WILLIAMS PRODUCTION RMT COMPANY, Appellant (Petitioner), v. STATE of Wyoming DEPARTMENT OF REVENUE, Appellee (Respondent), 107 P.3d 179

VOIGT, Justice. [¶ 1] This is a W.R.A.P. 12.09(

b) certification of a petition for review of administrative action in which the underlying question is the point of valuation for severance tax purposes of coal bed methane gas. We affirm the determination of the Wyoming State Board of Equalization. BACKGROUND [¶2] Barrett Resources Company (Barrett) began producing coal bed methane gas (CBM) in Campbell County, Wyoming, in 1999. Williams Production RMT Company (Williams) is Barrett’s successor in interest through merger. CBM is subject to the severance tax imposed in Wyo. Stat. Ann. § 39-14-203 (LexisNexis 2003), the relevant portions of which read as follows: (

a) Taxable event. The following shall apply: (

i) There is levied a severance tax on the value of the gross product extracted for the privilege of severing or extracting crude oil, lease condensate or natural gas in the state. The tax imposed by this subsection shall be in addition to all other taxes imposed by law including, but not limited to, ad valorem taxes imposed by W.S. 39-13-101 through 39-13-111. (

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; * * * (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^] Pursuant to Wyo. Stat. Ann. §§ 39 — 13— 102(m)(

i) and 39-13-103(b)(iv) (LexisNexis 2003), the same valuation is used for ad valorem tax purposes. [¶ 3] In 2001, the Wyoming Department of Audit (DOA) began an audit of Barrett’s 1999 CBM production. The audit was completed after Williams succeeded to Barrett’s interests. At the conclusion of the audit, the Department of Revenue (Department) determined that Williams owed an additional $170,747.15 in severance taxes, plus interest of $58,304.00, and the Department certified to Campbell County an increase in taxable value for ad valorem tax purposes of $3,392,635.00.

Williams paid the severance taxes under protest and filed a timely appeal with the Wyoming State Board of Equalization (Board) on September 23, 2002. After a contested case hearing, the Board affirmed the Department’s determination. Williams then filed a petition for review in the district court pursuant to Wyo. Stat. Ann. § 16-3-114(a) (LexisNexis 2003). The district court subsequently granted the Department’s motion to certify the matter to this Court pursuant to W.R.A.P. 12.09(b), and this Court ae-cepted certification on March 17, 2004. Oral argument was heard on October 4, 2004.

ISSUES [¶ 4] We rephrase Williams’ presented issues as follows: 1. Whether the Board acted arbitrarily, capriciously, without substantial evidence, and in violation of the Wyoming Constitution when it held that Western Gas Resources’ facility is not a processing facility and, therefore, the point of valuation for CBM is not located at the custody transfer meter? 2.

Whether the Board acted arbitrarily, capriciously, without substantial evidence, and in violation of the Wyoming Constitution when it held that the triethylene glycol dehydrator located in Western Gas Resources’ facility is the initial dehydrator and, therefore, the point of valuation for CBM? 3. If the Board is correct in determining that the legislature did not intend the oil and gas statutes in Wyo. Stat. Ann. §§ 39-14-201, et seq. (LexisNexis 2003), to apply to CBM, should CBM be taxed as an “other valuable deposit” under Wyo. Stat. Ann. §§ 39-14-701, et seq. (LexisNexis 2003)? 4.

Whether the Board acted arbitrarily, capriciously, without substantial evidence, and in violation of the Wyoming Constitution when it held that Williams is not entitled to deductions for all processing and transportation fees incurred downstream of the Department’s selected point of valuation for Barrett’s CBM? 5.

Whether the Board acted arbitrarily, capriciously, without substantial evidence, and in violation of the Wyoming Constitution when it held the assessment of interest on the alleged underpayment of taxes was proper? [¶ 5] We rephrase the Department’s presented issues as follows: 1.Whether the Board correctly affirmed the Department’s determination that the point of valuation for Barrett’s 1999 CBM production was the outlet of the triethylene glycol dehydrator pursuant to Wyo. Stat. Ann. § 39-14-203(b)(iv)? 2.

Whether the Board correctly affirmed the Department’s determination that dehydrators or compressors, individually or in combination, did not comprise a “processing facility” pursuant to Wyo. Stat. Ann. § 39-14-203(b)(iv)? 3. Whether the Board correctly affirmed the Department’s determination that separators and compressors are not “dehydrators” pursuant to Wyo. Stat. Ann. § 39-14-201(a)(vii) and are not the “initial dehydrator” pursuant to Wyo. Stat. Ann. § 39-14-203(b)(iv)? 4. Whether the Board correctly affirmed the Department’s and the DOA’s calculation of transportation expenses? 5.

Whether the Board reasonably concluded that Williams failed to sustain its burden of proving that the Department’s calculation of transportation expenses was incorrect? 6. Whether the Board correctly affirmed the Department’s assessment of interest upon unpaid taxes? STANDARD OF REVIEW [¶ 6] Wyo. Stat. Ann. § 16-3-114 provides for judicial review of administrative agency action. In particular, Wyo. Stat. Ann. § 16-3-114(c) (ii) requires the reviewing court to “[hjold unlawful and set aside agency action, findings and conclusions found to be:” (

A) Arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law; (

B) Contrary to constitutional right, power, privilege or immunity; (

C) In excess of statutory jurisdiction, authority or limitations or lacking statutory right; (

D) Without observance of procedure required by law; or (

E) Unsupported by substantial evidence in a case reviewed on the record of an agency hearing provided by statute. [¶ 7] We have held that “the substantial evidence test is the appropriate standard of review in appeals from [Wyoming Administrative Procedure Act] contested case proceedings when factual findings are involved and both parties submit evidence.” Newman v. State ex rel. Wyoming Workers’ Safety and Compensation Div., 2002 WY 91, ¶ 22, 49 P.3d 163, 171 (Wyo.2002).

In addition, [w]hen we are reviewing cases [that] have been certified to us pursuant to W.R.A.P. 12.09(b), we apply the appellate standards [that] are applicable to a reviewing court of the first instance. Hepp v. State ex rel. Wyoming Workers’ Compensation Division, 881 P.2d 1076, 1077 (Wyo.1994). When we are conducting our review, “[o]ur task is to examine the entire record to determine whether substantial evidence supported the hearing examiner’s findings. We will not substitute our judgment for that of the hearing examiner when substantial evidence supports his decision.

Substantial evidence is relevant evidence [that] a reasonable mind might accept in support of the agency’s conclusions.” Latimer v. Rissler & McMurry Co., 902 P.2d 706, 708-09 (Wyo.1995) (citations omitted). “We do not, however, defer to an agency’s conclusions of law. ‘Instead, if the “correct rule of law has not been invoked and correctly applied, ... the agency’s errors are to be corrected.” ’ Thunder Basin Coal Company v. Study, 866 P.2d 1288, 1291 (Wyo.1994) (quoting Devous v. Wyoming State Board of Medical Examiners, 845 P.2d 408, 414 (Wyo.1993)).” Celotex Corporation v.

Andren, 917 P.2d 178, 180 (Wyo.1996). JM v. Department of Family Services, 922 P.2d 219, 221 (Wyo.1996). The burden of proving a lack of substantial evidence is upon the party appealing an agency’s determination. Mountain Fuel Supply Co. v. Public Service Com’n of Wyoming, 662 P.2d 878, 883 (Wyo.1983). And specifically, the burden of proof with respect to tax valuation is on the party asserting an improper valuation. Amoco Production Co. v. Wyoming State Bd. of Equalization, 899 P.2d 855, 858 (Wyo.1995) (quoting Teton Valley Ranch v. State Bd. of Equalization, 735 P.2d 107, 113 (Wyo.1987)). [¶ 8] “Statutory

interpretation is a question of law and is reviewed de novo.” State ex rel. Wyo. Dept. of Revenue v. Powder River Coal Co., 2004 WY 54, ¶ 5, 90 P.3d 1158, 1159 (Wyo.2004). When interpreting statutes, we follow an established set of guidelines. First, we determine if the statute is ambiguous or unambiguous. A statute is unambiguous if its wording is such that reasonable persons are able to agree as to its meaning with consistency and predictability. Unless another meaning is clearly intended, words and phrases shall be taken in their ordinary and usual sense. Conversely, a statute is ambiguous only if it is found to be vague or uncertain and subject to varying

interpretations. Parker Land & Cattle Co. v. Wyoming Game & Fish Comm’n, 845 P.2d 1040, 1042-43 (Wyo.1993). Powder River Coal Co., 2004 WY 54, ¶ 5, 90 P.3d at 1160. DISCUSSION Point of Valuation [¶ 9] The fair market value of CBM for severance and ad valorem tax purposes is determined “after the production process is completed.” Wyo. Stat. Ann. § 39-14-203(b)(ii). The present controversy arises from application of Wyo. Stat.

Ann. § 39-14-203(b)(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[.] [¶ 10] 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. [¶ 11] The progression of CBM from coal seam to commercial pipeline is a complex process involving extraction, gathering, processing, and transportation.

Numerous separate activities occur throughout the process, including, as a result of CBM’s association with water in the ground, dehydration. Barrett’s CBM is gathered from separate wellheads in a spoke-and-wheel system of individual pipelines. The CBM passes through well meters at a central delivery point. Next, the CBM passes through a nearby custody transfer meter, where custody and possession is transferred to Western Gas Resources (Western).

The CBM then flows through Western’s initial transportation related compressor, and then through Western’s low-pressure pipeline a distance of about five miles, where it then passes through Western’s reciprocating compressors and a triethylene glycol (TEG) dehydrator. From that location, the CBM then enters either the Fort Union or the MIGC commercial pipeline. [¶ 12] The Department has determined that the correct point of valuation for Barrett’s CBM is at the outlet to the TEG dehydrator. Williams counters with two alternative theories: (1) if the TEG dehydrator is the “initial dehydrator” under Wyo. Stat.

Ann. § 39-14-203(b)(iv), then the point of valuation should be at the custody transfer meter because the TEG dehydrator is located within a “processing facility;” and (2) the TEG dehydrator is not the “initial dehydrator” because dehydration also occurs within both the central delivery point and the initial transportation related compressor. [¶ 13] The Board’s Findings of Fact, Conclusions of Law, Decision and Order is a document containing 170 separate numbered paragraphs. (See Appendix A as attached).

We have reviewed the findings and conclusions, along with the record citations contained therein, and we conclude that the Board properly affirmed the Department’s determination that the point of valuation should be the outlet to the TEG dehydrator. [¶ 14] Rather than reiterate all of the Board’s findings that support its conclusion, we will simply note some of the findings and underlying facts we find to be significant.

For instance, when Barrett first responded to the DOA concerning the upcoming audit, it identified no dehydrators in the system upstream from the TEG dehydrator and it made no reference to a “processing facility.” Later, in response to a specific request from the DOA for information, Barrett replied that “[t]here are no dehydrators at the wells, the [central delivery points], or the compression stations.” And during a later conference between DOA and Barrett representatives, Barrett specified that the dehydrator was located at the “booster station” after the “booster compressor.” Judging from Williams’ own schematic drawing of Barrett’s system, this clearly indicates the TEG dehydrator.

Even after the merger with Williams, Barrett employees identified to the DOA the TEG dehydrator as the initial dehydrator. [¶ 15] When Williams’ representatives took over dealings with the DOA, they perpetuated Barrett’s position that the TEG dehydrator was the initial dehydrator. They added the contention, however, that the portion of Western’s facilities where the TEG dehydrator was located was a “processing facility” and, therefore, inasmuch as dehydration took place within a processing facility, the point of valuation should be the inlet to the initial transportation related compressor.

But significantly, Williams did not argue at the time that the initial dehydrator was anything other than the TEG dehydrator. [¶ 16] The DOA did not accept Williams’ theory that the described portion of Western’s facilities was a “processing facility.” In accepting the DOA’s position, the Board de~ scribed the evidence upon which the DOA relied: 40. The auditors were not persuaded by this statement of position.

For a variety of reasons, [the DOA representative] disagreed that the Barrett gas was pro-cessed_Barrett had not reported a processing deduction on its state tax forms-In a federal royalty audit, Barrett had reported the gas as unprocessed, and claimed no processing allowance.... The engagement letter had requested documentation of processing costs, but none was provided....

Barrett never provided any processing agreements or plant statements, nor were the auditors advised of a plant name or facility at which the gas was processed.... [The DOA representative] did not receive any construction and operating agreements. She did not receive settlement statements to indicate the segregation and sale of liquid natural gas products, or byproducts such as sulfur.... [The DOA representative] had previous experience with gas processing facilities such as Whitney Canyon. See Union Pacific Resources Company et al, Docket No. 2000-147, 2003 WL 21774603 (Wyo.St.Bd.Eq.).

She had an understanding of typical gas processing facilities, and she saw no evidence of such facilities in this case. [¶ 17] 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. [¶ 18] However, we can look, as the Board did, to the definition of “natural gas” for purposes of taxation for some insight into the legislative intent as to what was meant by “processing” in this context. Wyo. Stat.

Ann. § 39-14-201(a)(xv) provides that “[fjor the purposes of taxation, the term natural gas includes products separated for sale or distribution during processing of the natural gas stream including, but not limited to plant condensate, natural gas liquids and sulfur[.]” This language implies that the legislature understood processing would separate certain products from the natural gas stream. Thus a processing plant logically would be a facility constructed to perform the function of removing such products.

The TEG dehydrator would not constitute such a facility. [¶ 19] In addition, when construing technical terms contained within statutes, we look to the meaning ascribed to those terms in the applicable field. Wyo. Stat. Ann. § 8-1-103(a)© (LexisNexis 2003); Amoco Production Co. v. State, 751 P.2d 379, 382-83 (Wyo.1988). A noted authority in the oil and gas industry indicates that a processing plant is one that removes liquefiable hydrocarbons from wet gas or casing-head gas. Howard R. Williams & Charles J. Meyers, Oil and Gas Law 833 (2003).

This accepted meaning of the term “processing facility” within the industry most likely explains why neither Barrett nor Williams considered the TEG dehydrator to be a processing facility before attempting to achieve a more favorable point of valuation for their CBM production. [¶20] It follows that, unless the TEG dehydrator was not the initial dehydrator, its outlet was the proper point of valuation. This conclusion, contained in the Department’s final determination, apparently induced Williams to “prepare[ ] a new approach to the dehydrator definition.” “Dehydrator” is defined at Wyo. Stat.

Ann. § 39-14-201(a)(vii) as “a device which removes water vapor that is commonly associated with raw natural gas[.]” Williams’ quest became to show that equipment in the central delivery points, as well as in the initial transportation related compressor, acted as dehydrators, which would make the appropriate point of valuation the custody transfer meter, rather than the TEG dehydrator. [¶ 21] Williams hired Bret Rhinesmith to evaluate its theory.

Rhinesmith’s testimony at the contested case hearing revealed that “the function of removing water is ubiquitous in coalbed methane equipment and piping.” The Board recited Rhinesmith’s testimony that water vapor is separated from the CBM in the headers located in the central delivery points, that water vapor content of CBM decreases after passing through the screw compressor in the initial transportation related compressor, and that water removal occurs throughout the entire sequence of equipment from wellbore to the outlet of the TEG dehydrator. [¶ 22] 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. [¶23] 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. Deduction of Expenses [¶ 24] Intertwined with Williams’ point of valuation argument is a separate argument that the Department incorrectly determined allowable expense deductions. In consonance with its theory that the point of valuation was at the custody transfer meter, Barrett had deducted all costs associated with Western’s services.

The Department’s determination that the correct point of valuation was the outlet of the TEG dehydrator required a recalculation of allowable expenses. [¶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 a gas gathering agreement, and $0.14 was paid for transportation and other services on the MIGC 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. [¶27] Williams contends that these conclusions were not supported by substantial evidence and that the Board acted arbitrarily and capriciously.

Williams argues that Barrett was statutorily entitled to deduct all transportation fees downstream of the Department’s selected point of valuation, including fuel charges on the MIGC and Fort Union pipelines and all transportation fees incurred downstream of those pipelines.

Further, Williams contends that the DOA’s audit worksheets showed that the DOA acknowledged these fees and that the Department presented no evidence as to why such fees were not legitimate transportation deductions. [¶ 28] The Board’s refutation of Williams’ position is partly based upon evidence supporting the position of the DOA and the Department, and partly based upon Williams’ failure to meet its burden of proof.

As with the point of valuation issue, we will not reiterate the Board’s complete thought process, which is revealed in the attached Appendix A, particularly in paragraphs 16-17, 26, 32-33, 35, 37, 42-45, 73-79, and 148-162. We will, however, discuss some of the pertinent reasoning. [¶ 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 nevertheless 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. [¶ 30] Williams’ next major issue is the alleged failure of the DOA and the Department to allow deductions for transportation charges to points of sale downstream from Glenrock. The Board found that “the evidence supporting this conclusion is negligible.” Specifically, the Board noted that Williams had not called any witnesses who could speak to possible sales beyond Glen-rock, and also noted that this issue was not raised until after the final letters were sent by the DOA and the Department.

Further, the Board found that the inferences of such sales contained in the testimony of Williams’ representative were entitled to little weight because they were not supported by the evidence. Instead, the Board’s findings relied upon the fact that the DOA had tied invoices to sales summaries in accepting Barrett’s own representation that Glenrock was the point of sale. [¶ 31] Not surprisingly, the Board’s conclusions mirrored its findings as to these issues.

The Board concluded that Williams had failed in its burden of going forward and in its burden of persuasion, meaning the burden never shifted to the Department to prove its determinations were correct. We affirm the conclusions of the Board in respect to this issue. The record evidence showing Glenrock to be the point of sale included Barrett’s own representations, as well as the auditors’ findings based upon review of invoices and sales summaries. Evidence to the contrary consisted only of a Williams’ witness’s suggestion that the records showed “inferences” that such sales took place. Interest [¶ 32] Wyo. Stat.

Ann. § 39-14-208(c) (ii) provides for the collection of interest on delinquent severance taxes “when a taxpayer or his agent knew or reasonably should have known that the total tax liability was not paid when due[.]” Williams’ position is that “Barrett did not and could not have predicted [the Department’s]

interpretation of the natural gas valuation and tax statutes would be so radically different from its own.” Williams supports this position with references to the Department’s refusal to supply a copy of an attorney general’s memorandum regarding taxation of CBM, and to the Board’s finding that the statutes are ambiguous.

Finally, Williams claims that “[t]he obvious complexity of the issues surrounding the [point of valuation] for this ‘new process’ of natural gas production make it clear that it was reasonable for Barrett to interpret the statutes as it did and assessment of interest is inappropriate under these circumstances.” [¶ 33] The Board emphasized three points in affirming the Department’s assessment of interest: First, Wyo. Stat. Ann. § 39-14-208(c)(iv) requires the assessment of interest on delinquent taxes.

Second, in describing their own facilities and those of Western, no Barrett employee characterized the booster compressor and TEG dehydrator as a processing facility, and no Barrett employee identified more than one dehydrator. And third, no Barrett or Williams employee requested of the Department either a written

interpretation of the statute or a value determination, both of which are available as a matter of right under Wyo. Stat. Ann. § 39-14-209(a). [¶ 34] Wyo. Stat. Ann. § 39-14-203(b)(iv) is quite clear in pronouncing that the natural gas production process is completed, for severance tax purposes, at the outlet of the initial dehydrator, unless no dehydration is performed other than within a processing facility.

The record is just as clear that at no time did Barrett treat anything other than the TEG dehydrator as a dehydrator, and at no time did Barrett consider the TEG dehydrator as being part of a processing facility. In other words, Barrett’s own knowledge and description of its and Western’s facilities recognized that the point of valuation of the CBM was at the outlet to the TEG dehydrator. For Williams belatedly to argue otherwise was not reasonable and the Board certainly was free to discount the credibility of Williams’ witness.

Under these circumstances, the Department and the Board made no error of law in assessing interest. The Board’s concession in its order that the statutory

definitions of dehydrator and processing facility may be a “little ambiguous” in the CBM context is not sufficient to create confusion for Barrett that did not exist at the time it was reporting its production. We agree with the Board’s conclusion that Barrett and Williams “simply failed to apply the plain language of the statute.” [¶ 35] Finally, we note that the attorney general’s memorandum sought by Williams was the subject of a motion to compel discovery that resulted in a motion hearing and in camera review of the memorandum.

The Board decided that the memorandum, which contained legal advice from the office of the attorney general to the Department in an unrelated case, was a privileged communication between attorney and client and was, therefore, not discoverable. In this appeal, Williams has shown us neither how that decision was legally incorrect nor how Williams may have been prejudiced by the ruling.

CONCLUSION [¶ 36] The Board’s determination that the point of valuation of Barrett’s CBM was at the outlet of the TEG dehydrator and its determination that the TEG dehydrator was not located within a processing facility were supported by substantial evidence. Interest was lawfully assessed against Barrett’s delinquent taxes because both Barrett and Williams knew or should have known the proper point of valuation, inasmuch as the TEG dehydrator clearly was the initial dehydrator and it was not located within a processing facility within the meaning of the statute. [¶ 37] Affirmed.

APPENDIX “A” BEFORE THE STATE BOARD OF EQUALIZATION FOR THE STATE OF WYOMING IN THE MATTER OF THE APPEAL OF WILLIAMS PRODUCTION RMT COMPANY FROM A PRODUCTION TAX AUDIT ASSESSMENT DECISION OF THE DEPARTMENT OF REVENUE (Production Year 1999) Docket No. 2002-103 FINDINGS OF FACT, CONCLUSIONS OF LAW, DECISION AND ORDER APPEARANCES Margo Harlan Sabee, Scott P. Klosterman, and Nicol M. Thompson, of Williams, Porter, Day & Neville, P. C., for Williams Production RMT Company, (Williams), successor in interest to Barrett Resources Company (Barrett). Martin L. Hardscog, and Karl D.

Anderson, Senior Assistant Attorneys General, for the Department of Revenue (Department). DIGEST This matter came on for hearing on August 18 through 22, 2003, before the State Board of Equalization (Board), consisting of Roberta A. Coates, Chairman, Alan B. Minier, Vice Chairman, and Thomas R. Satterfield, Member.- Gayle R. Stewart acted as Hearing Officer. All Board Members have considered this matter by attending the hearing, reviewing the file, hearing transcript, and exhibits, and participating in this Decision and Order.

This appeal arises from an audit of Williams’ production of coal bed methane gas during 1999, and the Department’s subsequent assessment of additional severance taxes and certification of increased value for ad valorem tax purposes. JURISDICTION The Board must review final decisions of the Department of Revenue on application of any interested person adversely affected. Wyo. Stat. Ann. § 30-11-102.1(6). Taxpayers are specifically authorized to appeal final decisions of the Department concerning oil and gas valuation amendments. Wyo. Stat. Ann. § 39-H-209(b)(v).

The taxpayer’s appeal must be filed with the Board within thirty days of the Department’s final decision. Wyo. Stat. Ann. § 39-llf-209(b)(iv); Rules, Wyoming State Board of Equalization,

Chapter 2, § 5(a). This case arises from the Department of Revenue’s assessment of additional severance taxes and increase in taxable valuation on Petitioner’s gas production following an audit by the Wyoming Department of Audit. Wyo. Stat. Ann. § 89-lk-208(b). DISCUSSION Williams Production RMT Company is the successor in interest to Barrett Resources Company. In 1999, Barrett produced coalbed methane from natural gas wells located in Campbell County, Wyoming. In 2001, the Wyoming Department of Audit (DOA), began an audit of Barrett’s severance and ad valorem taxes.

At the conclusion of the audit, the Department of Revenue determined that $170,747.15 of additional severance tax was due, together with interest in the amount of $58,304. The Department also certified a total increase of ad valorem taxable value of $3,392,635 to Campbell County. Williams filed a timely appeal, identifying four errors: 1.The Department determined that Barrett’s production process was completed, and therefore the point of valuation was located, at the outlet of a dehydration unit owned by Western Gas Resources. 2. The Department miscalculated the allowable transportation deduction. 3.

The Department failed to exclude the total amount of exempt royalties from the taxable value of Barrett’s 1999 production. 4. The Department assessed interest on the alleged underpayment of taxes. We affirm the Department on all four issues. The dispute between the parties turns in large part upon the names and characterizations of equipment owned and used by Barrett, and equipment owned and used by Western Gas Resources, Inc. (Western), a company which provided services to Barrett for a fee.

Generally speaking, the correct names of and characterizations of Barrett’s and Western’s equipment determine the point of valuation at which Barrett’s gas is valued, and thereby affects the value of the gas. The case largely turns on the existence of a “dehydrator” and/or “processing facility.” However, the positions of Barrett and Williams about names and characterizations varied considerably from the commencement of the audit to the conclusion of the hearing.

In order to clearly demonstrate the record supporting our findings of fact and to reach the correct conclusions of law, we must pay attention to the details of the Barrett/Williams position over time. FINDINGS OF FACT Coalbed methane compared to conventional natural gas 1. Coalbed methane is produced from wells that are drilled into coal seams. These wells typically have a center tube through which water is pumped from the coal seam. The act of pumping off water reduces pressure on the coal, which liberates the natural gas from the coal seam.

The gas enters an open-hole completion area, and flows to the surface through a production casing that surrounds the center tube. [Transcript Vol. I, pp. 73-74]. 2. Generally speaking, coalbed methane differs from other natural gas produced in Wyoming. It is typically produced at lower pressure. It has lower flow rates per well. Coalbed methane is not complex natural gas, that is, coalbed methane does not contains heavy hydrocarbons and has few impurities. [Transcript Yol. I, pp. 66-70].

Because coalbed methane does not have heavier hydrocarbons, there is no byproduct stream of natural gas liquids that can be used to generate revenue, nor any need to separate out oil or other liquid hydrocarbons. [Transcript Vol. I, pp. 71, 76]. 3. Coalbed methane is in contact with water when produced, so the gas produced from the well is saturated with water. [Transcript Vol. I, p. 76]. The water vapor content of gas from a high pressure conventional well is approximately 100 pounds of water vapor per million cubic standard cubic feet a day of gas. [Transcript Vol. I, pp. 76-77].

The water vapor content of gas from a coalbed methane well is approximately 1000 pounds of water vapor per million standard cubic feet a day of gas, or about ten times more for the same volume of gas. [Transcript Vol. I, p. 77]. 4. No party introduced precise information about industry-wide production of coalbed methane from the Powder River Basin of Wyoming, although such information is available from the Wyoming Oil and Gas Conservation Commission. [Transcript Vol.

II, p. 292], However, the parties agree, and we find, that coalbed methane production was not significant until the latter part of the decade of the 1990’s. [Transcript Vol. II, pp. 292-293; Transcript Vol. IV, pp. 679-680]. The Petitioner’s expert testified that, “1999 is probably the first year when things started ramping up.” [Transcript Vol. II, p. 292]. The audit of Barrett 5. In early 2001, the DOA commenced an audit of Barrett. Barrett had produced natural gas from coal bed methane wells in Campbell County, Wyoming, and paid severance and gross products taxes on that natural gas production.

The period covered by the audit was 1999. Barrett commenced production in February 1999. [Transcript Vol. IV, p.824; Exhibit 505]. 6. Valerie Simmons, a principal auditor for the DOA, contacted Barrett in early 2001 to request documentation for an initial pre-audit review.

William McGuire of Barrett sent the requested information to Simmons on January 10, 2001. [Exhibit 512], McGuire’s transmittal included three folders of material related to accounting, transportation, marketing, and gas purchase contracts, together with a map of the “[c]oalbed methane area showing well locations, PODS [central delivery points for the collection of gas from individual wells], Compressors and Pipelines.” [Exhibit 512], The transmittal made no reference to a dehydrator or processing facility. 7.

McGuire’s January 10, 2001, letter refers to agreements between Barrett (and a subsidiary) and a number of entities, including Western Gas Resources, Fort Union Gas Gathering, L.L.C., and MIGC. [Exhibit 512]. 8. Barrett was a party to a “Gas Gathering Agreement” with Western Gas Resources, Inc., dated February 1, 1999. [Exhibit 144]. Under this Agreement, Western provided certain Gathering Facilities, defined as “including, but not limited to dehydration, pigging equipment, pipelines, metering facilities and compressors ...” [Exhibit 144,

Article I

Definitions]. Western took custody of the Barrett gas at a custody transfer meter located between Barrett’s Central Delivery Points and a screw compressor owned by Western. [Transcript Vol. Ill, pp. 397-398]. Western was obliged to redeliver Barrett’s gas to points of “interconnection of the facilities of [Western] and those of MIGC or of Fort Union, as applicable.” [Exhibit 144,

Article I

Definitions; Transcript Vol II, p. 398]. 9. MIGC is a pipeline that is regulated by the Federal Energy Regulatory Commission (FERC). The pipeline provides service from the terminus of Western’s facilities to Glen-rock, Wyoming. [Transcript Vol. Ill, pp. 435, 442]. On February 1, 1999, Barrett entered into' an agreement with MIGC for service on a firm basis. [Exhibit 530]. On February 25, 1999, Barrett entered into an agreement with MIGC for service on an in-terruptible basis. [Exhibit 530]. 10. Fort Union Gas Gathering, L.L.C. (Fort Union) is a pipeline, but it is not regulated by FERC. [Transcript Vol.

Ill, p. 437] The record includes a Firm Gathering Agreement between Fort Union and Bargath, Inc., dated March 1, 1999. [Exhibit 531]. Bargath was a subsidiary of Barrett. [Transcript Vol. Ill, p. 614]. Fort Union provided only limited service to Barrett during 1999. [Exhibit 507; Exhibit 140, showing Fort Union charges only in September 1999]. 11. On February 9, 2001, Elwood Soderlind, Audit Supervisor for the DOA, sent a formal engagement letter to McGuire of Barrett. [Exhibit 505; Transcript Vol. IV, p. 824]. McGuire had been designated Barrett’s audit contact. [Transcript Vol. IV, p. 825].

The engagement letter identified Simmons as DOA’s contact. [Exhibit 505]. Among other things, the engagement letter requested, by February 28, 2001, comprehensive documentation for Barrett’s 1999 coalbed methane production from Campbell County. The request encompassed volumes of gas produced, prices received, “costs (allowances) of processing, gathering, dehydrating, and transporting,” gas sales contracts, tax workpapers, “a listing of actual government royalties paid”, and “all gathering and transportation agreements and field schematics.” [Exhibit 505]. 12.

On March 2, 2001, McGuire sent an email to Simmons, explaining how Barrett calculated the volumes of production associated with each coalbed methane well. [Exhibit 502]. Simmons responded with a specific question about the presence of dehydrators “at the wellhead, the pod, or the compression station” because she knew “the statute was pretty clear about needing to know where that was.” [Transcript Vol. IV, p. 833]. 13. Tom Pieeuch of Barrett responded to Simmons’ request on March 5, 2001. [Exhibit 502], He stated that, “There are no dehydrators at the wells, the pods or compressor stations.

However, there is a water knockout at the compressor stations.” [Exhibit 502]. We find that a water knock-out is synonymous with a separator. [Transcript Vol. II, pp. 261-262; Vol. IV, pp. 689-690]. 14. Representatives of Barrett and DOA, including McGuire and Simmons, met on May 1, 2001, for an opening conference. They discussed the tax audit and an audit of state and federal royalties. [Exhibit 507; Transcript Vol.

IV., pp. 826-827], The purpose of the conference was for the auditors to make sure that necessary information was available and to gain an understanding of the company, including deductions that were taken and who purchased production. [Transcript Vol. IV., p. 826]. Simmons made notes that are included in the audit file. [Transcript Vol. IV, pp. 828-829; Exhibit 507]. 15. During the conference, Barrett employees described the sequence of the equipment between the wellheads and Glenrock, Wyoming. Four to twelve of Barrett’s wells are served by a pod. At the pod, the gas is measured.

From the pod, the gas goes to a Western screw compressor. From the screw compressor, the gas goes on to a booster compressor before entering a transportation pipeline to Glenrock. Simmons’ notes state that, “[t]he dehydrator is located at the booster station and occurs prior to the booster compression.” [Exhibit 507]. (This note was incorrect. The dehydrator is located after the booster compressor. [Transcript Vol. IV, p. 837].) Western owned the metering equipment and pipeline from the screw compressor to the main transportation line. [Exhibit 507], 16.

During the conference, Barrett employees stated that Barrett paid Western a fee of approximately $0.43 per thousand cubic feet of gas (MCF) for all services necessary to move Barrett gas from Western’s screw compressor to Glenrock, including the services of MIGO and Fort Union. [Transcript Vol. IV, p. 830; Exhibit 507]. The next day, Piecuch told Simmons that only $0,294 of the total fee paid to Western was for services provided by Western. [Transcript Vol. IV, p. 830; Exhibit 507]. The remainder of the total fee was for pipeline services.

There was charge of $.014 per MCF for gas sent on the Fort Union pipeline. [Transcript Vol. IV, p. 830; Exhibit 507]. Barrett’s price to Glenrock was essentially equal via either Fort Union or MIGC, however, because Western provided a rebate against MIGC’s FERC-tariffed rate to match the Fort Union rate. [Transcript Vol. IV, p. 830; Exhibit 507]. 17. Barrett deducted from its taxes all of the charges billed by Western. [Exhibit 507].

Barrett deducted these charges as transportation expenses against Barrett’s total revenues from the Powder River Basin, allocated to the well level based on the production volume of each well. [Transcript Yol. II, pp. 391-392], 18. During the conference Barrett employees told the auditors that Barrett sold its gas to Western at the screw compressor, then Barrett repurchased the gas at Glenroek, where Barrett marketed the gas. [Exhibit 507; Transcript Vol. IV, p. 831]. However, the auditors could see that the sale to Western was not the ultimate sale. [Transcript Vol. IV, p. 831].

Sales invoices provided by Barrett did not give a specific detailed location of where sales occurred. [Transcript Vol. IV, p. 831]. 19. Barrett later represented that the point of sale for its coalbed methane gas was Glen-roek, and the auditors were able to tie invoices to sales summaries that Barrett provided. [Transcript Vol. IV, p. 831]. The auditors accepted Barrett’s representation of the point of sale [Transcript Vol. IV, p. 932], and so do we. We find that the point of sale was Glenroek, Wyoming.

This finding is supported by Barrett’s deduction of the charges billed by Western, which implicitly reflects Barrett’s position on (

a) the point of valuation, i.e., the custody transfer meter between Barrett’s pod and Western’s screw-compressor, and on (

b) the point of sale, i.e., Glenroek. 20. On May 7, 2001, Barrett accepted a bid from Williams to acquire Barrett. [Transcript Vol. II, p. 359]. Simmons received notice of the pending merger on May 14, 2001. [Transcript Vol. V, p. 878]. The merger closed in two steps. Williams bought fifty percent of the stock of Barrett in a transaction that closed on June 11, 2001. Williams acquired the balance of Barrett stock in a stock trade which closed on August 1, 2001. [Transcript Vol. II, pp. 359-360]. 21.

On June 14, 2001, Simmons and three other auditors took a field tour of Barrett facilities in Campbell County. [Transcript Vol. IV, p. 836]. The auditors had requested the tour because they were new to coalbed methane audits. The tour was arranged through an audit contact at Barrett and as part of the audit process. [Transcript Vol. IV, pp. 832, 844], Nathan Lopez conducted the tour; Lopez was an operations superintendent for Barrett. [Transcript Vol.

TV, p. 836], Simmons was specifically interested in learning “where the initial [dehydrator] was because that was key in the point of valuation decision.” [Transcript Vol. IV, p. 837]. 22. Simmons took notes of the trip. Her notes memorialize the terms Lopez used to describe the equipment. [Exhibit 537; Transcript Vol. IV, pp. 837-838, 840]. Lopez showed the auditors several wells, and three different pods. [Transcript Vol. TV, pp. 839-840; Exhibit 537]. Lopez showed the auditors two booster compressor stations. [Transcript Vol. IV, pp. 839-840; Exhibit 537].

Lopez stated that there were two different equipment configurations. With three stage compressors, the gas went from the wellhead to a pod, from the pod to a screw compressor, from the screw compressor to a booster compressor, from the booster compressor to a dehydrator, and from the dehydrator to the pipeline. With four stage compressors, the gas went directly from the pod to a booster compressor, but the sequence was otherwise the same. [Transcript Vol. IV, pp. 839-841; Exhibit 537], 23. Lopez showed Simmons a dehydrator in a building. The dehydrator came after a booster compressor. [Transcript Vol.

IV, pp. 840-841]. Lopez described the dehydrator to Simmons as a glycol dehydrator. [Transcript Vol. TV, p. 841]. 24. Once the merger with Barrett closed on August 1, 2001, Williams decided to consolidate Barrett’s accounting functions from Denver to the Williams home office in Tulsa. [Transcript Vol. II, p. 360]. Williams did not offer McGuire a position after the merger. [Transcript Vol. II, p. 362], Pieeuch accepted a job with Williams, but Williams severed Pieeuch in November of 2001. [Transcript Vol. II, p. 363].

At the hearing of this matter, Williams did not provide testimony from McGuire, Pieeuch, Lopez, or any other former Barrett employee having personal knowledge of Barrett’s policies or practices with respect to accounting, contracts administration, sales, or operations. 25. In August 2001, Williams Exploration and Production gave Greg Storts the responsibility to report Wyoming severance, conservation, and gross products taxes, as well as Wyoming state royalty. [Transcript Yol. II, pp. 385, 387]. 26. On October 11, 2001, Simmons entered a memorandum in the audit file.

She memorialized her preliminary conclusion that Barrett had deducted both a gathering charge, paid to Western, and a transportation charge, paid to MIGC. [Exhibit 517]. Generally speaking, gathering charges relate to services provided prior to the point of valuation, and cannot be deducted. Wyo. Stat. Ann. §§ 39-U-W3(b)(iv), 39-U-203(b)(vi). Williams reviews Barrett’s point of valuation 27. On October 29, 2001, Storts attended a seminar hosted by the Wyoming Department of Revenue. [Transcript Yol. II, p. 392].

The seminar was designed to instruct mineral taxpayers on how to correctly fill out the different forms associated with the Mineral Tax Division. [Transcript Vol. II, p. 392]. The seminar prompted Storts to review Barrett’s calculation of taxable value. [Transcript Vol. II, p. 393]. According to Storts, “Williams had been told that Barrett was using the custody transfer meter as the point of valuation.” [Transcript Vol. II, p. 394]. 28.

Storts reviewed the appropriate Wyoming statutes, and contacted Dean Tinsley, an engineer in Barrett’s Denver offices, to learn about Barrett’s coalbed methane operations. [Transcript Vol. II, pp. 393-394]. 29. Tinsley advised Storts that the field layout “went from the well to the POD to the screw compressor to the [reciprocating] station and then into the pipelines.” [Transcript Vol. Ill, p. 598]. Tinsley also explained such details as “what a screw compressor was and where it was located in the system.” [Transcript Vol. Ill, p. 599]. 30.

Storts then reached a conclusion based on his own reading of the Wyoming statutes. [Transcript Vol. II, p. 394]. Storts saw that there was no statutory definition of “processing facility,” but decided that a processing facility must be a facility where processing occurred. Storts then analyzed Western’s facilities in light of the statutory definition of “processing.” [Transcript Vol. II, p. 395]. Based on what Tinsley had told him about the Western facilities, Storts concluded that Western’s facilities were a processing facility. [Transcript Vol. II, pp. 395-396].

Storts then consulted the portion of the statute that identifies the point of valuation for processing facilities, and concluded that the point of valuation was the custody transfer meter. [Transcript Vol. II, pp. 394-396]. 31. Prior to this time, no one from either Barrett or the DOA had referred to the Western’s facilities as a “processing facility.” We find that the previous usages are entitled to heavier weight, particularly with respect to the customary usage in the industry. The Preliminary Issue Letter and Williams’ Response 32.

On April 17, 2002, the DOA sent its Preliminary Issue Letter to Williams. [Exhibit 101]. The purpose of the letter was to identify preliminary findings, and to give the audited party a chance to address the findings. [Transcript Vol. IV, p. 847]. The letter identified only two issues. The first issue was incorrect calculation of new gas well tax incentives. [Exhibit 101]. Williams accepted this audit finding. [Transcript Vol. II, p. 392], 33. The second issue was the transportation deduction claimed by Williams.

The auditors stated that: After careful review of the transportation/gathering information provided by Barrett Resources Corporation during the audit, we have determined that the allowable transportation charge is $0.14/MCF. Barrett Resources Corporation may wish to furnish additional information regarding the breakdown of all charges incurred to move the gas from the wellhead to the ultimate sales point. [Exhibit 101]. The letter stated that a response was due by May 17, 2002. [Exhibit 101]. 34.

When Williams received the Preliminary Issue Letter, Storts took over as the audit contact for Williams. [Transcript Vol. II, p. 400], 35. By the time the DOA sent the Preliminary Issue Letter, the auditors had concluded that the correct point of valuation was in the outlet of Western’s glycol dehydrator. [Transcript Vol. IV, p. 850]. The auditors were prepared to allow a deduction for the portion of the Western charges associated with Western’s pipeline connection from the glycol dehydrator outlet to the inlet of the MIGC or Fort Union pipeline.

The auditors had not made such an allowance because they had no information about those costs. [Transcript Vol. IV, p. 852]. 36. Williams responded to the DOA by letter of May 16, 2003. Margo Sabec, outside counsel for Williams, wrote the response. [Exhibit 503]. The letter is significant because it states additional details of fact; it ties those details to a legal position; and it conflicts with facts and positions later taken by Williams.

The letter proceeds on the premise that the Department has disallowed fees related to the services provided by Western. [Exhibit 503]. 37.Sabec asserted the following facts, among others, and in doing so supplemented the positions previously taken by Barrett employees: a. Gas “from individual wells was gathered from the wellhead to a central delivery point (“CDP”) in Barrett’s separate and individual pipelines... .The CDP is sometimes referred to as the pod house.” b.

At the CDP, the commingled gas flowed “through a separator that allowed the gas to separate from the water it was produced with.” c. “The commingled gas was transported in Barrett’s pipelines downstream from the CDP to a custody meter, where custody and possession of the gas was transferred to a third party transporter (Western).” d. “_Western charged Barrett a fee of $0.32/MCF, including fuel, to transport and process its gas on Western’s pipeline system.” e. “_The inlet of the initial screw compressor was located immediately downstream of the custody transfer meter.... ” f. “....Fort Union and MIGC charged Barrett a fee or rate of $0.14/MCF to transport and process its gas from the inlet of their pipeline systems downstream to the interstate transportation hub.” g. “_Barrett did not sell its natural gas at or prior to the point of valuation by bona fide arm’s length sale during production year 1999.” [Exhibit 503].

In reference to paragraph d above, we find that $0.32/MCF referred to the $0.294/MCF fee for services provided only by Western, to which Sabec added a maximum fuel charge. In reference to paragraph f above, we find that $0.14/MCF referred imperfectly to the fact that Western provided Barrett a rebate of $0.21/MMBTU of gas to provide a pipeline rate to Barrett that was essentially the same no matter which one of the two pipelines was used to move Barrett’s gas to Glenroek. [Transcript Vol. Ill, p. 434].

Referring to paragraph g above, we note that Sabec said nothing to repudiate the point of sale previously represented by Barrett’s employees. 38.Sabec also asserted positions that mixed facts with statutory characterizations: a. “On its pipeline system, Western performed processing functions to Barrett’s and other third party gas at screw compressors (boost the pressure of the gas to approximately 80 psi), reciprocating compressors (boost the pressure to approximately 1,400 psi), and dehydrators....” b. “... .The inlets to the Fort Union or MIGC pipeline systems are located downstream of Western’s processing facility (where compression and dehydration are performed).” c. “_Barrett reported that its production process was completed at the inlet to the initial transportation related compressor (the screw compressor).... ” d. “_Barrett’s gas had been extracted and severed from the ground and gathered from multiple wells via Barrett’s separate pipelines to a central point of accumulation (CDP), where separation and water removal occurred.

There was no dehydration, as it is defined in the statutes, performed by Barrett in the production process .” (emphasis supplied) [Exhibit 503]. 39. Williams’ key point was that the Barrett gas was dehydrated within a processing facility that belonged to Western. Like Storts individually, Williams concluded that Barrett had correctly selected the inlet of the initial transportation related compressor as the point of valuation. Williams cast its lot with the definition of point of valuation found in the second sentence of Wyo. Stat.

Ann. § 39-14-203(b)(iv): “Where 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.” Williams accordingly concluded that it was entitled to deduct all of the fees charged by Western. [Exhibit 503]. 40. The auditors were not persuaded by this statement of position. For a variety of reasons, Simmons disagreed that the Barrett gas was processed. [Transcript Vol. IV, p. 859].

Barrett had not reported a processing deduction on its state tax forms. [Transcript Vol. IV, p. 860]. In a federal royalty audit, Barrett had reported the gas as unprocessed, and claimed no processing allowance. [Transcript Vol. IV, p. 860]. The engagement letter had requested documentation of processing costs, but none was provided. [Transcript Vol. IV, p. 860]. Barrett never provided any processing agreements or plant statements, nor were the auditors advised of a plant name or facility at which the gas was processed. [Transcript Vol. TV, p. 860].

Simmons did not receive any construction and operating agreements. She did not receive settlement statements to indicate the segregation and sale of liquid natural gas products, or byproducts such as sulfur. [Transcript Vol. IV, pp. 861-862], Simmons had previous experience with gas processing facilities such as Whitney Canyon. See Union Pacific Resources Company et al, Docket No. 2000-147, 2003 WL 21774603 (Wyo.St. Bd.Eq.). She had an understanding of typical gas processing facilities, and she saw no evidence of such facilities in this ease. [Transcript Vol. IV, p. 861], 41.

Williams sought and received an audit conference. [Transcript Vol. II, p. 403]. The conference was held on June 13, 2002. [Transcript Vol. IV, p. 853]. At this conference, the auditors stated their position that the point of valuation was at the outlet of the initial dehydrator [Transcript Vol. IV, pp. 851-852]; we find the testimony of Simmons more credible than contrary testimony of Storts that the auditors did not do so. [Transcript Vol. II, p. 405]. Williams discussed its view about the existence of a processing facility, and about what processing functions occurred at Western’s facilities. [Transcript Vol.

II, p. 404], During the conference the auditors asked for a breakdown of the $0,294 Western charges, in order to allow a portion of the charges. [Transcript Vol. IV, p. 852]. 42. On June 25, 2002, Simmons spoke again with Storts about a breakdown of the Western fee. [Exhibit 510].

Storts told her that Williams did not have a way to break the fee down. [Exhibit 510], On July 9, 2002, Storts reiterated this position in an e-mail to Simmons, stating that, “Since this is a 3rd party, arms-length contract, Williams has no information regarding any breakdown of the fixed charge, as it relates to separate functions performed or segments of the Western Gas Resources system.” [Exhibit 513]. However, Storts concedes that Williams did nothing to see if a breakdown was available from Western. [Transcript Vol. Ill, p. 508]. Williams management chose not to contact Western. [Transcript Vol.

Ill, p. 509]. We find 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. The Final Issue Letter and the Department of Revenue’s Determination 43. On July 25, 2002, Simmons wrote a memo to the file to reflect that the auditors had modified the allowable transportation deduction. The auditors added a deduction value for the transport of gas from the outlet of the initial dehydrator to the inlet of the MIGC pipleline. [Exhibit 518].

We note that the auditors could have disallowed any Western expense because Williams did not come forward with information. [Transcript Vol. V, p. 898]. Instead, the auditors determined that the total allowable transportation deduction would be $0,224, or $.084 more than the original allowance of $0.14. [Exhibit 518]. This number was reached by subtracting $0.21/MCF from the Western Gas Resource Fee of $0,294. [Exhibit 518]. The $0.21/MCF was inspired by the rebate Western gave to Barrett on gas shipped on the MIGC pipeline. [Exhibit 518].

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. [Transcript Vol. IV, pp. 866-867]. 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. [Transcript Vol. IV, p. 863].

We find that this was a reasonable exercise of auditor judgment to reach a fair valuation for a taxpayer that refused to be cooperative. 44.On August 23, 2002, the Department sent Williams a final determination assessment notice. [Exhibit 500]. This notice stated the amount of severance tax underpayments including interest, and notified Williams of additional taxable value for ad valorem tax purposes. [Exhibit 500]. The Department determination was accompanied by a final issue letter to Williams from the DOA. [Exhibit 501].

The DOA’s final issue letter adopted the rationale expressed by Simmons in her July 25 memorandum, with this explanation: ... [W]e consider the Western Gas Resource Fee of $.294/MCF less the $.21/ MCF rebate, or $.084/MCF, as the allowable transportation deduction from the outlet of the dehydrator to the inlet of the main transmission line, and any charges prior to the outlet of the dehydrator are considered gathering and therefore deemed unallowable. The MIGC Fee of $.14/MCF to transport gas from the inlet of the main transmission line to market has been deemed an allowable transportation deduction.

Therefore, the total allowable transportation deduction is the $.084/ MCF charge plus the $.14/MCF charge, or $.224/MCF. (Emphasis supplied). [Exhibit 501]. 45. Randy Bolles, Administrator of the Mineral Tax Division of the Department of Revenue, testified that the Department embraced this logic, despite being aware of the limits of the information available. [Transcript Vol. Ill, pp. 736-744]. For Bolles, the key points were the total cost of $0.434/MCF, and the unavailability of information that would allow anyone to precisely allocate the cost of Western’s services [Transcript Vol. Ill, pp. 736-744].

Bolles stated that, “we did, I think, the best we could do with the information we had to determine this piece .... of that fee.” [Transcript Vol. Ill, p. 741], 46. Williams paid the severance taxes under protest [Exhibit 104], and filed a timely appeal on September 23, 2002. [Board Record]. Williams “prepares a new approach to the dehydrator definition 47. On review of the final issue letter, Williams took particular notice of the DOA’s reliance on the first sentence of Wyo. Stat.

Ann. § 39 — 14—203(b)(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.” (emphasis supplied) [Transcript Vol. Ill, pp. 418-424]. Williams also directed its attention to the definition of “dehydrator” in Wyo. Stat. Ann. § 39-14-201(a)(vii): “ ‘Dehydrator’ means a device which removes water vapor that is commonly associated with raw natural gas.” [Transcript Vol. Ill, pp. 423-424].

Williams reasoned that if the equipment in the CDP were a dehydrator, or the screw compressor were a dehydrator, then the point of valuation would be at or near the custody transfer meter, whether or not Western’s equipment constituted a processing facility. [Transcript Vol. Ill, p. 425]. 48. Williams hired Bret Rhinesmith to determine whether water vapor was removed from the Barrett gas by equipment other than the glycol dehydrator. [Transcript Vol. Ill, pp. 424, 551-552], Rhinesmith’s testing demonstrated that the function of removing water is ubiquitous in coalbed methane equipment and piping.

We find that water removal started in the wellbore itself and continued along the entire sequence of equipment to the outlet of the glycol dehydrator. 49. Unfortunately, Rhinesmith insisted on adding the name, “dehydrator,” to the equipment he tested. [E.g., Exhibit 112, depicting a piece of equipment identified as “Initial dehydrator: stacked vertical type dehydrator”]. By doing so, Rhinesmith confused the results of his functional analysis with the application of statutory terms, although he insisted that he had no such intention. [Transcript Vol. II, pp. 207-208].

We therefore make findings that disentangle the functional analysis from the application of statutory terms. 50. Within each central delivery point, or pod, there is a cylindrical vessel, into which gas flows via pipes from individual wells. We find that this vessel is a “header,” based on a standard dictionary definition [Webster’s New World College Dictionary, 4th Edition (2001), p. 655], on the language used in a patent [Exhibit 116, “Multiple Well Header System for Collection of Methane Coal Gas”], and on Rhinesmith’s testimony [Transcript Vol.

II, p. 299, “a header is a device that .... commingles streams”]. 51. The headers in coalbed methane pods are not used in the production of conventional natural gas; they are devices specifically designed for coalbed methane production. [Transcript Vol. I, pp. 99-100; Vol. II, p. 271]. The volume of gas produced from individual coalbed methane wells is relatively low, and the wells are somewhat closely spaced, so it is both useful and efficient to route the production from several wells to a single point. [Transcript Vol. I, p. 99; Transcript Vol. II, p. 283].

The pressure of gas from the individual wells is also low, so it is not necessary for headers to be code stamped pressure vessels, that is, they are not built under the American Society of Mechanical Engineers boiler and pressure vessel code. [Transcript Vol. I, pp. 100, 302], However, the gas pressure is high enough so that the gas normally flows into and through the header under its own pressure. [Transcript Vol. I, pp. 99-100, 300]. 52. Rhinesmith tested four different types of headers, which he classified as stacked vertical, vertical, slanted, and horizontal. [Transcript Vol. I, p. 98].

These headers were in four different locations [Transcript Vol. I, p. 85], corresponding to operating locations of the principal coalbed methane producers in the Powder River Basin. [Transcript Vol. II, p. 293; Exhibit 107]. 53. Barrett’s header was a vertical stacked header. [Transcript Vol. I, p. 118]. The design of this header was explained by a patent that was admitted into evidence. [Exhibit 116; Transcript Vol. I, p. 119]. However, with respect to removing water from the gas stream, all four types of headers functioned in essentially the same way. [Transcript Vol. II, p. 310]. 54.

Gas from the individual wells enters the body of the header, then the gas expands due to the larger space. [Transcript Vol. I, p. 120]. With expansion, the pressure of the gas drops, and the gas cools. [Transcript Vol. I, p. 120]. As the gas cools, water vapor in the gas stream condenses and falls to the bottom of the header, where water drains off. [Transcript Vol. I, p. 120]. There is also liquid water that reaches the header through the pipes from individual wells. [Transcript Vol. I, p. 120; Vol. II, p. 300], 55.

The patent on the header consistently refers to the header’s action on water vapor as separation: .... The inclined header receives the raw methane coal gas from the separate pipes and the separation of water vapor from the gas is expected to occur in the inclined head merely due to the force of gravity on the heavier water vapor.

Heretofore, water vapor separation has been both inefficient and incomplete in this prior art collection system based on the use of inclined collection heads.... .... gas entrained with water vapor .... enters the interior chamber of the header through the inlet pipes where the water vapor being heavier than the gas separates from the gas and falls to and condenses above and within the water collection area of the header whereas the gas rises to the upper end of the header ... [Exhibit 116, p. Williams/Barrett 0047](em-phasis supplied) 56.

In tests on the Barrett header, Rhines-mith found that the header removed 17.66 pounds of water vapor per million standard cubic feet a day of gas. [Transcript Vol. I, p. 123]. The test results on the other headers ranged from 14.24 pounds to 114.34 pounds of water vapor per million standard cubic feet a day of gas. [Transcript Vol. II, p. 304]. Rhinesmith confirmed these results with a computer simulation which showed that 28.67 pounds of water vapor per million standard cubic feet a day of gas would be removed in a header. [Transcript Vol. I, pp. 157-160; Exhibit 129], 57.

From an engineering perspective, the principles at work in the header are not limited by size. [Transcript Vol. II, p. 301]. One could construct and insert a smaller vessel next to the well head, and achieve water removal by condensation. [Transcript Vol. II, p. 302], Moreover, Rhinesmith testified that water is lost by condensation in the well bore itself. [Transcript Vol. I, p. 252], 58. Rhinesmith conducted field testing for water vapor content at a screw compressor located in facility unrelated to Barrett. [Transcript Vol. I, pp. 164-165].

Rhinesmith took measurements before the inlet to the screw compressor, and beyond the outlet of a cooling unit just after the screw compressor. [Transcript Vol. I, pp. 164-165]. He found a change in water vapor content of 65.43 pounds of water vapor per million standard cubic feet of gas per day [Transcript Vol. I, pp. 164-165], although the resulting water is “removed in downstream processes,” not at the location of the screw compressor. [Transcript Vol. I, p. 165; Vol. II, p. 263].

Rhines-mith again confirmed his field results with a computer simulation; his model showed the removal of 118.1 pounds of water vapor per million standard cubic feet of gas per day. [Transcript Vol. I, pp. 165-167; Exhibit 132], 59. Water was removed from the sequence of equipment at separators located in advance of the booster compressor, and at coolers located after the booster compressors. [Transcript Vol. I, pp. 171-174].

Rhinesmith conducted a computer simulation that, when adjusted to be expressed consistent with the other results, showed 165.52 pounds of water vapor per million cubic feet of gas coming into the booster compressors, which left about 100 pounds of water vapor to be removed by the glycol dehydrator. [Transcript Vol. II, pp. 315-319; Exhibit 134], 60. We find that removing this last 100 pounds of water vapor per million standard cubic feet a day of gas by glycol dehydrator is crucial to rendering the gas suitable for pipeline transport. [Transcript Vol. I, pp. 179-186]. 61.

The triethylene glycol dehydrator employs absorption, not condensation, to remove water. [Transcript Vol. I, p. 108]. It includes a number of pieces of equipment. [Transcript Vol. I, p. 226]. Unlike the header, the TEG contactor vessel is usually “code stamped because of the pressures at which it’s operating.” [Transcript Vol. II, p. 303]. Rhinesmith testified that there is no dehydrator in the computer simulation he uses. Instead, the glycol dehydrator function is simulated by use of a series of component functions. [Transcript Vol. II, p. 322].

These functions include an absorber; a separator to model filtration; a two-part force used to drive the glycol pump; a heat exchanger; a distillation operation, including a reboiler; a pump to return the glycol to the TEG contactor; another heat exchanger, to cool the glycol and warm the dry natural gas; and a recycle function. [Transcript Vol. II, pp. 322-324]. We find that these functions fairly reflect the workings of the glycol dehydrator. 62. The glycol dehydrator reduces the presence of other components of the coalbed methane, such as carbon dioxide. [Transcript Vol. I, p. 186; Exhibit 136].

Speaking generally, coalbed methane does not include volatile organic compounds, so the minor components removed by the glycol dehydrator are vented to the atmosphere. [Transcript Vol. II, pp. 328-329]. In contrast, conventional gas often contains aromatics, such as benzene, toluene, methylbenzene and xylenes, that are subject to regulation if released. [Transcript Yol. II, p. 328]. 63. Taking all of Rhinesmith’s findings together, and using his modeling for the sake of simplicity, we find that water is removed throughout the sequence of equipment, beginning with the annulus of the well.

There are 1000 pounds of water vapor per million cubic feet of gas when the gas rises from the coal seam. [Transcript Vol. I, p. 77]. Most of this water must be removed to meet a pipeline requirement 5 pounds of water at the outlet of the glycol dehydrator. [Transcript Vol. II, pp. 295-296], 64.

Subtracting 28.67 pounds for the header, 118.1 pounds for the screw compressor and its cooling unit, and about 160 pounds for the booster compressors through the glycol dehydrator outlet, Rhinesmith’s calculations showed that two-thirds of the water vapor was removed at points other than the header, the screw compressor, and the booster compressor/dehydrator. Rhinesmith says that rest of the vapor is removed in the pipeline systems connecting the equipment. [Transcript Vol. II, p. 320]. 65. Water in the pipelines between the screw compressor and the booster compressor is removed by a device known as a pig.

Rhinesmith stated that a pig “is a device that is put into a pipe and is used like a squeegee to push those liquids to downstream systems ...” [Transcript Vol. I, p. 172]. He further stated that a pig is “the device that flows through the pipeline to push any liquids from one point in the pipeline system to another point in the system.” [Transcript Vol. II, p. 249]. The pig is inserted in the pipeline by a pig launcher located downstream of the screw compressor. The pig pushes water that has condensed in the pipeline to an initial separator located upstream from the booster compressors. [Transcript Vol.

II, pp. 320-322]. We find that Rhinesmith is correct in his explanation of the pig and its use. Rhinesmith did not characterize the pig as a dehydrator, and Craig Grenvik affirmed that the Department did not view the pig as a dehydrator. [Transcript Vol. V, p. 1032], 66. If we contrast the 1000 pounds with the 100 pounds of water associated with conventional gas [Transcript Vol. I, pp. 76-77], and use Rhinesmith’s estimate of about 100 pounds of water removed by the glycol dehydrator [Transcript Vol.

II, p. 317], it is easy to see that all 100 pounds of water in conventional gas could be removed by a glycol dehydrator. Our observation is consistent with Rhinesmith’s explanation of the function of a dehydrator in his account of his prior gas processing experience in the Mobile Bay field. [Transcript Vol. I, pp. 50-51; Vol. II, pp. 288-289]. 67. Dehydrators are commonly associated with the processing and transport of conventional natural gas. In the record made in this case, these included field dehydrators [Transcript Vol.

II, p. 213], and dehydrators associated with improving the quality of gas for transport in downstream pipelines. [Transcript Vol. II, p. 297]. If more carbon dioxide must be removed to meet the specifications of downstream pipelines, the gas can be treated with amine. In doing so, the gas will become resaturated, and “a triethylene glycol dehydrator is typically used downstream of those amine systems to remove the water essentially a second time.” [Transcript Vol. II, p. 297].

We therefore find that it is meaningful to distinguish between an initial dehydrator and other dehydrators in the context of conventional natural gas. 68. We find that Rhinesmith’s functional orientation results in an extremely broad view of the purposes that any piece of equipment might serve, and would affect distinctions that are made in the statute. For example, Rhinesmith stated that a screw compressor is also a dehydrator. [Tr

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