Note: Portions of this opinion have been redacted for confidentiality.
BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
WILLIAMS PRODUCTION RMT CO. ) Docket No. 2006-107
FROM A PRODUCTION TAX AUDIT )
ASSESSMENT BY THE MINERAL )
DIVISION OF THE DEPARTMENT )
OF REVENUE (CBM Wells in Campbell & )
Johnson Counties Production Yrs 200-2002) )
FINDINGS OF FACT, CONCLUSIONS OF LAW, DECISION AND ORDER
APPEARANCES
Patrick R. Day and Delissa Hayano, Holland & Hart, LLP, for Williams Production RMT Co. (Williams).
Martin L. Hardscog and Karl D. Anderson, Senior Assistant Attorneys General, Wyoming 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 28, 2006, the Department notified Williams of its final determination regarding a production tax audit of Williams’ coal bed methane production years 2000, 2001, and 2002. Williams filed a timely appeal of the Department’s determination on September 26, 2006.
A hearing was held March 26, 27, and 28, 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). Williams reported the value of its coal bed methane production using points upstream of the statutory point of valuation at which it delivered gas to a third party for transportation. Williams relied on Wyo. Stat. Ann. § 39-14-203(b)(v) when reporting in this manner. Following an audit, the Department revalued Williams’ production using the statutory point of valuation. The Department viewed Williams’ position as contrary both to Wyo. Stat. Ann. § 39-14-203(b) and to the holding in 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 generally affirms the Department, but remands the audit findings to the Department for adjustment to account for a 21 cent per MMBtu rebate, and to correct a misunderstanding concerning payments to a third party for transportation. The Board reverses the assessment of interest.
CONTENTIONS AND ISSUES
Williams identified one contested issue of fact:
Whether Williams’ gas is sold to or transported by a third party prior to the outlet of the initial dehydrator.
[Petitioner’s Issues of Fact and Law and Exhibit Index, p. 1.]
Williams stated three contested issues of law:
Whether the Department was correct in applying Wyoming Statute section 39-14-203(b)(iv) to determine the valuation of Williams’ production.
Whether the Department was correct in refusing to apply Wyoming Statute section 39-14-203(b)(v) to determine the valuation of Williams’ production.
Whether the Department’s assessment of interest is proper pursuant to Wyoming Statute section 39-14-208(c)(ii).
[Petitioner’s Issues of Fact and Law and Exhibit Index, p. 2.]
We would note that Williams’ identification of contested issues of fact and law provided the Board poor guidance about the many matters of fact and law actually presented at the hearing of this matter.
The Department identified eight contested issues of fact:
Did Williams sell a portion of its CBM production upstream of the TEG dehydrator?
Whether Williams reported its CBM production as sold downstream of the TEG dehydrator or upstream of the TEG dehydrator? Whether Williams accurately represented the location of its sales?
Whether Williams provided information during the audit to allow evaluation of production sold upstream of the TEG dehydrator?
Whether the Department properly concluded that all reported production was sold downstream of the TEG dehydrator? (Mixed issue of fact and law)
Whether the Department correctly identified the deductible transportation for CBM sales based upon the Department’s applied point of valuation at the outlet of the initial dehydrator?
Whether Williams was unable to obtain or provide information regarding the gathering and transportation fees charged by Western Gas Resources or any other gatherer?
Whether the Department of Audit and Department of Revenue reasonably relied upon Williams’ representations regarding the location of sales?
Whether Williams knew or should have known that it misrepresented the taxable value of its CBM production?
[Wyoming Department of Revenue’s Updated Summary of Issues of Fact and Law and Exhibit List, p. 2].
The Department identified seven issues of law:
Whether the Department correctly valued all sales as occurring downstream of the outlet of the TEG dehydrators?
Whether the Department correctly assessed all CBM sales, revaluing all CBM production by placing the point of valuation at the outlet of the initial dehydrator – the outlet of the TEG dehydrator, pursuant to Wyo. Stat. Ann. § 39-14-203(b)(iv)?
Whether the Department correctly rejected Williams’ interpretation of Wyo. Stat. Ann. §§ 39-14-203(b)(iv) & (v), in which Williams argues that the point of valuation is relocated upstream of the point of valuation set forth in subparagraph (b)(iv)?
Whether the Department correctly calculated deductible and non-deductible costs in revaluing Williams’ CBM production?
Whether Williams’ claims are barred by doctrines of claim preclusion, issue preclusion, stare decisis, judicial estoppel or any other preclusive doctrine.
Whether the Department’s assessment of additional tax liability was in accordance with law?
Whether the Department’s imposition of interest was assessed in accordance with law?
[Wyoming Department of Revenue’s Updated Summary of Issues of Fact and Law and Exhibit List, p. 3].
The Board concludes the Department’s approach to determining the value of Williams’ production was consistent with the requirements of Wyo. Stat. Ann. §§ 39-14-203(b)(iv) and 39-14-203(b)(v), but remands the Department’s calculations of value to correct errors which became apparent during the course of the hearing.
The Board reverses the Department’s assessment of interest.
FINDINGS OF FACT
I. Previous Litigation and the Course of the 2000-2002 Audit
1. Williams Production RMT Company produces coal bed methane. Williams previously challenged the Department’s determination of the value of its 1999 coal bed methane production. By a decision dated November 14, 2003, this Board upheld the Department’s decision to determine the value of Williams’ production by reference to the outlets of triethylene glycol (TEG) dehydrators as the point of valuation. Williams Production RMT Company, Docket 2002-103, November 14, 2003, 2003 WL 22754175 (Wyo. St. Bd. Eq.).
2. On March 5, 2004, the Wyoming Department of Audit initiated an audit of Williams for production years 2000 and after. [Exhibit 924]. Craig Grenvik, administrator of the Mineral Tax Division of the Department of Revenue [Trans. Vol. II, p. 392], and Matthew Sachse, valuation manager for the Mineral Tax Division of the Department of Revenue [Trans. Vol. III, p. 522], both characterized the audit as an “issue based audit.” [Trans. Vol. III, p. 524]. The Departments of Audit and Revenue knew there was a point of valuation issue affecting all Williams coal bed methane production, and were trying to act before the statute of limitations expired. [Trans. Vol. III, p. 524]. Their general intent was to disallow costs between the reported point of valuation and the correct point of valuation, and to allow expenses from the correct point of valuation to the point of sale. [Trans. Vol. III, pp. 534-535]. Rather than go through an entire valuation calculation for each Williams mineral group, the audit focused only on transportation to be disallowed. [Trans. Vol. II, pp. 400-401].
3. The audit engaged all 2500 properties for which Williams reported coal bed methane production. [Trans. Vol. III, p. 525-526]. The Department of Audit began with a sample of 118 mineral groups, and later expanded the sample when an additional audit issue was discovered. [Trans. Vol. III, p 527; Exhibit 924, p. 0254]. The Department of Audit applied the results for its sample across all mineral groups. [Trans. Vol. III, p. 528].
4. On July 8, 2004, the Department of Audit’s Principal Auditor wrote to Williams requesting, among other things, “[a] breakdown of the Western Gas Resources fee.” [Exhibit 901]. Williams paid Western Gas Resources a fee for services provided under a Gas Gathering Agreement dated February 1, 1999, between Barrett Resources Company and Lance Oil & Gas Company, Inc., collectively the “Producer,” and Western Gas Resources, Inc, the “Gatherer.” [Exhibit 916]. Williams had acquired Barrett in 2001. [Trans. Vol. I, p. 156].
5. We will describe the Gas Gathering Agreement in some detail, because certain features of the Agreement are essential for understanding the case presented by Williams. However, the Agreement is confidential, and our findings must follow suit.
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13. The auditor’s request for a breakdown of the Western Gas Resources Fee was prompted by the fact that the services Western provided Williams straddled the point of valuation at the outlet of the TEG dehydrator. The auditors sought Williams’ assistance in determining what portion of the Western fee pertained to services provided before the outlet of the TEG dehydrator, and what services were provided after. To understand what the auditors sought, it is helpful to understand the facilities related to coal bed methane production.
14. The physical configuration of coal bed methane production facilities evolved from an original 40-acre spacing requirement for wells, or sixteen wells per section. [Trans. Vol. II, p. 245]. Producers would typically collect the production from multiple wells in a pod, or central collection point, to minimize disturbance and capital outlay. [Trans. Vol. II, pp. 245-246, 249-252; Exhibit 107, pp. WMS 210-213, 216-219]. Each pod meters production from four to twelve wells. [Joint Stipulation, ¶ 14].
15. Williams delivers its gas by low pressure pipeline from its pods to facilities controlled and operated by Western, including a header at Western’s Central Point of Delivery (CDP). [Trans. Vol. II, pp. 253-257; Exhibit 107, pp. WMS 223-224]. Thomas Doll, Powder River Basin District Manager for Williams [Trans. Vol. I, p. 241], believed that the majority of producers have “the same type of gathering system to bring the gas from the wells through the pods to the header to transfer custody to Western or other compression facilities.” [Trans. Vol. II, p. 264]. Williams may use as much as two and half miles of polypropylene pipe to send gas from its pod to the CDP. [Trans. Vol. I, pp. 112, 213].
16. One CDP may serve several producers. [Trans. Vol. I, p. 110; Exhibit 107, pp. WMS 124-125].
17. Western’s typical CDP consists of custody transfer meters, screw compressors, and related headers and piping. [Trans. Vol. I, p. 64]. Western’s screw compressors boost the pressure of Williams gas from about five pounds per square inch to 100 pounds per square inch. [Trans. Vol. I, p. 73, Vol. II, p. 263]. A single pipe leaves the CDP and moves gas up to nine miles to reciprocating booster compression stations. [Trans. Vol. I, p. 115]. These stations consist of reciprocating compressors, tri-ethylene glycol (TEG) dehydrators, and the piping necessary to connect all equipment at the site. [Trans. Vol. I, pp. 110-111]. At these stations, the gas is dehydrated and compressed to up to 1400 pounds per square inch to be pushed into the MIGC or Fort Union pipelines. [Trans. Vol. I, p. 64].
18. Western has developed its facilities in “cookie-cutter fashion” to facilitate relocation when gas volumes decline and producer demand for services declines with the volumes. [Trans. Vol. I, pp. 69-70, 154]. One photograph in the record depicts Western equipment on skids to aid its relocation. [Trans. Vol. I, pp. 153, 154; Exhibit 108, p. WMS 242].
19. On July 28, 2004, Rick Jones, Revenue Supervisor of Williams, wrote to Chris Wilson of Western Gas Resources: “Will you please provide us with a cost breakdown of the 29.4 cent fee by function or process on the Western system, i.e., what amount or percentage of the fee is allocated to the screw compressor stations, reciprocating compressor stations, transmission lines, and any other cost component like dehydration and CO2 removal?” [Exhibit 902].
20. Wilson declined the request from Jones by letter of August 2, 2004. He explained:
WGR’s standard practice, as with most providers of similar services, is to not divide its fee into the various components for the type of bundled services that you referred to in your letter. More importantly, in this specific situation, WGR does not even determine the breakdown of the fees due to the integrated nature of the services being provided, so the information you have requested is not available. WGR would, however, be open to discussing the matter further to assist Williams with its own determination of the fee breakdown requested by the Wyoming Department of Audit.
[Exhibit 903]. On August 5, 2004, Jones advised the Department of Audit that “Western did not provide me with a breakdown of the fees charged to Williams for transporting Williams’ gas on Western’s system.” [Exhibit 904].
21. On March 2, 2005, the Wyoming Supreme Court upheld the Department’s use of the outlet of TEG dehydrators as the point of valuation. Williams Production RMT Co. v. State Department of Revenue, 2005 WY 28, 107 P.3d 179 (Wyo. 2005). The Wyoming Supreme Court saw the location of the point of valuation as the critical issue in the appeal:
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 at 183-184. The decision addressed essentially the same issue presented in this case.
22. The Wyoming Supreme Court specifically upheld the Board’s approval of the auditors’ determination of the portion of the Western Gas Resources Fee which was disallowed. Williams Production RMT Co., 2005 WY 28, ¶¶ 24-29, 107 P.3d at 186-188. We quote the opinion at some length for the context it provides in the present dispute:
[¶ 25] Barrett paid Western $0.43 per mcf (one thousand cubic feet) of CBM for gathering and transportation to the point of sale. Of that fee, $0.294 was paid pursuant to the gas gathering agreement, and $0.14 was paid for transportation and other services on the MICG pipeline, which was owned by Western. Barrett’s reported taxable values reflected a transportation deduction for the expenses incurred between the custody transfer meters and the point of sale. In attempting to adjust these figures based on a point of valuation at the TEG dehydrator, the DOA several times requested from Williams a breakdown of the $0.294 per mcf fee but, without attempting to obtain the information from Western, Williams indicated that it could not provide such information.
[¶ 26] Eventually, the DOA decided that, of the $0.294 fee paid to Western under the gas gathering agreement, $0.084 would be allowed as a deduction for transportation from the outlet of the TEG dehydrator to the inlet of the MIGC pipeline. That figure was determined by reducing the $0.294 by the contractual rebate of $0.21 given by Western to match the lower rate charged by the parallel Fort Union pipeline. In addition, the DOA also allowed $0.14 per mcf for the fee to transport the CBM on the MIGC pipeline to the point of sale in Glenrock. . . .
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[¶ 29] 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. The Board found that “Williams has offered no evidence in this proceeding that would enable the Department of Revenue or Department of Audit to disaggregate the Western fee.” Despite noting further that the auditors could have disallowed any deduction for the Western expenses because Williams failed to provide information for that purpose, the Board nonetheless found that the DOA’s decision to allow the $0.084 per mcf deduction was “a reasonable exercise of auditor judgment to reach a fair valuation for a taxpayer that refused to be cooperative.” The DOA’s rationale, approved by the Board, was as follows:
Instead, the auditors determined that the total allowable transportation deduction would be $0.224, or $.084 more than the original allowance of $0.14. . . . This number was reached by subtracting $0.21/MCF from the Western Gas Resource Fee of $0.294. . . . The $0.21/MCF was inspired by the rebate Western gave to Barrett on gas shipped on the MIGC pipeline. . . . The auditors intended to allow transportation costs after the initial dehydrator, and broadly reasoned that all of Western’s most expensive equipment was located before the outlet of the initial dehydrator. . . . They allocated approximately 70% of the fees charged by Western to service between the custody transfer meter and the outlet of the glycol dehydrator. The auditors made no effort to account for fuel costs because fuel would be associated with the same equipment.
The Board also found that the administrator of the Department’s mineral tax division “embraced this logic” given the unavailability of further information. And finally, the Board found inconsequential the Department’s use of a $0.21/MMBTU rebate as “inspiration” for a deduction against a $0.294 mcf fee, given that the ultimate allowance of $0.084 was an estimate, not a precise calculation. As with earlier issues, we find that substantial record evidence supports these findings of the Board.
Williams Production RMT Co., 2005 WY 28, ¶¶ 25-26, 29, 107 P.3d at 186-188.
23. The source of the $0.294 Mcf fee referenced by the Wyoming Supreme Court was the Gas Gathering Agreement. Supra, ¶ 12. The source of the other fees were agreements between Williams’ predecessors in interest, Bargath and Barrett Resources [Trans. Vol. I, pp. 88, 156], and the two pipelines, Fort Union and MICG. [Exhibits 917, 918]. We will describe these Agreements in some detail, as certain features of the Agreements are essential for an understanding of the case. However, the Agreements are confidential, and our findings must follow suit.
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33. It is important to note the fee for Fort Union’s variable service is measured in Mcf, while the fee for MIGC’s interruptible service is measured in MMBtu. The $0.21 credit against the Western Gas Resources Fee when gas is transported on MIGC is likewise measured in MMBtus. Supra, ¶ 12.
34. Following the decision of the Wyoming Supreme Court, Williams reviewed its position. [Trans. Vol. II, p. 269]. Williams again concluded that its choice of an upstream point of valuation was correct, but relied on a different statutory argument than the one advanced in the prior litigation. This time Williams invoked Wyo. Stat. Ann. § 39-14-203(b)(v). [Trans. Vol. II, p. 271]. To provide a context for our findings, we quote the subsection in its entirety:
(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;
Wyo. Stat. Ann. § 39-14-203(b)(v).
35. Williams directed outside counsel to send the Department of Audit a letter articulating its revised authority for an upstream point of valuation. [Trans. Vol. II, p. 273]. Williams’ outside counsel did so on April 26, 2005. [Exhibit 906]. The letter relied on facts Williams recited in response to a Systems Review questionnaire from the Department of Audit. [Exhibit 905]. The letter then argued:
Under W.S. 39-14-203(b)(v) if the natural gas is transported by a third party at or prior to the point of valuation provided in paragraphs (iii) or (iv), the fair market value shall be the value established by bona fide arms-length transactions. Applying this statute and the facts of Barrett and Williams’ arms length transportation agreements, the value of the gas during the audit period should be determined by netting back from the sales point to the custody transfer meter immediately downstream of the CDP all charges incurred to transport and process the gas. The custody transfer meter is the point at which the production process is complete and the gas is turned over to a third party for transportation and processing.
[Exhibit 906].
36. On February 13, 2006, the Department of Audit sent Williams a Preliminary Issue Letter for production years 2000 through 2002. [Exhibit 907]. The Department of Audit concluded that Williams owed additional state severance tax of $2,030,406.01, based on additional severance tax value of $27,044,879.51. [Exhibit 907]. The letter also proposed to certify $21,871,325.55 of additional value to county tax authorities. [Exhibit 907]. The preliminary audit findings rested on the prior litigation:
Williams Production RMT’s (Williams) original tax reporting included a transportation allowance from the wellhead to the sales point. The Department of Audit (DOA) decreased this allowance to comply with the Wyoming Supreme Court’s ruling on the previous years’ audit. We allowed transportation from the outlet of the initial dehydrator to the point of sale. We applied this transportation allowance to the entire population of wells in operation during the audit period.
[Exhibit 907, p. 2].
37. Williams responded to the preliminary audit letter on May 15, 2006. [Exhibit 908]. Williams acknowledged the Wyoming Supreme Court’s decision, but argued it was beside the point. “[N]either the Supreme Court’s opinion nor the arguments and presentations of the parties in the Williams case considered the applicability of W.S. § 39-14-203(b)(v) to coal bed methane production.” [Exhibit 908, p. 2].
38. Williams also suggested a number of factual points later developed in the hearing of this case, including the significance of Western Gas’s status as a mid-stream service provider; the fact that a portion of Williams’ production was delivered directly to booster compression stations owned by MIGC; and the fact that it sold some of its gas outright at the Western Gas custody transfer meter. [Exhibit 908].
39. Williams met with representatives of the Department of Revenue and the Department of Audit on July 12, 2006, to discuss the preliminary audit findings. [Exhibit 909]. Notes of this conference reflect an impasse over the interpretation of Wyo. Stat. § 39-14-203(b)(v). [Exhibit 909]. The notes further reflect that Williams would provide the Departments with “contracts and volume and value information on those properties” where Williams sold its production at the custody transfer meter. [Exhibit 909].
40. On July 26, 2006, Landy Fullmer of Williams sent the Department of Audit a letter which further elaborated his company’s position. [Exhibit 911]. Fullmer presented these arguments, and others, during his testimony in this case. [E.g., Trans. Vol. II, pp. 285-322]. Since these are essentially legal arguments, we will address them as necessary in our Conclusions of Law.
41. On August 28, 2006, the Department of Audit sent Williams its final issue letter. [Exhibit 913]. This letter again found that $2,030,406.01 severance tax was due. [Exhibit 913]. However, the taxable value for gross products to be certified to the county was revised downward to $20,783,105.81. [Exhibit 913].
42. The Department of Audit explained it had decreased Williams’ allowance for transportation to comply with the Wyoming Supreme Court’s ruling:
....We disallowed Western Gas Resources (WGR) gathering from the wellhead to the outlet of the initial dehydrator. We allowed a portion of the WGR fee that we felt fairly represented the distance from the outlet of the initial dehydrator to the MIGC and Fort Union pipeline inlets. The MIGC and Fort Union charges were also allowed to transport the gas to Glenrock. Transportation beyond this point was netted out of the gross proceeds received from Williams Marketing and, therefore, not recognized as a separate deduction on the Severance Tax return. We applied the transportation allowance from the initial dehydrator to Glenrock to the entire population of wells in operation during the audit period.
[Exhibit 913]. The Department of Audit did not address the ancillary issues raised by Williams. Supra, ¶¶ 38, 40. It did, however, refer to the sampling technique it had used. [Exhibit 913]; supra, ¶ 3.
43. The Department of Revenue accepted the audit findings and issued an assessment letter on August 28, 2006. [Exhibit 914]. The assessment letter added interest of $1,204,444 to the audited value of severance tax due. [Exhibit 914].
II. The Taxpayer’s Evidence
44. With the history of the audit in mind, it is clear some facts are essentially the same as in the previous litigation, while other facts were developed at the hearing of this matter to support the Williams’ revised theory of law. Broadly speaking, Williams’ case introduced a great deal of new information about the circumstances surrounding its transactions.
45. Christopher Wilson was commercial development regional manager for Anadarko Petroleum Corporation at the time of the hearing in this matter. [Trans. Vol. I, p. 51]. Wilson had been employed in the oil and gas industry since graduating from college in 1980. [Trans. Vol. I, p. 52]. When deregulation of the natural gas industry began about 1985 under the Natural Gas Policy Act, Wilson moved to a gas marketing administrative position. [Trans. Vol. I, p. 53]. He first became engaged with coal bed methane in Colorado. [Trans. Vol. I, p. 53]. This led to a position with Western Gas Resources working on assets in southwest Wyoming. [Trans. Vol. I, p. 54]. He was reassigned to the Powder River Basin of Wyoming in 1998. [Trans. Vol. I, p. 54].
46. In these various positions, Wilson acquired experience of direct interest for the case. He was personally involved in negotiating the Firm Gas Gathering Agreement between Barrett and Western Gas, now between Williams and Western Gas [Trans. Vol. I, pp. 55-56; Exhibit 916], as well as gas sales contracts for coal bed methane in the Powder River Basin. [Trans. Vol. I, p. 56]. He was also involved with the transition in gas pipeline services caused by deregulation of some pipelines, and is familiar with how business is transacted on the pipelines of direct interest in this case. [Trans. Vol. I, pp. 54-55, 57]. Finally, he was involved in the development of what he refers to as the midstream business. [Trans. Vol. I, p. 56].
47. Wilson views the midstream business as an evolution from natural gas deregulation. [Trans. Vol. I, p. 58]. Its services begin where producers deliver coal bed methane to a first battery of compression, typically using low suction pressure screw compression. [Trans. Vol. I, pp. 59-60]. It ends where volumes are delivered to interstate pipelines. [Trans. Vol. I, p. 60]. Wilson stated the midstream business is commonly referred to as “gathering” to differentiate transportation on pipelines regulated by the Federal Energy Regulatory Commission (FERC) from transportation on pipelines which are not. [Trans. Vol. I, p. 60]. This use of “gathering” has nothing to do with either a definition in the oil and gas tax statutes, Wyo. Stat. Ann. § 39-14-201 (a)(ix), or with the Department’s use of the same word to describe movement of oil and gas before the statutory point of valuation. [Trans. Vol. III, p. 442].
48. At a superficial level, Wilson’s description of the midstream industry is supported by descriptions of coal bed methane production found in Williams Production RMT Co., 107 P.3d 179, 2005 WY 28, and presented in somewhat more detail in these proceedings. Like other producers, Williams produces its gas from coal bed methane wells, from which it is typically transported by low pressure polypropylene pipe to the custody transfer meter of a company like Western Gas at the latter’s screw compressors. [Trans. Vol. I, pp. 64, 213]. At its screw compressor station, Western boosts the gas to 100 pounds of pressure, and carries the gas to a reciprocating booster compression station. [Trans. Vol. I, p. 73]. The same station provides TEG dehydration. [Trans. Vol. I, p. 73]. The result is to raise compression to 1400 pounds, to be pushed further along to Fort Union or MIGC pipelines. [Trans. Vol. I, p. 73].
49. MIGC and Fort Union then deliver thermal equivalents of the Williams gas to one of three interstate pipelines which pass through southern Converse County: Wyoming Interstate Company’s Medicine Bow lateral; CIG Resources’ Powder River lateral; and Kinder Morgan. [Trans. Vol. I, pp. 79, 88, 96-97; Exhibit 921].
50. Williams introduced maps which show the locations of MIGC and Fort Union pipelines in broad detail [Exhibit 108, pp. WMS 0234-0236], which show finer detail for the entire Powder River Basin [Exhibit 921], and which show even finer detail in Campbell County [Exhibits 922, 923]. Generally speaking, the two pipelines run north and south in Campbell and Converse Counties. [Exhibit 921; Trans. Vol. I, p. 98]. MIGC runs far enough north of Gillette to deliver gas to the Williston Basin Interstate. [Trans. Vol. I, p. 79; Exhibit 921]. Fort Union begins near Gillette, in the center of coal bed methane activity, and runs south 106 miles to a treating facility which Fort Union owns and operates. [Trans. Vol. I, p. 88]. For much of its length, Fort Union lies about ten miles west of MIGC. [Trans. Vol. I, p. 100]. Both pipelines terminate in southern Converse County in the vicinity of Glenrock. [Exhibits 920, 921, and 108, p. WMS 0235].
51. Wilson’s general description of the midstream business is of little use when applied to the MIGC and Fort Union pipelines, since both appear to function like gathering (in Wilson’s sense) for redelivery to the three interstate gas pipelines in southern Converse County. Further, Western Gas operates not only its own system, but also the facilities that MIGC owns [Trans. Vol. I, p. 198; Exhibit 921], and those of Fort Union. [Exhibit 921]. MIGC nonetheless is an interstate pipeline, regulated by the Federal Energy Regulatory Commission [Trans. Vol. I., p. 61], and based on Wilson’s definition of the midstream business, is arguably not a provider of midstream services.
52. Although Wilson did not say when the MIGC pipeline was built, Western acquired MIGC between 1985 and 1990 as part of the acquisition of McCullough. [Trans. Vol. I, p. 79]. According to Wilson, before FERC deregulation pipelines like MIGC extended service to production pods to collect gas, for fees approved by FERC. [Trans. Vol. II, pp. 230-231]. Western itself had a history of processing conventional gas on a percentage-of-proceeds basis, compressing and redelivering residue gas to MIGC for transportation on the main interstate grid. [Trans. Vol. I, pp. 77-78].
53. Although MIGC is a wholly owned subsidiary of Western, Western pays MIGC the same regulated tariff paid by other shippers like Williams. [Trans. Vol. I, pp. 82, 86-87, 148].
54. Wilson described the location of MIGC as serendipity for the coal bed methane boom. [Trans. Vol. I, p. 80]. MIGC was along or close to the western boundaries of existing coal mines, which is where coal bed methane development began. [Trans. Vol. I, p. 80]. The coal beds were shallow, and there had already been some dewatering. [Trans. Vol. I, p. 80]. Typically, coal bed methane production increases with dewatering. [Trans. Vol. I, p. 66].
55. One result of this history is that MIGC owns booster compression facilities which provide services comparable to booster compression and TEG dehydration services provided by the midstream industry in general [Trans. Vol. I, pp. 85-86], and the services Western provided Williams in particular. [Trans. Vol. I, p. 138]. Wilson identified the Bonepile, Carter, Macsy, and Outback stations as examples of booster compression facilities owned by MIGC. [Trans. Vol. I, pp. 98, 140; compare illustrations in Exhibit 108, pp. WMS 0233 and 0233A]. These booster compressors are located near to and immediately upstream of TEG dehydrators. [Trans. Vol. I, p. 95].
56. MIGC’s customers paid the same tariff for all gas shipped on MIGC, no matter where it entered the pipeline [Trans. Vol. I, p. 86], with the exception of a higher fuel retention rate for gas delivered to the MIGC system at lower pressures. [Trans. Vol. I, p. 85]. Wilson testified that tariff for all classes of service was 35 cents per MMBtu, with an additional charge for fuel use. [Trans. Vol. I, pp. 84, 86]. Wilson made no effort to reconcile this statement describing the MIGC tariff with the precise language of the agreements between Barrett Resources and MIGC. [Confidential Exhibit 918]; supra, ¶ 32.
57. Fort Union Gathering put its pipeline in service on September 1, 1999. [Trans. Vol. I, p. 87]. It was “nonjurisdictional,” i.e., not regulated by FERC. [Trans. Vol. I, pp. 66-67, 150]. Unlike MIGC, Fort Union provides no booster compression service. [Trans. Vol. I, p. 93]. A producer like Williams must secure compression services from a company like Western to use the Fort Union pipeline. [Trans. Vol. I, p. 94].
58. Fort Union was originally owned by five separate companies: Western Gas - Wyoming; CIG Resources; Bargath, now a part of Williams; CMS Resources; and Enron Capital and Trade. [Trans. Vol. I, p. 88]. CMS Resources sold its position Canterra Natural Gas during the audit period. [Trans. Vol. I, p. 89]. During the latter part of the audit period, Canterra and Enron affiliate Crestone each owned 33 1/3 per cent; Western Gas - Wyoming owned 13.3 per cent; CIG owned 10 per cent; and Bargath owned 10 per cent. [Trans. Vol. I, p. 89].
59. The ownership in Fort Union is of interest because each of the original owners agreed to contract with Fort Union for an amount of firm capacity, based on the level it felt it needed. [Trans. Vol. I, pp. 89-91; see Confidential Exhibit 917]. Each member’s firm capacity was divided into fixed and variable: the former was paid for whether utilized or not, and the latter was paid for based on volumes used. [Trans. Vol. I, p. 89; see Confidential Exhibit 917]. According to Wilson, both components of capacity were stated as 14 cents per Mcf less nominal amounts of fuel used for a treating facility. [Trans. Vol. I, p. 90]. Wilson made no effort to reconcile this statement concerning Fort Union fees with the precise language of the Bargath contract with Fort Union. [Confidential Exhibit 917]; supra, ¶¶ 27-28.
60. Not all companies had enough volume to utilize the full amount of capacity for which the demand charge was required. [Trans. Vol. I, p. 91]. A company with volumes above its own fixed obligation could negotiate for the unused space of another owner, creating a secondary market for the capacity contracted on a firm basis. [Trans. Vol. I, pp. 91-92, 224-226]. Such a sale in fact occurred in this case, when CMS sold some of its capacity to transport Williams gas. [Trans. Vol. I, pp. 91-92; Vol. II, p. 355].
61. These differences between the two pipelines were generally known when Barrett and Western Gas negotiated the Gas Gathering Agreement [Confidential Exhibit 916] which is central to this case. Although the Gas Gathering Agreement itself remains confidential, Wilson’s testimony regarding the Agreement was not. [Trans. Vol. I, p. 155].
62. At the time the Gas Gathering Agreement was negotiated, the producers were Barrett and Lance Oil & Gas. [Trans. Vol. I, p. 156]. Lance was owned by Western. [Trans. Vol. I, p. 156]. Barrett and Lance had entered into a joint development agreement for a large area. [Trans. Vol. I, p. 157]. As their joint project matured, Barrett became interested in marketing its own gas, and was the source of the preference for a transportation agreement. [Trans. Vol. I, p. 159]. Western Gas negotiated the contract exclusively with Barrett, with little input from Lance. [Trans. Vol. I, p. 159].
63. Wilson described the fee provisions of the Gas Gathering Agreement as applying to deliveries into either the MIGC or Fort Union pipeline, but with a rebate for deliveries into MIGC. [Trans. Vol. I, p. 166]. The fee was based on Mcf, a volumetric measurement, but the rebate was based on MMBtu, a thermal content measurement. [Trans. Vol. I, p. 167]. Wilson explained that the fee was based on volumes because volumes of gas need to be compressed and dehydrated even though Btu content varies across the Powder River Basin. [Trans. Vol. I, p. 167]. Western based its anticipation of a revenue stream on service costs without regard for heat content. [Trans. Vol. I, p. 168].
64. Although Western’s fee was based on volumes of gas, its responsibility for redelivery of gas was based on thermally equivalent volumes, less fuel consumed. [Trans. Vol. I, p. 168; Confidential Exhibit 916]; supra, ¶ 7. The rationale for delivering back on a thermally equivalent basis is that the producer ultimately sells on a Btu basis. [Trans. Vol. I, p. 120].
65. It is not clear how or even whether the reasons for using these two different types of measurements led to the rebate in the Gas Gathering Agreement. From Wilson’s perspective, the overall intent was clear. Williams was to pay a full “29 cents for all gas volumes that are delivered into MIGC.” [Trans. Vol. I, p. 137]. “[T]hen there’s a 21-cent rebate off that 29 cents.” [Trans. Vol. I, p. 137]. “The actual fee that Western Gas Resources retains for delivering the volume into MIGC is 8 cents. [Williams’] overall cost, however, is approximately the same because they pay the full 35 cents to MIGC.” [Trans. Vol. I, p. 137]. We note the absence of strict attention to measurement by Mcf or MMBTu.
66. Strictly speaking, Wilson’s mathematics are incorrect, because a charge of a given number of cents per volume does not directly translate into a charge of a given number of cents per MMBtu. In the words of the Wyoming Supreme Court, “[t]here is some mixing of apples and oranges here.” Williams Production RMT Co., 107 P.3d 179, 2005 WY 28, f.n. 4. We also note that Wilson was content to speak in round numbers, ignoring tenths of a cent.
67. Wilson stated the 8 cents net was simply a number captured in the overall negotiation between Western and Barrett. [Trans. Vol. I, p. 144]. It recognized the general cost to transport gas out of the Powder River Basin while trying to generally preserve the 29 cent fee without regard to whether MIGC or Fort Union was used. [Trans. Vol. I, p. 144]. Wilson noted the uncertainty of knowing on any given day how much gas might be going to MIGC [Trans. Vol. I, p. 144], and the fact that Western continued to perform booster compression and dehydration for some gas sent to MIGC. [Trans. Vol. I, p. 146]. Over all, the majority of Williams’ gas was transported via MIGC rather than Fort Union. [Trans. Vol. I, p. 124].
68. On the whole, we find it plausible that the 21 cent rebate was based in some way on cost, and not the result of a purely arbitrary negotiation. [See Trans. Vol. I, p. 147]. Western owned MIGC. [Trans. Vol. I, p. 148]. The rebate was framed in terms of MIGC’s fees, stated in terms of MMBtus, rather than in terms of volumes, as was the case with Fort Union. [Compare Confidential Exhibits 917 and 918]. Western operated MIGC’s facilities, including the compression and dehydration facilities at the Bonepile, Carter, and Riehmann stations [Trans. Vol. II, p. 198], which would have unavoidably provided Western with insight into MIGC operations costs, even though Wilson was not familiar with specifics of Western’s operating contract with MIGC. [Trans. Vol. II, p. 198]. MIGC conducted business in a regulated environment [Trans. Vol. I, pp. 81-82], which would presumably preclude MIGC and Western from entering into agreements which could not be justified from the standpoint of cost. We note that Wilson had ample motive to be coy on this subject. See infra, ¶¶ 85-90.
69. Wilson credibly articulated the reason for the rebate arrangement. Western sought the operational flexibility to move volumes onto either MIGC or Fort Union as efficiently as possible, to economically accommodate the geographic area of several hundred thousand acres covered by the Gas Gathering Agreement. [Trans. Vol. I, pp. 138, 148]. Western could limit the incremental capital necessary to provide service if it did not have to install specific compressors to go to specific pipelines. [Trans. Vol. I, p. 139]. Western could deliver gas to either pipeline from its facilities located in the central part of the Powder River Basin. [Trans. Vol. I, p. 186]. Wilson identified Hawk Point as a booster compression station that could deliver into an MIGC lateral, into the MIGC main line, or into Fort Union’s Hawk Point. [Trans. Vol. I, p. 105; Exhibit 920 (enlarged version)]. From that location, Western could send volumes of gas to both pipelines on any given day. [Trans. Vol. I, pp. 106, 146].
70. The principal benefit to Barrett, now Williams, was that the overall cost to the producer would be approximately the same to deliver gas from the CDP to the interstate pipelines in southern Converse County, regardless of which pipeline the gas went down. [Trans. Vol. I, pp. 184-185]. Going by Fort Union, the fee would be 29.4 cents per Mcf for Western plus 14 cents per Mcf for Fort Union, or 43.4 cents per Mcf. [Trans. Vol. I, p. 185]. Going by MIGC, the fee would be 35 cents per MMBtu for MIGC, plus 29.4 cents per Mcf to Western, with a rebate against the Western fee of 21 cents per MMBtu. [Trans. Vol. I, p. 185]. Western is able to calculate the rebate based on information provided by MIGC. [Trans. Vol. II, p. 215].
71. We find that by either pipeline, the overall delivered cost originally anticipated by the producer would be approximately equal to 43.4 cents per Mcf (with adjustments as required by the contract for thermal measurement); otherwise, the choice of pipeline would not have been a matter of indifference to the producer. [Trans. Vol. II, p. 205]. We note this finding is consistent with the result in the prior litigation, supra, ¶ 22, and the audit calculations which take the Mcf/MMBTU distinction into account. Infra, ¶¶ 94 et seq. We also note that Williams did not seem particularly concerned about the Mcf/MMBtu distinction. [Petitioner’s Closing Brief, p. 38], quoted in Conclusions, ¶ 223.
72. Wilson pointed out that Williams counsel in the previous litigation before the Board was incorrect to say that Fort Union and MIGC both charged Barrett a fee of 14 cents per Mcf, because the MIGC fee was always 35 cents per MMBtu. [Trans. Vol. II, pp. 201, 205]. Western, not MIGC, absorbed the rebate. [Trans. Vol. I, p. 135]. This correction is duly noted. However, that error did not change the conceptual result that Barrett and then Williams paid the same fee to get to the interstate pipelines in southern Converse County, regardless of whether the gas was delivered through MIGC or Fort Union. [Trans. Vol. II, p. 203].
73. Wilson corrected another error in generalization regarding point of sale which stemmed from the limited evidence presented in the previous Board proceeding. As noted by the Wyoming Supreme Court, there were issues in the previous proceeding related to “deductions for transportation charges downstream from Glenrock,” with Glenrock (the reference point for the terminus of the MIGC and Fort Union pipelines in the previous case) being the point of sale. Williams Production RMT Co., 107 P.3d 179, 188, 2005 WY 28, ¶¶ 30-31. The evidence in this case included testimony and sample contracts demonstrating that Western purchased some gas from various parties at one or more CDPs. That is, some production owned by Williams through affiliates or subsidiaries was never subject to the Gas Gathering Agreement, and therefore was not sold at points downstream from Glenrock.
74. Williams introduced six confidential contracts which identified Western Gas Resources as the purchaser:
Exhibit 100 – 9/28/95 Restated and Amended Sales and Purchase Contract between American Oil & Gas Corporation d.b.a. Martens & Peck Production Co. (“Producer”) and Western Gas Resources, Inc. (“Purchaser”)
Exhibit 101 – 3/1/96 Gas Sales and Purchase Contract for Coal Seam Gas between Duncan Oil, Inc. (“Producer”) and Western Gas Resources, Inc. (“Purchaser”)
Exhibit 102 – 8/20/97 Gas Sales and Purchase Contract for Coal Seam Gas between Duncan Oil, Inc. (“Producer”) and Western Gas Resources, Inc. (“Purchaser”)
Exhibit 103 – 8/20/97 Gas Sales and Purchase Contract for Coal Seam Gas between Duncan Oil, Inc. (“Producer”) and Western Gas Resources, Inc. (“Purchaser”)
Exhibit 104 – 1/9/98 Gas Sales and Purchase Contract for Coal Seam Gas between Duncan Oil, Inc. (“Producer”) and Western Gas Resources, Inc. (“Purchaser”)
Exhibit 105 – 12/30/98 Gas Sales and Purchase Contract between Rim CMB LLC, Barrett Resources Corporation, Morse Acquisition, LLC and Paseo Resources, LLC (collectively “Producer”) and Western Gas Resources, Inc. (“Purchaser”)
[Confidential Exhibits 100, 101, 102, 103, 104, 105].
75. Only five of these six contracts were between Western and parties related to Williams. Wilson explained that Barrett Resources became an owner of Duncan Oil, and Williams as successor to Barrett would have been selling under the contracts between Western and Duncan Oil. [Trans. Vol. I, p. 127; Confidential Exhibits 101, 102, 103, 104]. As successor to Barrett [Trans. Vol. I, pp. 127, 156], Williams would also have had an interest as one of the entities comprising the multi-party Producer under Exhibit 105. [Confidential Exhibit 105]. However, to the extent that the interests at issue in Exhibit 100 originated with American Oil and Gas, Wilson testified that Lance had gotten into the coal bed methane business by acquiring American Oil & Gas in competition with Barrett. [Trans. Vol. I, p. 127; Exhibit 100]. Williams did not establish that Exhibit 100 is a contract between Western and a Williams affiliate or subsidiary.
76. Where Williams had an interest in the five Purchase and Sale Contracts, it is similarly unclear whether Williams itself reported the taxable value of this production, or whether such reporting was under the name of a Williams affiliate. For Exhibits 101 to 104, that would have been the name of Duncan. Wilson could not have testified to this point, since reporting is a responsibility of the producer, not the purchaser.
77. In contrast to reporting, Wilson could and did testify about Exhibit 106, which summarizes Western’s upstream sales and transport contracts for 2000 through 2002. [Trans. Vol. I, pp. 122-126; Exhibit 106]. The list shows total volumes of 318,777,976 Mcf for the period, with 236,908,990 Mcf, or more than 74%, transported under the Gas Gathering Agreement with “Lance and Barrett.” [Exhibit 906]. Exhibit 106 lists sixty-two Sales and Purchase Contracts with various parties, including six with Duncan of which four are Exhibits 101 to 104; one with Barrett Resources which is not an exhibit; one with Rim CBM, LLC, which is Exhibit 105, a contract in which Barrett owned a partial interest [Exhibits 105, 106]; and one with “Martens and Peck Operating Company (AOG)” with is Exhibit 100. Of the eight contracts with some apparent Williams affiliation through Barrett or Duncan, the Rim CBM LLC contract accounts for more volume than the other seven combined. (By calculation). All eight contracts amount to only 6.2% of total Western volume. (By calculation).
78. Exhibit 106 lists two Service and Purchase Contracts, one with Jim’s Water Service and one with Emerald Operating Company. Neither company was identified as a Williams affiliate. [Exhibit 106]. Neither of these contracts was a purchase contract; both were for redelivery of gas to the Thunder Creek pipeline. [Trans. Vol. I, p. 126]. Emerald Operating Company was otherwise listed as a party to three of the Sales and Purchase Contracts. [Exhibit 106].
79. Of the Sales and Purchase Contracts introduced as exhibits, Wilson testified to Exhibit 104 as an example, without invoking confidentiality. [Trans. Vol. I, pp. 127-135]. In the same spirit, we will note some features of the Contracts which are so general as not to warrant confidentiality.
80. Under Section 3.03 of Exhibit 104, title to all gas passed from the Producer to the Purchaser at the Delivery Point. [Trans. Vol. I, p. 128]. The Delivery Point was an inlet to metering facilities provided by Western, with the initial Delivery Point being near the boundary of the Bonepile Compressor Station. [Confidential Exhibit 104, §§ 2.04, 3.03]. Each of the other confidential Sales and Purchase contracts has a similar provision governing passage of title at a Delivery Point. [Confidential Exhibit 100, Article III; Confidential Exhibit 101, § 3.03; Confidential Exhibit 102, § 3.03; Confidential Exhibit 103, § 3.03; Confidential Exhibit 105, § 3.03]. Each also has a similar identification with a specific compressor station. [Confidential Exhibit 100, Article II, paragraph 3; Confidential Exhibit 101, §§ 2.04, 3.01; Confidential Exhibit 102, §§ 2.04, 3.01; Confidential Exhibit 103, §§ 2.04, 3.03; Confidential Exhibit 105, §§ 2.04, 3.03].
81. The pricing provisions in the purchase contracts reflect a discount from an index price to account for the distance from the “sales center” [Trans. Vol. I, p. 128], reflecting Western’s aggregated approach to selling the gas. Western has not “historically identified a discrete package of gas under one individual contract and gone and placed that into an individual sale.” [Trans. Vol. I, p. 129]. Instead, each contract becomes part of a larger volume of gas, and that larger volume is marketed in total. [Trans. Vol. I, p. 129]. The index price “is typically a very good indicator of the value of the gas at that liquid marketing point.” [Trans. Vol. I, p. 129]. The specific index references found in the contract were long established benchmarks for pricing at various market hubs. [Trans. Vol. I, p. 135].
82. Wilson affirmed that Western’s costs of gas transport from the CDP to where it can be sold are deducted off the price the producer is ultimately paid, as well as the cost of fuel consumed or retained in transportation. [Trans. Vol. I, pp. 124, 129]. In the specific example of Exhibit 104, the price deduction for transportation expense is reflected in scaled percentage discounts from the index shown in the pricing provision of the contract. [Trans. Vol. I, pp. 132-134; Confidential Exhibit 104, § 9.02]. We find that the purchase price Western paid a producer was intended to reflect a discount from the index price to account for costs of transportation to get the gas from the inlet of the CDP to a marketplace.
83. Wilson testified about various facets of Western’s standard policy of declining to divide its fee for bundled service into components, and declining the Williams request consistent with that policy. Supra, ¶ 20;[Trans. Vol. I, pp. 173-174, 206, 232].
84. Wilson explained that the economic interests of service providers like Western are always adverse to those of producers: the producer’s objective is the lowest possible fee, and the provider’s is the highest. [Trans. Vol. I, p. 71]. In support of this thesis, he explained that producers and providers have different skill sets, business objectives, and operational strengths. [Trans. Vol. I, pp. 67-70, 118, 154, 164]. He further stated that “most midstream service providers in the Powder River have no affiliation whatsoever with any companies that actually produce gas.” [Trans. Vol. I, p. 71].
85. We decline to place a great deal of weight on Wilson’s general analysis of the adverse interests of producers and providers. Western itself plainly has the type of affiliation which he describes as contrary to the norm. From before the negotiation of the Gas Gathering Agreement, Western owned Lance, a producer. [Trans. Vol. I, p. 156]. Wilson was notably circumspect on the subject of whether Western had disclosed unbundled costs to Lance. At most, he would only say he had not personally disclosed such costs to Lance. [Trans. Vol. I, p. 217]. The force of his testimony was further diluted by the concession that Western’s engineering organization, as opposed to Wilson’s business development group, may have calculated costs for a situation involving Lance royalties. [Trans. Vol. I, pp. 207-208].
86. We similarly decline to draw many conclusions from Wilson’s analysis of Western’s competitors. Wilson explained that Optigas, Canterra, and Bear Paw provide services similar to those of Western. [Trans. Vol. I, p. 65]. These providers generally try to anticipate the developing needs of producers, then develop and propose a fee structure. [Trans. Vol. I, p. 66]. The providers do so with an eye to aggregated quantities of gas, from numerous producers, that enable them to economically install compression and pipeline facilities. [Trans. Vol. I, p. 68]. Western fears that disclosure of unbundled cost elements would compromise its competitive position by outright loss of business, or by forcing it to provide unbundled elements which would jeopardize its ability to realize economies of scale. [Trans. Vol. I, pp. 171-172].
87. While all of this may be true, such truth must nonetheless be set against the weight of testimony which indicated that the services Western actually provided under the Gas Gathering Agreement were never precisely costed. Instead, a fee was negotiated taking into account such factors as the large scale of the entire service area, the MIGC facilities already in place, and features of location related to the MIGC and Fort Union pipelines. Supra, ¶¶ 67-71; [Trans. Vol. I, pp. 136-140]. If so, this implies that the determination of a reasonable fee for tax purposes would broadly account for a variety of factors which are not uniform, and may conceivable be starkly different than the calculation for a single project. This being so, it is not clear that such a calculation would have any direct bearing at all on Western’s competition for other business, or would represent any kind of deleterious reflection on Western’s pricing for an unbundled service.
88. Indeed, we cannot find that the construct of bundling makes much sense where the cost components at issue, from CDP to the outlet of the TEG dehydrator, include facilities owned by MIGC, and where most Williams gas is transported by MIGC. Supra, ¶¶ 67-68.
89. As we have already noted, Western owns MIGC [Trans. Vol. I, pp. 78, 148], and operates MIGC facilities [Trans. Vol. I, p. 198], even though it also has a firm agreement with MIGC. [Trans. Vol. I, p. 84]. It likewise operates Fort Union. [Exhibit 921]. Western’s relationships both with producers and entities downstream from itself casts further doubt on the generalizations Wilson and Williams would have us draw about a midstream industry. We see no reason to gloss over or ignore the details of the circumstances at hand in order to draw inferences from a generalized model, with results which may be contrary to the facts in front of us.
90. We also consider Wilson’s testimony in light of Williams’ refusal to provide its own alternative to the Department’s estimate of costs between the CDP and outlet of the TEG dehydrator. Landy Fullmer of Williams explained that Williams had made no effort to come up with such an alternative because “we felt we were correct in the way we were interpreting the statutes and if we were interpreting the statutes correctly, there was no need for that breakdown.” [Trans. Vol. I, p. 328]. The common ground between Western and Williams lay in resisting cooperation with the Department. To the extent that Western was willing to assist Williams with its dispute with the Department [Trans. Vol. I, p. 180], Western plainly did so when offered its own business reasons for refusing to provide Williams a cost allocation. Supra, ¶ 86.
91. Richard Jones, revenue manager for Williams [Trans. Vol. II, p. 333], stated additional reasons for Williams’ refusal to create a cost allocation, while confirming that Williams did not make any effort to come up with its own number. [Trans. Vol. II, p. 340]. Jones did not believe he could come up with an accurate number. [Trans. Vol. II, p. 340]. He objected to filing taxes based on allocations he was “not familiar with” or “may not even be defendable.” [Trans. Vol. II, pp. 340, 376]. He was also concerned that any estimate he made would create potential exposure to interest owners in the wells who might question the accuracy of his estimate. [Trans. Vol. II, p. 340]. As production moved around the Basin, he was also concerned he would have to alter his estimate from time to time, monitor it, and defend it to auditors. [Trans. Vol. I, p. 341].
92. At the same time, Jones testified that Williams has affiliates which provide midstream services. [Trans. Vol. I, p. 391]. He never sought the advice of an affiliate regarding an appropriate cost for the services from CDP to the outlet of the TEG dehydrator, and could offer no reason why he had not done so. [Trans. Vol. I, p. 391].
93. Jones was content to accept the Department’s cost breakdown. [Trans. Vol. I, p. 342]. We are persuaded by his concession that if an allocation of costs were needed, he knew of no better estimate than the one the Department had already provided Williams. [Trans. Vol. II, p. 376]. We find there is no better estimate than the one by the Department.
III. The Audit Calculations
94. Jones was called in large measure to articulate Williams’ specific complaints about the audit results. Much of his testimony on the subject is confidential [Trans. Vol. II, pp. 352-371], and summarized in Confidential Exhibit 113. Matthew Sachse, valuation manager for the Mineral Tax Division of the Department of Revenue [Trans. Vol. III, p. 522], testified on essentially the same subject matter. Much of his testimony is also confidential [Trans. Vol. III, pp. 537-553], and related to a similar exhibit demonstrating the details of the calculations supporting the audit findings. [Confidential Exhibit 502].
95. Williams bears the burden of going forward, and we find that Williams has met that burden with regard to Jones’s critique of specific audit results. As a practical matter, this facilitates discussion of the evidence regarding the audit calculations, which is easier to understand if the evidence of both parties is considered simultaneously.
96. Both Jones and Sachse focus on audit schedules which were prepared for each month of the audit period. [Confidential Exhibit 113, p. WMS 255 (September 2002); Confidential Exhibit 502 (all months)]. We can describe these schedules in general terms, without disclosing the precise financial details.
97. Each schedule prepared for months prior to September, 2001, has forty lines. [Confidential Exhibit 502]. Each schedule for September, 2001, and after has twenty-nine lines. [Confidential Exhibit 502]. The difference in the two formats is a calculation related to sales price found on lines 14-22 for earlier months. By the time of the hearing, the sales figures were not in dispute. [Trans. Vol. I, p. 352]. Line items for the earlier months support Sachse’s testimony that the sales figures included deductions for the transportation cost on interstate pipelines when gas was sold at points after Glenrock, i.e., the end points of MIGC and Fort Union. [Trans. Vol. I, p. 551].
98. The first thirteen lines of each schedule were devoted to a calculation of the auditors’ allowance for transportation between the outlet of TEG dehydrators and the inlet of either the Fort Union or MIGC pipeline. [Confidential Exhibit 502; Trans. Vol. III, p. 543]. The auditors replicated the approach of the prior litigation, which was to deduct the 21 cent MMBtu rebate from Western’s fee. Supra, ¶ 22. This time, the auditors’ calculation first adjusted the Western fee, expressed in Mcf, for a monthly average Btu factor to determine Western’s fee on an MMBtu basis. [Confidential Exhibit 502, lines 2 and 3 on all schedules]. After deducting the rebate, the auditors multiplied the allowable portion of the Western fee times the volume gathered by Western, likewise expressed in MMBtu, to reach an allowable expense for Western. [Confidential Exhibit 502, lines 5 to 7 on all schedules].
99. In each month, the auditors then applied the same allowable rate against fees of Bear Paw and CMS, on the understanding that they were providers similarly situated to Western. [Confidential Exhibit 502; Trans. Vol. I, pp. 544-545]. However, the auditors’ understanding of the CMS invoices was incorrect.
100. All fees Western paid to CMS were for the purchase of CMS capacity on the Fort Union pipeline at a discount from the regular Fort Union rate of 14 cents per Mcf, not for transport from the CDP to a trunk line. [Trans. Vol. I, p. 362]; see supra, ¶ 60. Sachse conceded the Department did not realize CMS was not a gathering system until the hearing in this matter. [Trans. Vol. III, pp. 540, 545-546]. The Department would have corrected its calculation if the issue had arisen during the audit conference. [Trans. Vol. I, p. 547]. It would have removed the CMS fees from the calculations of allowable expense between TEG dehydrator and trunk line, and added them to the other trunk line expenses associated with Fort Union and MIGC. [Trans. Vol. III, p. 548].
101. In view of the Department’s concession, we find Williams carried its burden of proof to demonstrate the CMS expense should be treated as allowable expense similar to other expenses related to the Fort Union pipeline. In this regard, we specifically note that the erroneous CMS expense can be readily identified and quantified by reference to entries on lines 11 to 13 of all schedules in Confidential Exhibit 502. No further field work or investigation should be required to make the corrections.
102. Six lines of each audit schedule were devoted to calculation of an allowable expense for fuel use. [Confidential Exhibit 502, lines 24 to 28 before September, 2001, lines 14 to 18 for September, 2001, and after]. This calculation relies on total MMBtu of fuel used on the MIGC, Fort Union, and Thunder Creek pipelines. [Id.]
103. Williams objected to the fact the Department made no fuel allowance for Western. [Trans. Vol. II, pp. 365-366]. Thomas Doll, district manager for Williams [Trans. Vol. II, p. 241], testified to the existence of locations known as the Spotted Horse screw compressor site and the Pinto reciprocating compressor station, where Western equipment occupied a leasehold held by Williams. [Trans. Vol. II, pp. 261-262]. Williams contended that fuel should be allowed under a specific statutory provision exempting fuel used on lease from taxation, [Trans. Vol. I, p. 366], and the absence of any fuel allowance for Western would logically be contrary to the requirements of the statute. Conclusions, ¶¶ 130, 226-232.
104. The Department generally disallowed Western fuel use by application of its general understanding of the facts based on testimony in the prior proceeding. This understanding was that fuel use was generally associated with the compressor stations, and that all screw compressor stations and reciprocating compressor stations were either on Western’s CDPs, or otherwise located prior to the outlet of the TEG dehydrator. [Trans. Vol. III, p. 548]. In other words, fuel use was associated with the portions of Western’s services which were not located on Williams’ lease and accordingly not an allowable deduction. By extension, fuel use on MIGC facilities providing booster compression and TEG dehydration would also not be allowable.
105. Fuel used off a lease but before the point of valuation is not deductible [Trans. Vol. III, p. 548], but the Department agreed “[f]uel used before it goes off the lease is not taxable, by statute.” [Trans. Vol. III, p. 548]. Sachse was willing to concede that Doll had identified property where compressors were on the lease, and that such circumstances would warrant an adjustment. [Trans. Vol. III, p. 549]. At the same time, Williams offered no evidence of what that adjustment should be. [Trans. Vol. III, p. 549]. We find Williams has failed to carry its burdens with regard to an adjustment related to the Spotted Horse and Pinto compressors, or any others.
106. Before the schedule recapitulated all of the charges, four lines of each audit schedule were devoted to transportation charges on MIGC, Fort Union, or Thunder Creek. [Confidentail Exhibit 502, lines 31 to 34 before September, 2001, lines 20 to 23 for September, 2001, and after]. These entries simply recorded the entries on pertinent billings. In doing so, the Department failed to take into account Western’s 21 cent per MMBtu rebate for gas delivered to MIGC for transport. [Trans. Vol. III, pp. 552-560; Exhibit 511]. The first portion of the schedule only used the rebate as a way of calculating allowance for transport between the outlet of the TEG dehydrator and a trunk line. [Trans. Vol. III, p. 571]; supra, ¶ 98. We find the Department did not account for the overall reduction in Western fees when MIGC transported Williams gas.
107. As we have seen, there were good reasons for the rebate, including not only operational flexibility but the use of MIGC facilities for booster compression and dehydration in some locations. Supra, ¶¶ 68-70. The taxpayer generally refuses to present an allocation of its own. Supra, ¶¶ 91-93;[see Trans. Vol. III, pp. 580-581]. There is no reason to expect better or fairer calculations of allowances than the Department’s method already does, as Jones has testified. Supra, ¶ 93.
108. We find the Department’s audit calculations improperly failed to account for the 21 cents per MMBtu rebate for deliveries on MIGC. Whether this oversight is corrected by an adjustment to the MIGC transportation line on the audit schedules [Confidential Exhibit 502, line 31 before September, 2001, and line 20 for September, 2001, and after], by a separate line, or by a separate calculation is immaterial to the Board. Specifically, we would not consider an adjustment to the MIGC transportation line of the audit schedule as incorporating an erroneous assumption that MIGC rather than Western bears the fee. See supra, ¶ 72; [see Trans. Vol. III, pp. 572-573, 585].
109. A further point remains concerning the integrity of the audit calculations. The Department considered what Williams said concerning sales at the CDP by Duncan and others. [Trans. Vol. III, pp. 529-530]. The Department concluded that Williams had not reported on the Duncan contracts, and so they were not picked up during the audit. [Trans. Vol. III, p. 531]. Landy Fullmer testified that none of the Williams gas under audit was sold to Western. [Trans. Vol. II, p. 323]. Since Williams produced no evidence to rebut the Department’s testimony, we find Williams failed to carry its burden of persuasion on the assertion the Sales and Purchase Contracts were included in the audit.
IV. The Department’s Position
110. Craig Grenvik, Administrator of the Mineral Tax Division of the Department [Trans. Vol. II, p. 392], testified to the Department’s position on the principal matters raised in the taxpayer’s case. Generally speaking, the Department believed the Wyoming Supreme Court’s decision in the previous litigation answered the questions now presented. [Trans. Vol. II, p. 397]. The core of the Department’s position is that application of the statute depends on knowledge of the physical features of a taxpayer’s production. [Trans. Vol. II, p. 396]. With this fundamental in mind, the Department viewed the physical flow of gas, and all related contracts, as being unchanged from the prior litigation. [Trans. Vol. II, pp. 397-398]. The Department viewed the sole difference between this case and the previous litigation as the Williams theory that Wyo. Stat. Ann. § 39-14-203(b)(v) supercedes all other statutes and thereby changes the statutory point of valuation. [Trans. Vol. II, p. 398].
111. The Department considers the statutory point of valuation as the cornerstone for determining the value of oil and gas production. [Trans. Vol. II, p. 408]. The Department equates the point of valuation with the point at which the production process is completed. [Trans. Vol. II, p. 405]. As the Department reads the statute, there is and can be only one point of valuation. [Trans. Vol. II, p. 409]. The point of valuation is quite often not where the sale of the mineral occurs. [Trans. Vol. II, p. 408].
112. The Department considers a single point of valuation essential to achieving a uniform approach to value for all taxpayers. [Trans. Vol. III, p. 487].
113. From this general perspective, the Department disagrees that activities classified as production activities under Wyo. Stat. Ann. §39-14-203(b)(iv) are or can be re-classified as post-production activities by Wyo. Stat. Ann. §39-14-203(b)(v). [Trans. Vol. II, p. 409]. The Department believes the legislature went to some length to say in specific mechanical terms what activities must occur before production is complete. [Trans. Vol. II, p. 410]. The Department rejects the idea that contractual designations can change the result of applying the statute based on physical layout of facilities. [Trans. Vol. II, p. 411].
114. Grenvik acknowledges that Wyo. Stat. Ann. §39-14-203(b)(v) applies to gas transported prior to the point of valuation specified in Wyo. Stat. Ann. §39-14-203(b)(iv), and therefore (b)(v) applies in this case. [Trans. Vol. II, pp. 414, 456]. However, the Department notes that subsection (b)(v) only requires that fair market value be established by bona fide arms length transaction, without necessarily being limited to the contract for transportation. [Trans. Vol. II, p. 414]. To get to a correct value, one has to refer to sales downstream and all transportation costs between the point of sale and the point of valuation, and make appropriate adjustments. [Trans. Vol. II, p. 414]. We agree.
115. The Department concedes that it has not been consistent in its approach. Grenvik characterizes the Department’s position in Department of Revenue v. Michael T. Guthrie d/b/a MTG Operating Company, 2005 WY 79, ¶ 14, 115 P.3d 1086, 1092 (Wyo. 2005) as incorrect, even though the point of valuation was not an issue in that case. [Trans. Vol. I, pp. 416-417, 454]. In MTG Operating Company, the Department failed to require the taxpayer to add a calculated amount for the cost associated with getting to the outlet of the TEG dehydrator. [Trans. Vol. III, p. 453].
116. Grenvik dismissed the taxpayer’s concerns for the inherent difficulties of allocating costs. Supra, ¶ 91. The Department frequently depends on allocations to reach fair market value. [Trans. Vol. II, pp. 420, 424-425]. The Department does not expect an allocation to be a precise determination of cost, but rather a reasonable attempt to put cost classifications where they belong in the context of the statute. [Trans. Vol. II, pp. 421, 425-426]. The difficulty of getting information or making allocations does not make statutes untenable or illegal. [Trans. Vol. II, p. 426]. We find Grenvik credible on the issue of the necessity of allocations.
117. Grenvik was supported by Steve Dilsaver, Administrator of the Mineral Audit Division of the Department of Audit. [Trans. Vol. III, p. 502]. Dilsaver stated that other coal bed methane producers, including IPC, Pinnacle, and Kennedy Oil, have provided the Department of Audit with reasonable allocations of costs incurred upstream of the point of valuation. [Trans. Vol. III, pp. 508-509].
118. Grenvik noted the Department could have denied the taxpayer’s deduction all together. [Trans. Vol. II, p. 427]. The Department’s calculation was the best it could achieve with the information it had. [Trans. Vol. II, p. 428]. We agree.
119. On cross-examination, Williams explored the Department’s customary distinction between gathering and transportation. The Department normally uses the word “gathering” as shorthand for movement of gas to the point of valuation, and “transportation” as shorthand for the movement of gas after the point of valuation. [Trans. Vol. III, pp. 442, 446]; see supra, ¶ 47, for Wilson’s different use of the term “gathering”. Using the Department’s vernacular, gathering is not allowable. [Trans. Vol. III, p. 443]. Grenvik accordingly considers the Gas Gathering Agreement [Exhibit 916] to be both a gathering and a transportation contract. [Trans. Vol. III, p. 447].
120. Grenvik acknowledges the Department did not employ the statutory definition of gathering to describe movement of gas prior to the TEG dehydrator. [Trans. Vol. III, p. 445]. The statute defines gathering:
“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.
Wyo. Stat. Ann. § 39-14-201(a)(ix). Grenvik observed that a central point of accumulation could be many places, making the application of the definition problematic. [Trans. Vol. III, pp. 482-484]. In contrast, once you locate a point of valuation, everything upstream is by definition part of the production process. [Trans. Vol. III, p. 451].
121. In a brief discussion of the netback method of valuation found in Wyo. Stat. Ann. § 39-14-203(b)(vi)(C), Grenvik stated that it is appropriate for a taxpayer to deduct transportation expenses all of the way back to the point of valuation, but not before that point. [Trans. Vol. III, p. 448].
122. Grenvik agreed with Williams counsel that a number of consequences flow from the location of the point of valuation at the outlet of the TEG dehydrator:
The reciprocating compressors and TEG dehydrators owned by MIGC are considered production-related, even though MIGC is a FERC-regulated pipeline.
Western’s screw compressors are considered production equipment, even though the definition of compressors indicates that such equipment can be used for processing or transportation.
Reciprocating compressors are production related, even though Western’s reciprocating compressors provide the compression necessary to move gas on the Fort Union pipeline.
[Trans. Vol. III, pp. 451-452]. Like Grenvik, we do not regard these results as anomalous, but simply a consequence of the application of the statute as written.
123. Similarly, Grenvik dismisses any argument which turns on the fact that Williams is paying a tax on a value greater than it actually receives, because it must incur expenses for services all the way back to the CDP, not the point of valuation. [See Exhibits 110, 111, 112]. The Department views this argument as similar to the discredited argument of producer-processors that the Department does not allow actual expenses. [Trans. Vol. III, p. 498]. Grenvik also notes that a taxpayer may incur other expenses which are never specifically taken into account, such as legal fees. [Trans. Vol. III, p. 500].
124. Although the Department seeks interest in this case, Grenvik acknowledged that the Department did not make its first public statement of a position regarding how subsection (b)(v) works in conjunction with subsections (b)(iv) and (b)(vi) until the hearing of Kennedy Oil in early 2007, well after the audit assessment in this case was complete. [Trans. Vol. III, p. 454]. The Department had no previous occasion to consider the possibility that subsection (b)(v) could provide a way to complete the production process that was an alternative to the requirements of subsections (b)(ii) and (b)(iv). [Trans. Vol. III, pp. 464-465].
125. The Department does not believe there is a sale at a CDP if the contract price is an index price. [Trans. Vol. III, p. 471]. It is inclined to view the sale point as wherever the index is established. [Trans. Vol. III, p. 470].
126. 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
127. 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.…
128. 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;
129. 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.
130. Wyoming Statute Annotated § 39-14-205(j) provides:
(j) Natural gas which is vented or flared under the authority of the Wyoming oil and gas conservation commission and natural gas which is reinjected or consumed prior to sale for the purpose of maintaining, stimulating, treating, transporting or producing crude oil or natural gas on the same lease or unit from which it was produced has no value and is exempt from taxation.
131. 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....
132. 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.
133. “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).
134. 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).
135. “....The omission of words from a statute must be considered intentional on the part of the legislature. (citation omitted) Words may not be supplied in a statute where the statute is intelligible without the addition of the alleged omission. (citations omitted) Words may not be inserted in a statutory provision under the guise of interpretation. (citations omitted) The Supreme Court will not read into laws what is not there. (citations omitted)....” Matter of Adoption of Voss, 550 P.2d 481, 485 (Wyo. 1976).
136. “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).
137. “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).
138. “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).
139. 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 the Wyoming Supreme Court’s Williams Production RMT Company decision:
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 Vol. 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 , ¶¶ 89-95, 116-117 (Wyo. St. Bd. Eq.).
140. “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).
141. “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).
142. “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).
143. “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).
144. “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
145. Williams did not specify jurisdictional grounds when filing its Notice of Appeal. The Notice of Appeal attached the Department’s letter of August 28, 2006, which simply recites, “This letter should be considered a final determination letter and administrative action by the Department of Revenue.” [Notice of Appeal]. We presume 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.”
146. 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 (Wyo. St. Bd. Eq.).
147. In applying this standard, the Board must presume the Department’s valuations are valid, accurate, and correct. BP America Production Company v. Department of Revenue, 2005 WY 60, ¶ 26, 112 P.3d 596, 608 (Wyo. 2005). Williams 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, 139 (Wyo. 2007). A taxpayer’s burdens of proof and persuasion are further articulated in the Board’s Rules. Rules, State Board of Equalization, Chapter 2, Section 20.
I. The Board’s Decision on the Principal Issue
148. 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, ¶ 129. 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, ¶ 129.
149. By application of the facts to the plain language of the statute, the Board concludes that for the entire audit period, all Williams production transported by Western under the Gas Gathering Agreement was gas transported by a third party prior to the point of valuation. Findings, ¶¶ 4-12, 62-71, 114. All such transportation fell under Wyo. Stat. Ann. § 39-14-203(b)(v).
150. In contrast, the Board does not agree with Williams’ argument that the Department must determine the taxable value of Williams production transported under the Gas Gathering Agreement by reference to Wyo. Stat. Ann. § 39-14-203(b)(vi). [See generally Petitioner’s Closing Brief, pp. 26-29]. The Board disagrees for reasons generally articulated in Kennedy Oil, Docket No. 2006-104, September 4, 2007, 2007 WL 2509669 (Wyo. St. Bd. of Eq.). However, Kennedy Oil proceeded on the factual premise that the taxpayer had sold its gas at a point corresponding to Western’s CDP. Williams also raises a number of arguments not raised by Kennedy Oil. We will accordingly present the elements of our Kennedy Oil decision in detail, adapted for specific aspects of this case.
151. Williams began with the premise 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). Findings, ¶¶ 34-35.
152. The layout of the physical facilities in this case was essentially unchanged from Williams Production RMT Company. Coal bed methane gas is produced at low pressure, collected, and twice compressed as it moves downstream. Findings, ¶¶ 14-18. To protect the transporting pipelines operating at higher pressures, the gas is dehydrated in a triethylene glycol (TEG) dehydrator. Compare Findings, ¶ 18, with Williams Production RMT Company, supra, ¶ 11, and Appeal of Williams Production RMT Company, Docket 2002-103, November 14, 2003, 2003 WL 22754175, ¶ 60 (Wyo. St. Bd. Eq.)
153. The stakes in this case are likewise essentially the same. The Wyoming Supreme Court has described why. “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.” Williams Production RMT Company, 2005 WY 28, ¶ 10, 107 P.3d 179, 183-184. As in Williams Production RMT Company, Williams seeks to place the point of valuation at the CDP, which is further upstream than the TEG dehydrator.
154. Williams views Wyo. Stat. Ann. § 39-14-203(b)(v) as an alternative to valuation under paragraph (b)(iv). From the inception of its appeal, Williams has contended that “Section 39-14-104(b)(v) supersedes (b)(iv) where there is a bona fide arms-length sale or transfer of custody upstream of the initial dehydrator.” [Notice of Appeal; Preliminary Statement of Williams]. The idea that the two subsections are mutually exclusive is reflected in Williams statement of the principle issues in the case, i.e., whether “the Department was correct in applying Wyoming Statute section 39-14-203(b)(iv) to determine the value of Williams’ production,” and whether “the Department was correct in refusing to apply Wyoming Statute section 39-14-203(b)(v). [Petitioner’s Issues of Fact and Law and Exhibit Indices]. In its final briefing, Williams rephrased this issue to claim that Wyo. Stat. Ann. §§ 39-14-203(b)(v) and (b)(vi) “collectively provide that all third party transportation fees shall be allowed in determining fair market value.” [Petitioner’s Closing Brief, p. 2].
155. 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 Board’s 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, ¶ 129. The Wyoming Supreme Court did not characterize its decision in Williams Production RMT Company as a choice between paragraphs (iv) and (v).
156. Paragraph (iv) contains no direction about how the Department is to determine value. Instead, paragraph (iv) speaks to when the production process is completed. The completion of the production process defines the point of valuation generally 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).
157. 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).
158. For natural gas “not sold at or prior to the point of valuation by bona fide arms-length sale,” or “if the production is 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.
159. 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 methods 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).
160. 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.).
161. 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, ¶¶ 146-147.
162. The Department has its own 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. Wyo. Stat. Ann. § 39-14-203(b)(ix).
163. Unlike paragraph (vi), paragraph (v) applies in the event certain transactions occur “at or prior to the point of valuation.” Wyo. Stat. Ann. § 39-14-203(b)(v).
164. 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). We note that Grenvik’s description of the way the Department reached a correct value, which is to refer to downstream sale transactions and evidence of costs between the point of sale and the point of valuation, Findings, ¶ 114, comports with the direction of paragraph (v) for the determination of value.
165. 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. We nonetheless conclude MTG Operating Company did not address the issues in this case.
166. 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.
167. 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, ¶ 144. 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.
168. In MTG Operating Company, the only contracts at issue were the sale contracts described in the opinion, and no attention was given to issues other than fuel use. In any event, 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 the narrower reference to bona fide arms-length sale in paragraph (vi). See Conclusions, infra, ¶¶ 189-190.
169. We also conclude that MTG Operating Company did not address the relationship between paragraphs (v) and (vi).
170. 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.
171. 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).
172. The “third party” language. 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, exemplified in this case by the Gas Sales and Purchase Contracts between Duncan Oil and Western. Findings, ¶¶ 74-76, 80-82. The Gas Gathering Agreement is similarly a transportation agreement between two parties. This accordingly raises the issue of what a third party is in the context of paragraph (v). “Third party” is not a term defined by statute with respect to oil and gas taxation, Wyo. Stat. Ann. § 39-14-201(a), or with respect to other taxes on mine products. Wyo. Stat. Ann. §§ 39-11-101, 39-14-101 et seq.
173. The Wyoming Supreme Court has commented on the phrase “third party” in the context of litigation pertaining to the comparable value method of Wyo. Stat. Ann. § 39-14-203(b)(vi)(C). BP America Production Company, quoted in Conclusions, ¶ 136. Though the Court did not provide a definition, we agree with Williams that in the context of the oil and gas taxation statutes, the words “third party” refer to a party unrelated to the taxpayer. [Id.; Petitioner’s Closing Brief, p. 23]. 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, ¶ 133.
174. 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 the specified methods of 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, ¶ 143. The Department might not learn that a taxpayer had circumvented the prescribed approaches of paragraph (vi) unless and until the taxpayer was 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 therefore prevent a taxpayer from manipulating taxable value by inexpensive measures. See Appeal of Williams Production RMT Company, ¶ 117, quoted in Conclusions, ¶ 139.
175. The omitted definite article. Second, the legislature omitted the definite article “the” within the phrase “value established by bona fide arms-length transaction.” The phrase does not read, “value established by the bona fide arms-length transaction.”
176. 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, p. 1483 (Michael Agnes, ed., 2001).
177. 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, p. 368 Huddleston and Pullum (2002).
178. The absence of the word “the” before the “bona fide” in 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, ¶ 177), 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, ¶ 128. The Department’s starting point, however, must be a taxpayer’s contracts. MTG Operating Company, discussed in Conclusions, ¶ 144.
179. 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 its underlying decision, 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, ¶ 139, 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, ¶ 138.
180. Paragraph (v) required a flexible, nonspecific reference to market transactions to reasonably account for the wide variety of circumstances which might arise when paragraph (v) applies. As the Gas Gathering Agreement demonstrates, paragraph (v) may apply when gas is transported under a contract which includes no sale price. The sale price for all production which falls under paragraph (v) by virtue of the Gas Gathering Agreement must be determined by reference to downstream sale transactions. Findings, ¶¶ 6-12, 114. As the Sale and Purchase Contracts between Duncan Oil and Western demonstrate, the selling price at a point of sale prior to the point of valuation may incorporate one or more market transactions far downstream from the point of sale. Findings, ¶¶ 81-82. Paragraph (v) gives the Department broad authority to reach an appropriate valuation.
181. Giving meaning to all of paragraph (v). 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 under the Gas Gathering Agreement in this case – where both paragraphs appear to apply. The reason for applying paragraph (v) is that Williams production was “transported ... by a third party ... prior to the point of valuation.” Findings, ¶ 114. The reason for applying paragraph (vi) to the same production is that Williams’ “natural gas production ... [was] not sold at or prior to the point of valuation by bona fide arms-length sale.” Findings, ¶ 97. Indeed, Williams takes the position that paragraphs (v) and (vi) both apply in this case.
182. If the taxpayer’s production in this case were governed by paragraph (vi), the portion of paragraph (v) related to production transported or processed at or prior to the point of valuation would be rendered meaningless. Because the language of paragraphs (v) and (vi) differs only by a “not” when referring to the relationship between the point of valuation and the point of sale, 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. The correct result should be that when production is transported or processed at or prior to the point of valuation, the Department is authorized use “the value established by bona fide arms-length transaction” rather than one of the four methods specified in paragraph (vi). Reading paragraph (vi) as governing paragraph (v) for any sale past the point of valuation would render the phrase “transported or processed at or prior to the point of valuation” meaningless and thus 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, ¶ 134.
183. 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, and the production “is not sold 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, ¶¶ 157-162, 170.
184. 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, based on the Wyoming Supreme Court’s passing reference to paragraph (vi). 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. The Wyoming Supreme Court referred briefly to paragraph (vi) in its analysis. Id., ¶ 29.
185. 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.
186. After careful review of the statements of the issues in the referenced decisions, the Board concludes that neither Williams 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. The mere mention of paragraph (vi) in Williams Production RMT Company and Appeal of Williams Production RMT Company, Docket 2002-103, does not affect our decision in this case.
187. The reference to paragraph (vi) in Williams Production RMT Company may account for the fact that Williams has assumed that the value of its production must be governed by paragraphs (v) and (vi) jointly. [E.g., Petitioner’s Closing Brief, pp. 19-20]. Based on such an assumption, Williams ultimately reaches a conclusion that paragraph (v) can only have meaning as a direction to deduct transportation and processing prior to the point of valuation. [Id.] The Board makes no such assumption, and disagrees with the conclusion.
188. Transaction rather than sale. 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, p. 1535 (8th Ed. 2004). Similarly, the root of transaction, transact, is defined as “to carry on, perform, conduct or complete (business, etc.).” Webster’s New World College Dictionary , p. 1519 (Michael Agnes, ed., 2001).
189. In its standard popular meaning, Rodriguez v. Casey, supra, quoted in Conclusions, ¶ 134, “transaction” in subsection (b)(v) 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, ¶ 127.
190. 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.”
191. 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. This makes sense. A valuation determination may fall under paragraph (v) as a result of a transportation or processing transaction which may itself provide no insight, or incomplete insight, into sales value. [See Findings, ¶¶ 4-12, 97]. Our conclusion of the sense intended by the legislature is consistent with the Board’s interpretation of the relationship between paragraphs (v) and (vi).
192. In sum, paragraph (v) applies and is not superceded by paragraph (iv). The Department has correctly selected a value for Williams’ production.
193. Having stated our conclusions with regard to the principal issue, we turn to specific arguments which appear in Williams’ briefs.
II. Specific Williams Arguments and Remaining Issues
A. Whether Taxable Value Is Determined by Applying § 39-14-203(b)(vi)
194. Williams argues that its taxable value must be determined by one of the four valuation methodologies set out in Wyo. Stat. Ann. § 39-14-203(b)(vi). [Petitioner’s Closing Brief, pp. 26-29]. Williams would have us conclude “the legislature has made clear that Williams’ final taxable value shall be established by starting with the sales price under § 39-14-203(b)(vi) and subtracting the full amount of transportation fees charged to Williams by third parties under arm’s length transaction.” [Id., pp. 27-28]. It is important to articulate why the Board disagrees with Williams.
195. Williams’ analysis consistently resorts to broad but unsubstantiated characterizations of the statute, purporting to state its “basic objective,” its “fundamental principle,” its “central purpose,” its “express purpose”, or its “core principle.” [Petitioner’s Closing Brief, pp. 4, 28]. For example, Williams asserts, “It has long been recognized that the basic objective of the tax valuation statute is to arrive at a fair market value for the product that excludes values added by post-production processing and transportation services.” [Petitioner’s Closing Brief, p. 4]. While it may be true that application of the tax statutes typically excludes values added by post-production processing and transportation services, there is no reason to characterize this as the “basic objective” of the statute. If there is a such a basic objective, it is expressed by the language of the statute itself.
196. When the Wyoming Supreme Court has chosen to describe the fundamental objective of Wyoming’s tax statutes, it has done so by tracking the language of the constitution and the statutes:
To properly interpret the various statutes applicable to coal valuation, we must first review their fundamental objective. The Wyoming Constitution requires the gross product of mines 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. The legislature defined “value of the gross product” as the fair market value less deductions and exemptions, Wyo. Stat. Ann. § 39-14-101(a)(xv) (LexisNexis 2001), and “fair market value” as “the amount . . . a well informed buyer is justified in paying for a property and a well informed seller is justified in accepting, assuming neither party to the transaction is acting under undue compulsion.” Wyo. Stat. Ann. § 39-11-101(a)(vi) (LexisNexis 2001). With regard to the valuation of coal, the value of the gross product is the fair market value of the product at the mouth of the mine where produced, after the mining or production process is completed, and mining or production is deemed completed when the mineral product reaches the mouth of the mine. Wyo. Stat. Ann. § 39-14-103(b) (LexisNexis 2001). The “mouth of the mine” for a surface mine, such as Wyodak’s, is further defined as “the top of the ramp where the road or conveying system leaves the pit.” Wyo. Stat. Ann. § 39-14-101(a)(vi) (LexisNexis 2001). All these provisions read together provide the context within which the specific valuation methods contained in § 39-14-103(b) must be interpreted. While the valuation statutes may not result in seamless coverage of all possible mining situations, we conclude the legislature intended for those statutes to be interpreted so that mineral production would be valued at its full fair market value. Wyodak’s contention that § 39-14-103(b)(viii) allowed coal sold to its parent company pursuant to a long term agreement to be valued on the basis of spot market prices is inconsistent with this conclusion.
Wyodak Resources Development Corporation v. Wyoming Department of Revenue, 2002 WY 81, ¶33, 60 P.3d 129, 141-142 (Wyo. 2002). The Board has from time to time followed this template. E.g., Union Pacific Resources Company et al, Docket No. 2000-147 et al., June 9, 2003, 2003 WL 21774603 , ¶ 117 (Wyo. St. Bd. Eq.).
197. Unlike the Wyoming Supreme Court, Williams does not string together a statement of principle from elements of constitution and statute – provisions which read together provide a context – but instead adopts characterizations unsupported by authority or argument. These supposed statements of principle are nothing more than a reflection of the outcome which Williams desires. Based on these premises, Williams would nonetheless have us reject principles articulated by the Wyoming Supreme Court, this Board, and the Department in previous litigation.
198. For example, Williams castigates the Department for its view that paragraph (iv) establishes a physical point of valuation, arguing that a physical point of valuation “contravenes the fundamental principle that value added by processing or transportation should not be included in taxable value.” [Petitioner’s Closing Brief, p. 4]. Elsewhere, Williams claims “[t]he legislature has determined that the core principle around which fair market value is to be determined is the use of arm’s-length sales, transportation, and processing agreements, not the location of physical equipment provided by third-party transporters and processors over whom the taxpayer has no control.” [Petitioner’s Closing Brief, p. 28]. From the Board’s perspective, Williams Production RMT Company settled this point in favor of the Department: paragraph (iv) establishes a physical point of valuation. Quoted in Conclusions, ¶ 140. Reliance on principles not explicitly supported by statute does nothing to persuade us this settled question should be revisited, much less reversed.
199. As another example, Williams argues:
The central purpose of § 39-14-203(b)(v) is to insure that all third-party transportation and processing fees are fully deductible under § 39-14-203(b)(vi) even if those fees relate to transactions that begin “prior to” the point of valuation in § 39-14-203(b)(iv). Any other conclusion renders § 39-14-203(b)(v) meaningless and requires that only a portion of transportation and processing fees be deductible, which is not what § 39-14-203(b)(vi)(B) or (C) provides. Section 39-14-203(b)(v) therefore exists for the express purpose of preventing what the Department seeks to do here: disallow a significant portion of arm’s-length transportation fees.
[Petitioner’s Closing Brief, p. 4]. As we understand the argument, Williams infers the central purpose stated in the first sentence from the premise stated in the second, i.e., that any other conception of paragraph (v) renders paragraph (v) meaningless. The Board finds merit in neither the premise nor the inference.
200. The Board disagrees with the tacit premise that the value of production under the Gas Gathering Agreement is determined by reference to both paragraphs (v) and (vi), since the Board views the two paragraphs as mutually exclusive. Conclusions, ¶ 171. The Board likewise disagrees that paragraph (v) is meaningless if one does not accept that its purpose is to insure that fees under paragraph (vi) are deductible. Nothing about paragraph (v) is meaningless in the Board’s interpretation, and nothing about paragraph (v) concerns the value determinations of paragraph (vi).
201. Williams did not carry its burden of persuasion with respect to these and other arguments which invoke unsupported claims of statutory principles and purposes.
202. As a secondary theme in its approach to paragraph (v), Williams complains of the difficulty of calculating a value for the Western service from the inlet of the CDP to the outlet of the TEG dehydrator. Williams asks us to infer that the determination of such a value is so unreasonable that we should disregard the requirements of paragraph (iv). For example, Williams does not believe the legislature “would create a taxable value that would be impossible for the taxpayer to calculate because it would be based upon facilities owned and operated by others not engaged in production functions.” [Petitioner’s Closing Brief, p. 28; also, p. 4]. Williams decries the use of “arbitrary values” to reach a taxable value based on the point of valuation prescribed by paragraph (iv) as “odd and irrational.” [Petitioner’s Closing Brief, pp. 4, 31]. Moreover, Williams considers reliance of the location of field equipment to establish a point of valuation to be not only “arbitrary and unpredictable,” but “fundamentally irrational.” [Petitioner’s Closing Brief, p. 6]. This complaint, in its various avatars, is not persuasive.
203. None of Williams, concerns are supported by authority. What authority there is runs against Williams’ position. In a case involving the allocation of direct costs under the coal tax statutes, the Wyoming Supreme Court recognized that some allocation was necessary “either because of the level of detail provided by the taxpayer’s accounting system or because of the nature of the cost.” Powder River Coal Company v. Department of Revenue, 2006 WY 137, ¶ 21, 145 P.3d 442, 450 (Wyo. 2006). Where the point of valuation is uncontested, as in this case, we have no reason to believe the Wyoming Supreme Court would excuse Williams from the plain letter of the statute because accurate numbers for an adjustment are not readily available.
204. Industry practice supports the Department, not Williams. The Administrator of the Mineral Tax Division credibly asserted the Department’s administration of the tax statutes contemplates reasonable attempts to put cost classifications where they belong in the context of the statute. Findings, ¶ 116. The Department’s position is reinforced by the fact that other coal bed methane taxpayers have reported valuations in a way which satisfies the statute and the Department. Findings, ¶ 117; Kennedy Oil, Docket No. 2006-104, ¶¶ 48-53.
205. Indeed, the taxpayer’s position is indefensible in the context of this audit. First, the Wyoming Supreme Court affirmed the Department’s method of calculating a value with essentially same the information presented in this audit. Findings, ¶ 22.
206. Second, Williams devoted no substantial effort to computing an alternative value. The Revenue Manager for Williams, Richard Jones, conceded that if an allocation were ultimately needed, he knew of no better estimate than the one the Department had already provided. Findings, ¶ 93. Even if Williams had originally refused to calculate an alternative value because it believed its position was correct, Findings, ¶ 91, the audit provided ample opportunity to reconsider that refusal. The same is true of Jones’s protest that he did not believe he could come up with a number that was auditable or defensible. Findings, ¶ 91. We note that Jones made no effort to seek the technical assistance of a Williams affiliate that provides midstream services. Findings, ¶ 92.
207. We attach little significance to the testimony of Christopher Wilson. Even if we accept that Western had a policy of not disclosing cost elements of its services, Findings, ¶ 20, that does not excuse Williams from its obligation to properly report and pay taxes based on the taxable value of its production. Wyo. Stat. Ann. § 39-14-207(a), quoted in Conclusions ¶ 131. Neither Williams’ reporting responsibilities nor the Department’s responsibilities for the determination of value are contingent on the cooperation of a transporter like Western. We have also noted certain concerns about the details of Wilson’s testimony. Findings, ¶¶ 85, 87-89.
B. Whether the Department’s Interpretation of § 39-14-203(b) Is Irrational and Leads to Absurd Results
208. Williams argues at length that the Department’s interpretation of § 39-14-203(b), as a whole, is irrational, based on Williams’ view that the purpose of paragraph (v) is to authorize the deduction of transportation and processing fees upstream of the point of valuation established by paragraph (iv). Petitioner’s Closing Brief, p. 29-36. Since the Board’s decision goes beyond the interpretation of the Department with regard to paragraphs (v) and (vi), and rejects this view of the purpose of paragraph (v), the Board rejects Williams’ argument. The Board nonetheless wishes to state additional grounds for rejecting elements of the argument not raised in the Board’s Kennedy Oil decision. We will not repeat our discussion concerning the MTG case. Conclusions, ¶¶ 165-169.
(1) “Expenses incurred by the producer”
209. Williams finds harmony in sections 39-14-203(b)(ii) and 39-14-203(b)(v) by ascribing a particular meaning to the phrase “expenses incurred by the producer.” [Petitioner’s Closing Brief, pp. 29-30]. It is easier to understand this argument with the language of paragraphs (ii), (iv), (v), and (vi) in front of us. The phrase “expenses incurred by the producer” appears only twice:
(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;
* * *
(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.
Wyo. Stat. Ann. § 39-14-203(b)(ii), (iv), (v) [emphasis supplied].
210. Relying on the specific distinction which appears in the netback valuation methodology of paragraph (vi), Williams argues that the statute makes an important general distinction between “expenses incurred by [a] producer” and fees paid to a third party. [Petitioner’s Closing Brief, pp. 29-30]. Paragraphs (ii) and (v) “work perfectly well together if the phrase ‘expenses incurred by the producer’ is understood to mean something different than third-party processing and transportation fees set forth in a bona fide arm’s-length transaction with a producer,” [id., p. 29], since “[f]ees ‘charged to’ are not ‘expenses incurred by.’” [Id., p. 30]. For Williams, it follows that “a producer may [only] deduct its own transportation expenses back to the physical point set forth in [subsection (iv)], but can deduct all the third-party processing fees even if they go back further, or ‘prior to,’ the defined end of the production process in § 39-14-203(b)(iv).” Id., p. 30.
211. With paragraphs (ii) and (v) at hand, it is immediately obvious that Williams is reading the words “fees” or “fees charged to” into paragraph (v), where those words do not appear. In doing so, Williams goes beyond “the ordinary and obvious meaning of the words employed according to their arrangement and connection.” Chevron U.S.A., Inc. v. Department of Revenue, quoted in Conclusions, ¶ 133. The omission of the words “fees” or “fees charged to” must be considered intentional on the part of the legislature. Matter of Adoption of Voss, quoted in Conclusions, ¶ 135. Williams may not insert those words under the guise of interpretation. Id.
212. The Board’s interpretation implicitly and explicitly addresses key points of the Williams argument. The Board has a view of the significance of the words “third party” in paragraph (v) which not only gives them meaning, but is consistent with Williams’ view of the meaning of those same words. Conclusions, ¶ 173. The Board views the mandatory concluding words of paragraph (v), “the fair market value shall be the value established by bona fide arms-length transaction,” as a general directive, not a specific directive for exemption of transportation and processing costs. Conclusions, ¶ 164. The Board views paragraph (v) as an exception to paragraph (vi), Conclusions, ¶ 171, casting doubt on the notion that inferences may properly be drawn from the language of one specific valuation method for production sold after the point of valuation.
213. More broadly, Williams fails to explain what public policy would be served by the distinction it would have us read into the statute. For example, given the tax advantage which results by moving the point of valuation upstream when production is delivered to a transporter like Western, is Williams implicitly arguing that the legislature sought to encourage the creation of a midstream industry? The Department’s concern for the objective test to establish a point of valuation, one that may be uniformly applied, Findings, ¶ 112, is not only more compelling but also makes more common sense from the standpoint of the statutes as a whole.
214. Finally, the Supreme Court has already addressed the phrase “expenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the mineral,” and done so in a way contrary to the nuance that Williams would add:
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) (emphasis supplied). The Board concludes the Supreme Court’s emphasis is on a statement of general principle and policy, not on legislative language chosen to create a narrowly drawn tax advantage for specific circumstances applicable only to a specific sector of the oil and gas industry.
(2) Intent to increase revenue
215. Williams next argues that the Department has selectively given “meaning to those parts of § 39-14-203(b) that increase revenue for the State.” [Petitioner’s Closing Brief, p. 31]. Williams produced no evidence to support this claim, and the Board concludes it is unsupported as matter of law.
(3) Gathering
216. Williams criticizes the Department for use of the word “gathering” to provide general direction to taxpayers about the point of valuation. [Petitioner’s Closing Brief, p. 33]. Part of this argument turns on the statutory definition of gathering:
(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....
Conclusions, ¶ 127. The definition incorporates other phrases either defined or nearly defined (compressor, heating and treating, separating), words used elsewhere with greater specificity (e.g., “dehydration” in Wyo. Stat. Ann. § 39-14-203(b)(iv)), and words of uncertain application (“point of accumulation”). As important, “gathering” is described in Wyo. Stat. Ann. § 39-14-203(b)(iv) as an activity “which occurs before the outlet of the initial dehydrator.” This specific usage, together with the specific provisions of Wyo. Stat. Ann. § 39-14-203(b), control the general definition. Matter of Lyles, 957 P.2d 843, 846 (Wyo. 1998). The Board, like the Department, concludes it is not necessary to strain to determine the significance of the statutory definition of “gathering” in the circumstances of this case.
217. At the same time, we find no fault with the Department’s customary use of gathering as a shorthand for activities which occur prior to the point of valuation. For many taxpayers, such a description is simple, straightforward, and useful advice. Conversely, there is likely no such thing as simple, straightforward, and useful advice for a taxpayer disinclined to be advised, as Williams was.
(4) The TEG dehydrator as the point of valuation
218. Williams argues that the TEG dehydrator is an artificial point of valuation which “forces the end of the production process to the outlet of the TEG even though the production process ends uniformly throughout the Powder River Basin at the CDP demarking the inlet to the midstream service provider’s facilities.” [Petitioner’s Closing Brief, p. 33]. Williams goes on to complain that “locating the point of valuation at the outlet of the TEG arbitrarily locates the end of the production process in the middle of a transportation business, which is an entirely different business that has nothing to do with severing or extracting natural gas from the ground.” [Id., p. 34]. Finally, Williams complains that by allowing a deduction for only the segment of transportation which follows the outlet of the TEG dehydrator, “the Department has attempted to carve up a bundled fee that Western charges Williams for transporting its gas.” [Id., p. 34].
219. The Board declined to adopt or rely on the broad factual characterizations Williams urges. Findings, ¶¶ 85-89. We have no way of being certain that the entire industry is or will remain structured as portrayed by the witnesses in this case. Indeed, the transportation arrangements in this case, where some compression and dehydration services were performed by MIGC, Findings, ¶ 55, do not square with the notion of a clear delineation of the midstream business based on whether or not a service provider is regulated by FERC. [Petitioner’s Closing Brief, p. 34] (“Midstream service providers such as Western transport gas on non-regulated FERC pipelines.”)
220. We are also concerned that the emphasis on bundled fees is a construct of the attorneys rather than the witnesses. Our review of the 646 pages of transcript indicates only witness Christopher Wilson, used the word “bundled,” and on just one occasion. [Trans. Vol. I, p. 182]. On all other occasions the word was used in arguments or questions posed by attorneys. “Bundled” was never defined, and seems inconsistent with the integration of MIGC booster compression and dehydration into Western’s scheme for handling Williams gas. In a case where Williams has seen fit to disavow the representations of the attorneys who handled its first appeal, Findings, ¶ 72, the Board sees little reason to place any weight on a such a detail as bundling. However, the facts of the case are not the main reason for dismissing the general argument.
221. All of Williams’ complaints about the point of valuation were resolved by the Wyoming Supreme Court in Williams Production RMT Company. The configuration of equipment in this case – screw compressors, transport, reciprocating booster compressor, TEG dehydrator – has not changed. Williams complains about a statutory scheme it has already litigated unsuccessfully; its recourse is to the legislature. While Williams has its own passionate views about the end of the production process for coal bed methane production, the Board has no reason to reconsider law which is now settled.
C. Whether Williams Is Entitled to Deduct the Full Amount of the MIGC Tariff
222. In addition to its claims regarding the point of valuation, Williams argues the Department may not make an adjustment to the MIGC tariff of 35 cents per MMBtu to account for Western’s 21 cents per MMBtu rebate against production transported on MIGC. [Petitioner’s Closing Brief, p. 36]; Findings, ¶¶ 106-108. The crux of this argument is that the rebate must be subtracted from the fee Western charges producers, rather than MIGC’s regulated tariff, which cannot be discounted. “This means that from Williams’ perspective it pays Western .08 [sic] cents per Mcf for gas delivered to MIGC, plus the MIGC fee of 35 cents per Mcf.” [Petitioner’s Closing Brief, p. 38]. “Disallowing a post-point of valuation FERC approved transportation tariff violates the plain language of the comparable value statute, which allows downstream transportation fees comparable to those charged to other parties to be deducted.” [Petitioner’s Closing Brief, pp. 38-39].
223. This argument fails under the Board’s reading of sections (v) and (vi). Williams’ production must be valued under section (v), not under section (vi). Conclusions, ¶¶ 148-192. Under section (v), the taxpayer must report value, and the Department must determine value “by bona fide arms-length transaction.” The Department has proposed to take into account the effect of the 21 cents per MMBtu rebate against the MIGC tariff, also expressed in MMBtus. Findings, ¶¶ 32, 56. By doing so, we conclude that the Department properly applied the statute, and reached a result consistent with the Wyoming Supreme Court’s decision in Williams Production RMT Company.
224. For the same reasons, we conclude the case should be remanded to the Department to adjust the audit findings to account for the 21 cents per MMBtu rebate against the MIGC tariff.
D. Whether Williams Is Entitled to an Exemption for Fuel Used on the Lease
225. Williams seeks an exemption for fuel used upstream of the TEG dehydrators under Wyo. Stat. Ann. § 39-14-205(j), which provides:
Natural gas which is vented or flared under the authority of the Wyoming oil and gas conservation commission and natural gas which is reinjected or consumed prior to sale for the purpose of maintaining, stimulating, treating, transporting or producing crude oil or natural gas on the same lease or unit from which it was produced has no value and is exempt from taxation.
Wyo. Stat. Ann. § 39-14-205(j). As we noted in our Findings, Williams alluded to only one specific location where this occurred. Findings, ¶ 103. Williams did not attempt to quantify the value of fuel used at that location prior to resting its case. Findings, ¶ 105.
226. Following the close of evidence in this case, the Board encouraged the parties to proceed with the work of determining the values associated with “the calculations that you agree need to be revised” [Trans. Vol. III, pp. 641-642], knowing that both parties sought a remand, albeit for different reasons. On June 8, 2007, more than two months after the close of evidence, Williams filed a brief indicating that it now claimed the fuel use exemption for “45 compressor and/or dehydrator stations located on Williams’ leases or units.” [Petitioner’s Closing Brief, p. 40]. Williams now claims the exemption would reduce its severance tax assessment by $843,079. [Williams Production Company’s Supplemental Brief on Audit Recalculations Requested by the State Board of Equalization, p. 16].
227. This is a startling claim for an issue which Williams did not identify in advance of the hearing. [Notice of Appeal; Petitioner’s Preliminary Statement; Petitioner’s Updated Summary of Contentions; Petitioner’s Issues of Fact and Law and Exhibit Indices]. In opening statements, Petitioner’s counsel simply asserted, as one of many quarrels with the Department, “They didn’t allow any exemptions for unleased fuel.” [Trans. Vol. I, p. 11]. As the case developed, Williams introduced evidence that one Western CDP may serve several producers, Findings, ¶ 16; that it may be as much as two and one half miles from one producer’s pod to a CDP, Findings, ¶ 15; that it may be as much as nine miles from a CDP to a booster compressor, Findings, ¶ 17; and that a substantial portion of the booster compression and dehydration takes place in facilities owned by MIGC. Findings, ¶¶ 55, 67. In this environment of dispersed facilities serving multiple producers, Williams had ample reason to develop a complex record to support a claim for $843,079, and to support a reasoned approach to the application of the statute, but did not.
228. Williams is no more persuasive when it invokes the history and purposes of Wyo. Stat. Ann. § 39-14-205(j) without citing any authority for its pronouncements. “When § 39-14-205(j) was drafted, the production process was understood to end at or very near the lease unit. Producers extracted gas from the ground and transported it a short distance to the inlet of a FERC regulated pipeline, which was piped into the lease or unit boundary.” [Petitioner’s Closing Brief, p. 39]. We have explained why we find reasoning from the supposed purposes of a statute to be unpersuasive. Conclusions, ¶¶ 194-201. Williams now suggests it has special knowledge of the facts known to the legislature when it enacted Wyo. Stat. Ann.§ 39-14-205(j). In a state where even the testimony of participants in the legislative process is improper legislative history, Independent Producers Marketing Corp. v. Cobb, 721 P.2d 1106, 1108 (Wyo. 1986), such arguments are not persuasive.
229. Nor is the Board swayed by the argument that the effect our ruling is to push “the end of the production process up to nine miles from the wellhead,” while not allowing “a fuel exemption to get the gas to that point.” [Petitioner’s Closing Brief, p. 40]. We note that this argument is not supported by any authority, and makes no effort to address the possibility that the result may be entirely appropriate in light of the differing language of Wyo. Stat. Ann. § 39-14-203(b) and Wyo. Stat. Ann. § 39-14-205(j). The argument is nothing more than a complaint about the principles approved in Williams Production RMT Company.
230. We are mindful that a Department witness conceded that a fuel use exemption would have been appropriate. Findings, ¶ 105. Yet nothing in our record would allow us to understand how this would be done, or whether, if all pertinent circumstances were known, the generalized concession of the Department’s witness should be translated into a specific adjustment to the audit findings in this case. As always, the parties are free to settle some portion of a dispute before us, but they are not free to usurp the Board’s function by requiring us to speculate about facts and the conclusions which may be drawn from those facts. That remains the Board’s duty and its prerogative. Wyo. Stat. Ann. §§ 16-3-109, 16-3-110.
231. We conclude that Williams failed to carry its burdens of proof and persuasion on this issue.
D. Accounting for CMS Invoices
232. The Department has conceded that it misunderstood CMS invoices to be for gathering services, rather than the purchase of capacity on the Fort Union pipeline. Findings, ¶ 100. The nature of the adjustments necessary to correct this error was explained in detail in the record. Findings, ¶ 101. We conclude this aspect of the audit findings should be remanded to the Department for correction.
E. The Duncan Oil Purchases
233. We have already found that Western’s purchases from Duncan Oil were not reported under the name of Williams, and hence not included in the audit. Findings, ¶ 109. Based on the description of the pricing of the contracts, i.e. an index-based price discounted to provide for transportation services after the CDP, Findings, ¶¶ 81-82, the appropriate taxable value under section (v) would require an adjustment from the CDP to the point of valuation. The result would accordingly follow our result in Kennedy Oil, where we concluded the Department’s approach to valuation was and should be essentially the same under contracts for sale or contracts for transport at a point equivalent to Western’s CDP.
F. Interest
234. 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).
235. Because the Williams Production RMT Company litigation affirmed a previous valuation of the Department with the same configuration of equipment, there is plainly one sense in which Williams should have known its tax liability was not paid when due. The Board would normally be reluctant to reach any other conclusion simply because a taxpayer had hired new attorneys and advanced an alternative legal theory.
236. At the same time, the applicability of paragraph (v) and (vi) was not an issue presented for review in the Williams Production RMT Company litigation. Conclusions, ¶¶ 184-186. Nor was the application of paragraph (v) fully considered in MTG Operating Company. Conclusions, ¶¶ 165-169.
237. The Department has acknowledged that the first time a producer could have known the Department’s interpretation of paragraph (v) was in January of 2007 when the Department took a position in Kennedy Oil. Findings, ¶ 124. As important, Williams would not have reached the right result in this case simply by accepting the advice of the Department. The Department did not provide a legal analysis that the Board found persuasive in Kennedy Oil or in this case. 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, such that Williams could not have readily foreseen the details of the result in this case.
238. We conclude Williams does not owe interest because it could not have known its total tax liability was not paid when due.
ORDER
IT IS THEREFORE HEREBY ORDERED that this matter is remanded to the Department of Revenue (1) to modify the audit calculations to account for the 21 cent per MMBtu rebate and (2) to modify the audit calculations to correct the error concerning CMS invoices. The assessment of interest is reversed. The determination of the Department is in all other respects affirmed.
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 January, 2008.
STATE BOARD OF EQUALIZATION
_____________________________________
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