November 2013

County showed courage in battle with Kinder Morgan

Suppose you, the homeowner, wanted to make a little extra scratch, and decided to turn your house’s plumbing into a separate holding company, then charge yourself for its use, sort of like an additional utility bill – even though you were actually just transferring money from one pocket to another. Suppose this ploy was creating a not-so-little property tax break for you . . . .

A recent decision of the Colorado Board of Assessment Appeals, which ultimately could mean several million dollars in additional revenues for Montezuma County, considered an analogous situation. This one involved two businessmen named Mr. Kinder and Mr. Morgan and the gas-production and pipeline companies in which they own major interests – Kinder Morgan CO2 Company, formerly Shell CO2 Company, which they’ve wholly owned since 2000, and Cortez Pipeline Company, with both listed as officers and in which Kinder Morgan currently owns 50 percent interest. (Cortez Pipeline was started in 1982 by Shell and Mobil Cortez Pipeline, which still owns 37 percent of it.)

On Oct. 28, the Montezuma County commissioners learned that the county had won a victory in a battle with the giant carbon-dioxide company. It’s good news for them and for the county as a whole.

The case had hinged on how KM calculated and reported its revenues.

Montezuma County Assessor Mark Vanderpool had argued that for purposes of assessing Kinder Morgan’s production value, the two companies (KM and Cortez Pipeline) should be considered one and the same, meaning KM could not lower the amount on which it was taxed by listing tariffs paid to Cortez Pipeline as a business expense.

Together, Kinder Morgan and Mobil tariffs paid to Cortez Pipeline account for more than 96 percent of its revenues, according to the BOAA’s ruling issued Oct. 18. In other words, the pipeline is used almost exclusively for shipping the gas they extract from the McElmo Dome CO2 fields, one of the largest known reservoirs of this gas in the world, and one where KM is even now preparing to drill new exploratory wells.

Based on an audit of KM’s self-reported value for 2008, Vanderpool upped its tax bill by about $2 million for that year alone.

It was in 2008 when the company’s shrinking self-reported production value aroused Vanderpool’s curiosity, prompting him to hire energy-tax expert Mary Ellen Denomy to examine KM’s books at the company’s headquarters in Houston, Texas.

Denomy calculated KM’s omitted production value for that year added up to about $40 million, and KM admitted it had “inadvertently” neglected to report about another $10 million, Vanderpool explained to the Free Press.

The company paid the difference in 2009, but then appealed to the Montezuma County Commission last December for an abatement, which was denied. After further negotiations failed to reach an agreement, the case was argued before the BOAA.

The two issues that were considered and decided in the county’s favor, Vanderpool explained to the commission Oct. 28, were whether his office had the power to retroactively alter assessments and impose “omitted value,” and whether Kinder- Morgan has a substantial “relationship” with Cortez Pipeline, which transports its CO2 to Texas, where it is used to extract the remaining dregs of crude oil from otherwise tapped-out wells.

After considering thousands of pages of documents and two days of testimony, the BOAA sided with the county, meaning Kinder Morgan has to pay at the higher assessed valuation unless it successfully appeals the decision to the Colorado Court of Appeals, a process that must be initiated within 45 days.

“The board did not find the Petitioner’s arguments convincing,” pretty much told the story of the ruling.

First off, under state law county assessors are expressly authorized to review oil and gas companies’ self-reported worth, the BOAA stated in its mercifully short (four-page) decision, and second, KM has an obvious relationship with Cortez Pipeline.

Of course, Kinder Morgan has the option of appealing this decision and both sides have the option of further appealing to the Colorado Supreme Court. So Vanderpool has cautioned other entities that benefitted from the new methodology of assessing such assets to keep this in mind rather than spend the additional bucks just yet. (Former county Administrator Ashton Harrison created a contingency fund in case the county’s share of the revenues – about a half-million bucks – ultimately had to be refunded.) Other entities’ shares ranged from $942,000 for Montezuma-Cortez School District Re-1 to $223 to the Sylvan Cemetery District.

When KM coughed up the $2 million in 2009, Vanderpool sent letters to the recipients warning them not to count their chickens just yet and hold the additional revenue in reserve. “Whether they did or not I have no idea,” he said.

If KM should decide to appeal, Vanderpool said, “I think Montezuma County would be obligated to present its case.”

The commissioners appeared to concur, with Chairman Steve Chappell commending him for his persistence.

“Mark had to go out on a limb,” Chappell said. “It had to be a little unnerving to take on the big one.” KM is the largest taxpayer in the county, accounting for about 40 percent of its total property-tax revenue.

Chappell was right on target. It was a gamble to go after KM, not knowing the outcome and risking the additional expenses of taking the issue to court.

Vanderpool emphasized the decision was not an occasion for gloating, praised KM for its cooperation and gave a large share of the credit to Denomy and attorney Nathan Keever, who represented the county before the BOAA.

Should KM decide against further appeals, it has the option of deducting 87 percent of the additional taxes, or about $1.7 million, from its state severance tax, if it had filed for this within the two-year deadline.

Vanderpool explained that auditing Kinder Morgan’s books for the past four years would mean another three-week stint in Houston for Denomy, since the company would not provide the confidential information otherwise. He has included this expense along with attorney’s fees – about $30,000 in all – in his budget request for next year.

He said he’d been informed by KM tax manager Walker Knight that the company had reduced the pipeline tariff it claimed in those subsequent years, but that if it were only half the 2008 omitted value, that would mean an additional $1 million for the county’s taxing districts.

We commend Vanderpool for his stout initiative and courage in reassessing one of the county’s largest taxpayers, along with the former and current county commissioners and former county attorney Bob Slough, all of whom strongly supported Vanderpool’s effort.

For Kinder Morgan, which is reportedly planning on spending around $750 million to upgrade its facilities here, $2 million would seem to be a small price to pay for what is obviously a profitable enterprise.

But for the sprawling, cash-strapped county, it could mean better schools and roads and a feeling everyone is paying their fair share.