BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
KENNEDY OIL FROM A PRODUCTION ) Docket No. 2006-104
TAX AUDIT ASSESSMENT BY THE )
MINERAL DIVISION OF THE )
DEPARTMENT OF REVENUE )
(North Kitty, South Kitty and Central Kitty )
fields, Production Years 2000-2002) )
FINDINGS OF FACT, CONCLUSIONS OF LAW, DECISION AND ORDER
APPEARANCES
Morris R. Massey and John Chambers, Brown, Drew and Massey, LLP, for Kennedy Oil (Kennedy Oil).
Martin L. Hardscog and Karl D. Anderson, Senior Assistants Attorney General, Attorney General’s Office, for the Department of Revenue (Department).
JURISDICTION
The State Board of Equalization (Board) has jurisdiction to hear this appeal. The Board must review final decisions of the Department on application of any interested person adversely affected. Wyo. Stat. Ann. § 39-11-102.1(c). Taxpayers are specifically authorized to appeal final decisions of the Department. Wyo. Stat. Ann. § 39-14-209(b); Rules, Wyoming State Board of Equalization, Chapter 2, § 5(a). By letter dated August 31, 2006, the Department notified Kennedy Oil of its final determination regarding a production tax audit of Kennedy Oil’s coal bed methane production years 2000, 2001, and 2002. Kennedy Oil filed a timely appeal of the Department’s determination on September 19, 2006.
A hearing was held January 9 and 10, 2007, before the Board, consisting of Alan B. Minier, Chairman, Thomas R. Satterfield, Vice Chairman , and Thomas D. Roberts, Board Member.
STATEMENT OF THE CASE
When the Department determines the taxable value of coal bed methane, it does so by reference to a statutory point of valuation defined in Wyo. Stat. Ann. § 39-14-203(b)(iv). Kennedy Oil reported the value of its coal bed methane production using a point of sale near its wellheads upstream of the statutory point of valuation. Kennedy Oil relied on Wyo. Stat. Ann. § 39-14-203(b)(v) when reporting in this manner. Following an audit, the Department revalued Kennedy Oil’s production using the statutory point of valuation. The Department viewed Kennedy’s position as an contrary both to Wyo. Stat. Ann. § 39-14-203(b) and to the holding of Williams Production RMT Company v. Department of Revenue, 2005 WY 28, 107 P.3d 179 (Wyo. 2005).
For reasons which differ from those advanced by both parties, the Board will affirm the Department’s revised valuation, but deny the assessment of interest.
CONTENTIONS AND ISSUES
Kennedy Oil asserts there are “no pure questions of fact to be decided.” [Petitioner’s Issues of Fact and Law and Exhibit Index, p. 1]. Kennedy Oil otherwise contends it sold all its coal bed methane production at the wells where the gas was produced. Id. The Board disagrees.
Kennedy Oil stated the only question of law as follows:
Whether paragraph (iv) or paragraph (v) of subsection (b) of § 39-14-203 is to be applied in establishing the taxable value of Petitioner’s [coal bed methane] production.
[Petitioner’s Issues of Fact and Law and Exhibit Index, p. 2.] The Board does not agree with the implicit assumptions of Kennedy’s statement of the issues.
In contrast, the Department identified four contested issues of fact (a fifth issue was resolved prior to the hearing):
1. What costs did the Petitioner incur downstream of the wellhead?
2. Did the Department properly allocate between deductible post-production costs and non-deductible production costs? (Mixed question of fact and law).
3. Whether Petitioner intended to sell its gas at the wellhead or downstream of the wellhead? As otherwise stated, did Petitioner sell its [coal bed methane] production at the wellhead or downstream of the initial TEG dehydrators? (Mixed question of fact and law). (For the Department’s view on the significance of indexed-base pricing in this case, see infra, ¶ 59.)
4. Whether Petitioner knew or should have known that it underreported and underpaid its severance tax liability to the Department?
[Department’s Issues of Fact and Law and Exhibit Index, pp. 1-2].
The Board has reached Findings concerning the costs incurred by Kennedy, and concludes the Department properly allocated costs. The Board finds that the point of sale for Kennedy Oil’s production varied during the audit period.
The Department identified four contested issues of law:
1. Did the Petitioner sell [coal bed methane] production, at issue in the Department’s audit assessment, pursuant to an arms-length transaction at the wellhead or further downstream? (Mixed question of fact and law).
2. Did the Petitioner correctly value its [coal bed methane] production when it placed the point of valuation at the wellhead? (Mixed question of fact and law).
3. Did the Department correctly revalue Petitioner’s [coal bed methane] production?
4. Did the Department correctly assess interest? (Mixed question of fact and law).
[Department’s Issues of Fact and Law and Exhibit Index, pp. 1-2].
The Board concludes Kennedy Oil did not correctly report the value of its production, and affirms the Department’s revaluation of Kennedy Oil’s production.
The Board reverses the Department’s assessment of interest.
FINDINGS OF FACT
1. John Kennedy and his wife jointly own Kennedy Oil, a company which produces coal bed methane. [Trans. Vol. I, p. 98]. Kennedy Oil claims it delivered and sold its production at its wellheads. [Trans. Vol. I, p. 98]. Kennedy Oil believes that, for taxation purposes, the point of valuation for its production is, likewise, at the wellheads. [Stipulation of Uncontroverted Material Facts, Number 3].
2. Kennedy Oil reported and paid taxes on its production according to its view that the point of valuation was near the wellheads. [Id.]. Kennedy Oil calculated its reported value by reference to an index-based sales price which netted out various fees for gathering and transportation. [Stipulation of Uncontroverted Material Facts, Number 2].
3. The Department of Audit audited Kennedy Oil’s severance and gross products tax returns for production years 2000 through 2002. As a consequence of the audit, the Department Revenue determined the point of valuation to be the outlet of the initial dehydrators downstream from the wellheads, rather than near the wellheads. [Stipulation of Uncontroverted Material Facts, Number 4; Exhibits 501, 503, 503-A].
4. The Department disallowed all expenses Kennedy Oil had incurred between the wellheads and the outlet of the initial dehydrators. [Stipulation of Uncontroverted Material Facts, Number 5]. For production years 2000 through 2002, the result is a difference in valuation of $9,298,896. This amount is subject to both state severance and county ad valorem taxes. [Exhibits 503, 503-A, 506].
5. This case turns on Kennedy Oil’s arrangements for delivery and sale of its natural gas. On August 27, 1999, Kennedy Oil entered into related contracts with two different Enron affiliates. [Exhibits 101, 106]. One contract was a Gas Purchase Agreement with Enron Capital & Trade Resources Corporation (“Enron Capital & Trade”). [Exhibit 101]. The other was a Field Services Agreement with Enron Midstream Services, L. L. C. [Exhibit 106]. The Gas Purchase Agreement refers to the Field Services Agreement as the Gathering Services Agreement [Exhibit 101, Appendix 1, p. 009]. For clarity, we will only use the name “Field Services Agreement.”
6. The Gas Purchase Agreement and the Field Services Agreement were arms-length transactions. [Stipulation of Uncontroverted Material Facts, Number 1].
7. Kennedy Oil called Dan Bump to provide background on the purposes and practical implementation of the two contracts. In August, 1999, Bump was employed by Enron Capital & Trade, which later became Enron North America. [Trans. Vol. I, p. 44; Exhibit 101, Amendment, pp. 030-034]. Bump negotiated the Gas Purchase Agreement and the Field Services Agreement for the Enron entities. [Trans. Vol. I, p. 46].
8. Enron Capital & Trade decided to move into Wyoming’s Powder River Basin, where coal bed methane development was still getting started, before it negotiated the two Kennedy Oil agreements. [Trans. Vol. I, p. 44].
9. Enron Capital and Trade’s strategy was to approach smaller producers with a proposal to loan money to drill wells, and build all necessary gathering and transport facilities from the wellhead. [Trans. Vol. I, pp. 45, 47]. Enron would then purchase the gas and re-market it. [Trans. Vol. I, p. 45]. Kennedy Oil was responsive to the Enron strategy. Kennedy Oil owned only wells. It did not own gathering or compression assets. [Trans. Vol. I, p. 103].
10. Enron Capital & Trade also sought to distinguish itself from its competitors by favorable marketing terms. [Trans. Vol. I, p. 50]. Rather than a price based on a single index, Enron Capital & Trade offered a portfolio of indexes. [Trans. Vol. I, pp. 50, 60].
11. The Gas Purchase Agreement price included a charge to Kennedy Oil for services Enron provided after the sale point. The sale point was a Delivery Point near each wellhead. [Trans. Vol. I, pp. 46-47]. John Kennedy stated that Kennedy Oil’s gas was “burner-tip quality” at the Delivery Point. [Trans. Vol. I, p. 102].
12. The payment for services after the sale point was intended, in part, to account for the fact that “there wasn’t a real market up in the field.” [Trans. Vol. I, p. 62]. The payment was also intended to provide a return to Enron Capital & Trade for its substantial investment in facilities, even if the marketing relationship failed. In the absence of a marketing relationship, Enron would provide services under the Field Services Agreement. [Trans. Vol. I, pp. 62-64, 67-69, 79-80].
13. The Primary Term of the Gas Purchase Agreement was ten years, continuing month to month thereafter. [Exhibit 101, Article 1, p. 001]. Even if the Gas Purchase Agreement terminated, the Field Services Agreement remained in effect. [Id.]. During the term of the Gas Purchase Agreement, the Field Services Agreement provided it was effective only as specified in the Gas Purchase Agreement. [Exhibit 106, Article III, p. 086].
14. Although the Primary Term of the Gas Purchase Agreement was ten years, its Initial Pricing Term was for two years, continuing month to month thereafter until either Party elected to renegotiate the price. [Exhibit 101, Article 2.1, pp. 001, 002]. The price renegotiation election, which allowed Kennedy Oil to opt out of the marketing agreement, acted as a kind of insurance that Enron Capital & Trade would be offering a fair price. [Trans. Vol. I, pp. 50, 71-72]. Opting out would terminate the Gas Purchase Agreement and therefore the Field Services Agreement would kick in. [Trans. Vol. I, p. 56].
15. While the Gas Purchase Agreement was in effect, the contract price was determined by reference to specified indices:
(b) From and after the WIC In-Service Date the price per MMBtu of Gas purchased by Buyer and paid to Seller will be computed based on the following:
(i) for volumes of Gas delivered hereunder each Day for up to eighty percent (80%) of Seller’s First of the Month Schedule Volume the price shall be:
(1) for volumes up to 12,000 MMBtu per Day the price shall equal the Inside F.E.R.C. first of the Month “Index Price” for NGPL (OK) plus $.01, less the total of (i) Trailblazer Pipeline Company transportation rates including fuel and surcharges, plus (ii) Wyoming Interstate Company’s Medicine Bow Lateral transportation rates including fuel and surcharges, plus (iii) the Gathering Services Fee; and
(2) for volumes in excess of 12,000 MMBtu per Day and up to eighty percent (80%) of the First of the Month Scheduled Volume the price per MMBtu shall equal the Inside F.E.R.C. first of the Month “Index Price” for Colorado Interstate Gas Co. – Rocky Mountains less the Gathering Services Fee.
(ii) for the remaining volume of Seller’s Gas delivered hereunder each Day the price shall equal the Gas Daily Price for Rockies, CIG (North System) for each Day, less the Gathering Services Fee.
If any referenced index is not available in the future, and the Parties do not agree to an alternative as of the end of the first Month for which the price could not be determined, then the determination of a replacement index shall be the subject of arbitration.
[Exhibit 101, pp. 001-002].
16. Kennedy Oil called John Bower, of Natural Gas Associates of Colorado, to explain how the indices worked. [Trans. Vol. I, pp. 146-147, 159]. The Board found Bower to be a credible witness on the following points.
17. The Inside F.E.R.C., First of the Month index price for NGPL Oklahoma referred to gas sales delivered to an NGPL pipeline in Oklahoma. [Trans. Vol. I, pp. 148-149]. Toward the end of each month, a company named Platt’s polled buyers and sellers who delivered into or bought gas from the NGPL pipeline, and asked for prices. [Trans. Vol. I, pp. 148-149]. Using its own discretion, Platt’s determined and published an index price which then remained in effect for a month. [Trans. Vol. I, p. 149]. The name Inside F.E.R.C. referred to historic practice, by which pipelines were required to report prices to the Federal Energy Regulatory Commission (“F. E. R. C.”) each month. These reported prices became the basis of a published price. [Trans. Vol. I, p. 155].
18. Platt’s created the Inside F.E.R.C. First of the Month index price for Colorado Interstate Gas Company, Rocky Mountains, in the same way. [Trans. Vol. I, p. 150]. In that case, the price referred to delivery into a pipeline system across southern Colorado. [Trans. Vol. I, p. 150].
19. The Gas Daily price for the Rockies CIG (North System) referred to sales into or out of a Colorado Interstate Gas pipeline which ran across southern Wyoming. [Trans. Vol. I, p. 151]. This index was based on sales through an electronic trading program called ICE. [Trans. Vol. I, p. 151]. The index was an arithmetical average of third party sales each business day, and therefore changed each business day. [Trans. Vol. I, p. 151]. The weekend price was the result of Friday sales, and carried over through Monday. [Trans. Vol. I, p. 151].
20. According to Bower, it is accurate to think about a local sales price as being related to an indexed location, less transportation. [Trans. Vol. I, p. 158]. He cautioned that the price for transporting gas from one point to another can fluctuate significantly. [Trans. Vol. I, p. 158]. As an example, Bower stated that the Medicine Bow pipeline had a published tariff of 14.5 cents plus fuel. As recently as two months before the hearing, this same capacity could have been bought for 4 cents plus fuel. [Trans. Vol. I, p. 158]. Some buyers and sellers of Wyoming gas were sensitive to these circumstances and acted quickly to buy or sell gas based on pipeline prices, which may be discounted at predictable times during the month. [Trans. Vol. I, pp. 158-159]. Kennedy Oil was not such a seller. [Trans. Vol. I, p. 159].
21. Bower observed that Kennedy Oil would never be able to negotiate an index price without also agreeing to an offset to account for the cost of transporting the gas to the indexed location. [Trans. Vol. I, p. 160].
22. John Kennedy was sensitive to the importance of negotiating for indexed prices. [Trans. Vol. I, p. 102]. Like Dan Bump, Kennedy believed gas in the middle of Wyoming had no value. [Trans. Vol. I, pp. 102,115]. The Board so finds. Kennedy further believed that an honest average of what a price should be would be reflected by the indices for different markets. [Trans. Vol. I, p. 107].
23. Kennedy explained that, as the coal bed methane industry was developing in Wyoming, producers faced a Wyoming price for gas that was “at quite a discount to what the real value of the gas was.” [Trans. Vol. I, p. 127]. Kennedy believed that a producer had to have knowledge of the prices at various hubs, and the expense to get to those hubs, in order to be successful in the coal bed methane business. [Trans. Vol. I, p. 135]. He was also sensitive to the potential demands of royalty owners, including the federal government, if Kennedy Oil failed to achieve an adequate price. [Trans. Vol. I, p. 136].
24. Under the terms of the Gas Purchase Agreement, the index price was offset by a Gathering Services Fee. Supra, ¶ 15. The Gathering Services Fee was a defined term of the Gas Purchase Agreement:
“Gathering Services Fee” shall mean $0.47 per MMBtu of Gas delivered at the Delivery Point, plus actual fuel; provided however total fuel from the Delivery Point through deliver into the Maverick Facilities shall not exceed 7%.…
[Exhibit 101, Appendix 1 General Provisions, p. 009]. The Gathering Services Fee directly corresponds to the Field Services Fees in the Field Services Agreement.
25. In the Field Services Agreement, there were different fees for Kennedy Oil’s three different production areas. The Field Services Fee for the North Kitty Area was $0.47 per MMBtu plus actual fuel and shrink. [Exhibit 106, Section 4.1 a, p. 086]. The Field Services Fee for the South Kitty area was $0.61 per MMBtu, plus actual fuel and lost and unaccounted for gas. [Exhibit 106, Section 4.1 b, pp. 086-087]. By an Amendment dated August 16, 2001, the Field Services Agreement provided a Field Services Fee for the Central Kitty area of $0.63 per MMBtu, plus actual fuel and lost and unaccounted for gas. [Exhibit 106, Section 4.1 c, p. 086].
26. Kennedy Oil’s Exhibit 108 is a helpful diagram depicting the location of various aspects of the local systems which gathered and transported Kennedy Oil’s gas. [Exhibit 108].
27. While the Gas Purchase Agreement was in effect, the fees Enron actually charged Kennedy Oil corresponded to the Field Services Fees stated in the Field Services Agreement. [E.g., Exhibit 107, p. 124, calculation of “South Kitty Backs” showing “EMS Transport/MMBtu” of $0.6100].
28. The August 16, 2001, Amendment to the Field Services Agreement recited that Bear Paw Energy, L. L. C., was the successor to Enron Midstream Services, and that the parties to the Field Services Agreement were now Kennedy Oil and Bear Paw Energy. [Exhibit 106, Amendment, p. 117]. Bear Paw had been acquired by Enron and Northern Border Partners. Enron continued to use the Bear Paw name, and used the name Crestone. [Trans. Vol. I, p. 55].
29. For each of the three production areas specified under the Field Services Agreement, the Agreement specified that the Field Services Fee for that area “is comprised of $0.14 MMBtu for Field Services performed by the Provider upstream of the second stage of compression,” with the remainder of the Fee being for services “performed by Provider into the second stage of compression through the Delivery Point(s).” [Exhibit 106, Section 4.1, pp. 086-088, and Amendment, pp. 117-118]; see discussion of Delivery Points in the Field Service Agreement, infra, ¶ 46. We find the second stage of compression corresponds to the booster or reciprocating compressor located before a triethylene glycol (“TEG”) dehydrator. [See Exhibit 538]; see infra, ¶ 35.
30. In practice, the field services fee was paid by Enron Capital & Trade to its affiliate. [Trans. Vol. I, pp. 82-83, 105, 126]. As Dan Bump (supra, ¶ 7) characterized the transaction, the cost of the field services was borne by Kennedy Oil and came off Kennedy Oil’s index-based compensation to yield a netted price; Enron Capital & Trade handled the administrative function as one of the services it provided. [Trans. Vol. I, p. 83; Exhibit 107]. The Board accepts this characterization and so finds. Kennedy Oil received a consolidated statement showing amounts due from the purchase of its gas, reflecting the specified indices and discounts, and the appropriate netbacks including field services fees. [Trans. Vol. I, pp. 105-106, Exhibit 107].
31. The Gas Purchase Agreement obliged Kennedy Oil to sell all of its gas to Enron Capital & Trade. [Exhibit 101, Article 3, pp. 002-003].
32. Generally speaking, Enron Capital & Trade had the right to receive Kennedy Oil gas at Delivery Points listed in Exhibit C to the Gas Purchase Agreement. [Exhibit 101, Sections 3.3 and Article 4, p. 003]. Specifically, “Buyer shall have the right to purchase and receive at the Delivery Point(s), or cause to be received for Buyer’s account, Seller’s Daily Deliverability of Gas.…” [Exhibit 101, Section 3.3, p. 003]. Exhibit C to the Gas Purchase Agreement listed the Delivery Points as “At the wellhead of the following,” and identified 295 wells. [Exhibit 101, Exhibit C, pp. 019-019G]. The list was frequently updated to add wells. [Trans. Vol. I, p. 47].
33. Gas was allocated, measured and paid for at a Measurement Point. [Exhibit 101, Article 4, p. 003]. The Measurement Point was the inlet flange of Buyer’s Transporter’s meter located at the screw compressor applicable to each Delivery Point. [Exhibit 101, Appendix 1, p. 009]. By definition in the Gas Purchase Agreement, the Transporter was the gathering facilities or Pipeline receiving Gas at the Delivery Point, and/or Pipeline(s) receiving Gas at the interconnection to the gathering facilities. [Exhibit 101, Article 4, p. 010].
34. In practice, Kennedy Oil maintained its own measurements of gas using a Barton recorder with a V-cone at the wellhead. [Trans. Vol. I, p. 104]. Its payments from Enron were based on the measurements of a more accurate electronic flow meter at the inlet of each screw compressor. [Trans. Vol. I, p. 104]. Kennedy Oil integrated the two readings to come up with its own wellhead volumes. [Trans. Vol. I, p. 105]. Kennedy Oil’s wellhead meters provided a means to allocate quantities back to the wells [Trans. Vol. I, p. 146], information presumably of interest to Kennedy Oil’s royalty holders.
35. Kennedy Oil’s facilities near the wellhead included a simple system for precipitating out some of the water which occurs in coal bed methane. [Trans. Vol. I, pp. 103-104]. Otherwise, its gas flowed in a polyurethane line to the screw compressor where Enron measured the gas. [Trans. Vol. I, pp. 110, 112]; supra, ¶ 33. The gas flowed from the screw compressor to reciprocating high pressure compressors, where gas pressure was boosted at the beginning of a steel pipeline. [Trans. Vol. I, p. 112]. With coal bed methane, a TEG dehydrator is typically located where the gas enters the steel pipeline, to remove any water which might cause a corrosion problem. [Trans. Vol. I, p. 111].
36. Enron Capital & Trade became responsible for transportation of the gas from the Delivery Point. [Exhibit 101, Article 4, pp. 003-004]. From Kennedy’s perspective, the point of sale was at the wellhead, and its gas was delivered and sold at the wellhead. [Trans. Vol. I, p. 98]. We find Kennedy Oil sold gas to Enron Capital & Trade at the Delivery Point identified under the Gas Purchase Agreement, that is, a point upstream of the TEG dehydrator.
37. Kennedy Oil’s marketing relationship with Enron North America broke down when Enron went bankrupt. [Trans. Vol. I, p. 99]. Enron did not pay Kennedy Oil for gas taken in October and November, 2001, although Kennedy Oil paid royalties and taxes on the production delivered to Enron. [Trans. Vol. I, p. 99].
38. Kennedy Oil and Enron North America amended the Gas Purchase Agreement on October 18, 2001, and in doing so modified the Contact Price to include indices (like NYNEX) more favorable to Kennedy Oil, beginning December 1, 2001. [Exhibit 101, Amendment, pp. 030-031; Trans. Vol. I, pp. 131, 152]. No one testified that Kennedy Oil continued to deliver gas to Enron under the Gas Purchase Agreement after the end of November, 2001, so we have no reason to consider pricing under the October Amendment. Purchase transactions after November, 2001, i.e., for thirteen months of the audit period, were governed by agreements other than the Gas Purchase Agreement.
39. Forced to turn to other buyers, Kennedy Oil subsequently entered into at least four other sale and purchase agreements: with e prime, inc., on December 1, 2001 [Exhibit 102]; with Sempra Energy Trading Corp. on January 10, 2002 [Exhibit 103]; with Enserco Energy Inc. on October 1, 2002 [Exhibit 104]; with Tenaska Marketing Ventures on an unspecified date [Exhibit 105]. [Trans. Vol. I, p. 100]. For e prime inc. and Sempra Energy Trading Corp., the sale and purchase contract incorporated by reference the General Terms and Conditions for Short-Term Sale and Purchase of Natural Gas published by the Gas Industry Standards Board. [Exhibits 102, 103]. For Enserco Energy and Tenaska, the Base Contract incorporated by reference the General Terms and Conditions for Sale and Purchase of Natural Gas published by the North American Energy Standards Board. [Exhibits 104, 105].
40. In all four instances, the price was determined by reference to the Gas Daily Midpoint. [Exhibits 102, 103, 104, 105]. Kennedy has characterized this index variously as the Colorado Interstate Index or the Front Range price, published daily. [Trans. Vol. I, p. 135]; see supra, ¶ 19. Kennedy was willing to accept this index in part because his new purchasers did not have access to NGPL. See supra, ¶ 17; [Trans. Vol. I, p. 135; see Exhibit 101, Section 2.1(b)(1)].
41. Despite the new purchasers, Bear Paw Energy continued to move Kennedy Oil’s gas. [Trans. Vol. I, p. 99]; regarding Bear Paw, see supra, ¶ 28. We find that it did so under the Field Services Agreement. [Exhibit 106]. Unlike the Gas Purchase Agreement, the Field Services Agreement identifies the parties thereto as the Owner and Provider, respectively. [Exhibit 106, p. 084]. The Owner recites that it has a supply of natural gas for which it desires to have Field Services performed, and the Provider recites that it desires to perform such Field Services for the Owner. [Exhibit 106, Recitals, p. 084].
42. There was an important difference in the terms of the two Enron agreements. The 295 wells listed as Delivery Points in Exhibit C of the Gas Purchase Agreement were instead listed as Receipt Points in Exhibit C to the Field Services Agreement. [Exhibit 106, Section 2.2, Exhibit C, pp. 085, 106-112]. The Provider claimed no right to purchase the gas. To the contrary, the Owner affirmatively represented “that it holds title to all gas delivered to Provider hereunder.” [Exhibit 106, Section 1.1, p. 084].
43. In contrast to the Field Services Agreement, the boilerplate language of Kennedy Oil’s contracts with its four new buyers contain standardized language strongly indicating a point of sale:
8.1 Unless otherwise specifically agreed, title to the Gas shall pass from Seller to Buyer at the Delivery Point(s). Seller shall have responsibility for and assume any liability with respect to the Gas prior to its delivery to Buyer at the specified Delivery Point(s). Buyer shall have responsibility for and assume any liability with respect to said Gas after its delivery to Buyer at the Delivery Point(s).
[Exhibit 102, p. 041; Exhibit 103, p. 048; Exhibit 104, p. 060; Exhibit 105, p. 075]. Less helpfully, Sections 2.12 or 2.14 of the same contracts define Delivery Point(s) as “such point(s) as are agreed to by the parties in a transaction.” [Exhibit 102, p. 039; Exhibit 103, p. 046; Exhibit 104, p. 057; Exhibit 105, p. 072].
44. Kennedy assumed his new purchasers would call up Enron and notify Enron that they would be paying the established transportation and compression fees. [Trans. Vol. I, p. 116]. To his knowledge, the purchasers relied on the existing price and paid Crestone, “which was really Enron.” [Trans. Vol. I, p. 118; regarding Crestone, see supra, ¶ 28]. From Kennedy’s perspective, he continued to receive an index price minus fuel, pipeline charges, a field services fee, and additional pipeline charges all the way to wherever the gas was valued. [Trans. Vol. I, pp. 118-119]. He agreed to a price which netted these various charges because he believed the net price reflected the value of Kennedy Oil’s gas at the wellhead. [Trans. Vol. I, p. 119].
45. John Kennedy plainly was under a good faith impression that he sold his gas at the same point for all transactions with all purchasers during the audit period. [Trans. Vol. I, p. 98]. However, Kennedy Oil’s contracts contradict this impression.
46. In the Field Services Agreement, Delivery Points have a different meaning than under the Gas Purchase Agreement. [Exhibit 106, Section 2.3, p. 086]. They are points at which Kennedy Oil may take re-delivery of gas after the Field Services have been provided, specifically, the “terminus of the Fort Union header.” [Exhibit 106, Section 2.3, Exhibit D, pp. 086, 113]. While selling its gas to Enron Capital & Trade under the Gas Purchase Agreement, Kennedy Oil never took re-delivery of gas after Field Services had been provided. [Trans. Vol. I, p. 49].
47. In contrast, we find that the purchasers which followed Enron Capital & Trade after November, 2001, bought Kennedy Oil’s gas at the location(s) defined as the Fort Union header. In making this determination, we specifically reject Kennedy Oil’s proposal to find the Delivery Point under the Gas Purchase Agreement to govern all sales which occurred during the audit period. [Petitioner’s Proposed Findings of Fact and Conclusions of Law, Findings ¶ 5].
48. Although there was a difference in the point of sale before and after November, 2001, the auditors calculated a corrected sale price which applied to the entire audit period. On commencement of the audit, the Department of Revenue advised the Department of Audit that the point of valuation would be the outlet of the initial dehydrator, i.e., the TEG dehydrator. [Trans. Vol. I, p. 163]. The auditors were therefore charged with disallowing costs prior to that point, including booster and dehydration costs at the booster facility following screw compression. [Trans. Vol. I, pp. 267, 277].
49. The outlet of the dehydrator is physically located after the wellhead and before the Delivery Points identified in the Field Services Agreement, i.e., the end point of services under that contract. [Exhibit 106; Exhibit 538]. Kennedy Oil could not provide a breakout of the costs between the beginning and end of the system of services Bear Paw provided under the Field Services Agreement. [Trans. Vol. I, p. 266].
50. To reach the total cost to be disallowed, the auditors first turned to the Field Services Agreement. The Field Services Agreement specified an individual cost of service for the North Kitty, South Kitty, and Central Kitty areas. Supra, ¶ 25. For each of the three areas, the Field Services Agreement specified that $0.14 MMBtu of the fee for field services was related to services performed by the Provider upstream (i.e., toward the wellhead) of the second stage of compression. Supra, ¶ 29. In short, the Field Services Agreement itself provided the value of a component to be disallowed for services provided to all three areas. [Exhibit 503, pp. 017-018; Trans. Vol. I, p. 271]. Because the Gathering Service Fees under the Gas Purchase Agreement also tied to the Field Services Agreement, see supra, ¶ 24, the auditors’ rationale based on the Field Services Agreement may be fairly applied to all transactions during the audit period.
51. The auditors then determined there were pipeline tariffs for two components of service downstream from the TEG dehydrator. The tariffs were 4 cents on the Maverick pipeline and 14 cents for Fort Union gas gathering. [Trans. Vol. I, p. 271]. It follows that of the total fees for each of the three areas, the auditors could account for 32 cents: 14 cents as specified in the Field Services Agreement, and an additional 18 cents by reference to posted tariffs. [Trans. Vol. I, p. 271]. Subtracting this from the individual area Fees specified in the Field Services Agreement, there was a remainder for all other services in each area: 15 cents for North Kitty, 29 cents for South Kitty, and 31 cents for Central Kitty. [Trans. Vol. I, p. 27]; see supra, ¶ 25.
52. Kennedy Oil directed the auditors to a company with knowledge of the pertinent costs, Bear Paw. [Trans. Vol. I, p. 266]. Bear Paw representatives proposed that sixty percent of the unaccounted costs be associated with the booster/reciprocating compressor and dehydration, with the remaining forty percent associated with the Maverick Booster station located between the Maverick and Fort Union lines. [Trans. Vol. I, p. 271]. There is no dehydration at the Maverick Booster. [Trans. Vol. I, p. 272]. After further consultation with Bear Paw and Kennedy Oil, the auditors made an additional adjustment to account for specific volumes associated with the three different service areas. [Trans. Vol. I, p. 274; Exhibit 503, p. 018].
53. Kennedy Oil does not contest the Department of Audit’s allocation, if the Department of Revenue has correctly determined the point of valuation. [Trans. Vol. I, p. 274].
54. For the Department of Revenue, Kennedy Oil’s position on the interpretation of Wyo. Stat. Ann. § 39-14-203(b)(v) presents a critical policy concern. Craig Grenvik, Administrator of the Mineral Tax Division of the Department, explained that the point of valuation for the typical coal bed methane producer is at the outlet of the TEG dehydrator, a principle affirmed by the Wyoming Supreme Court in Williams Production RMT Company v. State Department of Revenue, 2005 WY 28, 107 P.3d 179 (Wyo. 2005). [Trans. Vol. 1, p. 163]. The Department normally sees a sale at a place, like Glenrock in Williams Production RMT Company, and can identify transportation agreements to take the gas from the TEG dehydrator to the point of sale. [Trans. Vol. I, p. 165]. Portions of the transportation cost are then backed out of the price to reach a value at the point of valuation. [Trans. Vol. I, p. 165].
55. The Department views Kennedy Oil as a case in which transportation expense and the purchase are wrapped up in one agreement. [Trans. Vol. I, p.165]. Transportation (along with gathering expense) is being backed out of the purchase price, but is still being borne by the taxpayer. [Trans. Vol. I, p. 167]. However, the contract price for Kennedy Oil looks different than a contract price for a producer who had tried to sell directly at an index point or other point of sale beyond and downstream of the outlet of the initial dehydrator. [Trans. Vol. I, p.167].
56. Kennedy Oil reads Wyo. Stat. Ann. § 39-14-203(b)(v) to require a different point of valuation based on the structure of its contracts. [Trans. Vol. I, p. 173]. The Department believes Kennedy Oil’s reading would violate principles of uniformity [Trans. Vol. I, p. 184], and would betray a legislative purpose to ground the point of valuation by reference to physical equipment, thereby avoiding manipulation of the point of valuation by contract arrangements. [Trans. Vol. I, pp. 186-190].
57. The Department also believes Kennedy Oil’s interpretation contradicts the statutory definition and significance of gathering, which is a production expense. [Trans. Vol. I, pp. 192-193]. Likewise, the Department is concerned that an initial dehydrator would cease to be a production related expense when a taxpayer properly structured a transaction to fall under Kennedy Oil’s reading of Wyo. Stat. Ann. § 39-14-203(b)(v), contrary to the plain language of Wyo. Stat. Ann. § 39-14-203(b)(iv). [Trans. Vol. I, p. 193].
58. Reviewing the language of Wyo. Stat. Ann. § 39-14-203(b) in its entirety, the Department believes there is only one situation in which legislature intended a deduction prior to the point of valuation. That situation is when a taxpayer enhances the value of crude oil prior to the point of valuation; it is addressed in Wyo. Stat. Ann. § 39-14-203(b)(x). [Trans. Vol. I, p. 197].
59. The Department argues the correct way to look at the transaction is to view the index hubs, supra, ¶¶ 17-19, as being the point of sale. [Trans. Vol. I, p. 168]. The Department does not believe the point of sale in a contract is actually dispositive of where the sale occurs. [Trans. Vol. I, p.177]. The Department prefers instead to look at all transactions associated with a sale, and focus on the outcome. [Trans. Vol. I, p. 177]. The Department argues that Kennedy Oil’s market is actually at the terminus of the Fort Union Header in the various locations specified in the Field Services Agreement [Exhibit 106, Exhibit D, p. 113], and that’s where Kennedy Oil was selling gas. [Trans. Vol. I, p. 178].
60. While we agree that the Department may appropriately look to the terms of a contract and related transactions to determine a true point of sale, we disagree with the Department concerning the point of sale in this case. Kennedy Oil’s expressed intention, its conduct, and its contracts all support a finding that the point of sale for transactions with Enron Capital & Trade (and any other Enron entity which bought gas under the Gas Purchase Agreement through November, 2001) was at the Delivery Points specified in the Gas Purchase Agreement. The Board so finds. As a consequence, sales under the Gas Purchase Agreement occurred prior to the point of valuation. Kennedy Oil has carried its burdens of proof and persuasion to demonstrate that fact.
61. After November, 2001, Kennedy Oil’s buyers took delivery of Kennedy Oil’s gas at the Delivery Points specified in the Field Services Agreement, i.e., the terminus of the Fort Union header. All sales to these buyers accordingly took place after the point of valuation. Nevertheless, Kennedy Oil delivered its gas to Bear Paw at the Receipt Points specified in the Field Services Agreement. Kennedy Oil’s gas was accordingly transported by an unrelated third party, Bear Paw, prior to the point of valuation. Kennedy has not carried its burdens of proof or persuasion to demonstrate that the Gas Purchase Agreement governed transactions after November, 2001.
62. Any portion of the Conclusions of Law: Principles of Law or the Conclusions of Law: Application of Principles of Law set forth below which includes a finding of fact may also be considered a Finding of Fact and, therefore, is incorporated herein by reference.
CONCLUSIONS OF LAW - PRINCIPLES OF LAW
63. Wyoming Statute Annotated § 39-14-201 provides:
(a) As used in this article:
(i) "Arm's-length market or sales price" means the transaction price determined in connection with a bona fide arm's length sale;
(ii) "Bona fide arm's-length sale" means a transaction in cash or terms equivalent to cash for specified property rights after reasonable exposure in a competitive market between a willing, well informed and prudent buyer and seller with adverse economic interests and assuming neither party is acting under undue compulsion or duress;
* * *
(ix) "Gathering" means the transportation of crude oil, lease condensate or natural gas from multiple wells by separate and individual pipelines to a central point of accumulation, dehydration, compression, separation, heating and treating or storage.…
64. Wyoming Statute Annotated § 39-14-202 provides:
(a) Administration. The following shall apply:
(i) The department shall annually value and assess crude oil, lease condensate or natural gas production at its fair market value for taxation;
(ii) Based upon the information received or procured pursuant to W.S. 39-14-207(a) or 39-14-208(a), the department shall annually value crude oil, lease condensate and natural gas for the preceding calendar year in appropriate unit measures at the fair market value of the product, after the mining or production process is completed;
65. Wyoming Statute Annotated § 39-14-203 provides:
(b) Basis of tax. The following shall apply:
(i) Crude oil, lease condensate and natural gas shall be valued for taxation as provided in this subsection;
(ii) The fair market value for crude oil, lease condensate and natural gas shall be determined after the production process is completed. Notwithstanding paragraph (x) of this subsection, expenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the mineral;
(iii) The production process for crude oil or lease condensate is completed after extracting from the well, gathering, heating and treating, separating, injecting for enhanced recovery, and any other activity which occurs before the outlet of the initial storage facility or lease automatic custody transfer (LACT) unit;
(iv) The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first;
(v) If the crude oil, lease condensate or natural gas production as provided by paragraphs (iii) and (iv) of this subsection are sold to a third party, or processed or transported by a third party at or prior to the point of valuation provided in paragraphs (iii) and (iv) of this subsection, the fair market value shall be the value established by bona fide arms-length transaction;
(vi) In the event the crude oil, lease condensate or natural gas production as provided by paragraphs (iii) and (iv) of this subsection is not sold at or prior to the point of valuation by bona fide arms-length sale, or, except as otherwise provided, if the production is used without sale, the department shall identify the method it intends to apply under this paragraph to determine the fair market value and notify the taxpayer of that method on or before September 1 of the year preceding the year for which the method shall be employed. The department shall determine the fair market value by application of one (1) of the following methods:
(A) Comparable sales - The fair market value is the representative arms-length market price for minerals of like quality and quantity used or sold at the point of valuation provided in paragraphs (iii) and (iv) of this subsection taking into consideration the location, terms and conditions under which the minerals are being used or sold;
(B) Comparable value - The fair 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;
(C) Netback - The fair market value is the sales price minus expenses incurred by the producer for transporting produced minerals to the point of sale and third party processing fees. 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;
(D) Proportionate profits - The 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.
(vii) When the taxpayer and department jointly agree, that the application of one (1) of the methods listed in paragraph (vi) of this subsection does not produce a representative fair market value for the crude oil, lease condensate or natural gas production, a mutually acceptable alternative method may be applied;
(viii) If the fair market value of the crude oil, lease condensate or natural gas production as provided by paragraphs (iii) and (iv) of this subsection is determined pursuant to paragraph (vi) of this subsection, the method employed shall be used in computing taxes for three (3) years including the year in which it is first applied or until changed by mutual agreement between the department and taxpayer. If the taxpayer believes the valuation method selected by the department does not accurately reflect the fair market value of the crude oil, lease condensate or natural gas, the taxpayer may appeal to the board of equalization for a change of methods within one (1) year from the date the department notified the taxpayer of the method selected;
(ix) If the department fails to notify the taxpayer of the method selected pursuant to paragraph (vi) of this subsection, the taxpayer shall select a method and inform the department. The method selected by the taxpayer shall be used in computing taxes for three (3) years including the year in which it is first applied or until changed by mutual agreement between the taxpayer and the department. If the department believes the valuation technique selected by the taxpayer does not accurately reflect the fair market value of the crude oil, lease condensate or natural gas, the department may appeal to the board of equalization for a change of methods within one (1) year from the date the taxpayer notified the department of the method selected;
(x) If crude oil is enhanced prior to the point of valuation as defined in paragraph (iii) of this subsection by either a blending process with a higher grade hydrocarbon or through a refining process such as cracking, then the fair market value shall be the fair market value of the crude oil absent the blending or refining process;
(xi) For natural gas, the total of all actual transportation costs from the point where the production process is completed to the inlet of the processing facility or main transmission line shall not exceed fifty percent (50%) of the value of the gross product without approval of the department based on documentation that the costs are due to environmental, public health or safety considerations, or other unusual circumstances.
66. Wyoming Statute Annotated § 39-14-207 provides:
(a) Returns and reports. The following shall apply:
(i) Annually, on or before February 25 of the year following the year of production any person whose crude oil, lease condensate or natural gas production is subject to W.S. 39-14-202(a) shall sign under oath and submit a statement listing the information relative to the production and affairs of the company as the department may require to assess the production....
67. Wyoming Statute Annotated § 39-14-208(c) provides:
(c) Interest. The following shall apply:
* * *
(ii) Taxes are delinquent pursuant to paragraphs (iii) and (iv) of this subsection when a taxpayer or his agent knew or reasonably should have known that the total tax liability was not paid when due;
* * *
(iv) Effective January 1, 1994, interest at an annual rate equal to the average prime interest rate as determined by the state treasurer during the preceding fiscal year plus four percent (4%) shall be added to all delinquent severance taxes on any mineral produced on or after January 1, 1994. To determine the average prime interest rate, the state treasurer shall average the prime interest rate for at least seventy-five percent (75%) of the thirty (30) largest banks in the United States. The interest rate on delinquent taxes shall be adjusted on January 1 of each year following the year in which the taxes first became delinquent. In no instance shall the delinquent tax rate be less than twelve percent (12%) nor greater than eighteen percent (18%) from any mineral produced on or after January 1, 1994. The interest rate on any delinquent mineral tax from any mineral produced before January 1, 1994, shall be eighteen percent (18%) per annum.
68. “As we have often stated, our rules of statutory construction focus on discerning the legislature’s intent. In doing so, we begin by making an ‘inquiry respecting the ordinary and obvious meaning of the words employed according to their arrangement and connection.’ Parker Land and Cattle Company v. Wyoming Game and Fish Commission, 845 P.2d 1040, 1042 (Wyo.1993) (quoting Rasmussen v. Baker, 7 Wyo. 117, 133, 50 P. 819, 823 (1897)). We construe the statute as a whole, giving effect to every word, clause, and sentence, and we construe together all parts of the statute in pari materia. State Department of Revenue and Taxation v. Pacificorp, 872 P.2d 1163, 1166 (Wyo.1994).” Chevron U.S.A., Inc. v. Department of Revenue, 2007 WY 79, ¶ 15, 158 P.3d. 131, ¶ 15 (Wyo. 2007).
69. The Wyoming Supreme Court has previously summarized a number of useful precepts concerning statutory interpretation:
Statutes must be construed so that no portion is rendered meaningless. (citation omitted) Interpretation should not produce an absurd result. (citation omitted) We are guided by the full text of the statute, paying attention to its internal structure and the functional relation between the parts and the whole. (citations omitted) Each word of a statute is to be afforded meaning, with none to be rendered superfluous. (citation omitted) Further, the meaning afforded to a word should be that word’s standard popular meaning unless another meaning is clearly intended. (citation omitted) If the meaning of a word is unclear, it should be afforded the meaning that best accomplishes the statute’s purpose. (citation omitted) We presume that the legislature acts intentionally when it uses particular language in one statute, but not in another. (citations omitted) If two sections of legislation appear to conflict, they should be given a reading that gives them both effect. (citation omitted)
Rodriguez v. Casey, 2002 WY 111, ¶ 10, 50 P.3d 323, 326-327 (Wyo. 2002); quoted in Hede v. Gilstrap, 2005 WY 24, ¶ 6, 107 P.3d 158, 163 (Wyo. 2005).
70. “We find no support for Taxpayers’ argument on the term ‘other parties’ as used in the statute. We find that the legislature did not intend that an ‘other party’ has to be a ‘third party engaged in arms-length negotiations.’ The legislature uses the term ‘third party’ several times within subsection (b), for instance in (b)(v). Most importantly for our current purpose, the legislature uses the term in (b)(vi)(C) in establishing the netback method of valuation. The statutory language specifically states that ‘third party processing fees’ are to be deducted from the sales price in using the netback method. The legislature did not add such a provision to the comparable value method. The legislature’s omission of the term ‘third party’ must be given effect. Merrill v. Jansma, 2004 WY 26, ¶29, 86 P.3d 270, ¶29 (Wyo. 2004) (‘[O]mission of words from a statute is considered to be an intentional act by the legislature, and this court will not read words into a statute when the legislature has chosen not to include them.’). Construing all parts of the statute in pari materia, paying particular attention to the statutory language used, and more specifically the statutory language not used, we find the legislature did not intend for comparable processing fee contracts to necessarily be arms-length, third-party contracts in order to achieve the ultimate statutory goal of taxation based upon accurate fair market value.” BP America Production Company v. Department of Revenue, 2005 WY 60, ¶ 22, 112 P.3d 596, 607 (Wyo. 2005).
71. “Determining the point of valuation is of particular significance because ‘expenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the [CBM].’ Wyo. Stat. Ann. § 39-14-203(b)(ii). Thus, because certain expenses ‘downstream’ of the point of valuation are deductible, it is to the producer’s benefit to have the point of valuation determined ‘upstream’ as far as possible. That is the instant case in a nutshell. Williams seeks an ‘upstream’ point of valuation instead of the ‘downstream’ point of valuation determined by the Department and confirmed by the Board.” Williams Production RMT Company v. Department of Revenue, 2005 WY 28, ¶ 10, 107 P.3d 179, 183-184 (Wyo. 2005).
72. “In addition to the observations of the DOA representative, the Board also relied upon a lengthy analysis whereby relevant statutory definitions and concepts were applied to Barrett’s system, and it also gave deference to the Department’s interpretation of a ‘processing facility’ because such was not in conflict with legislative intent. We find that the Board’s analysis, which is revealed in paragraphs 89-132 of the final order, that the TEG dehydrator was not located within a processing facility was a correct interpretation of the applicable statutes. Williams argues essentially that because the TEG dehydrator performs some of the functions listed in the definition of ‘processing’ contained in Wyo. Stat. Ann. § 39-14-201(a)(xviii), ipso facto, it too is a processing facility. When the statutes are read in para materia, as we are required to do, that reasoning simply does not fly. As the Board noted in Conclusion #122, Williams’ approach relies on a circular reading of the statute that is not supported by its plain language. The first sentence of the definition limits any activity deemed to be processing to those occurring ‘beyond the inlet to a natural gas processing facility.’ Wyo. Stat. Ann. § 39-14-201(a)(xviii). In addition, the definition recognizes that some of the functions specifically listed may occur during production. In reality, the definition of processing is of little assistance in determining what the legislature meant by processing facility in the context of the severance tax statutes.” Williams Production RMT Company v. Department of Revenue, 2005 WY 28, ¶ 17, 107 P.3d 179, 185 (Wyo. 2005).
73. This Board’s final order in Appeal of Williams Production RMT Company, Docket 2002-103, November 14, 2003, 2003 WL 22754175 (Wyo. St. Bd. Eq.), included the following paragraphs which are among those referenced in the preceding paragraph of Williams Production RMT Company:
89. The Wyoming Constitution requires the gross product of mines to be taxed in proportion to the value thereof and uniformly valued for tax purposes at full value as defined by the legislature. Wyo. Const. Art. 15, §§ 3, 11. For natural gas, the value of the gross product “means fair market value as prescribed by Wyo. Stat. Ann. 39-14-203(b), less any deduction and exemption allowed by Wyoming law or rules.” Wyo. Stat. Ann. §39-14-201(a)(xxix).
90. “The fair market value for...natural gas shall be determined after the production process is completed. ...[E]xpenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the mineral.” Wyo. Stat. Ann. §39-14-203(b)(ii). These two sentences contain two fundamental premises for our decision.
91. First, the point of valuation is a physical location. This physical location is determined by reference to the production process, and where that production process is completed. We will accordingly be deciding which party appropriately identified a point in the sequence of equipment that was the point of valuation.
92. Second, the point of valuation directly affects the calculation of expenses that may be deducted from Barrett’s sale price to determine fair market value. Barrett sold its gas at a location beyond the point of valuation. Findings of Fact, ¶19. For natural gas sold after the point of valuation, expenses incurred after the point of valuation are deducted from the sale price to reach fair market value. Wyo. Stat. Ann. §39-14-203(b)(vi). The taxpayer argues for a point of valuation that is closer to the wellhead, and further from the point of sale, than the point of valuation chosen by the Department of Revenue. If we found for the taxpayer, the effect would be to increase the deduction of expenses from the sale price of the taxpayer’s natural gas.
93. The statute determines the point of valuation for natural gas by reference to the production process:
The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first.
Wyo. Stat. Ann. §39-14-203(b)(iv)(hereafter, the point of valuation statute).
94. Williams takes two conflicting positions that reach the same result. On the one hand, Williams argues that both the header and the screw compressor were dehydrators, so that the custody transfer meter located between them was an acceptable point of valuation. See Findings of Fact, ¶¶ 48, 49, 68-70. On the other hand, Williams argues that if the glycol dehydrator was the only piece of equipment in which dehydration was performed, then the glycol dehydrator was located in a processing facility operated by Western, and the custody transfer meter is the point of valuation. See Findings of Fact, ¶¶37-39. If either theory were correct, Barrett’s original deduction for expenses would likewise be correct, since Barrett reported its taxes using the custody transfer meter as the point of valuation. See Findings of Fact, ¶27.
95. The Department takes the position that the glycol dehydrator is the only dehydrator, and that there is no processing facility. Findings of Fact, ¶72. Under this theory, the point of valuation is the outlet of the glycol dehydrator. Findings of Fact, ¶72.
* * *
116. The legislature enacted the point of valuation statute and the definitions of dehydrator, compressor, separating, and processing in 1990. 1990 Wyo. Sess. Laws, Ch. 54. Coal bed methane was not commercially significant at the time. Findings of Fact, ¶ 4. We accordingly conclude the reference to water vapor commonly associated with natural gas is a reference to the water vapor in conventional natural gas. Based on the facts presented in this case, the glycol dehydrator, all by itself, possessed adequate capacity to remove water vapor in quantities associated with conventional natural gas. Findings of Fact, ¶¶ 60, 66. We conclude the legislature’s intention was only to identify as a dehydrator a device that is the same or similar to the one identified in this case as the glycol dehydrator. The Department offered a similar rationale for its interpretation of the statute, but declined to concede the statute is in any way ambiguous. [Transcript Vo. IV, pp. 680-682, 708-709, 750].
117. We are obliged to avoid a construction that reaches an absurd result. Stauffer Chemical Company v. Curry, 778 P.2d 1083, 1093 (Wyo. 1989). It would be absurd to accept as a dehydrator any enlarged space that creates condensation. This would allow the taxpayer to freely manipulate the point of valuation with inexpensive measures. It is also contrary to an expectation expressed in the first sentence of Wyo. Stat. Ann. § 39-14-203(b)(iv) that the initial dehydrator follows other production functions. As the record in this case shows, the principal purpose of a glycol dehydrator was to make raw natural gas ready for transportation by pipeline. Further, we believe it is logical to infer that the legislature contemplated that normally such dehydration would be a last step in the production of gas that was not processed.
Appeal of Williams Production RMT Company, Docket 2002-103, November 14, 2003, 2003 WL 22754175 (Wyo. St. Bd. Eq.), ¶¶ 89-95, 116-117.
74. “Citing to numerous pieces of technical evidence in the record, the Board found that, unlike the incidental separation of water and CBM in headers and compressors, and in the pipeline, itself, the TEG dehydrator is a specialized dehydrator—a particular piece of equipment. The Board found this significant because of Wyo. Stat. Ann. § 39-14-203(b)(iv)’s location of the point of valuation at the outlet of the initial dehydrator—a piece of equipment—rather than at the initial place that any dehydration—a function—takes place. Once again, we find that the Board’s interpretation of the statute to be consistent with legislative intent.” Williams Production RMT Company v. Department of Revenue, 2005 WY 28, ¶ 22, 107 P.3d 179, 186 (Wyo. 2005).
75. “Before going on to the next substantive issue, we will briefly discuss Williams’ third stated issue, which questions whether the legislature intended CBM to be taxed as “oil and gas” under Wyo. Stat. Ann. § 39-14-201, et seq., or as an “other valuable deposit” under Wyo. Stat. Ann. § 39-14-701, et seq. We conclude, for two reasons, that this is not actually an issue in this case. First, both parties agree that CBM is and should be taxed under Wyo. Stat. Ann. § 39-14-201, et seq. Second, Williams’ query is founded on the apparent assumption that the Board determined that the legislature did not intend for CBM to be taxed under Wyo. Stat. Ann. § 39-14-201, et seq., for which assumption we find no basis in the record. The Board did not even suggest that CBM should not be taxed under Wyo. Stat. Ann. § 39-14-201, et seq. Rather, in assessing statutory definitions, the Board merely considered the fact that CBM was not being commercially produced at the time the statutes were drafted. There is no substance to this issue.” Williams Production RMT Company v. Department of Revenue, 2005 WY 28, ¶ 23, 107 P.3d 179, 186 (Wyo. 2005).
76. “After examining the record concerning the various charges previously deducted by Barrett, the Board made a specific finding noting the DOA’s conclusion that Barrett had deducted both a gathering charge, paid to Western, and a transportation charge, paid to MIGC, and that the former cannot be deducted under Wyo. Stat. Ann. § 39-14-203(b)(iv) and (vi). In its findings, the Board then narrated the DOA’s attempt to obtain from Williams information to allow a deduction for that portion of the Western charges that represented transportation costs from the outlet of the TEG dehydrator to the MIGC or Fort Union pipelines.…” Williams Production RMT Company v. Department of Revenue, 2005 WY 28, ¶ 29, 107 P.3d 179, 187 (Wyo. 2005).
77. “Preliminarily, it should be noted that the taxable value of state assessed property in Wyoming is self-reported. Wyo. Stat. Ann. § 39-13-107 (LexisNexis 2005) (ad valorem taxation); Wyo. Stat. Ann. § 39-14-207 (LexisNexis 2005) (severance taxation of mine products); Moncrief v. Wyoming State Bd. of Equalization, 856 P.2d 440, 445 (Wyo. 1993) (‘Since the severance tax was enacted in 1969, it has been a self-assessment system.’). The Department of Audit is authorized to conduct audits of the taxpayer-reported taxable value of production. Wyo. Stat. Ann. § 9-2-2003(e) (LexisNexis 2005). The Department of Revenue is authorized to request the Department of Audit to conduct an audit, involving the examination of ‘the books and records of any person paying ad valorem taxes,’ for the purpose of verifying a taxpayer’s reported values. Wyo. Stat. Ann. § 39-14-208(b)(i) (LexisNexis 2005). Wyoming Statute § 39-14-208(b)(vii) (LexisNexis 2003)(amended 2005) mandates that taxpayers retain ‘accurate books and records of all production subject to severance taxes imposed by this article and determinations of taxable value as prescribed by [Wyo. Stat. Ann. §] 39-14-203(b) for a period of seven (7) years and make them available to department examiners for audit purposes.’ Thus the taxpayer is required to maintain accurate records supporting its reported taxable value to produce to the Department, through the Department of Audit, upon audit. Department of Revenue v. Michael T. Guthrie d/b/a MTG Operating Company, 2005 WY 79, ¶ 14, 115 P.3d 1086, 1092 (Wyo. 2005).
78. “Statutory construction is a matter of law which this Court reviews de novo. Amoco Prod. Co. v. State of Wyoming, Dep’t of Revenue, 2004 WY 89, ¶ 34, 94 P.3d 430, (Wyo. 2004). While MTG’s logic is appealing, the Department presents the more persuasive argument. The language of the statute is plain as it pertains to the instant issue. The fair market value ‘shall be the value established by bona fide arms-length [sic] transaction.’ The gas purchase contracts embody the terms of the arm’s-length sales transaction between MTG and Purchaser. Thus, the fair market value ‘shall be the value established’ in the gas purchase contracts. It follows that it is the specific terms of the contracts that must be used to establish the legislatively defined fair market value. In verifying the value of gas production, therefore, the Department is required by the statute to refer to the specific terms of the contracts.” Department of Revenue v. Michael T. Guthrie d/b/a MTG Operating Company, 2005 WY 79, ¶ 23, 115 P.3d 1086, 1094-1095 (Wyo. 2005).
CONCLUSIONS OF LAW: APPLICATION OF PRINCIPLES OF LAW
79. Kennedy Oil did not specify jurisdictional grounds when filing its Notice of Appeal. [Board Record]. The Notice of Appeal attached the Department’s letter of August 31, 2006, simply recites, “This letter should be considered a final determination letter and administrative action by the Department of Revenue.” [Board Record]. We presume that the appeal was filed pursuant to Wyo. Stat. Ann. § 39-14-209(b)(i), under which “[a]ny person aggrieved by any final administrative decision of the department may appeal to the state board of equalization.”
80. The Board decides appeals brought under Wyo. Stat. Ann. § 39-14-209(b) using “the general standard that the valuation must be in accordance with constitutional and statutory requirements for valuing state-assessed property.” E.g., Chevron U. S. A., Inc., Docket No. 2005-66, June 8, 2006, 2006 WL 3327955, ¶ 84.
81. In applying this standard, the Board must presume that the Department’s valuations are valid, accurate, and correct. BP America Production Company v. Department of Revenue, 112 P.3d 596, 608, 2005 WY 60, ¶ 26 (Wyo. 2005). Kennedy Oil had the burden of presenting credible evidence to overcome the presumption. Id.; Chevron U.S.A., Inc. v. Department of Revenue, 2007 WY 79, ¶ 30, 158 P.3d 131, ¶ 30 (Wyo. 2007). Kennedy Oil’s burdens of proof and persuasion are further articulated in the Board’s Rules. Rules, State Board of Equalization, Chapter 2, Section 20.
82. Kennedy Oil and the Department have presented contradictory proposals to the Board regarding where Kennedy Oil’s sale transactions occurred. “Sale” is not a defined term in the statutes pertaining to oil and gas taxation, Wyo. Stat. Ann. § 39-14-201 et seq. There are nonetheless both statutory and dictionary definitions to aid the Board in applying “the ordinary and obvious meaning of the words employed.” Conclusions, ¶ 68. All are of similar import in the context of this case, and lead to conclusions of law consistent with the Board’s Findings. Findings, ¶¶ 60-61.
83. The Wyoming sales tax statute focuses on “any transfer of possession in this state for a consideration.” Wyo. Stat. Ann. § 39-15-101(a)(vii).
84. Under the Uniform Commercial Code, a sale “consists in the passing of title from the seller to the buyer for a price.” Wyo. Stat. Ann. § 34.1-2-106(a). “Unless otherwise explicitly agreed title passes to the buyer at the time and place at which seller completes his performance with reference to the physical delivery of the goods.…” Wyo. Stat. Ann. § 34.1-2-401(a)(ii). The references to Delivery Points in the various contracts discussed in this case tie to the significance of delivery under the Uniform Commercial Code.
85. According to a standard legal source, sale means “1. The transfer of property or title for a price. 2. The agreement by which such a transfer takes place. The four elements are (1) parties competent to contract, (2) mutual assent, (3) a thing capable of being transferred, and (4) a price in money paid or promised.” Black’s Law Dictionary (8th Ed.)(2004), p. 1364. Elsewhere, we find sale defined as the “exchange of property of any kind, or of services, for an agreed sum of money or other valuable consideration.” Webster’s New World College Dictionary (4th Ed.)(2001), p. 1264.
86. Wyoming Statute Annotated §39-14-203(b)(v) (“paragraph (v)”) provides:
(v) If the crude oil, lease condensate or natural gas production as provided by paragraphs (iii) and (iv) of this subsection are sold to a third party, or processed or transported by a third party at or prior to the point of valuation provided in paragraphs (iii) and (iv) of this subsection, the fair market value shall be the value established by bona fide arms-length transaction....
Conclusions, ¶ 65. Paragraph (iii) of Wyo. Stat. Ann. §39-14-203(b) applies to crude oil and lease condensate. Paragraph (iv) applies to natural gas. Wyo. Stat. Ann. § 39-14-203 (b)(iii),(iv), quoted in Conclusions, ¶ 65.
87. By applying the plain language of paragraph (v) to our Findings regarding the relation between the transactions in this case and the point of valuation, the Board concludes that, for all sale transactions under the Gas Purchase Agreement, i.e., through November, 2001, Kennedy Oil sold its production to a third party prior to the point of valuation. Those transactions accordingly fell under Wyo. Stat. Ann. § 39-14-203(b)(v).
88. The Board further concludes that, for all sales after November, 2001, all Kennedy Oil production was transported by a third party prior to the point of valuation pursuant to the Field Services Agreement. Those transactions likewise fell under Wyo. Stat. Ann. § 39-14-203(b)(v).
89. The Board nonetheless finds for the Department and not Kennedy Oil, even though Kennedy Oil has viewed this case as one which turns entirely on the point of valuation. Broadly speaking, the Board concludes that Kennedy Oil failed to read all parts of Wyo. Stat. Ann. § 39-14-203(b) functioning as a whole, and misinterpreted the specific valuation instructions in paragraph (v) of Wyo. Stat. Ann. § 39-14-203(b), as more fully described below.
90. The Board’s conclusions avoid the need to give detailed consideration to an odd practical result which Kennedy Oil’s contentions and hearing arguments imply. If Kennedy Oil had prevailed in its appeals on sales through November, 2001, but not after, the Board understood Kennedy Oil to concede that the Department’s revaluation after audit would apply to the later sales. That is, two different approaches to valuation would have applied during the same audit period.
91. If sharply different taxable values were to result for highly similar transactions, due exclusively to the location of the sales in relation to the point of valuation, the practical result would verge on the absurd. See Rodriguez v. Casey, supra, quoted in Conclusions, ¶ 69. The modification of a point of sale after a bankruptcy, where field services continued to be provided under an existing contract, would result in a such a sharp change both in valuation and in tax liability. A producer such as Kennedy Oil would likely be under pressure from its royalty owners, see Findings, ¶ 23, to manipulate its transactions to fall under the more favorable valuation procedure. The Board could also be faced with constitutional questions concerning uniform treatment of taxpayers. Under the Board’s interpretation of Wyo. Stat. Ann. §39-14-203(b), none of these difficulties arise.
92. In addition to the language of the statute, the parties and the Board began with the common understanding that this case presents issues not fully resolved by Williams Production RMT Company v. Department of Revenue, 2005 WY 28, 107 P.3d 179 (Wyo. 2005).
93. Unlike Williams Production RMT Company, the issues in this case do not turn on characterization of the physical facilities engaged in production, gathering, and transportation of coal bed methane. The layout of the physical facilities in this case is essentially the same as in Williams Production RMT Company. Coal bed methane gas is produced at low pressure, then collected and pressurized for transport. To protect the initial transporting pipeline, the gas is dehydrated in a triethylene glycol (TEG) dehydrator. Compare Findings, ¶ 35, with Williams Production RMT Company, supra, ¶ 11, and Appeal of Williams Production RMT Company, Docket 2002-103, November 14, 2003, 2003 WL 22754175 (Wyo. St. Bd. Eq.), ¶ 60.
94. The stakes in this case are likewise essentially the same. The Wyoming Supreme Court’s description of the significance of the point of valuation applies herein as well:
Determining the point of valuation is of particular significance because “expenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the [CBM].” Wyo. Stat. Ann. § 39-14-203(b)(ii). Thus, because certain expenses “downstream” of the point of valuation are deductible, it is to the producer’s benefit to have the point of valuation determined “upstream” as far as possible. That is the instant case in a nutshell. Williams seeks an “upstream” point of valuation instead of the “downstream” point of valuation determined by the Department and confirmed by the Board.
Williams Production RMT Company, 2005 WY 28, ¶ 10, 107 P.3d 179. Kennedy Oil is a coal bed methane producer, like Williams in Williams Production RMT Company, which seeks to place the point of valuation further upstream than the TEG dehydrator.
95. From the inception of its appeal, Kennedy Oil has characterized the pertinent issue of law as being “[w]hether paragraph (iv) or paragraph (v) of subsection (b) of § 39-14-203 is to be applied in establishing the taxable value of Petitioner’s CBM production.” [Preliminary Statement of Kennedy Oil; Petitioner’s Issues of Fact and Law and Exhibit Index]; Contentions and Issues, supra. The characterization includes the premise that Williams Production RMT Company governs the determination of value when paragraph (iv) applies. [See generally, Memorandum of Law Submitted by Kennedy Oil].
96. Kennedy Oil’s characterization of the issue of law rests on the legal theory that the application of Wyo. Stat. Ann. § 39-14-203(b)(v) was not considered in Williams Production RMT Company. Kennedy Oil accordingly views paragraph (v) is an alternative to valuation under paragraph (iv).
97. In 2005, the Wyoming Supreme Court held that the point of valuation for a taxpayer’s coal bed methane production was the outlet of the TEG dehydrator. Williams Production RMT Company, supra. The identification of that point of valuation was based on consideration of the extensive factual determinations made in the record, and on the language of Wyo. Stat. Ann. § 39-14-203(b)(iv) (“paragraph (iv)”):
(iv) The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first....
Wyo. Stat. Ann. § 39-14-203(b)(iv), quoted in Conclusions, ¶ 65. The Wyoming Supreme Court did not characterize its decision in Williams Production RMT Company as a choice between paragraphs (iv) and (v).
98. Indeed, on its face, paragraph (iv) contains no direction at all about how the Department is to determine value. Instead, paragraph (iv) speaks to when the production process is complete. The completion of the production process ties to the point of valuation stated in Wyo. Stat. Ann. § 39-14-203(b)(ii). Broadly speaking, the consequences of a point of valuation for the determination of value are addressed in paragraphs (v) and (vi).
99. In most respects, the cornerstone of Wyo. Stat. Ann. § 39-14-203(b) is paragraph (vi), with its related paragraphs (vii), (viii), and (ix). Paragraph (vi) provides detailed directions to the Department for determining the value of natural gas under specified circumstances, lending specific content to general statutory statements concerning the Department’s responsibilities to determine value. Wyo. Stat. Ann. § 39-14-202(a)(i),(ii).
100. For natural gas “not sold at or prior to the point of valuation by bona fide arms-length sale,” or “if the production used without sale,” the legislature has prescribed a limited universe of four valuation methods. Wyo. Stat. Ann. § 39-14-203(b)(vi). Litigation before the Board has regularly demonstrated that these four methods do not yield the same value. E.g., Union Pacific Resources Company et al, Docket No. 2000-147 et al., June 9, 2003, 2003 WL 21774603 (Wyo. St. Bd. Eq.), aff’d sub nomine BP America Production Company v. Department of Revenue, 2005 WY 60, 112 P.3d 596 (Wyo. 2005); Chevron U.S.A., Inc. v. Department of Revenue, 2007 WY 79, 158 P.3d. 131 (Wyo. 2007). As important, one of the four methods may be either impossible to apply to a given taxpayer, or barred from application by statute. Id.
101. When paragraph (vi) applies, the statute expressly restricts use of valuation techniques other than the prescribed quartet of methods. The Department and a taxpayer may only apply a mutually agreeable alternative to the four statutory methods if they “jointly agree, that the application of one (1) of the listed in paragraph (vi) of this subsection does not produce a representative fair market value for the .... natural gas production....” Wyo. Stat. Ann. § 39-14-203(b)(vii).
102. The legislature placed temporal restrictions on the Department’s authority to determine value under paragraph (vi). The Department must select one of the four methods for a cycle of three consecutive years, Wyo. Stat. Ann. § 39-14-203(b)(viii), and must notify the taxpayer of its selected method by “September 1 of the year preceding the year for which the method shall be employed.” Wyo. Stat. Ann. § 39-14-203(b)(vi). This Board has had occasion to uphold the rights of a taxpayer when the Department has not met its obligation to make a timely selection of method. ExxonMobil Corporation, Docket 2004-84 et al, December 1, 2005, 2005 WL 3347975 (Wyo. St. Bd. Eq.).
103. A taxpayer has a specific right to challenge the Department’s selection of a method under paragraph (vi), using the standard that the Department’s selected method “does not accurately reflect the fair market value of the....natural gas.” Wyo. Stat. Ann. § 39-14-203(b)(viii). The taxpayer’s right to appeal the Department’s selection of method is separate and distinct from its general right to appeal “any final administrative decision” of the Department, with its more general review standard. Conclusions, ¶¶ 79-80.
104. The Department has a special statutory appeal right related to paragraph (vi). The Department may appeal a taxpayer’s selected method when the Department has failed to make a timely selection of its own. Wyo. Stat. Ann. § 39-14-203(b)(ix).
105. Unlike paragraph (vi), paragraph (v) applies in the event of certain transactions “at or prior to the point of valuation.” Wyo. Stat. Ann. § 39-14-203(b)(v).
106. Kennedy Oil and the Department generally agree that natural gas sales which are the subject of paragraph (v) are only those which occur “at or prior to the point of valuation.” It is nonetheless possible to parse paragraph (v) into two independent parts. The first would apply when the natural gas production is “sold to a third party.” The second would apply to natural gas production transported or processed “at or prior to the point of valuation provided in paragraphs (iii) and (iv) of this subsection,” with the quoted phrase modifying only “processed or transported by a third party.” However, such a reading would make paragraph (v) apply to all sales to a third party, and would therefore conflict with paragraph (vi) and its focus on production “not sold at or prior to the point of valuation.” Such a reading would be contrary to the precept that “[i]f two sections of legislation appear to conflict, they should be given a reading that gives them both effect.” Rodriguez v. Casey, supra, quoted in Conclusions, ¶ 69. The Board therefore concludes the parties are correct in reading paragraph (v) to apply only to production sold to a third party at or prior to the point of valuation, and not to all production sold to a third party.
107. Like paragraph (vi), paragraph (v) includes a direction for the determination of value, albeit a much simpler direction than those in paragraph (vi). “The fair market value shall be the value established by bona fide arms-length transaction.” Wyo. Stat. Ann. § 39-14-203(b)(v).
108. Unlike the valuation directions of paragraph (vi), the valuation direction of paragraph (v) has rarely been the subject of litigation. Department of Revenue v. Michael T. Guthrie d/b/a MTG Operating Company, 2005 WY 79, 115 P.3d 1086 (Wyo. 2005) was such a case. Paragraph (v) is referenced in ¶ 20 of that decision.
109. In MTG Operating Company, MTG contested an audit determination upheld by this Board. MTG reported a taxable value for its natural gas production which included a deduction for a fuel use adjustment. Id., ¶¶ 4-5. The auditors sought verification for the deduction but were never satisfied. Id., ¶ 5. At a hearing before the Board, MTG sought to verify the deduction by reliance on a back calculation which used the difference between its contract price and monthly gas statement purchase prices. Id., ¶ 6. The Board refused to accept the back calculation because MTG’s contracts required specific volumetric information, and because MTG failed to produce evidence of the actual amount of gas used as fuel. Id., ¶¶ 7, 15.
110. The Wyoming Supreme Court upheld the Board’s decision after reversal by the district court. The Court relied on the language of paragraph (v) to conclude that MTG’s contracts were the correct source of “legislatively defined fair market value” under paragraph (v). Id., ¶ 23; quoted in Conclusions, ¶ 78. The Court went on to say that “[i]n verifying the value of gas production, the Department is required by the statute to refer to the specific terms of the contracts.” Id.
111. In MTG Operating Company, the only contracts at issue were the sale contracts described in the opinion. However, paragraph (v) is not limited to the sale of production. Paragraph (v) also applies where the taxpayer’s natural gas production is “processed or transported by a third party at or prior to the point of valuation.” This application is reflected in the paragraph (v) reference to bona fide arms-length transaction, which contrasts with a reference to bona fide arms-length sale in paragraph (vi). See Conclusions, infra, ¶ 131.
112. The legislature has provided a stark functional contrast for value determinations governed by paragraph (v) rather than paragraph (vi). Under paragraph (v):
• The Department is not restricted to use of four specified methods;
• The Department is not obliged to notify the taxpayer of its choice of methods in advance;
• The Department is not obliged to use the selected method for three consecutive years, or to provide advance notice of its selected method;
• The taxpayer has no independent right to appeal the Department’s selection of method based on whether the selected method accurately reflects fair market value;
• The Department has no right to appeal the taxpayer’s selection of method when the Department fails to make a timely selection; and
• There is no provision for the Department and the taxpayer to negotiate an alternative valuation method.
113. Based principally on these substantial functional differences, the Board concludes paragraphs (v) and (vi) are mutually exclusive statutory directions for determining the value of natural gas. The Board further concludes paragraph (v) is properly read as an exception to paragraph (vi). This conclusion is supported by, and explains, four aspects of the language used in paragraph (v), particularly when compared to paragraph (vi).
114. First, paragraph (v) is restricted to transactions involving third parties: “sold to a third party, or processed or transported by a third party.” Wyo. Stat. Ann. § 39-14-203(b)(v). A sale transaction customarily involves two parties, a buyer and a seller, which was indeed the case with the Gas Purchase Agreement. Findings, ¶¶ 15, 32 and Exhibit 101; see Conclusions, ¶ 84. Kennedy Oil offered no insight as to the meaning or purpose of the statutory reference to a third party, nor why the third party requirement was satisfied by the Gas Purchase Agreement. “Third party” is not a term defined by statute with respect to oil and gas, or with respect to other taxes on mine products. Wyo. Stat. Ann. § 39-14-101 et seq.
115. The Wyoming Supreme Court has commented on the phrase in the context of litigation pertaining to the comparable value method of Wyo. Stat. Ann. § 39-14-203(b)(vi)(C). Quoted in Conclusions, ¶ 65. Though not providing a definition, the Wyoming Supreme Court indicated that in the context of the oil and gas taxation statutes, the words third party refer to a party unrelated to the taxpayer. Id. This reading gives meaning to all the words of paragraph (v), while also giving meaning to paragraphs (v) and (vi) when construed in pari materia. Chevron U.S.A., Inc. v. Department of Revenue, quoted in Conclusions, ¶ 68.
116. The third party requirement prevents a taxpayer not satisfied with the four methods of paragraph (vi) from using an affiliate to structure a sale or other transaction simply to avoid valuation under paragraph (vi). We note that Wyoming is a self-reporting state. Wyo. Stat. Ann. § 39-14-207(a); MTG Operating Company, ¶ 14, quoted in Conclusions, ¶ 77. The Department might not learn that a taxpayer had circumvented the prescribed approaches of paragraph (vi) unless and until the taxpayer were audited. The third party requirement is a clear statutory signal that a taxpayer may not elect to rely on subsection (v) by the simple expedient of a transaction with an affiliate. The requirement would prevent a taxpayer from manipulating taxable value by inexpensive measures. See Appeal of Williams Production RMT Company, ¶ 117, quoted in Conclusions, ¶ 73.
117. Second, the legislature omitted the definite article “the” in the phrase “value established by bona fide arms-length transaction.” Kennedy Oil assumes that the value mandated by statute is the sale price between itself and Enron. That is, Kennedy Oil reads the statute as referring to the “value established by [the] bona fide arms-length [sale] transaction [between the seller and buyer],” thereby implicitly adding clarifications which do not appear in the statute. Kennedy Oil offered no justifications for these unstated clarifications, but treats them as self-evident.
118. A dictionary definition explains the function of “the” as a definite article. “The” may be defined as: “I. referring to a particular person, thing, or group (as opposed to a, an), as: 1. that (one) already spoken or already mentioned [the story ended]...” Webster’s New World College Dictionary (4th Ed.)(2001), p. 1483.
119. A treatise on grammar provides a more elaborate statement of the same point made in the dictionary:
The definite article the is the most basic indicator of definiteness. It is illustrated in [1], which shows that it is compatible with all types of common noun: count singular, count plural, non-count.
[1] Bring me [the ladder/ladders/cement]!
Use of the definite article here indicates that I expect you to be able to identify the referent – the individual ladder, the set of ladders, the quantity of cement I am referring to.
The concept of identifiability expressed by the definite article is best understood in terms of pre-empting a question with which? Compare, for example:
[2] i Where did you park the car?
ii The father of one of my students rang me up last night.
iii The first person to run the mile in under four minutes was Roger Bannister.
Example [i] illustrates the frequent case where the addressee can be assumed to be familiar with the referent of the definite [noun phrase]: you have been driving the car and presumably know a good deal more about it than that it is a car – what colour and make of car it is, and so on. You don’t need to ask Which car?: you know which one I’m referring to....
The Cambridge Grammar of the English Language, Huddleston and Pullum (2002), p. 368.
120. The absence of the word “the” before the phrase “value established by bona fide arms-length transaction” implies the Department is not bound to rely exclusively on the face value of the same sale, transportation, or processing transaction which is the reason for application of paragraph (v). If we ask which transaction the Department may or must use to establish value (Conclusions, ¶ 119), the statute does not provide a response. This is a matter left to the Department’s discretion as it fulfills its general statutory duty to determine value. Wyo. Stat. Ann. § 39-14-202(a)(i),(ii), quoted in Conclusions, ¶ 64. However, the Department’s starting point must be a taxpayer’s contracts. MTG Operating Company, discussed in Conclusions, ¶¶ 108-111.
121. Williams Production RMT Company and the underlying Board decision, Appeal of Williams Production RMT Company, indirectly support the statutory reliance on contract values from unspecified transactions. In the underlying case, this Board agreed with the Department on two principles: (1) the point of valuation is a physical location; and (2) physical location directly affects the calculation of expenses deducted from a taxpayer’s sale price to determine fair market value. Appeal of Williams Production RMT Company, quoted in Conclusions, ¶ 73, numbered paragraphs 91 and 92. The Wyoming Supreme Court broadly endorsed the Board analysis which included those principles. Williams Production RMT Company, quoted in Conclusions, ¶ 72.
122. If the valuation directions of paragraph (v) did not rely on an unspecific (and hence flexible) reference to market transactions, there would be no way to resolve the tension between a physical point of valuation and taxpayer transactions that did not occur at the point of valuation. Generally speaking, a third party sale transaction at the point of valuation would not include gathering expense. See Wyo. Stat. Ann. § 39-14-203(a)(ix). In contrast, transactions like the Gas Purchase Agreement plainly do account for such expense, which Kennedy Oil wishes to deduct. Findings, ¶ 1. A valuation direction could not uniformly value both types of transactions, by reference to essentially the same point of valuation and the market value of the transaction, if it did not provide the leeway to adjust the value of the transaction which did not occur at the point of valuation. Under the Board’s interpretation, the legislature has provided the Department the authority to make such adjustments.
123. Third, the Board’s interpretation resolves a conflict between the application of paragraphs (v) and (vi) when the point of sale is after the point of valuation. If paragraphs (v) and (vi) are not mutually exclusive, then circumstances may arise – as they have in this case for sales after November, 2001 – where both paragraphs appear to apply. The reason for applying paragraph (v) to Kennedy Oil’s sales after November, 2001, is that its production was “transported ... by a third party ... prior to the point of valuation.” Findings, ¶¶ 42, 61. The argument for applying paragraph (vi) to the same sales after November, 2001, is that Kennedy Oil’s “natural gas production ... [was] not sold at or prior to the point of valuation by bona fide arms-length sale.” Findings, ¶ 61.
124. If a taxpayer’s production (in this case, the sales after November, 2001) were governed by paragraph (vi), a portion of paragraph (v) would be meaningless. There would only be two directions for valuation. A taxpayer’s production would be governed either (1) by reference to whether production was sold to a third party at or before the point of valuation, and hence under paragraph (v); or (2) by reference to whether production was not sold at or prior to the point of valuation by bona fide arms length sale, hence under paragraph (vi).
125. We note that the language of the two tests is more similar than may first appear. The “bona fide arms-length sale” of paragraph (vi) is a term defined by statute:
(ii) "Bona fide arm's-length sale" means a transaction in cash or terms equivalent to cash for specified property rights after reasonable exposure in a competitive market between a willing, well informed and prudent buyer and seller with adverse economic interests and assuming neither party is acting under undue compulsion or duress;
Wyo. Stat. Ann. § 39-14-201(a)(ii), quoted in Conclusions, ¶ 63. The effect of a reference to bona fide arms-length sale in paragraph (vi) is, for the purposes of this context, to assure a distance between buyer and seller indistinguishable from that required by the third party language of paragraph (v). See Conclusions, supra, ¶ 116.
126. Because the point of valuation language of paragraphs (v) and (vi) differs only by a “not,” if paragraph (vi) governed paragraph (v) in the event of transportation or processing at or prior to the point of valuation, then only the point of sale would determine whether value was determined under paragraph (v) or paragraph (vi). Whether production was transported or processed at or prior to the point of valuation would cease to have any meaning. Reading paragraph (vi) as governing paragraph (v) for any sale past the point of valuation would violate the precept that “[e]ach word of a statute is to be afforded meaning, with none to be rendered superfluous.” Rodriguez v. Casey, supra, quoted in Conclusions, ¶ 69.
127. In contrast, if production transported or processed by a third party at or prior to the point of valuation is governed by paragraph (v) rather than paragraph (vi), paragraph (v) merely takes on the character of an exception to paragraph (vi). Paragraph (vi) continues to have application to those instances where there is no transportation or processing by third parties at or prior to the point of valuation. In the Board’s experience, this is the most common circumstance. It is also the circumstance for which the legislature provided the most extensive express direction for determining value. See Conclusions, ¶¶ 99-104.
128. The Board notes that Williams Production RMT Company conceivably could be read to contradict the Board’s conclusions regarding the application of paragraph (v) where a sale occurs past the point of valuation. In Williams Production RMT Company, the taxpayer’s predecessor in interest, Barrett Resources Company, identified Glenrock, Wyoming, as the point of sale for its production. Williams Production RMT Company, f.n. 3., ¶ 30. However, similar to the transactions under the Field Services Agreement in this case, custody of the Barrett/Williams production was transferred to Western Gas Resources upstream from the TEG dehydrator. Williams Production RMT Company, ¶ 11. The Wyoming Supreme Court referred briefly to paragraph (vi) in its analysis. Id., ¶ 29.
129. This Board also referred generally to paragraph (vi) in its underlying Williams decision. Appeal of Williams Production RMT Company, Docket 2002-103, ¶¶ 26, 72(g), 92, 126, 127.
130. After careful review of the statements of the issues in the referenced decisions, the Board concludes that neither Williams Production RMT Company nor the Department questioned whether the statutory basis for determining the value of the production at issue was paragraph (v) or paragraph (vi). Williams Production RMT Company, ¶¶ 5-6; Appeal of Williams Production RMT Company, Docket 2002-103, “Discussion”, p. 2. The applicability of paragraph (v) and (vi) was not an issue presented for review in the Williams Production RMT Company litigation.
131. The fourth noteworthy aspect of the language of paragraph (v) is the reference to bona fide arms-length transaction. In this context, a transaction is “1. The act or an instance of conducting business or other dealings. 2. Something performed or carried out; a business agreement or exchange.” Black’s Law Dictionary (8th Ed.)(2004) p. 1535. Similarly, the root of transaction, transact, is defined as “to carry on, perform, conduct or complete (business, etc.).” Webster’s New World College Dictionary (4th Ed.)(2001), p. 1519. The word plainly has a meaning broader than sales, see Conclusions, ¶¶ 83-85, and can embrace agreements for transportation and processing.
132. This standard popular meaning, Rodriguez v. Casey, supra, quoted in Conclusions, ¶ 69, is consistent with the sense of two defined terms, “arm’s-length market or sales price” and “bona fide arm’s-length sale.” Wyo. Stat. Ann. § 39-14-201(a)(i),(ii), quoted in Conclusions, ¶ 63.
133. In contrast to paragraph (v), paragraph (vi) applies to production “not sold at or prior to the point of valuation by bona fide arms-length sale.” We conclude the sense intended by the legislature was that the language of paragraph (v) mimics the sense of the defined term in paragraph (vi), but with a broader application to embrace agreements for sales, transportation, processing, and unspecified other transactions the Department may deem pertinent. We conclude that other unspecified transactions must be available to the Department by implication; a valuation determination may fall under paragraph (v) as a result of a transportation or processing transaction which may itself provide no insight into sales value. Our conclusion of the sense intended by the legislature is consistent with the Board’s interpretation of the relationship between paragraphs (v) and (vi).
134. Turning once again to the arguments in this case, the Board notes Kennedy Oil did not share the Board’s concern for the details of the language of paragraph (v). [See generally, Petitioner’s Proposed Findings of Fact and Conclusions of Law.] Nor did Kennedy Oil share the Board’s interest in “paying attention to [the] internal structure between” paragraphs (v) and (vi) and subsection 203(b) as a whole. Id.
135. Kennedy Oil focused instead on larger problem with its interpretation, a problem which Kennedy Oil characterizes as the “incompatibility between paragraphs (iv) and (v) of subsection (b).” [Petitioner’s Proposed Findings of Fact and Conclusions of Law, Conclusions ¶ 8]. Kennedy Oil would have the Board suppose an incompatibility “results from the fact that the initial dehydrators utilized by the transporters of the coal bed methane purchased from Kennedy Oil are not in close proximity to the wells as was the case with respect to conventional gas in 1990, when the valuation provisions were adopted by the legislature.” Id. Kennedy Oil argues that since the “legislature has not chosen to rationalize the incompatible provisions,” this Board must give effect to Kennedy Oil’s reading. Id.
136. Kennedy Oil’s argument regarding legislative intent assumes the premise Kennedy Oil desires to demonstrate – i.e., the incompatibility of paragraphs (iv) and (v). In any event, the Board does not agree the prototype of conventional gas before 1990 requires the Board to conclude that the legislature adopted paragraphs (iv) and (v) in an incompatible form.
137. The Board itself previously relied on a factual finding that “[c]oalbed methane was not commercially significant [in 1990].” Appeal of Williams Production RMT Company, quoted in Conclusions, ¶ 73, numbered paragraph 116. From this fact, the Board concluded “the reference to water vapor commonly associated with natural gas is a reference to the water vapor in conventional natural gas.” Id., numbered paragraph 116. This reasoning led the Board to reach a further narrow conclusion that “[i]t would be absurd to accept as a dehydrator any enlarged space that creates condensation. This would allow the taxpayer to freely manipulate the point of valuation with inexpensive measures.” Id., numbered paragraph 117.
138. The Wyoming Supreme Court generally endorsed this analysis, including paragraphs 116 and 117 of the Board’s decision. Williams Production RMT Company, quoted in Conclusions, ¶ 72. The Court likewise rejected an attempt by Williams Production RMT Company to mischaracterize the Board’s reliance on the commercial significance of coal bed methane as a concession that the legislature did not intend to tax coal bed methane as natural gas. Id., quoted in Conclusions, ¶ 75.
139. Kennedy Oil infers too much from its limited testimony concerning the differences between conventional natural gas production and coal bed methane production. [E.g., Trans. Vol. I, pp. 108-112]. Wyoming is a state in which even the affidavits of persons involved in the enactment of a statute are not a proper source of legislative history. Independent Producers Marketing Corp. v. Cobb, 721 P.2d 1106, 1108 (Wyo. 1986). Since Kennedy Oil has not argued that the statute is ambiguous, we should not resort to such extrinsic aids to construction. In Re Estate of Kirkpatrick, 77 P.3d 404, 406, 2003 WY 125, ¶ 7 (Wyo. 2003). In reaching its conclusions, the Board has relied principally on the plain language of the statute, and determined no ambiguity exists.
140. With this foundation for its interpretation of paragraph (v), the Board concludes the Department’s valuation for the entire audit period satisfied the requirement of relying on “value established by bona fide arms-length transaction.” We have already concluded the statute obliged the Department to consider the taxpayer’s transaction when determining value. Conclusions, ¶ 120. At the same time, the Department was broadly authorized to consider how the taxpayer’s transaction shed light on market value in the context of the statutory point of valuation. Conclusions, ¶¶ 120–122. The Department reached a value by relying on prices established by contract with Kennedy Oil’s buyers; gathering fees and transportation fees established by the Enron contracts; and pipeline tariffs and fees. Findings, ¶¶ 50-51. These sources were supplemented by reasonable cost allocations made with reference to the framework of the arms-length transactions. Findings, ¶ 52. The Department’s allocations were accepted by the taxpayer. Findings, ¶ 53.
141. Since all of the transactions in this case were transactions under paragraph (v), Conclusions, ¶¶ 87-88, our conclusion applies to all of the transactions. For this reason, we affirm the valuations determined by the Department for the entire audit period.
142. Not coincidentally, we conclude the Department’s approach to determining value in this case was employed and upheld in Williams Production RMT Company. Williams Production RMT Company, ¶¶ 24-29. In retrospect, we would view the transaction in Williams Production RMT Company as falling under paragraph (v). We also find the Department’s general approach to coal bed methane valuation was in accordance with constitutional and statutory requirements for valuing state-assessed property, which is our standard of review under Wyo. Stat. Ann. § 39-14-209(b). Conclusions, ¶ 80. Grenvik testified that the Department normally sees a sale at a place and can identify transportation agreements to take the gas from the TEG dehydrator to the point of sale (his logic would likewise apply to taking the gas upstream to the wellhead). Portions of the transportation cost are then backed out of the price to reach a value at the point of valuation. Findings, ¶ 54. Grenvik’s description fits what the Department did in this case, and did in Williams Production RMT Company.
143. Under Wyo. Stat. Ann. § 39-14-208(c)(iv), the Department must add interest to all delinquent severance taxes. Taxes are delinquent when a taxpayer knew or reasonably should have known that total tax liability was not paid when due. Wyo. Stat. Ann. § 39-14-208(c)(ii).
144. John Kennedy plainly did not know that Kennedy Oil’s total tax liability was not paid when due. The Board found Kennedy was under a good faith impression that Kennedy Oil sold its gas at the same points to all purchasers during the audit period. Findings, ¶ 45. We have also concluded that the applicability of paragraph (v) and (vi) was not an issue presented for review in the Williams Production RMT Company litigation, so Kennedy Oil reasonably believed its appeal presented a novel question of law. Conclusions, ¶ 130.
145. This leaves only the question of whether Kennedy Oil should have known its total tax liability was not paid when due. The Board is normally reluctant to make such a finding in a case where a taxpayer has framed its dispute with the Department as purely question of law, as Kennedy Oil has done in this case. Contentions and Issues. Our normal concern is alleviated because there were indeed questions of fact for the Board to determine, contrary to Kennedy Oil’s position.
146. We conclude that Kennedy Oil does not owe interest because it could not have known its total tax liability was not paid when due. This conclusion rests in part on two points already mentioned, Kennedy’s good faith impression of its sale points, and the novelty of the issue presented. Conclusions, ¶ 144.
147. Our conclusion also rests on the observation that Kennedy Oil would not have reached the right result in this case simply by accepting the advice of the Department. The Board did not accept the Department’s argument that the price index hubs should be treated as the points of sale. Findings, ¶ 59. Indeed, based on our prehearing proceedings, neither party anticipated scrutiny of Kennedy Oil’s contracts would lead to a conclusion that the contractual Delivery Points changed during the audit period.
148. As important, the Department did not provide a legal analysis that the Board found persuasive. We do not fault the Department in this regard; its position was well and timely briefed, and its briefing was helpful to the Board in its deliberations. At the same time, the emphasis in the Board’s analysis differs from that of the Department, to a degree that Kennedy Oil could not have readily foreseen the details of the result in this case.
149. Finally, Kennedy Oil’s full and fair presentation of its case reinforced the Board’s sense of Kennedy Oil’s good faith and consistent commitment to a position it believed to be fairly in dispute. Witnesses Bump and Bower provided information that shed useful light on the positions of both parties, particularly so with respect to the index pricing that was of central concern to the Department’s original view of the case. In this regard, Kennedy Oil’s behavior may be readily contrasted with taxpayers who have adjusted their account of the facts to suit an evolving legal position, thereby casting doubt on the integrity of the taxpayer’s evaluation of tax liability. E.g., Williams Production RMT Company, Docket 2002-103, ¶¶ 168-169.
150. Kennedy Oil failed to carry its burdens and proof and persuasion with regard to its tax liability. It carried its burdens of proof and persuasion to demonstrate that it did not know and could not have known its tax liability was not paid in full when due.
ORDER
IT IS THEREFORE HEREBY ORDERED the Department’s revaluation of Kennedy Oil’s production for audit years 2000-2002 is affirmed. The Department’s assessment of interest is reversed and remanded.
Pursuant to Wyo. Stat. Ann. § 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 day of September, 2007.
STATE BOARD OF EQUALIZATION
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Alan B. Minier, Chairman
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Thomas R. Satterfield, Vice-Chairman
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Thomas D. Roberts, Board Member
ATTEST:
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Wendy J. Soto, Executive Secretary