today. There is no indication that Petitioner would be receptive to the intervention of another governmental entity of any stripe, or a private group claiming to represent the public interest. Historically and practically, the county is the entity best positioned to represent many interests that, for whatever reason, are not prepared to acquiesce in the judgments of the Department of Revenue and/or the Department of Audit. Further, in appeals filed under Wyo. Stat. Ann. §39-14-209(b)(iv), such as the one before us, the appeal statute itself assures that county commissioners will reliably have notice that the Department’s determination is being contested, unlike the public at large.
We also think Petitioner’s position is unwise. Where, as in this case, a county is prepared to pursue concerns that are not frivolous, we believe that the public good may be well served by airing those concerns at the earliest possible stage, rather than insisting that those concerns be addressed, if at all, only after the much later conclusion of audits, or in a separate proceeding under the Board’s power to investigate. Under Chapter 2, Section 14(a), of the Board’s Rules, the Board is in an advantageous position to condition the participation of county intervenors, as we have done in this case, to minimize disruption of the proceeding and to prevent unnecessary and unfair expenditures of money, time, and effort by other parties. The county is also bound by its participation as an intervenor, and hence practically foreclosed from initiating later proceedings in a way that cannot apply to a less formal means of appearance.
In short, intervention can be an effective means to reach an early, efficient, and satisfactory disposition of the public business before the Board. As such, our Rule falls squarely within the purview of our authority to exercise discretion in the conduct the Board’s affairs. Wyo. Stat. Ann. §39-11-102.1(c)(viii), (xvi).
In the Matter of the Appeal of Amoco Production Co. et al., Docket No. 2000-147 et al., 2003 WL 21774603 (June 19, 2003).
69. Finally, we believe that the grant of intervention to Fremont County was particularly appropriate in these cases. The issue presented in these cases was first raised by Fremont County in In the Matter of the Appeal of Fremont County, Board Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003). In that case, Fremont County appealed a decision of the Department based on a final audit, a decision Fremont County had the right to appeal. Board of County Commissioners for Sublette County, Wyoming v. Exxon Mobil Corp., 2002 WY 151, 55 P.3d 714 (Wyo. 2002). In this case, the grant of Fremont County’s motion to intervene allows it to defend the position it took and prevailed on in its prior appeal.
70. We conclude the Department correctly included production taxes and royalties as direct costs of producing in the direct cost ratio of the proportionate profits method in valuing Petitioner’s gas production processed through the Lost Cabin Plant for 1998, 1999 and 2000. We further conclude the intervention of Fremont County was proper.
ORDER
IT IS THEREFORE HEREBY ORDERED:
The Department of Revenue’s determination of taxable value certified to Fremont County for Petitioner’s gas production processed through it’s Lost Cabin Gas Plant during production years 1998, 1999 and 2001 is affirmed.
Pursuant to Wyoming Statute Section 16-3-114 and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition for review within 30 days of the date of this decision.
Dated this 10th day of May, 2004.
STATE BOARD OF EQUALIZATION
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Roberta A. Coates, Chairman
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Alan B. Minier, Vice Chairman
ATTEST:
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Wendy J. Soto, Executive Secretary