No. 91,253
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
IN THE MATTER OF THE EQUALIZATION PROCEEDING
OF THE AMOCO PRODUCTION COMPANY
FOR THE YEARS 2000 AND 2001
FROM GRANT COUNTY, KANSAS
SYLLABUS BY THE COURT
1. According to K.S.A. 74-2426(c)(4), review of the Kansas Board of Tax Appeals (BOTA) orders about the valuation of real property for ad valorem tax purposes are heard by the district court of the county where the property is located.
2. On appeal, a district court may not substitute its judgment for that of an administrative tribunal. It is restricted to considering whether, as a matter of law, (1) the administrative agency acted fraudulently, arbitrarily or capriciously, (2) the agency's administrative order is supported by substantial evidence, and (3) the agency's action was within the scope of that agency's authority.
3. In reviewing a district court's decision reviewing an agency action, an appellate court must first determine whether the district court observed all the legal requirements and restrictions placed upon it and then make the same review of the administrative agency's action as the district court.
4. BOTA is a specialized agency that exists to decide taxation and valuation issues. Therefore, its decision should be accorded deference and given great weight. But a reviewing court may take corrective steps if it finds that BOTA's interpretation is erroneous as a matter of law.
5. Substantial competent evidence is evidence that possesses something of substance and relevant consequence or furnishes a substantial basis of fact from which issues can reasonably be resolved.
6. A decision by BOTA that is not supported by substantial evidence may be deemed arbitrary or capricious.
7. Because a rebuttable presumption of validity attaches to all administrative agency actions, the burden of proving arbitrary and capricious conduct lies with the party challenging the agency's actions.
8. Under the facts of this case, there is substantial competent evidence supporting the decision of the district court upholding the ruling of BOTA concerning the value of a natural gas processing plant in Grant County for the year 2000. Because there is no evidence in the record concerning the valuation for 2001, BOTA's and the district court's must be reversed for that year's valuation.
Appeal from the Kansas Board of Tax Appeals. Opinion filed December 17, 2004. Affirmed in part, reversed in part, and remanded with directions.
Michael Lennen, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, for appellant.
Douglas P. Campbell, county attorney, for appellee.
Before MARQUARDT, P.J., HILL and McANANY, JJ.
HILL, J.: This appeal requires us to determine if the Jayhawk Natural Gas Processing Plant in Grant County has been properly valued for ad valorem tax purposes for the tax years 2000 and 2001. Upon appeal from the county appraiser, the Kansas Board of Tax Appeals (BOTA) approved the values assessed by the county. In its subsequent review, the district court affirmed the BOTA valuations.
We think there is substantial competent evidence that supports all three valuation conclusions for the year 2000, the county's appraised value, BOTA's order, and the district court's subsequent affirmation. Accordingly, we affirm that portion of the court's order determining the year 2000 value. But, because the county merely adopted the same 2000 year value for the 2001 tax year and failed to take any steps to appraise the plant for 2001, the record is devoid of any evidence to support the 2001 value determination. Therefore, we reverse the district court and BOTA's findings for that tax year and remand the case back to the Grant County Appraiser with directions to begin the appraisal process anew for that year.
Overview
The owner of the Jayhawk Plant, Amoco Production Company, a subsidiary of BP America, completed construction of the plant in 1998 at a cost of $91,935,251. The plant is a cryogenic gas processing facility that was designed to process 450 million cubic feet (Mmcf) of natural gas per day from proprietary Amoco production and third-party gas wells. Amoco operates approximately 2,000 gas wells in the Hugoton Gas Field.
Natural gas is processed in order to "condition" it for sale and to recover valuable constituents contained within the gas stream. During gas processing at the plant, impurities such as water and nitrogen are removed. Helium and various liquid hydrocarbons, known as natural gas liquids (NGL's), are recovered from the raw gas stream. The processed natural gas, or residue gas, is delivered to the Williams Natural Gas Company's pipeline system (Williams). The Jayhawk Plant also features helium recovery, a process known as nitrogen rejection, and propane product fractionation in order to help local sales of propane. Helium and nitrogen gases from the plant are sold to an industrial gas company, Praxair. The remaining "Y-grade" stream is sent through the MAPCO and Koch pipelines.
Amoco estimates the plant's value was $50,000,000 in 2000 and $38,500,000 in 2001. Grant County assessed its value to be the same as its 1999 value, $70,733,660, for both years 2000 and 2001. The value disagreement was informally appealed to the county appraiser and then formally appealed to BOTA. Obtaining no relief, the matter was taken up by Amoco to Grant District Court.
Amoco Claims of Error
Amoco's arguments can be grouped into two areas. First, Amoco argues that Grant County, at the BOTA hearing, failed in four respects to meet its burden of supporting its value determination by a preponderance of the evidence. First, it alleges the county's valuation witness, John Cooper, was not an expert. Second, Amoco thinks that the county's appraisal did not meet the generally accepted appraisal standards found in the Uniform Standards of Professional Appraisal Practice (USPAP). Third, Amoco believes the county's valuation failed to follow the statutory definition of fair market value. Fourth, Amoco contends the county presented to BOTA no real evidence, but only speculation, about the future availability of natural gas supplies. The second group of Amoco's arguments arise because it argues that BOTA was unreasonable and arbitrary when it rejected Amoco's opinion of the plant's value.
In turn then, Amoco contends that the district court erred when it found that the rulings of BOTA were supported by substantial competent evidence and therefore not unreasonable or arbitrary. Amoco also contends that the trial court erred when it ruled that Amoco had failed to sustain its burden in showing a disparity in valuation between the Jayhawk Plant and other nearby gas plants.
Standards of Review
According to K.S.A. 74-2426(c)(4), review of BOTA orders regarding the valuation of real property for ad valorem tax purposes are heard by the district court of the county where the property is located. On appeal, a district court may not substitute its judgment for that of an administrative tribunal. It is restricted to considering whether, as a matter of law, (1) the administrative agency acted fraudulently, arbitrarily, or capriciously, (2) the agency's administrative order is supported by substantial evidence, and (3) the agency's action was within the scope of that agency's authority. See Lacy v. Kansas Dental Board, 274 Kan. 1031, 1040, 58 P.3d 668 (2002). The party who asserts that the agency's decision is invalid, according to K.S.A. 77-621(a)(1), bears the burden of proving the invalidity.
In reviewing a district court's decision reviewing an agency action, we must first determine whether the district court observed all the legal requirements and restrictions placed upon it and then make the same review of the administrative agency's action as the district court. See Lacy, 274 Kan. at 1040.
BOTA is a specialized agency that exists to decide taxation and valuation issues. Therefore, its decision should be accorded deference and given great weight. But a reviewing court may take corrective steps if it finds that BOTA's interpretation is erroneous as a matter of law. See In re Tax Appeal of Family of Eagles, LTD, 275 Kan. 479, 483, 66 P.3d 858 (2003).
January 1, 2000, Valuation
The law requires the county appraiser to appraise all taxable real property each year at its fair market value as of January 1, unless another date is specified by law. (K.S.A. 79-1455.) When a taxpayer challenges BOTA's use of a county's appraisal in assessing the fair market value of property for tax purposes, the reviewing court must determine whether BOTA's valuation was supported by substantial competent evidence and whether BOTA's action was not otherwise unreasonable, arbitrary, or capricious. In re Tax Appeal of Andrews, 18 Kan. App. 2d 311, 314, 851 P.2d 1027, rev. denied 253 Kan. 859 (1993).
Substantial competent evidence is evidence that possesses something of substance and relevant consequence or furnishes a substantial basis of fact from which issues can reasonably be resolved. Depew v. NCR Engineering & Manufacturing, 263 Kan. 15, 26, 947 P.2d 1 (1997). A decision by the Board which is not supported by substantial evidence may be deemed arbitrary or capricious. See In re Tax Appeal of ANR Pipeline Co., 276 Kan. 702, 710, 79 P.3d 751 (2003). An agency's action is arbitrary and capricious if it is without foundation in fact. Sokol v. Kansas Dept. of SRS, 267 Kan. 740, 746, 981 P.2d 1172 (1999). Because a rebuttable presumption of validity attaches to all administrative agency actions, the burden of proving arbitrary and capricious conduct lies with the party challenging the agency's actions. Connelly v. Kansas Highway Patrol, 271 Kan. 944, 965, 26 P.3d 1246 (2001), cert. denied 534 U.S. 1081 (2002).
Amoco argues that Grant County is required by K.S.A. 74-2438 to demonstrate by a preponderance of the evidence the validity and correctness of its valuation of Amoco's industrial property to BOTA. But, according to Amoco it failed in four ways: 1. Cooper, who appraised the plant and testified for the county, was no expert. 2. Cooper's evaluation did not meet USPAP standards. 3. Cooper's work failed to follow the statutory definition of fair market value found in K.S.A. 79-503a. 4. The County gave BOTA incorrect information about the future availability of gas supplies. We examine each claim in order.
1. Cooper's Expertise
One of the rules that governs BOTA's actions, K.A.R. 94-2-2 (a), incorporates our Kansas rules of civil procedure. Therefore, K.S.A. 60-456(b) controls the admission of expert testimony here. It provides:
"If the witness is testifying as an expert, testimony of the witness in the form of opinions or inferences is limited to such opinions as the judge finds are (1) based on facts or data perceived by or personally known or made known to the witness at the hearing and (2) within the scope of the special knowledge, skill, experience or training possessed by the witness."
A decision to admit expert testimony will not be overturned absent an abuse of discretion. Irvin v. Smith, 272 Kan. 112, 125, 31 P.3d 934 (2001). An abuse of discretion must be shown by the party attacking the evidentiary ruling and exists only when no reasonable person would take the view adopted by the factfinder. Jenkins v. T.S.I. Holdings, Inc., 268 Kan. 623, 633-34, 1 P.3d 891 (2000).
Cooper testified he had been a member of the Appraisal Institute since 1974 and that he was certified as a general real property appraiser in both Kansas and Missouri. Employed by the Kansas Department of Revenue Property Valuation Division (PVD) since 1976, Cooper has worked in the areas of oil and gas valuations, commercial and industrial real estate, and special purpose property. From 1979 through 2001, one of Cooper's primary duties has been to oversee the annual update of the PVD oil and gas guide; accordingly, Cooper testified he kept apprized of economic trends in the oil and gas industry. From 1984 through 1991, he completed work associated with the tax equalization of refineries. In addition to appraising the National Helium Plant in 1984, he participated in reviewing an update of the statewide appraisal report in 1996. Also, the county procured Cooper's services under K.S.A. 75-5105a(d), which provides that the director of the PVD is required to assist county appraisers in determining the fair market value of "nonstate assessed properties, the valuation of which requires specialized technical knowledge."
Amoco had the opportunity to voir dire Cooper before the Board in order to disclose any deficiencies in Cooper's ability to testify as an expert witness. In short, it does not appear that BOTA abused its discretion in determining that Cooper was an expert witness for purposes of offering an opinion of the value of the Jayhawk Plant. Employing our standard of review, we cannot say that no reasonable person would take the view of BOTA here and accept the testimony of Cooper.
2. USPAP Compliance
Amoco alleges that Cooper failed not only to correctly employ the recognized technique for appraising gas processing plants, the income approach, but also chose to disregard the approach. Amoco lists "numerous material departures from USPAP" committed by Cooper who basically "disregarded what he admitted were key elements to the income approach."
The Kansas Legislature adopted the USPAP with the enactment of K.S.A. 79-506. Amoco maintains Cooper violated USPAP Standard 1, Standards Rule 1-1(a),1-1(b), 1-2(f), and Standards Rule 1-4(c), as provided below:
"In developing a real property appraisal, an appraiser must identify the problem to be solved and the scope of work necessary to solve the problem, and correctly complete research and analysis necessary to produce a credible appraisal." USPAP Standard 1, Real Property Appraisal Development, Uniform Standards of Professional Appraisal Practice, p. 13 (1999).
"In developing a real property appraisal, an appraiser must:
(a) be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal;
(b) not commit a substantial error of omission or commission that significantly affects an appraisal." Standards Rule 1-1(a) and (b), USPAP.
. . . .
"In developing a real property appraisal, an appraiser must:
. . . .
"(f) identify the scope of work necessary to complete the assignment." Standards Rule 1-2(f), USPAP, p. 15.
"In developing a real property appraisal, an appraiser must collect, verify, and analyze all information applicable to the appraisal problem, given the scope of work identified in accordance with Standards rule 1-2(f).
. . . .
"(c) When an income approach is applicable, an appraiser must:
i. analyze such comparable rental data as are available to estimate the market rental of the property;
ii. analyze such comparable operating expense data as are available to estimate the operating expenses of the property;
iii. analyze such comparable data as are available to estimate rates of capitalization and/or rates of discount; and
iv. base projections of future rent and expenses on reasonably clear and appropriate evidence." Standards Rule 1-4, USPAP, p. 16.
Importantly, Standards Rule 1-1 "contains binding requirements from which departure is not permitted." USPAP, p. 13. However, Standards Rule 1-4 "contains specific requirements from which departure is permitted." USPAP, p. 16.
Cooper's 45-page written appraisal included a certification that the "analyses, opinions, and conclusions were developed, and this report prepared, in conformity with the Uniform Standards of Appraisal Practice," and "the requirements of the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute." Specifically, Cooper's appraisal began with a statement of assumptions and limiting conditions. The report continued with factual data, including identification of the property, statement of ownership, purpose of the appraisal, definition of market value, property rights appraised, identity of the client, intended use of the appraisal, scope of the appraisal work involved, date of appraisal, date of valuation estimate, zoning, history of the property appraised, region description, and a discussion of future production of the Hugoton Gas Field. Cooper's appraisal included a chart of Amoco gas production from the Hugoton Gas Field for 1999 and 2000 and information regarding a proposed gas line. A property description followed, along with information on the plant's manufacturing process and accrued depreciation. Under the analysis section, Cooper included 10 pages of information regarding the gas processing industry, the outlook for natural gas, gas processing statistics for 1995 through 2000, and a review/forecast from 1991 through 2000. After considering the highest and best use of the property, Cooper provided his valuation of the plant after giving consideration to the three approaches to value: sales comparison, cost, and income.
Under the income approach, Cooper disclosed that the information he relied upon was "referenced in Interrogatory No. 20" in addition to that provided to Grant County by the BP Amoco Corporation tax department. Cooper concluded the income approach was not relevant "because of the information limitations." He continued:
"Industry is able to scrutinize income projections . . . because of the availability of proprietary information made so in anticipation of acquiring or disposing such assets. Such information is not available for this report. The information used in the income capitalization approach is not considered as reliable as it should be in this approach. The cost approach is the better indication of value because the plant is new and properly improves the site to its highest and best use, a criteria that is recognized as the best indication of value for special purpose industrial manufacturing properties."
BOTA noted that Cooper had "physically inspected the subject property prior to completion of his appraisal." The district court determined that Cooper was "familiar with and understands the [USPAP]." Cooper testified regarding the requirements of completing an appraisal in compliance with USPAP and detailed actions taken in completing the appraisal report. He further stated that he considered
"the reserve's production decline rates, plant process type, the actual plant performances, its history, and it doesn't have any history to speak of, mechanical state of the plant equipment, and the extent of deferred maintenance, historical operating cost, it has none, contractual arrangement with gas producers we did not have, ownership of the gathering system and the degree of competition from other gatherers and processors, but not the forecasted gas and NGL prices."
We conclude that the record discloses substantial competent evidence that supports the district court's finding that Cooper understood and applied USPAP when completing his valuation on behalf of the county and that any deviations from USPAP found by BOTA were deemed not to be materially detrimental to the opinion rendered by Cooper. We are mindful that this court will uphold findings supported by substantial evidence even if the record could have also supported contrary findings. See Foos v. Terminix, 31 Kan. App. 2d 522, 528, 67 P.3d 173 (2003), aff'd 277 Kan. 687, 89 P.3d 546 (2004).
3. Use of Statutory Definition of Fair Market Value
Without specifying which statutory factors Cooper failed to use, Amoco argues that Grant County's valuation did not adhere to the statutory definition of fair market value because Cooper did not correctly perform the income approach, and they add that Cooper's cost approach was flawed. The statute in question, K.S.A. 79-503a, defines fair market value as "the amount in terms of money that a well informed buyer is justified in paying and a well informed seller is justified in accepting for property in an open and competitive market, assuming that the parties are acting without undue compulsion." The statute also provides an extensive list of factors to be considered by county appraisers when determining fair market value.
"Sales in and of themselves shall not be the sole criteria of fair market value but shall be used in connection with cost, income and other factors including but not by way of exclusion:
(a) The proper classification of lands and improvements;
(b) the size thereof;
(c) the effect of location on value;
(d) depreciation, including physical deterioration or functional, economic or social obsolescence;
(e) cost of reproduction of improvements;
(f) productivity;
(g) earning capacity as indicated by lease price, by capitalization of net income or by absorption or sell-out period;
(h) rental or reasonable rental values;
(i) sale value on open market with due allowance to abnormal inflationary factors influencing such values;
(j) restrictions imposed upon the use of real estate by local governing bodies, including zoning and planning boards or commissions; and
(k) comparison with values of other property of known or recognized value. The assessment-sales ratio study shall not be used as an appraisal for appraisal purposes. K.S.A. 79-503a.
"The appraisal process utilized in the valuation of all real and tangible personal property for ad valorem tax purposes shall conform to generally accepted appraisal procedures which are adaptable to mass appraisal and consistent with the definition of fair market value unless otherwise specified by law."
When we examine the record we see that Cooper's appraisal:
identified the property and provided its size,
indicated the purpose of the appraisal,
noted the location of the plant in connection with the Hugoton Gas Field and generally described the Hugoton region,
indicated the reproduction cost new and allowed for depreciation,
addressed productivity by including an overview of gas processing production statistics for 1995 through 2000,
considered the plant's productivity in making adjustments for functional and external obsolescence,
considered the three approaches to value assessment, cost, income, and sales comparison,
completed the income approach with the information given him,
calculated the cost approach for the value of the property, and
noted any restrictions imposed on the property.
This is substantial competent evidence that supports the district court's finding that Cooper understood that the purpose in completing the appraisal was to estimate the fair market value of the Jayhawk plant in compliance with K.S.A. 79-503a.
Mindful of our duties, we will not weigh evidence at this stage:
"'"When findings of fact are attacked for insufficiency of evidence or as being contrary to the evidence, the duty of the appellate court extends only to a search of the record to determine whether substantial competent evidence exists to support the findings. An appellate court will not weigh the evidence or pass upon the credibility of the witnesses. Under these circumstances the reviewing court must review the evidence in the light most favorable to the party prevailing below. [Citations omitted.]"'" In re Tax Appeal of Colorado Interstate Gas Co., 276 Kan. 672, 692, 79 P.3d 770 (2003).
BOTA noted that Cooper acknowledged that the method of valuation most utilized by those in the industry was the income approach if a reliable operating history was available. Ultimately, BOTA agreed that the Jayhawk Plant's income and expense history "was not extensive enough to be probative of the subject property's fair market value." Cooper testified that because the plant was less than 2 years old, with only 1 year of complete operating history available, insufficient income and expenses existed to provide reasonable net incomes which could be capitalized into value. Cooper used historic information and forecasting provided by Amoco's tax representative to the county to arrive at a value of $65,000,000 using this approach. Nevertheless, he did not want to "base my future on using that approach as a final value estimate for this property." Therefore, when correlating the values arrived at by considering the cost and income approaches, Cooper valued the plant at $70,000,000.
In arriving at his value under the cost approach, Cooper looked at the construction costs of various gas processing plants and compared the cost of constructing the Jayhawk Plant with the costs of building the same type of gas plants in the same price range and time span. Cooper arrived at a replacement cost new for the Jayhawk Plant as of January 1, 2000, of $95,670,000 after allowing for inflation. Cooper did not account for any physical depreciation as he estimated the plant to effectively be "new." Cooper allowed a 5% functional obsolescence, while noting that the plant was a state-of-the-art facility, by calculating the difference in percentage between the Jayhawk Plant's throughput for 1999 and the prior year average throughput for Kansas natural gas plants.
Cooper explained that operating capacity is compared to the design capacity when accounting for external/economic obsolescence in manufacturing properties. After allowing 5% for the functional obsolescence, the difference between the plant's 1999 throughput and its design capacity was 23%. Thus, Cooper deducted 23% for external obsolescence. Cooper opined that the throughput of the predecessor plant in the past 5 years had been 85%; therefore, he conceivably could have compared the Jayhawk Plant's 1999 throughput percentage, 73% to 85%, in order to obtain the adjustment for external obsolescence. He stated he gave the taxpayer "the benefit of the doubt" and applied a much greater reduction by comparing the Jayhawk's operating capacity or percentage throughput to its full design capacity.
Even Amoco's expert, Spletter, admitted that while the cost approach is not typically relied on in the industry by willing buyers or sellers, she testified that "within the ad valorem property tax situations, the cost approach is very often looked upon. And if it's done rigorously, it can provide a good indicator of value."
We think, therefore, that substantial competent evidence appears to support BOTA's determination that Cooper's appraisal, which relied on the cost approach, provided credible evidence in support of its valuation. Cooper understood the general importance of the income approach when appraising the Jayhawk plant; however, he explained why he did not deem the income approach to provide a credible value in this case.
4. Future Gas Supplies
Amoco forcefully argues that the county provided BOTA with pure speculation about gas reserves in the Hugoton Gas Field and mistaken assumptions about the ability of new vacuum gas recovery operations and a planned new Williams pipeline to increase gas production. Thus, in Amoco's opinion, Cooper's appraisal could not be considered substantial competent evidence. We think that argument misstates Cooper's valuation and fails to take into account testimony from others that was considered by BOTA.
BOTA noted that Amoco and the county disagreed on the remaining life of the Hugoton Gas Field, results from vacuum operations, and the probable impact on natural gas production from a new pipeline. The county's witness, Ronald Cook, a consulting petroleum engineer with 40 years' experience working in the Hugoton Gas Field, testified to BOTA that the Hugoton Gas Field had a 20-year supply of recoverable reserves. Cook's testimony that the field's production had been dropping due to dangerously low pressures was also recounted by BOTA. Furthermore, BOTA acknowledged that engineers provide range estimates from 3 to 12 trillion cubic feet of gas remaining in recoverable reserves in the field. Finally, it noted Cook's testimony that the amount of recoverable reserves may be affected by new drilling technology, such as vacuum operations.
Likewise, BOTA recounted testimony from Steve Ruehle that substantial process modifications would have to be implemented at the Jayhawk Plant once the inlet volume at the plant reached a certain level. Additionally, BOTA noted that "Amoco's Reservoir Engineer," Richard Dixon, testified that Amoco's proprietary wells have continued to decline in production at a rate of 12% annually, even though Amoco employs an aggressive recovery program. Further, BOTA acknowledged that Dixon disagreed with the county's witness, Cook, regarding the impact that vacuum operations would have on the life of the Hugoton Gas Field. Dixon also stated that vacuum operations were not feasible for Amoco's wells. It is clear, therefore, that in arriving at its conclusion, BOTA was not just relying upon the testimony of Cooper.
Cooper pointed out in his testimony that in arriving at his valuation he did rely on some of the information from Cook regarding reservoir engineering and decline in production in the Hugoton Gas Field. Even Amoco, who contended that Cook was not qualified to render an opinion of value regarding a gas processing plant, had no difficulty with Cook's qualifications regarding testimony he offered regarding matters of reserve valuation, decline rates, and rate profiles from the Hugoton Gas Field.
More importantly, Cooper also stated that while he looked at the future supply from the Hugoton Gas Field, his valuation was based more on history. Cooper testified that he included information regarding future pipeline supplies and vacuum operations in the report "solely to indicate that there will be changes in the future, and anybody in business is going to be anticipating changes." Cooper's adjustments for obsolescence under the cost approach were based on Kansas average throughput percentages and the Jayhawk Plant's 1999 throughput. Thus, Amoco's argument that Cooper's appraisal could not constitute s