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Fayetteville Express Pipeline, LLC v. Arkansas Public Service Commission

Court of Appeals of Arkansas, Divisions III, IV

October 25, 2017



          Corbitt Law Firm, PLLC, by: Chris P. Corbitt, for appellant.

          Justin A. Hinton and Dawn Kelliher Guthrie, for appellee.

          LARRY D. VAUGHT, Judge

         This case involves an assessment of 2014 ad valorem taxes on properties of Fayetteville Express Pipeline, LLC (FEP or appellant), by the Tax Division of the Arkansas Public Service Commission (Commission). FEP filed a formal petition asking the Commission for review. An administrative law judge (ALJ), sitting by designation of the Commission, conducted a public hearing and affirmed the Tax Division's assessment. The assessment was reaffirmed by the Commission. FEP subsequently appealed to the Pulaski County Circuit Court. The circuit court found that the Commission's decision to affirm the assessment of FEP's property was supported by substantial evidence in the record. On appeal, FEP argues six points. We affirm.

         I. Background

         FEP owns a 185-mile natural gas pipeline that originates in Conway County, Arkansas, and terminates by connecting with another pipeline in Mississippi. FEP entered into long-term contracts with four gas producers in the Fayetteville Shale region reserving 92.5 percent of the pipeline's capacity. These contracts expire in 2020 and 2021 and pay FEP roughly $55 million a year regardless of the amount of gas carried through the pipeline. The pipeline went into operation in 2012.

         On March 27, 2014, FEP filed its 2014 ad valorem tax report for the year ending December 31, 2013. Based on the information provided by FEP, the Tax Division prepared FEP's 2014 ad valorem tax assessment, showing a total unit value of $886, 387, 572, resulting in an Arkansas-assessed value of $149, 580, 000.

         FEP filed a petition for review with the Commission challenging the assessment. In its petition, FEP argued that the Tax Division had failed to consider certain conditions, such as that the market for natural gas had substantially declined, causing FEP's pipeline to be underutilized. FEP also argued that the Tax Division had failed to consider economic obsolescence. FEP noted that the Federal Energy Regulatory Authority (FERC) had allowed some 770 miles of mainline transmission pipeline to be abandoned, including 725 miles that FEP described as being essential to the original purpose of constructing FEP's pipeline. FEP further argued that the Tax Division applied an improper capitalization rate. FEP also asserted that the assessment was arbitrary, not supported by substantial evidence, manifestly excessive, clearly erroneous, and confiscatory. The Tax Division filed a response asking that FEP's petition for review be denied.

         A hearing was held before the ALJ, who eventually affirmed the Tax Division's assessment of FEP's property in Order No. 9. In doing so, the ALJ found that FEP had failed to present sufficient evidence to show that the Tax Division's treatment of obsolescence in its cost approach resulted in a manifestly excessive, clearly erroneous, or confiscatory assessment. The ALJ further found that the Tax Division had the discretion to consider economic or functional obsolescence in valuing taxable property and that FEP had failed to meet its burden of demonstrating that the Tax Division abused its discretion or that its failure to consider functional or economic obsolescence rendered the assessment incorrect in measuring the fair market value of FEP's property. The ALJ next addressed the Tax Division's consideration of FEP's future income, noting that Arkansas Code Annotated section 26-26-1607 (Supp. 2015) neither specifies how far into the future the Tax Division must consider future income nor requires the Tax Division to project the future income of a company. According to the ALJ, the statute only requires that the Tax Division consider a company's future income stream and that it did so. Although noting that the Tax Division had a preference for company-specific capitalization rates where possible, the ALJ found that FEP failed to submit information for the Tax Division to calculate a company-specific capitalization rate for FEP and that FEP's calculation of an individualized capitalization rate was based on comparison companies dissimilar to FEP. The ALJ found that FEP had failed to prove that the Tax Division's assessment was incorrect in measuring the fair market value of FEP, and FEP had not met its burden to overturn the assessment. The ALJ concluded that the assessment was proper, reasonable, and in the public interest.

         FEP filed its "Petition for Rehearing" from Order No. 9 with the Commission, arguing that the Tax Division should have considered economic obsolescence; should have developed a specific, individualized capitalization rate; and should have used an average of FEP's income over a three-year period instead of a two-year average.

         In its response, the Tax Division argued, among other things, that FEP was insulated from the market conditions of the Fayetteville Shale by having guaranteed contracts through 2020 and 2021. It further argued that the methods FEP used to show economic obsolescence-underutilization and the income shortfall methods-had previously been rejected by the Commission and by the Arkansas Supreme Court. The Tax Division also argued that it did not abuse its discretion by failing to make an adjustment for economic obsolescence.

         After the Commission had denied FEP's petition for rehearing in Order No. 11, FEP sought review of that order in the circuit court.[1] FEP argued that Order No. 11 was unlawful for many of the same reasons stated in its petition seeking review of the assessment. These included that the Tax Division failed to consider FEP's undisputed evidence as to the market conditions in the Fayetteville Shale, including that FEP is entirely dependent on production from the Fayetteville Shale and the underutilization of FEP's pipeline. FEP further argued that the Tax Division failed to properly consider the imminent termination of contracts that provide over 90 percent of FEP's revenue. According to FEP, the Tax Division misapplied section 26-26-1607 by failing to properly consider economic obsolescence. The Tax Division answered, asking that the petition be denied.

         Following briefing and oral argument before the circuit court, the court ruled from the bench. The court affirmed the Commission's assessment as supported by substantial evidence, not clearly erroneous, and that the ad valorem assessment of the FEP natural-gas pipeline of $886, ...

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