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In re Appeal of the Director of Property Valuation

July 13, 2007; as amended July 23, 2007


Appeal from the Kansas Board of Tax Appeals.


In a tax case involving the exemption of stored natural gas from ad valorem property taxation in Kansas it is held: (1) rules of statutory construction are restated and applied; (2) the "and" in the phrase "own, control and hold for resale" found in K.S.A. 2006 Supp. 79-5a01 is construed in the conjunctive and not as "or" as requested by the appellant so that ordinary words may be given their ordinary meaning and the plain language of the statute is interpreted exactly as written; (3) under the tariffs of the Federal Energy Regulatory Commission and the contractual provisions of the agreements between the taxpayers and interstate pipeline companies, the interstate pipeline companies are in possession and control of the natural gas during the underground storage process in Kansas; and (4) the findings, rulings, and decision of the Board of Tax Appeals of the State of Kansas that "and" means "and," that the taxpayers do not control stored natural gas in Kansas, that the taxpayers are not public utilities as defined by K.S.A. 2006 Supp. 79-5a01(a), and that their natural gas rights and inventories are exempt from taxation under K.S.A. 79-201m as merchants' inventories are affirmed.

Per curiam.


This is a tax case involving the exemption of stored natural gas from ad valorem property taxation in Kansas.

The appellees, herein designated the "taxpayers," are 44 non-Kansas municipal utilities, non-Kansas natural gas marketing companies, and non-Kansas public utilities that have contracted for gas storage or deferred delivery with interstate natural gas pipeline companies.

The appellant is Mark S. Beck, the Director of the Property Valuation Division of the Kansas Department of Revenue, herein designated the "PVD," who valued and assessed the stored natural gas for ad valorem taxation against the taxpayers for the years 2004 and 2005 in response to 2004 amendments to K.S.A. 79-5a01, which expanded the definition of "public utility" for ad valorem tax purposes. See L. 2004, ch. 171, sec. 4.

The taxpayers appealed to the Kansas Board of Tax Appeals, herein designated "BOTA" or the "Board," which held that the taxpayers were not public utilities under the new definition contained in K.S.A. 2006 Supp. 79-5a01, and consequently their natural gas was exempt from property taxation as merchants' inventory under K.S.A. 79-201m. Specifically, BOTA reasoned and held that "it would be improper for the Board to find that the taxpayers, who relinquish possession of natural gas to interstate pipeline companies and retain only contractual rights to inventory balances, 'own, control and hold for resale stored natural gas in an underground formation in the state'" as required by the clear language of K.S.A. 2006 Supp. 79-5a01.

The PVD has timely appealed.

We have jurisdiction of the appeal pursuant to the parties' motions under K.S.A. 20-3017.

This is the third in a trilogy of cases to come before us involving ad valorem property taxation of underground stored natural gas in the state of Kansas. The most recent decision was In re Tax Exemption Application of Central Illinois Public Services Co., 276 Kan. 612, Syl. ¶ 3, 78 P.3d 419 (2003), which determined that many of the same parties, or those similarly situated to the taxpayers in this case, were not public utilities for Kansas ad valorem taxation purposes.

The earlier case is Colorado Interstate Gas Co. v. Board of Morton County Comm'rs, 247 Kan. 654, Syl. ¶ 3, 802 P.2d 584 (1990), which discussed the 1986 amendment to Article 11, § 1 of the Kansas Constitution and held that natural gas owned by public utilities and stored for resale comes within the exemption from ad valorem taxation afforded to merchants' and manufacturers' inventories. Although we must of necessity at times refer to these cases, the issue before us is primarily that of statutory construction of the explicit language of K.S.A. 2006 Supp. 79-5a01(a), but the previous cases set the stage for the issue we face.

Factual and Procedural Background Before BOTA

Many of the facts in this case were stipulated to by the parties, but testimony was also received in the BOTA hearing. We will summarize and at times quote verbatim from the BOTA decision on appeal before us.

The subject matter before BOTA is timely appeals and tax exemption applications filed pursuant to K.S.A. 74-2438 and K.S.A. 79-213 respectively.

These appeals are of the PVD final notices of valuation and ad valorem property tax exemptions, filed by 44 taxpayers for the tax years 2004 and 2005 involving stored natural gas in underground formations in Meade County, Kansas.

The taxpayers include various public utilities, municipal utilities, and natural gas marketing companies located outside the state of Kansas. They do not deliver, sell, trade, or otherwise dispose of natural gas within the state of Kansas and are not certified or regulated as natural gas public utilities by the Kansas Corporation Commission, nor do they engage in any of those activities specified in K.S.A. 2006 Supp. 79-5a01(a)(1) through (7).

The taxpayers do not own facilities in Kansas for the transmission, distribution, or storage of natural gas. None of the taxpayers are authorized to exercise the power of eminent domain in Kansas.

The taxpayers purchase natural gas from various producers and marketers and deliver this gas for storage or deferred delivery to one or more of the following interstate pipelines/common carriers having storage facilities in Kansas and other states: Panhandle Eastern Pipe Line Company; Colorado Interstate Gas Company; Northern Natural Gas Company; and Southern Star Central Gas Pipeline (the "Interstate Pipelines"). The Interstate Pipelines are regulated by the Federal Energy Regulatory Commission (FERC), and natural gas storage and deferred delivery services furnished by the Interstate Pipelines are provided in accordance with and subject to FERC-approved tariffs.

In describing FERC tariffs, the Board found:

"Relevant provisions of the FERC approved tariffs contain specific provisions regarding control and possession of natural gas delivered to the interstate pipelines for storage or deferred delivery. Each of the FERC tariffs includes provisions placing the risk of loss, liability and damages on the interstate pipelines during the period when natural gas is in their control and possession."

The gas that the taxpayers deliver to the Interstate Pipelines is stored somewhere by the Interstate Pipelines in their storage or transportation system, but the same molecules of natural gas that were originally delivered for storage or deferred delivery service are not returned to the taxpayers. The natural gas the taxpayers deliver to the Interstate Pipelines is intended to be inventory for subsequent resale outside the state of Kansas.

The volumes of natural gas that the PVD assessed were computed by allocations, but such allocations do not represent actual volumes of natural gas in particular locations that are attributable to the taxpayers, but rather pro rata allocations of the taxpayers' contractual storage balances.

Four witnesses testified at the BOTA hearing.

Jeff Balfort, Director of Gas Operations for Panhandle Eastern, testified for the taxpayers. He explained that FERC-approved tariffs establish control of the taxpayers' gas delivered for transportation and storage to be in the Interstate Pipelines, and natural gas is used to maintain "line pack" or pressure in the system. Storage is at times used to provide balance in the system if gas pressure is to low or too high as delivery occurs in their system between Texas and Michigan.

Kent Miller, Vice-President of Pricing and Storage for Northern, affirmed Northern is controlled by FERC and that Northern was in possession and control of natural gas from delivery to redelivery. He affirmed the lack of any control in the taxpayers over the gas in Northern's system and explained that underground storage and line pack allowed simultaneous receipt and delivery at opposite ends of its pipeline system. He testified that much of the gas in its system would never be in the vicinity of a storage field as, for example, it might be transported from Canada to a delivery point in Iowa.

Miller explained that when Northern provided information to the PVD for 2004 and 2005, system-wide balances were not specific to Kansas and the volumes stored were theoretical in nature and did not track actual gas stored in any particular storage field. He said the summary of allocations his company ...

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