    Notice: This opinion is subject to correction before publication in the P ACIFIC R EPORTER .
    Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,
    303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email
    corrections@appellate.courts.state.ak.us.



             THE SUPREME COURT OF THE STATE OF ALASKA


BP PIPELINES (ALASKA) INC.,                  )
CONOCOPHILLIPS                               )        Supreme Court Nos. S-14095/14116/14125
TRANSPORTATION ALASKA,                       )
INC., EXXONMOBIL PIPELINE                    )        Superior Court No. 3AN-06-08446 CI
COMPANY, KOCH ALASKA                         )
PIPELINE COMPANY, LLC,                       )
UNOCAL PIPELINE COMPANY,                     )        OPINION
and ALYESKA PIPELINE SERVICE                 )
COMPANY,                                     )
                                             )        No. 6867 – February 19, 2014
    Appellants and                           )
    Cross-Appellees,                         )
                                             )
    v.                                       )
                                             )
STATE OF ALASKA,                             )
DEPARTMENT OF REVENUE, and                   )
STATE ASSESSMENT REVIEW                      )
BOARD,                                       )
                                             )
    Appellees and                            )
    Cross-Appellees,                         )
                                             )
NORTH SLOPE BOROUGH,                         )
FAIRBANKS NORTH STAR                         )
BOROUGH, and CITY OF                         )
VALDEZ,                                      )
                                             )
    Appellees, Cross-Appellants,             )
    and Cross-Appellees.                     )
                                             )
CITY OF VALDEZ,                     )
                                    )
    Cross-Appellant/Appellee,       )
                                    )
    v.                              )
                                    )
BP PIPELINES (ALASKA) INC.,         )
CONOCOPHILLIPS                      )
TRANSPORTATION ALASKA,              )
INC., EXXONMOBIL PIPELINE           )
COMPANY, KOCH ALASKA                )
PIPELINE COMPANY, LLC,              )
UNOCAL PIPELINE COMPANY,            )
ALYESKA PIPELINE SERVICE            )
COMPANY, STATE OF ALASKA            )
DEPARTMENT OF REVENUE,              )
STATE ASSESSMENT REVIEW             )
BOARD, NORTH SLOPE                  )
BOROUGH, FAIRBANKS NORTH            )
STAR BOROUGH,                       )
                                    )
    Cross-Appellees/Appellants.     )
                                    )

          Appeal from the Superior Court of the State of Alaska, Third
          Judicial District, Anchorage, Sharon Gleason, Judge.

          Appearances: Leon T. Vance, Faulkner Banfield, P.C.,
          Juneau, Alexander O. Bryner, Feldman Orlansky & Sanders,
          Anchorage, Michael R. G aratoni, Garatoni Breen & Malone,
          Inc., San Antonio, Texas, for Appellants/Cross-Appellees.
          William Walker, Craig Richards, Sara Rishko, Walker &
          Levesque, LLC, Valdez, for Cross-Appellant/Appellee City
          of Valdez. Robert M. Johnson, Law Office of Robert M.
          Johnson, Anchorage, and Kenneth J. Diemer, Assistant
          Attorney General, Anchorage, and Richard Svobodny, Acting
          Attorney General, Juneau, for Appellees/Cross-Appellees
          State of Alaska Department of Revenue and State Assessment
          Review Board. Mauri Long and Jessica Dillon, Dillon &

                                        -2-                              6867

             Findley, P.C., Anchorage, for Appellee North Slope
             Borough. Robin Brena and Laura S. Gould, Brena, Bell &
             Clarkson, P.C., Anchorage, for Appellee Fairbanks North
             Star Borough.

             Before: Fabe, Chief Justice, Winfree, Stowers, and Maassen,
             Justices, and Senior Justice Matthews.* [Carpeneti, Justice,
             not participating.]

             FABE, Chief Justice.

             WINFREE, Justice, with whom STOWERS, Justice, joins, dissenting in

             part.



I.    INTRODUCTION
             This case involves the assessed value of the Trans-Alaska Pipeline System
for property tax purposes. On appeal from the Alaska State Department of Revenue and
the State Assessment Review Board, the superior court conducted a trial de novo to
assess the value of the pipeline by calculating its replacement cost and then accounting
for depreciation. The parties dispute the method used to assess the pipeline’s value as
well as the specific deductions made for functional and economic obsolescence. We
affirm the superior court’s valuation.
II.   FACTS AND PROCEEDINGS
             The Trans-Alaska Pipeline System is an 800-mile-long oil pipeline that
connects oil reserves in Alaska’s North Slope to a shipping terminal in the City of




      *
             Sitting by assignment made under article IV, section 11 of the Alaska
Constitution and Alaska Administrative Rule 23(a).

                                          -3-                                     6867
Valdez. This appeal involves a dispute between the Owners1 of the pipeline and
government entities about the assessed value of the pipeline for tax purposes.
              Alaskan municipalities may levy and collect a tax on oil and gas property,
including pipeline property, but the State Department of Revenue assesses the “full and
true value” of that property.2 Alaska Statute 43.56.060 controls the Department of
Revenue’s assessment.3 A party may appeal the Department of Revenue’s valuation to
the five-member State Assessment Review Board.4 In turn, the superior court reviews
an appeal of the Assessment Review Board’s decision in a trial de novo.5 In this case,
the Owners of the Trans-Alaska Pipeline System appeal the superior court’s valuation
of the pipeline for 2006 property tax assessment purposes.
              In 2006 the Department of Revenue valued all pipelines in Alaska through
a mass appraisal process, meaning that it used “standardized approaches and
standardized adjustments” for them all. When deciding how to assess these pipelines,
the Department of Revenue considered the three primary methods for calculating a
property’s value: (1) the income method, measuring the property’s earning power



       1
              The Owners and their ownership percentages of the Trans-Alaska Pipeline
System are BP Pipelines (Alaska) Inc. (46.9%), ConocoPhillips Transportation Alaska,
Inc. (28.3%), ExxonMobil Pipeline Company (20.3%), Koch Alaska Pipeline Company
(3.1%), and Unocal Pipeline Company (1.4%). The Alyeska Pipeline Service Company,
also an appellant, “is the operating agent for the Owners and operates [the Trans-Alaska
Pipeline System], and additionally holds title to some of the taxable property that is part
of the 2006 [Trans-Alaska Pipeline System] assessment.”
       2
              AS 29.45.080(b).
       3
              AS 43.56.060(e).
       4
              AS 43.56.120.
       5
              AS 43.56.130.

                                           -4-                                       6867

through the capitalization of its income; (2) the cost method, measuring the cost of
acquiring a substitute property of equivalent utility; and (3) the sales comparison method,
analyzing the sales price of comparable property. The Department of Revenue decided
that the most reliable method was to estimate the replacement cost of the pipeline less
depreciation. After conducting this “replacement cost new” analysis for the Trans-
Alaska Pipeline System, the Department of Revenue’s assessor, Randy Hoffbeck,
determined that the pipeline’s 2006 value was $3.641 billion.
              Both the Owners and the Municipalities6 seeking to levy and collect tax on
the Trans-Alaska Pipeline System appealed the Department of Revenue’s valuation to
the State Assessment Review Board. After a three-day hearing in May 2006, the
Assessment Review Board rejected the Owners’ argument that the pipeline should be
valued using the income approach rather than the cost approach. The Assessment
Review Board agreed with the Municipalities that the Department of Revenue made
certain inappropriate deductions when assessing the value of the property. Thus the
Assessment Review Board raised the valuation of the Trans-Alaska Pipeline System to
$4.3062718 billion.
              The Owners and Municipalities appealed the Assessment Review Board’s
decision to the superior court. The Owners argued that the 2006 assessed value of the
Trans-Alaska Pipeline System should be reduced to $850 million, and the Municipalities
argued that the assessed value should be raised to $11.570 billion. After a five-week trial
de novo in August and September of 2009, Superior Court Judge Sharon Gleason issued
a decision in May 2010 finding the value to be $9.98 billion for the 2006 tax year. The
Owners, Municipalities, and the Department of Revenue all filed motions for



      6
            The Municipalities are the City of Valdez, the Fairbanks North Star
Borough, and the North Slope Borough.

                                           -5-                                       6867
reconsideration. The superior court issued an amended decision upon reconsideration
in October 2010.7 That decision forms the basis of this appeal.
             The superior court determined that the Department of Revenue and the
State Assessment Review Board’s reliance on the cost approach to valuation, rather than
an income approach as proposed by the Owners, was not improper, unsupported by the
record, or fundamentally wrong. But the superior court agreed with the Municipalities
that the Assessment Review Board’s valuation was improper in certain respects.
             The superior court found the Municipalities’ cost study to be more credible
and accurate than any of the other cost studies in the record, including that presented by
the Owners and that relied upon by the Department of Revenue and the Assessment
Review Board.8 Based on this study, the superior court determined that the valuation’s
scaling adjustment for excess capacity should be larger and should be characterized as
economic or external rather than functional obsolescence. The superior court arrived at
a final valuation of $9.977934 billion for the 2006 tax year, more than twice the
Assessment Review Board’s valuation.
             In its final judgment, the superior court directed the Department of Revenue
to issue a supplemental certified assessment roll based on the superior court’s valuation
of the Trans-Alaska Pipeline System that would form the basis of the supplemental taxes
owed by the Owners. The superior court ruled that interest owed on the supplemental
taxes would begin to run on June 30, 2006, when the taxes would have been due in 2006.



      7
              The amended decision clarified or revised various factual findings and
made “editing/errata type corrections.” Most significantly, the superior court remanded
the case to the Department of Revenue instead of the Assessment Review Board. The
assessed value of the pipeline remained the same.
      8
             The Owners do not appeal the superior court’s decision to rely on the
Municipalities’ cost study.

                                           -6-                                      6867

             The Owners appeal the superior court’s decision, arguing that the pipeline
should have been assessed at fair market value as measured by tariff income rather than
use value as measured by replacement cost. The Owners also argue that the superior
court’s assessment improperly reached non-taxable property, that the superior court
misconstrued a settlement agreement, and that the superior court’s imposition of interest
dating from 2006 was in error. The Municipalities cross-appeal, arguing that the
superior court erred in applying a scaling deduction for economic obsolescence.
III.   STANDARD OF REVIEW
             When parties appeal the superior court’s review of an administrative
agency’s decision in a trial de novo, we review only the superior court’s decision, not
that of the administrative agency.9 We review the superior court’s factual findings under
the clearly erroneous standard and will not overturn a factual finding unless “left with
the firm and definite conviction on the entire record that a mistake has been made.”10 On
questions of law, we are not bound by the lower court’s decision.11 “Our duty is to adopt
the rule of law that is most persuasive in light of precedent, reason, and policy.”12




       9
             City of Nome v. Catholic Bishop of N. Alaska, 707 P.2d 870, 875 (Alaska
1985) (citing Kott v. City of Fairbanks, 661 P.2d 177, 180 n.1 (Alaska 1983)).
       10
             Id. at 876 (quoting Stanton v. Fuchs, 660 P.2d 1197, 1198 (Alaska 1983))
(applying the clearly erroneous standard to the superior court’s findings of fact when
reviewing the superior court’s de novo review of an administrative agency decision).
       11
             Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979).
       12
             Id.

                                           -7-                                      6867

IV.    DISCUSSION

       A.	    The Superior Court Did Not Err By Assessing The Use Value Of The
              Trans-Alaska Pipeline System.
              1.	    Alaska Statute 43.56.060 does not require pipeline property to
                     be assessed at its “fair market value.”
              The Alaska Constitution provides that “[s]tandards for appraisal of all
property assessed by the State . . . shall be prescribed by law.”13 Consistent with this
commandment, AS 43.56.060 provides that the Department of Revenue shall assess
“property used . . . for the pipeline transportation of gas or unrefined oil or for the
production of gas or unrefined oil at its full and true value as of January 1 of the
assessment year.”14 It also specifies that the full and true value of pipeline property is
“determined . . . with due regard to the economic value of the property based on the
estimated life of the proven reserves of gas or unrefined oil then technically,
economically, and legally deliverable into the transportation facility.”15 The parties
dispute the meaning of this “full and true value” appraisal standard. The Owners contend
that the “full and true value” of the pipeline can only be assessed by looking at its fair
market value. The Municipalities agree with the Department of Revenue and the
Assessment Review Board that “full and true value” may be measured by any one of
several assessment standards, including fair market value or use value.
              The superior court determined that the Department of Revenue and the
State Assessment Review Board assessed the value of the Trans-Alaska Pipeline System
by looking at the “use value” of the pipeline, defined as “the value that [the pipeline] has



       13
              Alaska Const. art. IX, § 3.
       14
              AS 43.56.060(a) (emphasis added).
       15
              AS 43.56.060(e)(2).

                                            -8­                                       6867
for its specific use in an integrated system in transporting [Alaska North Slope] products
from the Owners’ affiliates from the Alaska North Slope to market.” The superior court
found that the use value premise had “not been demonstrated to constitute a
fundamentally wrong principle of valuation.” The superior court found that “economic
value” has “no generally accepted definition in the appraisal profession,” and the Owners
do not dispute this finding. The superior court further concluded that “neither the term
‘full and true value’ nor the term ‘economic value’ as used in [AS 43.56.060(e)]
mandates, as a matter of law, the exclusive reliance on the regulated tariff income stream
to derive a value of [the Trans-Alaska Pipeline System] for property tax purposes.”
              The Owners argue on appeal that the legislature intended the phrase “full
and true value” to mean “fair market value” and contend that market value should be
assessed by calculating the value of the pipeline’s income from tariffs.
              The Appraisal of Real Estate defines “market value” as
              [t]he most probable price, as of a specified date . . . for which
              the specified property rights should sell after reasonable
              exposure in a competitive market under all conditions
              requisite to a fair sale, with the buyer and seller each acting
              prudently, knowledgeably, and for self-interest, and assuming
              that neither is under undue duress.[16]
“Market value” differs from “use value,” which “focuses on the value the real estate
contributes to the enterprise of which it is a part, without regard to the highest and best
use of the property or the monetary amount that might be realized from its sale.”
              The Owners contend that the superior court erroneously gave the
Department of Revenue and the State Assessment Review Board the discretion to select
an assessment standard when in fact the statute compels the use of the “fair market
value” standard. The Owners’ primary argument is that “full and true value” is defined


      16
              A PPRAISAL INST ., THE A PPRAISAL OF REAL ESTATE 23 (13th ed. 2008).

                                            -9-                                      6867
elsewhere by the legislature as “fair market value,” and analyzing the statutory scheme
as a whole indicates that “full and true value” should be defined as “fair market value”
under AS 43.56.060(e)(2) as well.
              Thus the question for this court is whether AS 43.56.060 compels the use
of a “fair market value” standard and prohibits the use of a “use value” standard. The
plain text and history of AS 43.56.060 indicate that the legislature did not intend for “fair
market value” to be the only allowable standard for the assessment of pipeline property.
              “When the legislature uses the same term in two closely related statutes, we
will normally presume that the legislature intended that term to mean the same thing in
both cases.”17 The Owners point out that AS 43.56, which sets the assessment standard
for oil and gas property, operates in conjunction with AS 29.45, which allows
municipalities to tax property, including oil and gas properties.                    Alaska
Statute 29.45.110(a) defines “full and true value” as “market value,” or “the estimated
price that the property would bring in an open market and under the then prevailing
market conditions in a sale between a willing seller and a willing buyer both conversant
with the property and with prevailing general price levels.”18 But AS 29.45.110(a) refers
to property that the municipality, not the state, assesses. And that chapter explicitly
provides that the full and true value of pipeline property is determined not under
AS 29.45, but “under AS 43.56 as assessed by the Department of Revenue.”19 Thus,




       17
            Tesoro Alaska Petroleum Co. v. Kenai Pipe Line Co., 746 P.2d 896, 906
(Alaska 1987) (quoting Matanuska-Susitna Borough v. Hammond, 726 P.2d 166, 180
(Alaska 1986)).
       18
              AS 29.45.110(a).
       19
              AS 29.45.080(c).

                                            -10-                                       6867

AS 29.45.110’s definition of full and true value is not relevant to the assessment standard
used by the Department of Revenue.
              The Owners note that the legislature also defined “full and true value” as
“market value” in certain sections of AS 43.56.060. But AS 43.56.060 defines “full and
true value” differently for each type of oil and gas property the statute covers. For
exploration property, “full and true value” is defined as “market value,” but that
definition is explicitly limited to exploration property.20 The “full and true value” of
production property, on the other hand, is “determined . . . on the basis of replacement
cost less depreciation based on the economic life of proven reserves.” 21 The value of
under-construction production and pipeline property in the first year of assessment is
measured by “the actual cost incurred or accrued with respect to the property as of the
date of assessment.”22 Thus there is no global definition of “full and true value” in
AS 43.56.060, and there is no definition of “full and true value” specific to pipeline
property.
              The legislative history of AS 43.56.060 supports the Municipalities’
position that the legislature did not intend “full and true value” to have the uniform
meaning of “market value” throughout the property tax statutes. In 1973 the Director
of the Alaska Oil and Gas Division testified to the House Finance Committee about the
bill that would become AS 43.56.23 He noted that the phrase “full and true value” was

       20
               AS 43.56.060(c) (specifying that “[t]he full and true value of taxable
property . . . for use in the exploration for gas or unrefined oil . . . is [market value]”
(emphasis added)).
       21
              AS 43.56.060(d)(2).
       22
              AS 43.56.060(d)(1), (e)(1).
       23
              Minutes, H. Fin. Comm. Hearing on H.B. 1, 8th Leg., 1st Spec. Sess. 49
                                                                       (continued...)

                                            -11-                                     6867

“a problem” because there were “many different methods of assessment” and that “he
defied a tax assessor to determine ‘full and true value.’ ”24 The Director then went down
the list of types of oil and gas property covered under AS 43.56.060:
             Under Sec. 60 of the Governor’s bill, sub-section (a) is a
             provision for what is assessed. . . . (b) Deals only with
             exploration equipment, based on market value. . . .
             (c) Cover[s] production equipment. The tax assessor would
             check the equipment, old and new, and tax accordingly, using
             actual cost less depreciation. . . . (d) Pipeline and pipeline
             equipment. It starts with the actual cost as a basis, but is
             depreciated on the economic life except in the event the
             physical life is different.[25]
The Director’s testimony indicates that “full and true value” was construed differently
for each subsection, that “market value” was thought to be the standard only for
exploration property, and that the cost approach was considered to be a definition of
“full and true value” distinct from market value.
             The testimony of former Attorney General John Havelock also supports the
Municipalities’ view that “full and true value” is not synonymous with “fair market
value.”26 The Attorney General was asked whether it would “make much difference” for
production property to be valued at “fair market value” as opposed to the method laid out




      23
        (...continued)
(Oct. 22, 1973) (comments of Homer Burrell, Director, Division of Oil and Gas).
      24
             Id. at 49-50.
      25
             Id. at 51.
      26
             Minutes, H. Fin. Comm. Hearing on H.B. 1, 8th Leg., 1st Spec. Sess. 21
(Oct. 20, 1973) (comments of John Havelock, Attorney General).

                                          -12-                                     6867

in the draft bill.27 Havelock responded that “it would be a considerable change” because
“[t]he fair market value method would introduce an element of uncertainty in property
that doesn’t have a fair market value.”28 He explained that he “didn’t think the fair
market value was appropriate” for valuing production property.29 While Havelock was
referring to production rather than pipeline property, his testimony shows that fair market
value was not considered the common standard for valuing all property under
AS 43.56.060 and that the standard used for both pipeline and production property was
considered distinct from fair market value.
              We therefore conclude that the statutory language of AS 43.56.060 does not
compel the Department of Revenue to use a fair market valuation standard. But although
the use of a fair market standard is not always required, we must also examine whether
the superior court erred in this case by assessing the Trans-Alaska Pipeline System under
a use value standard.
              2.	    The superior court did not err by applying a use value standard
                     in this case.
              The parties dispute whether the Assessment Review Board’s decision to
evaluate the pipeline under a use value standard implicates agency expertise such that the
superior court — and by extension, this court — should treat that decision with
additional deference.30 We need not answer this question. After giving due deference


       27	
              Id.
       28	
              Id.
       29	
              Id.
      30
             See Tesoro Alaska Petroleum Co. v. Kenai Pipe Line Co., 746 P.2d 896,
903 (Alaska 1987) (noting that the “rational basis test is used where the questions at
issue implicate special agency expertise or the determination of fundamental policies
                                                                        (continued...)

                                           -13-	                                     6867

to the superior court’s factual findings, we conclude that its decision to apply a use value
assessment standard stands on its own merits. The superior court made ample findings
to support its conclusion that, because there is no market from which to calculate fair
market value for the Trans-Alaska Pipeline System or for shipping capacity on the
pipeline, the use value standard was appropriate.
              The superior court found that the Trans-Alaska Pipeline System’s primary
value is its utility in transporting North Slope oil reserves. The court estimated the
reserves to be “worth $350 billion, to market.” Because “[t]he value of those proven
reserves cannot be realized without [the pipeline], as it constitutes the only viable means
of transporting [Alaska North Slope] product to market,” the superior court ruled that
valuing the pipeline based on the market value of its tariff income stream31 alone would
fail to capture its full and true value.
              The superior court found that the Trans-Alaska Pipeline System is a
limited-market and special-purpose property. A limited-market property is a property
that “has relatively few potential buyers at a particular time.”32 The superior court
further found that all but one pipeline owner has a corporate affiliate Alaska North Slope
oil producer and that there is a limited market for the sale of an individual ownership
interest in the Trans-Alaska Pipeline System. Historically when such a sale has taken
place, it has included an interest in transporting oil production. The superior court
recognized that the three largest owners of the pipeline had a combined 95% ownership



       30
        (...continued)
within the scope of the agency’s statutory function”).
       31
             Tariff income is revenue generated from charging a tariff to transport oil
through the pipeline.
       32
              A PPRAISAL INST ., supra note 16, at 27.

                                           -14-                                       6867

interest in the pipeline and their corporate affiliates had a combined 91.4% share of the
estimated Alaska North Slope oil production. Thus the superior court found the
production of oil and ownership of the Trans-Alaska Pipeline System to be inextricably
linked.
              The superior court took into account an affidavit from an economic expert,
Adam Jaffe, who had testified for the Owners before the Federal Energy Regulatory
Commission in a previous matter. Jaffe testified at trial that the Trans-Alaska Pipeline
System was distinct from “most other oil pipelines” because it was “largely a closed
system in which the vast majority of business is transacted among affiliated buyers and
sellers.” Thus the market for the Trans-Alaska Pipeline System is “very different from
‘textbook’ markets.” The superior court noted that while the Owners presented evidence
that there were markets for investors in some crude oil pipelines in the Lower 48 based
on tariff income alone, those pipelines are distinguishable from the Trans-Alaska
Pipeline System. It observed that the Owners had not presented evidence that there was
a market for ownership interest in the pipeline based on tariff income.
              The superior court also determined that the Trans-Alaska Pipeline System
was a special-purpose property, or a property with “unique designs, special construction
materials, or layouts that restrict their functional utility to the use for which they were
originally built.”33 Jaffe’s affidavit notes that “all of the carriers entered into the
construction of the pipeline primarily for the purpose of ensuring a means of transporting
their own oil.” The superior court found that the Owners gave priority to the capacity
demands of their affiliated producers and “are almost completely dependent upon their
affiliate and parent companies.” Thus valuing the pipeline using its tariff income,
according to the superior court, would ignore the Owners’ interests in transporting their


       33
              Id. at 28.

                                           -15-                                      6867
corporate affiliates’ oil to market and monetizing the oil reserves of the Alaska North
Slope.34
              In light of these unchallenged factual findings, we cannot conclude that it
was error to assess the Trans-Alaska Pipeline System under a use value standard.
       B.	    The Use Value Assessment Standard Does Not Improperly Tax Non­
              Trans-Alaska Pipeline System Property.
              The Owners argue that even if the “full and true value” assessment standard
does not compel the calculation of the pipeline’s market value, the use value assessment
standard is inappropriate in this case because it results in the improper taxation of items
that are not taxable under AS 43.56. Alaska Statute 43.56.210(5), which defines taxable
oil and gas property, does not include actual reserves of oil and gas, which are taxed
separately.35 The Owners’ argument implies that because the superior court assessed the
pipeline’s value as a vessel for transporting oil reserves to market, the superior court
improperly imposed a tax on the actual value of those oil reserves.
              But the Owners have not shown that the superior court considered the value
of Alaska North Slope oil reserves for any other reason than to support the conclusion
that the Trans-Alaska Pipeline System has a unique use value distinct from its tariff
income. The superior court calculated the replacement cost of the pipeline — before
adjusting for depreciation — at $18.7 billion. It also found that the Owners and their

      34
              See, e.g., Tenneco, Inc.-Tenn. Gas Pipeline Div. v. Town of Cazenovia, 479
N.Y.S.2d 587, 589 (N.Y. App. Div. 1984) (affirming use of the “replacement cost new”
method rather than capitalized income method to value pipeline because the pipeline
property was “unique and specially built . . . there is no market for the type of property
and there are no sales of property for such use . . . and it is an appropriate improvement,
which if destroyed, would be reasonably expected to be replaced or reproduced”).
       35
             AS 43.55.017(a) provides that “neither the state nor a municipality may
impose a tax on (1) producing oil or gas leases; (2) oil or gas produced or extracted in
the state.”

                                           -16-	                                     6867

affiliates would reconstruct the Trans-Alaska Pipeline System not for its tariff income
but in order to monetize the Alaska North Slope’s $350 billion worth of oil reserves. But
the superior court did not include the $350 billion figure as part of its replacement cost
calculation. Instead, the superior court used the presence of those reserves to explain its
determination that tariff income could not adequately capture the pipeline’s value as a
special-purpose property.
              The Owners further argue that when it assessed the value of the pipeline,
the superior court improperly included the value that the Owners’ affiliate shippers
receive by paying below-market regulated tariff rates to transport oil through the
pipeline. The Owners argue that this “shippers’ interest” is not “real and tangible
personal property” taxable under AS 43.56.210(5)(A).36
              The Department of Revenue defines shippers’ interest as “the economic
interest transferred to the shipper through the regulatory process which allows them to
ship oil at tariff rates below those of an open and competitive market.” The State’s
witness noted that a producer would “receive a benefit through shipping because of the
lower-than-market rate.” The witness acknowledged under cross-examination that this
interest could only be “monetized” by a shipper actually using the pipeline to transport
oil.
              But in rejecting the tariff income approach, the superior court did not
attempt to measure the value of shippers’ interest or add any such measure to the value
of the pipeline, nor did it even mention the shippers’ interest concept. It merely



       36
              AS 43.56.210(5)(A) provides that “taxable property” under AS 43.56
“means real and tangible personal property used . . . within this state primarily in the
exploration for, production of, or pipeline transportation of gas or unrefined oil . . . or in
the operation or maintenance of facilities used in the exploration for, production of, or
pipeline transportation of gas or unrefined oil.”

                                            -17-                                        6867

concluded that tariff income cannot fully capture the value that the pipeline contributes
to the integrated system of which it is a part. The Owners have not shown that the
superior court valued non-pipeline property. They have merely demonstrated that it took
the pipeline’s role in transporting Alaska North Slope oil reserves into account in
concluding that the pipeline’s full and true value is not captured by the tariff income
approach.37 We therefore find no basis to conclude that the superior court erroneously
considered the value of non-taxable property in its assessment.
       C.	     The Superior Court Did Not Err In Deducting For Physical,
               Functional, And Economic Obsolescence.
               Notwithstanding their objection to the superior court’s assessment of the
Trans-Alaska Pipeline System’s use value instead of its fair market value, the Owners
concede that calculation of the replacement cost of the pipeline is a permissible method
of measuring the “full and true value” of the pipeline because “replacement cost less
depreciation” is one of several standard appraisal methods used to determine market
value.38     This valuation method involves determining the cost of constructing a



       37
             The Owners also briefly state that the superior court’s attempt to reach the
value of non-pipeline property violated the Due Process and Commerce Clauses because
non-Trans-Alaska Pipeline System property is “owned by other entities and . . . taxable
by other jurisdictions,” and therefore cannot be taxed without apportionment. The
Owners’ briefing on this point is confined to a single sentence, and is not sufficiently
developed to allow us to evaluate it. In any case, as discussed above, the Owners have
not shown that the superior court assessed the value of non-pipeline property.
       38
              See 15 Alaska Administrative Code (AAC) 56.110(c) (2013) (“[T]he full
and true value of pipeline property in operation is its economic value based upon the
estimated life of proven reserves of the gas or oil then technically, economically and
legally deliverable into the transportation facility. Economic value is determined by the
use of standard appraisal methods such as replacement cost less depreciation,
capitalization of estimated future net income, analysis of sales, or other acceptable
methods.”).

                                          -18-	                                    6867

replacement property of equivalent utility to the Trans-Alaska Pipeline System, then
deducting any necessary amounts for all three traditionally recognized forms of
depreciation: physical, functional, and economic.39 The superior court made depreciation
adjustments for physical and other types of depreciation (using the economic age-life
method), for functional obsolescence (based on the anticipated costs of the Owners’
strategic reconfiguration plan), and for economic obsolescence (a scaling deduction for
excess capacity). Both the Owners and the Municipalities contend that the superior court
erred when making these deductions for obsolescence. The Owners claim that the
superior court did not deduct enough; the Municipalities claim it deducted too much.
             1.	    The superior court was not required to treat tariff regulations
                    as a form of economic obsolescence.
             “ ‘Economic obsolescence’ is diminution in the value or usefulness of
property’ that ‘results from external factors, such as decreased demand or changed
governmental regulations.’ ”40 The Owners argue that the superior court erred by not
making a deduction for economic obsolescence based on the effect of government
regulation of the tariffs the Owners are allowed to charge shippers for transportation of
oil. This argument is based on the theory that the Trans-Alaska Pipeline System is worth
less than a new pipeline because, under existing regulations, a new pipeline would be
allowed to charge higher tariffs for transporting oil. They argue that by not making an
obsolescence deduction for tariff regulation from the replacement cost of the pipeline,
the superior court assessed the value not of the Trans-Alaska Pipeline System, but of a




      39
             A M . SOC ’Y OF A PPRAISERS , V ALUING M ACHINERY AND EQUIPMENT 66 (2d
ed. 2005).
      40	
             Horan v. Kenai Peninsula Borough Bd. of Equalization, 247 P.3d 990, 996
n.39 (Alaska 2011) (quoting BLACK ’S LAW D ICTIONARY 1107 (8th ed. 2004)).

                                          -19-                                     6867
“hypothetical pipeline” that is “free from the actual legal restrictions affecting the value
of [the Trans-Alaska Pipeline System].”
                     a.	    The State’s appraisal did not treat tariff regulation as a
                            form of depreciation.
              At trial, the State’s appraiser, Randy Hoffbeck, explained his decision not
to make a deduction for economic obsolescence based on tariff regulation. He testified
that there are three primary ways appraisers measure economic obsolescence: capitalized
rent or income loss (comparing a property’s income to that of another property without
the perceived deficiency), paired sales analysis (comparing a property’s sales price to
that of another property without the perceived deficiency), and market extraction (taking
the sale of a property and breaking its sales price down into physical, functional, and
economic obsolescence). Hoffbeck testified that he was unable to perform any of those
tests because they all require market data that does not exist for the Trans-Alaska
Pipeline System due to “the lack of comparable income streams or comparable sales.”
The Owners’ appraiser agreed that, assuming that a market for the Trans-Alaska Pipeline
System does not exist, a capitalized income loss approach “would not apply.”
              Because Hoffbeck found those three tests to be inapplicable, he came up
with his own method to determine whether tariff regulation had a significant impact on
the pipeline’s use value. Hoffbeck’s test asked two questions: first, whether tariff
regulation is “a hindrance to production or [whether it would] make the oil
uncompetitive,” and second, whether tariff regulation would prevent the Trans-Alaska
Pipeline System from being constructed today if the pipeline did not exist.
              Hoffbeck concluded that for a newly constructed replacement pipeline with
a higher rate base,41 the higher allowable tariffs would nonetheless not be so high that


       41
              A rate base is defined as “[t]he investment amount or property value on
                                                                        (continued...)

                                           -20-	                                      6867
producers could not “get the product to market profitably.” Similarly, Hoffbeck
determined that higher tariffs on a replacement pipeline would not make the Trans-
Alaska Pipeline System less competitive compared to the existing Cook Inlet Pipeline.
Finally, Hoffbeck looked at a New York case that held that if a property is worth the cost
of replacement then, under the cost approach, a deduction for economic obsolescence
based on earning capacity after reproduction is not appropriate.42 Hoffbeck determined
that the Trans-Alaska Pipeline System is worth the cost of replacement because the
potential revenue to be gained compared to the cost of construction is comparable to the
equivalent figures when the pipeline was first constructed in 1977. He testified that “the
usefulness of [the pipeline] right now is similar to the usefulness of [the pipeline] . . . at
the time it was constructed.” Based on those tests, Hoffbeck “concluded that there was
no external obsolescence to be calculated for [the pipeline].”
                     b.	    The Owners argue that tariff regulation is a form of
                            depreciation.
              On appeal, the Owners do not dispute or even discuss Hoffbeck’s treatment
of economic obsolescence, nor do they specify the nature or amount of their argued-for
economic obsolescence adjustment. Instead, they generally argue that the superior
court’s replacement cost measure should be adjusted downward because the hypothetical
new property would have a greater allowable tariff than the Trans-Alaska Pipeline
System and thus would generate more tariff income for the Owners.




       41
        (...continued)
which a company, esp[ecially] a public utility, is allowed to earn a particular rate of
return.” BLACK ’S LAW D ICTIONARY 1375 (9th ed. 2009).
       42
            Tenneco, Inc.-Tenn. Gas Pipeline Div. v. Town of Cazenovia, 479 N.Y.S.2d
587, 590 (N.Y. App. Div. 1984).

                                            -21-	                                       6867

             At trial, the Owners’ appraiser used an “income shortfall” approach to
support the conclusion that tariff regulations reduce the value of the Trans-Alaska
Pipeline System. The appraiser compared the tariff income actually allowed to the tariff
income from a hypothetical, newly constructed pipeline. The Owners’ appraiser testified
that because the rate base for a newly constructed property would be higher, the new
property would be allowed to charge higher tariffs. The Owners’ appraisal expert
characterized this difference as economic obsolescence due to “income shortfall” and
valued it at $1.3 billion. On appeal, the Owners again argue that “replacing the entire
pipeline system would produce a tariff far different from the current [Trans-Alaska
Pipeline System] tariff.”
                    c.	     The superior court did not err by refusing to make a
                            deduction for tariff regulation.
             The superior court found that the State gave “due consideration” to whether
a deduction for tariff regulation should be made, and that the Owners “failed to establish
that the [Department of Revenue and the State Assessment Review Board] erred in
refusing to apply [their suggested] income shortfall method to determine economic
obsolescence.” We find no error in the superior court’s conclusion.
             The superior court heard testimony that the “income shortfall” method
differs from the established method of calculating capitalized income loss because,
instead of comparing similar properties — one regulated and one unregulated — in an
established market, it compares the existing property to a hypothetical new one, both
subject to current regulations. But the superior court heard ample testimony that this
method of calculating depreciation is not a widely accepted appraisal practice, nor does
it appear in any widely accepted appraisal manuals. The superior court concluded that
the two appraisal manuals that the Owners cited as supporting the income shortfall
technique were not authoritative, one because it was unpublished and not peer-reviewed


                                          -22-	                                     6867

and the other because a newer edition of the same text omitted any mention of the
income shortfall technique. One witness also testified that the Owners’ estimate of the
tariffs that a hypothetical new pipeline would be allowed to charge was not reliable.
               Even if the income shortfall method were an accepted appraisal technique
in some cases, it would be improper here. The bedrock assumption of that technique is
that the Trans-Alaska Pipeline System is less valuable than a hypothetical new pipeline
because the new pipeline would be allowed to charge higher tariffs. But in this case, the
primary value of the pipeline is its ability to monetize Alaska North Slope oil reserves
because the companies collecting tariffs are closely affiliated with the companies paying
tariffs. So the fact that a new pipeline could charge higher tariffs does not imply that the
new pipeline would be more valuable to its Owners.
               The highly integrated nature of the Trans-Alaska Pipeline System means
that the companies paying to transport oil through the pipeline are closely affiliated with
the companies collecting those tariffs. Several witnesses testified that, due to this
integration, the value of the pipeline is completely divorced from the Owners’ ability to
charge tariffs. One witness testified that the tariff the Owners are allowed to charge has
no effect on value because the same entity is levying and paying the tariff: “[W]hatever
. . . the tariff might be, it is either benefiting the pipeline Owner . . . or it’s benefiting the
shipper, or some combination of that. And so . . . it doesn’t make any difference what
[the tariff] is.” Relying on this evidence, the superior court found that tariff regulation
is not a source of external obsolescence because such regulation is irrelevant to the value
of the pipeline:
               [The pipeline’s] highest and best use is not as a stand-alone
               investment property, but as an essential component of the
               integrated production and transportation system from the
               Alaska North Slope. The evidence has persuasively
               demonstrated that [the pipeline’s] value lies in that use — a


                                              -23-                                          6867

              use which is distinct from whatever tariff revenue [the
              pipeline] may generate. As such, there is no additional
              economic obsolescence caused by the fact that the [Trans-
              Alaska Pipeline System] is a regulated pipeline.
We conclude that the superior court did not err by refusing to treat tariff regulations as
a form of economic obsolescence.
              2.	    The superior court did not improperly consider unproven
                     reserves of oil when calculating the economic life of the pipeline.
              One measure of depreciation, called economic age-life, is the age of the
property in comparison to its economic life.43 Alaska law requires that the measure of
a pipeline’s economic life be based on the estimated life of “proven” reserves of oil and
gas.44 Proven reserves are those reserves “then technically, economically, and legally
deliverable” into the pipeline.45 The superior court found that the record “amply”
demonstrated that adequate proven reserves existed to allow the Trans-Alaska Pipeline
System to operate until 2047. The Owners argue that in determining the reserves
available for delivery into the pipeline, the superior court took into account reserves that
do not constitute “proven reserves” as specified by statute.
              When deciding which reserves were “then technically, economically, and
legally deliverable” into the pipeline, the superior court found that it was not necessary
for production facilities delivering the resources to the pipeline to currently exist for
reserves to be “proven” as long as the technology to deliver those reserves existed. The
superior court considered oil fields categorized by the State as “under development” and


       43
               Depreciation is calculated from estimated economic life by “calculating the
ratio of the effective age of the property to its economic life expectancy and applying this
ratio to the property’s total cost.” A PPRAISAL INST ., supra note 16, at 420.
       44
              AS 43.56.060(e)(2).
       45	
              Id.

                                           -24-	                                      6867

“under evaluation” to be “proven reserves.” A State’s witness explained that oil “under
development” means oil where facilities to transport the oil to the Trans-Alaska Pipeline
System were in the process of being developed, and oil “under evaluation” means oil that
has been discovered and determined to be technically recoverable.
              The Owners argue that oil reserves under development and under
evaluation are not “proven reserves.” They contend that the statutory term “proven
reserves” is a technical term 46 that requires the oil in question to be “recoverable based
on existing conditions.” For support, the Owners cite a House Finance Committee report
on the bill that eventually became AS 43.56.47 In the report, the Director of the Oil and
Gas Division told the legislature that “reserves means the amount recoverable at today’s
technology and today’s prices.”48
              It is unclear from the Owners’ briefing why this statement supports their
reading of the statute. The statement appears consistent with the superior court’s
definition of “proven reserves” as those reserves theoretically recoverable with today’s
technology even if the facilities to recover the oil are not actually in place. Moreover,
the complete legislative history indicates confusion as to the meaning of the phrase
“proven reserves.” A member on the Finance Committee remarked that “no matter what




       46
              Under Alaska law, statutory words and phrases that are “technical” and
“those that have acquired a peculiar and appropriate meaning, whether by legislative
definition or otherwise, shall be construed according to the peculiar and appropriate
meaning.” AS 01.10.040(a).
       47
             Minutes, H. Fin. Comm. Hearing on H.B. 1, 8th Leg., 1st Spec. Sess.
(Oct. 22, 1973).
       48
              Id. at 52 (comments of Homer Burrell, Director, Division of Oil and Gas).

                                           -25-                                      6867

is done in this area, proven reserves will become a matter of litigation.”49 Another
indicated that “the State’s information” concerning proven reserves would be “as good
as any company’s in the industry.”50 The committee did not discuss the meaning of the
phrase in more detail.51
              The Owners also cite an industry definition of “proven reserves.” The
Society of Petroleum Engineers defines the term as “[t]he quantities of crude oil, natural
gas and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in the future from known oil and gas reservoirs
under existing economic and operating conditions.” The definition goes on to include
several types of proven reserves, including “[p]roved developed reserves behind the
casing of existing wells or at minor depths below the present bottom of such wells which
are expected to be produced through these wells in the predictable future,” as well as
“[p]roved [u]ndeveloped [r]eserves” which are “[p]roved reserves to be recovered from
new wells on undrilled acreage or from existing wells requiring a relatively major
expenditure for recompletion or new facilities for fluid injection.” The superior court
concluded from this definition that “proven reserves” include undeveloped reserves
without the current infrastructure for delivery. We agree. The Owners have not shown


       49
             Minutes, H. Fin. Comm. Hearing on H.B. 1, 8th Leg., 1st Spec. Sess. 64
(Oct. 23, 1973) (comments of Representative Keith Specking).
       50
              Id. (comments of J.H. Hogan, staff member of the House Finance
Committee).
       51
              A now-repealed Alaska statute, codified in 1975, dealing with property tax
on oil and gas reserves also supports the superior court’s interpretation of the term. That
statute defined “proven reserves” as “the volumes of oil and gas in a known deposit
which geological and engineering information indicate will be recoverable in the future
under prevailing economic conditions and technology.” Former AS 43.58.190(8)
(1975).

                                           -26-                                      6867

that the superior court’s definition of “proven reserves” is inconsistent with the statute
or any widely accepted industry definition of the term.
              3.	    The superior court did not err in reducing the assessed value of
                     the pipeline to account for excess capacity.
              At trial, the superior court heard evidence that the Trans-Alaska Pipeline
System’s actual throughput is lower than its maximum capacity. The Owners urged the
superior court to make a downward scaling adjustment to the assessed value of the
pipeline to account for this excess capacity as economic or functional obsolescence.
Such an adjustment is appropriate to account for features that would be expensive to
replace but that add little or no value to the property. The superior court provided the
example of a feature that costs more than the value it adds to the property, such as a
building with ceilings that are too high. In this case, while it would be expensive to build
a new pipeline with the Trans-Alaska Pipeline System’s current carrying capacity, such
“superadequacy” adds little value over a smaller, less expensive pipeline. The superior
court found that the Trans-Alaska Pipeline System’s excess capacity was a form of
economic, not functional, obsolescence.52


       52
             The dissent argues that “at no point during the underlying litigation . . . did
anyone argue for an economic obsolescence deduction based on excess capacity” and
that “[t]he Owners argued to the superior court that excess capacity warranted a
deduction for functional obsolescence, not economic obsolescence.” Dissent at 40.
               But the issue of economic obsolescence was squarely before the superior
court in this case. The Owners sought deductions of all varieties, arguing in their points
on appeal in the superior court that the Assessment Review Board “Failed to Apply All
Forms of Obsolescence in its Cost Approach Considerations” and that “[i]t is a
fundamentally wrong application of valuation principles not to apply all three forms of
depreciation (physical, functional, and economic).” The Owners specifically argued that
the Assessment Review Board “Failed to Properly Consider Economic Obsolescence
with Regard to the [Trans-Alaska Pipeline System].” Contrary to the dissent’s assertion,
                                                                           (continued...)

                                           -27-	                                      6867

              In explaining its choice not to deduct for functional obsolescence, the
superior court found that the Trans-Alaska Pipeline System is legally required to
maintain a physical capacity of 1.1 million barrels per day by the terms of the Amended
Capacity Settlement Agreement53 and by AS 42.06.290(a).54 The superior court also
found that “maintaining [the pipeline’s] ability to operate in a broad range of throughputs


       52
        (...continued)
nothing in the points on appeal indicates that the Owners limited their argument for an
economic obsolescence deduction to considerations of tariff regulations. The Owners
argued broadly for deductions of every type. And they argued broadly for economic
obsolescence deductions, stating simply, “Valuation standards require consideration of
economic obsolescence.”
              When the Owners argued in their points on appeal to the superior court that
there should be a deduction for “declining. . . production” in “the North Slope Oil Fields”
leading to less “crude oil being shipped through [the Trans-Alaska Pipeline System]
every year,” the Owners argued broadly that the Assessment Review Board “either
entirely disregarded” that factor “and/or failed to give adequate consideration” to that
factor “in determining the assessed value.” Similarly, the Owners argued in their points
on appeal to the superior court that the Assessment Review Board “fail[ed] to properly
calculate obsolescence” when it ignored the “excess capacity” resulting from
“deplet[ing]” oil fields. In neither excess-capacity argument did the Owners restrict
themselves to seeking a deduction for functional obsolescence; rather, the Owners argued
as broadly as possible that the Assessment Review Board erred more generally by
refusing to take account of this excess capacity as any form of obsolescence.
              Thus, we cannot agree with the dissent that the superior court made an
economic obsolescence deduction based on excess capacity “without any prior notice to
the parties.” Dissent at 40.
       53
              The Amended Capacity Settlement Agreement “assure[s] the State of a
certain level of excess capacity to optimize the development of its natural resources.”
       54
              AS 42.06.290(a) provides that “[a] pipeline carrier may not abandon or
permanently discontinue use of all or any portion of a pipeline . . . without the permission
and approval of the commission [after] a finding by the commission that continued
service is not required by public convenience and necessity.”

                                           -28-                                       6867

enhances the value of the pipeline,” because the pipeline “is the only viable means of
transportation for an entire oil region that includes vast proven reserves.” The superior
court found that the value of maintaining a flexible carrying capacity was demonstrated
in part by the Owners’ $600 million strategic reconfiguration project to ensure that the
Trans-Alaska Pipeline System has the ability “to efficiently operate at throughputs
between 200,000 [barrels per day] and 1.14 million [barrels per day].” For these reasons,
the superior court found a functional obsolescence deduction to be improper.
              Notwithstanding these findings and conclusions, the superior court went on
to make a deduction for economic obsolescence based on the superadequacy of the
pipeline. The superior court found that production in “most North Slope fields” is
declining significantly, and that the pipeline’s average 2006 throughput was significantly
lower than capacity. It also found that “[i]f a plant is not operating at capacity for
economic reasons, the inutility is caused by economic obsolescence.”55 Therefore, the
superior court found that “[w]hile [the Trans-Alaska Pipeline System] is required to have
a design capacity of at least 1.1 million [barrels per day], the fact that capacity is not all
being used to transport affiliated oil reduces the utility and value of [the pipeline] as of
the lien date.”
              The Owners appeal these decisions, and the Municipalities cross-appeal on
a number of grounds.
                     a.	    There was sufficient evidence to support the superior
                            court’s decision that excess capacity is a form of
                            obsolescence.
              In their cross-appeals, the Municipalities argue that the fact that the Trans-
Alaska Pipeline System operates below capacity does not justify a deduction for


         55
              The superior court was quoting A M . SOC ’Y OF A PPRAISERS , supra note 39,
at 98.

                                            -29-	                                       6867
economic obsolescence from the assessed value of the pipeline. Specifically, the
Municipalities argue that the superior court’s finding that the Owners are legally
obligated to maintain a capacity of 1.1 million barrels per day, and its subsequent refusal
to deduct for functional obsolescence, is incompatible with its decision to use a scaling
deduction for economic obsolescence. The Owners and the State maintain that the
deduction was appropriate. For their part, the Owners appeal the superior court’s finding
that the pipeline’s excess capacity is legally compelled, arguing that the parties to the
Amended Capacity Settlement Agreement did not intend for it to have the effect of
requiring them to maintain a physical capacity of 1.1 million barrels per day.
                Whether the Trans-Alaska Pipeline System’s excess capacity reduces its
value is a question of fact, and we will not disturb the findings of the superior court
unless we are left with a “firm and definite conviction” that a mistake has been made.56
We conclude that there was sufficient evidence to support the superior court’s ruling that
a deduction for economic obsolescence was appropriate based on the superadequacy of
the pipeline.
                Both the State and the Owners agree that the Trans-Alaska Pipeline System
operates below its projected maximum throughput capacity and that the resulting
“superadequacy” is a type of functional obsolescence. At trial the State’s appraiser
discussed scaling, which he originally performed as part of the functional obsolescence
deduction. He concluded that “[a]t this point in time, there’s no real thought that they
would ever recover back up to their design capacity, so we need to be able to adjust for
that, because somebody that’s going to acquire the property isn’t going to spend money
on capacity that it doesn’t need or isn’t required to have.” The superior court accepted



       56
             City of Nome v. Catholic Bishop of N. Alaska, 707 P.2d 870, 876 (Alaska
1985) (quoting Stanton v. Fuchs, 660 P.2d 1197, 1198 (Alaska 1983)).

                                           -30-                                      6867
the substance of this view and found that “[w]hile [the Trans-Alaska Pipeline System]
is required to have a design capacity of at least 1.1 million [barrels per day], the fact that
capacity is not all being used to transport affiliated oil reduces the utility and value of
[the pipeline] as of the lien date.” We conclude that there is no error in the superior
court’s decision to give credence to the appraiser’s assessment, even if it did so under the
label of economic instead of functional obsolescence.
              Both the Owners and the Municipalities urge us to reach the merits of
whether the Owners are legally obligated, by statute or by contract, to maintain a
capacity above average throughput. We decline to do so because whether a deduction
for economic obsolescence is appropriate does not depend on any obligation the Owners
may have to maintain a certain capacity.
              Any obligation the Owners may have to maintain excess capacity does not
make an economic obsolescence deduction for superadequacy improper. If there were
no requirement to maintain excess capacity then, according to the State’s own appraiser,
a deduction for superadequacy would be appropriate because the too-large pipeline is no
more valuable than a smaller, less expensive pipeline.            The addition of a legal
requirement to maintain a certain operating capacity does not change that analysis. Such
an obligation cannot make the pipeline worth more; if anything, this constraint would
make the pipeline less valuable than before. A deduction for superadequacy, therefore,
is still appropriate. We conclude that it was not clear error for the superior court to find
that excess capacity was a type of obsolescence even if the Owners had an obligation to
maintain a certain capacity.
              We recognize that the superior court’s finding on this point — that a
deduction for functional but not economic obsolescence was improper because of the
Owners’ legal obligations to maintain a certain capacity — may reflect a certain degree
of internal inconsistency. But it may also be that the superior court’s discussion of the

                                            -31-                                        6867

Owners’ legal obligations was merely an attempt to explain why excess capacity is a
form of economic, not functional, obsolescence. And whether the superior court’s
deduction was labeled as functional or economic obsolescence is of no consequence.
After reviewing the superior court’s ultimate decision to deduct for excess capacity, we
conclude that it was well supported by the evidence and legally sound.
                    b.     The matter was fully litigated below.
             The Boroughs57 argue that it was error to make an economic obsolescence
adjustment for excess capacity because the parties did not directly litigate the issue
below. The Boroughs argue that the superior court’s decision was improper and based
on “little to no guidance,” first because the superior court did not apply the appropriate
standard of review to the Assessment Review Board’s decision finding no such
depreciation, and second because the Owners had the burden to show economic
obsolescence and they did not make such a showing.
             The Boroughs’ first assertion is contrary to statute. The Boroughs argue
that “the trial court was required to find that the Board’s decision finding no additional
economic obsolescence was unequal, excessive, or improper under AS 43.56.130(f).”
But that provision controls the Assessment Review Board’s hearings on appeal from the
Department of Revenue, not the superior court’s de novo review of the Assessment




      57
              The City of Valdez does not join in this argument, stating that it “does not
object to the superior court, in a de novo review with new evidence, making its own
conclusions on appraisal theory so long as appropriate deference is afforded the Board’s
expertise.”

                                          -32-                                      6867
Review Board’s findings.58 The same statute provides that the superior court on appeal
conducts a trial de novo of the Assessment Review Board’s decision.59
             The Boroughs’ second claim also fails. The arguments for and against
applying a scaling deduction for excess capacity were raised and fully litigated at trial.
In their statement of points on appeal to the superior court, the Owners expressly argued
that the Assessment Review Board had erred by failing to adequately account for the fact
that production was declining as oil fields were depleted:
             The super adequacy of the property increases as the
             throughput of unrefined oil continues to decline over time (as
             the oil fields feeding the line continue to deplete) and the
             capacity of the TAPS is significantly underutilized. This
             excess capacity has associated significant costs of operation
             which can not be ameliorated or reduced and thereby
             significantly and negatively impact the property. The
             [Assessment Review Board]’s failure to properly calculate
             obsolescence constitutes the application of a fundamentally
             wrong principle of appraisal and acts to create an excessive
             valuation.
And according to treatises submitted into evidence, the scaling procedure is similar for
both types of obsolescence calculation. Therefore, the superior court’s decision to label
excess capacity as economic rather than functional obsolescence is not reversible error.
                    c.	    The superior court did not count economic obsolescence
                           from excess capacity twice.
             Finally, the Boroughs argue that the superior court counted depreciation
due to excess capacity twice by using both the economic age-life method and applying
an additional scaling deduction for excess capacity. They cite various parties’ witnesses
and treatises acknowledging that the economic age-life method is a measure of total

      58
             AS 43.56.130(a) (referencing AS 43.56.120(a)).
      59
             AS 43.56.130(i).

                                          -33­                                      6867
depreciation. Therefore, they argue, a second adjustment for the excess capacity of the
pipeline double-counts economic obsolescence.
              The superior court characterized its economic life calculation as a measure
of how far into the future the Trans-Alaska Pipeline System could continue operating at
a rate of at least 200,000 barrels per day, its minimum capacity. The superior court
acknowledged that the related economic age-life measure captures more than just
physical depreciation. But at trial, the State’s appraiser testified — and the superior court
recognized — that while economic age-life captures more than just physical depreciation,
it also allows for a “separate look” at other types of obsolescence. The Appraisal of Real
Estate similarly indicates that other deductions for obsolescence may be appropriate
when using the economic age-life method.60 It was therefore not error for the superior
court to examine other types of obsolescence that may not have been accounted for in
the economic age-life calculation.
              The question, then, is whether the superior court’s calculation of economic
life accounted for obsolescence caused by declining throughput such that an independent
deduction for excess capacity would be double counting. The Owners argue that the
end-of-life estimate does not account for such obsolescence because, while it takes into
account the projected level of reserves to be transported through the Trans-Alaska
Pipeline System, it does not take into account the fact that the pipeline has a greater
physical capacity than that projected level of reserves would demand.
              Both the Department of Revenue and the superior court took into account
projections for declining throughput in determining economic life.            The external
production forces that mean less oil is being delivered to the pipeline were factored into
the economic age-life equation. But the economic age-life calculation did not take into


       60
              A PPRAISAL INST ., supra note 16, at 421-22.

                                            -34-                                       6867
account the fact that the design capacity of the pipeline — and therefore the cost of a
hypothetical replacement — is considerably greater than necessary to handle projected
throughput. As noted in Valuing Machinery and Equipment, when operating level is
significantly less than design capacity, “the asset is less valuable than it would otherwise
be,” and that drop in value comes not just from the decline in operating level, but also
from the superadequacy that exists.61 We therefore find that the superior court’s
deduction for economic obsolescence due to excess capacity was not improper.
       D.	    Interest On The Owners’ Supplemental Taxes Runs From The
              Original 2006 Due Date.
              After assessing the value of the Trans-Alaska Pipeline System, the superior
court directed the Department of Revenue to issue a supplemental certified assessment
roll “reflecting the 2006 value of [the pipeline] within 30 days” of the issue of final
judgment. That supplemental roll was to be the basis for the Municipalities to assess tax
bills and for the State to assess tax credits. The superior court ruled that interest due on
the additional taxes owed would run from “the due date in the year of the original
assessment rather than from the date of reassessment.”62 The superior court found that
date to be June 30, 2006.63 The interest rate was set at the statutory rate of eight percent
per year.64
              The Owners appeal, arguing that the superior court’s decision improperly
imposed interest on taxes before they were assessed and payment was due. According

       61	
              A M . SOC ’Y OF A PPRAISERS , supra note 39, at 97.
       62
            The superior court was quoting Cool Homes, Inc. v. Fairbanks North Star
Borough, 860 P.2d 1248, 1258 (Alaska 1993) (internal quotation marks omitted).
       63
              15 AAC 56.065 provides that taxes levied under AS 43.56 are due by
June 30.
       64
              AS 43.56.160.

                                           -35-	                                      6867

to the Owners, interest runs only on unpaid or delinquent taxes; because they paid all the
taxes they owed in 2006 and no obligation was owing until the supplemental assessment
was issued in 2010, the Owners argue that taxes could not be delinquent until the
assessment date in 2010.
              We addressed a similar issue in Cool Homes, Inc. v. Fairbanks North Star
Borough, where we held that “interest on a tax assessment runs from the due date in the
year of the original assessment rather than from the date of reassessment.”65 In that case,
the property lessor did not pay its property taxes for three years.66 The lessor sought
review of the assessment, and the superior court upheld the Borough’s right to levy the
tax in question but remanded for recalculation of the assessment amount.67 The lessor
argued that interest and penalties “could not begin to accrue” until a valid assessment
was made after remand.68 We held that determining the interest and penalties due were
separate questions with separate standards.69 While penalties are considered punitive,
“[t]he assessment of interest for late payment has no punitive element.”70 Rather, interest

       65
              860 P.2d at 1258.
       66
              Id. at 1253.
       67
              Id.
       68
              Id. at 1255.
       69
              Id. at 1258.
      70
               Id. at 1257 n.12 (quoting N. Slope Borough v. Sohio Petroleum Corp., 585
P.2d 534, 546 (Alaska 1978), superseded by statute, Ch. 23, §§ 2-3, SLA 1991, as
recognized in State, Commercial Fisheries Entry Comm’n v. Carlson, 270 P.3d 755
(Alaska 2012)). We recently held in Carlson that interest was punitive where the
legislature raised the statutory interest rate from 8% to 11% compounded quarterly. 270
P.3d at 761 n.38. But the text quoted from Sohio Petroleum still applies in this context
where the interest rate is 8% and the legislature has taken no steps to impose a punitive
                                                                           (continued...)

                                           -36-                                      6867

“is intended to compensate the party to whom the sum is owed for the use of the money
during the period of nonpayment [and does not] depend[] on which party is at fault for
the delay.”71
                The Owners contend that Cool Homes is distinguishable because it dealt
with past-due and not retrospectively assessed taxes. For support, they cite our holding
in Alascom v. North Slope Borough that “[u]ntil the borough has exercised its right to
demand real property taxes in the manner provided by statute there can be no valid tax
and hence no delinquency within the meaning of AS 29.53.180, which authorizes
penalties and interest on delinquent taxes.”72 In that case the municipality failed to list
or assess the property for several years.73
                But our opinion in Cool Homes expressly limited Alascom, stating that
Alascom’s rationale “is not applicable where the municipality makes an assessment of
the real property in question, but makes a mistake as to the amount of the assessment.”74
And we explicitly held that “Alascom does not stand for the proposition that interest on
taxes imposed on property which is timely assessed should not relate back to the original
due date.”75 Here, the superior court’s judgment was not a new assessment but instead
a reassessment of the original, mistaken assessed value of the pipeline. We agree with


       70
       (...continued)
element.
       71
                Cool Homes, 860 P.2d at 1257.
       72
            Alascom, Inc. v. N. Slope Borough, Bd. of Equalization, 659 P.2d 1175,
1180 (Alaska 1983).
       73
                Id. at 1177.
       74
                860 P.2d at 1257.
       75
                Id. at 1258.

                                              -37-                                   6867

the superior court that interest on the additional taxes owed runs from the due date in the
year of the original assessment.76
V.     CONCLUSION
              We find no error in the superior court’s standard or method of valuation of
the Trans-Alaska Pipeline System, nor in the specific deductions it made to account for
depreciation. And we conclude that the superior court did not err by finding that interest
on the supplemental taxes owed runs from June 30, 2006. We therefore AFFIRM the
superior court’s decision.




       76
               While we recognize that interest is meant to compensate for lost use of
money without regard to fault, we also understand that the 8% annual return may not
reflect the reality of today’s interest rates and that the Municipalities would have
struggled to make anything close to an 8% annual return on this money had they received
it in 2006. For evidence of this we need look no further than the related Rule 67 appeal
in this matter, in which neither party wished to hold the disputed money while this appeal
was pending for fear of being liable for compensatory interest if they did not prevail. But
the 8% interest rate is mandated by statute, and any reform should be sought from the
legislature, not the courts.

                                           -38-                                      6867

WINFREE, Justice, with whom STOWERS, Justice, joins, dissenting in part.
I.     OVERVIEW
              Today the court implicitly decides a long-standing dispute between the
State of Alaska, Department of Natural Resources, and the companies controlling North
Slope oil production and distribution through their related companies’ Trans-Alaska
Pipeline System (TAPS) and oil tankers. This dispute is: Why has North Slope oil
production and TAPS input declined so that TAPS has excess capacity? Is it because the
oil companies are warehousing proven reserves for their own internal business reasons,
notwithstanding that the reserves are technically and economically available for
production,1 or is it because external factors limit current production of proven reserves?
The dispute arose in a matter before this court in 2012, when we considered certain
superior court rulings in a legal battle over development of Point Thompson oil and gas
reserves, but that battle was settled.2
              The dispute again arises, this time indirectly from a legal battle over the
2006 TAPS property tax valuation and the concept of depreciation for obsolescence, a
battle in which the Department of Revenue, and not the Department of Natural
Resources, is a participant. In the superior court proceedings, the parties contested
whether there should be a depreciation deduction for functional obsolescence due to
TAPS’s excess capacity — a functional obsolescence deduction is appropriate when an
asset has become less useful due to its flawed or outdated physical characteristics. The

       1
              The superior court found that there are adequate proven reserves to allow
TAPS to operate at least until 2047 and that North Slope reserves contain billions of
barrels of “technically and economically recoverable oil.” We affirm this finding,
Op. 24-27, noting that the superior court estimated the reserves to be worth $350 billion,
Op. 14.
       2
             State, Dep’t of Natural Res. v. ExxonMobil Corp., No. S-13730 (Alaska,
filed May 10, 2011).

                                           -39-                                      6867

superior court rejected depreciation for functional obsolescence. However, after trial and
without any prior notice to the parties, the superior court determined that TAPS’s excess
capacity warranted an economic obsolescence deduction — an economic obsolescence
deduction is appropriate when an asset has become less useful due to external causal
factors affecting the entire business.3 But at no point during the underlying litigation,
either before the State Assessment Review Board (SARB) or the superior court, did
anyone argue for an economic obsolescence deduction based on excess capacity or
present evidence demonstrating external causes of production decline and ensuing
throughput decline.4


       3
              The superior court stated that “the fact that external economic factors, and
specifically the decreased availability of North Slope oil, may preclude the full use of
TAPS’ capacity, does form a basis for a scaling adjustment based on economic
obsolescence.”
       4
               The court incorrectly states that the Owners urged the superior court to find
that TAPS’s excess capacity warranted a deduction for “economic or functional
obsolescence.” Op. 27. The Owners argued to the superior court that excess capacity
warranted a deduction for functional obsolescence, not economic obsolescence. The
Owners’ argument for an economic obsolescence deduction was limited to the assertion
that tariff regulations were a form of economic obsolescence, which both the superior
court and this court correctly rejected. Op. 19-24.
              The Owners do not even contend on appeal that they argued in the superior
court for an economic obsolescence deduction for low throughput — in their brief to us
they describe the Department of Revenue’s original characterization of the obsolescence
factor as functional, and then simply state that the superior court addressed the
obsolescence factor “from a different perspective.” At oral argument before us the
Owners’ attorney expressly described what happened as follows:
              Everybody analyzed it in the past as functional, the State, the
              SARB, taxpayer, were treating it as functional. But it was the
              same facts, it was the same condition of excess capacity, that
              was being addressed. And so all Judge Gleason did was
                                                                             (continued...)

                                           -40-                                       6867

                By affirming the superior court’s determination that an economic
obsolescence deduction is warranted for the 2006 TAPS valuation, the court necessarily
holds that TAPS’s throughput decline is caused by external factors outside the oil
companies’ control. That issue was not litigated in the superior court, neither the
superior court nor the court today explains exactly what factors external to the oil



      4
          (...continued)

                 change the way she named the adjustment she made for

                 excess capacity of TAPS. Instead of calling it functional, she

                 called it external. But she was analyzing those same facts

                 and just calling it another name.

             The Department of Revenue is even more direct in a heading in its brief:
“The superior court properly determined that lower available throughput in TAPS is a
basis for economic obsolescence despite that point not being specifically advocated at
trial.”
               In response to my dissent the court asserts that because the Owners
(1) stated in their notice of appeal to the superior court that SARB failed to apply all
forms of depreciation, and (2) argued economic obsolescence to the superior court, the
issue was squarely before the superior court. Op. 27 n.52. The broad sweep of the
notice of appeal is irrelevant — what is relevant is the precise nature of the economic
obsolescence argument the Owners actually presented to the superior court. The
economic obsolescence argument presented to the superior court was based on tariff
regulations, not low throughput. If the Owners presented evidence to support a claim of
economic obsolescence based on low throughput, then the court should be able to
identify and quote at least one trial expert witness who testified that low throughput
should result in a depreciation deduction for economic obsolescence. The court did not,
because it cannot. If the Owners presented and proved their entitlement to an economic
obsolescence depreciation deduction based on low throughput, the court should be able
to identify and quote from at least one trial expert witness who testified about factors
external to the integrated enterprise that have caused the declining production and
delivery of oil to TAPS. The court did not, because it cannot. Both the Department of
Revenue and the Owners conceded that the question of an economic obsolescence
depreciation deduction for low throughput was not specifically raised at trial — the court
is in error on this point.

                                             -41-                                   6867

companies are causing TAPS’s throughput decline, and the determination likely will
have an impact far beyond TAPS’s 2006 property tax valuation. I would vacate the
superior court’s determination that an economic obsolescence deduction is warranted for
the 2006 tax year and remand for further trial proceedings on the question; I therefore
dissent on this aspect of the court’s decision.
II.	   DISCUSSION
       A.	    A Separate Functional Obsolescence Deduction Was Correctly
              Rejected By The Superior Court.
              The superior court found that a separate functional obsolescence
depreciation deduction5 is improper because the Owners have obligations to maintain
TAPS’s physical capacity at 1.1 million barrels per day. This capacity requirement
makes a functional obsolescence deduction inappropriate because TAPS’s excess
capacity provides value by meeting minimum capacity requirements; TAPS’s best and
most cost-effective design would have to incorporate this required capacity — it
therefore is not physically flawed or outdated. I agree with the court that this aspect of
the superior court’s decision is correct.6




       5
              Functional obsolescence is defined as “a flaw in the structure, materials, or
design that diminishes the function, utility, and value of the improvement.” A PPRAISAL
INST ., THE A PPRAISAL OF REAL ESTATE 331 (13th ed. 2008).
       6
               In my view this same reasoning should preclude a depreciation deduction
for economic obsolescence, as well. The court concedes that there is “a certain degree
of internal inconsistency” in the superior court’s ruling, but brushes it aside without any
explanation. Op. 31. As part of the remand I would order for further trial proceedings,
the superior court would be directed to explain this inconsistency.

                                             -42-	                                   6867

      B.	    A Separate Economic Obsolescence Deduction May Be Appropriate
             But Was Not Adequately Litigated In The Superior Court.
             1.	    Depreciation for economic obsolescence relies on a different
                    threshold determination than for functional obsolescence.
             Because depreciation for functional obsolescence was correctly rejected,
a separate obsolescence depreciation deduction could be warranted only under an
economic obsolescence theory.        Economic obsolescence is “the loss in value or
usefulness of a property caused by factors external to the asset,” including increased
costs, reduced demand, increased competition, regulation, or similar factors.7
“[E]conomic obsolescence is usually a function of outside influences that affect an entire
business . . . .”8 Therefore, a separate economic obsolescence deduction for TAPS would
be appropriate only if loss in value were caused by external factors beyond the control
of the integrated enterprise of which TAPS is a part.
             It is here that the court’s analysis falters — the court, like the superior court,
relies on the declining oil supply to TAPS as an external factor supporting a depreciation
deduction for economic obsolescence. But the court is affirming the superior court’s
determination that to properly value TAPS, it must be considered as an integrated part
of the entire production-transportation business.9 In short, the Owners’ integrated


      7
             A M . SOC ’Y OF A PPRAISERS , V ALUING M ACHINERY AND EQUIPMENT 96-97
(2d ed. 2005); see also Horan v. Kenai Peninsula Borough Bd. of Equalization, 247 P.3d
990, 996 n.39 (Alaska 2011) (quoting BLACK ’S LAW D ICTIONARY 1107 (8th ed. 2004)).
      8	
             A M . SOC ’Y OF A PPRAISERS , supra note 7, at 97.
      9
              The superior court found that TAPS is part of an integrated economic
enterprise in which the TAPS owners are closely affiliated with companies producing
Alaska North Slope oil, and that “TAPS was built . . . because of the overwhelming
economic value arising from its highly integrated use for transporting [Alaska North
Slope] production from affiliated producers.” As the court notes, these findings are
                                                                        (continued...)

                                            -43-	                                        6867

enterprise controls TAPS’s supply — therefore declining supply warrants an economic
obsolescence depreciation deduction only if it is caused by factors external to the
Owners’ integrated enterprise. The court, like the superior court, identifies no relevant
external factors causing declining oil supply to TAPS.
              If low throughput is the result of factors external to the integrated
enterprise, then it may be appropriate to apply an economic obsolescence deduction. But
if low throughput is the result of factors within the integrated enterprise’s control — for
example, if affiliated production companies failed to utilize productive fields or delivered
less oil to TAPS for the integrated enterprise’s internal purposes — then an economic
obsolescence deduction may be inappropriate or at least limited. As alluded to earlier,
in State, Department of Natural Resources v. ExxonMobil Corp. the Department of
Natural Resources argued that oil companies, in derogation of lease obligations, were
deliberately stalling production of the Point Thompson oil and gas reserves to advance
their own internal interests.10 More recently, Alaskans have been inundated with
political commentary regarding a referendum to overturn the legislature’s latest
restructuring of Alaska’s oil-tax framework,11 including spirited debate whether oil
production has been limited by excessive taxation or oil companies have delayed
production to leverage legislative action lowering oil taxes.
              Let me be clear: I raise these issues simply to make my point about the
necessary threshold determination for an economic obsolescence deduction. I have no


       9
       (...continued)
unchallenged.
       10
             Brief for Appellant at 2-3, State, Dep’t of Natural Res. v. ExxonMobil
Corp., No. S-13730 (Alaska, filed May 10, 2011).
       11
              See Ch. 10, § 13, SLA 2013; Veto Referendum for Senate Bill (S.B.) 21
(2014).

                                           -44-                                       6867

view on the actual cause of TAPS’s low throughput and would look to the development
of a full evidentiary record, rather than public commentary or the State’s briefing in the
Point Thompson matter, as the factual basis for a reasoned decision. And I also note that
delaying oil production to serve the integrated enterprise’s internal business purposes
would not necessarily be an inappropriate business decision; but such a decision might
be incompatible with a depreciation deduction for economic obsolescence due to TAPS’s
declining throughput.
              This threshold issue is unique to economic obsolescence and highlights the
important distinction between economic and functional obsolescence, which the court
clearly misunderstands. Even if both forms of obsolescence might be used to calculate
a loss in TAPS’s value due to excess capacity, they focus on different reasons for the
excess capacity and therefore require different threshold determinations.12 The court is
incorrect in stating, contrary to indisputable appraisal theory,13 that “whether the superior
court’s deduction was labeled as functional or economic obsolescence is of no
consequence.”14 Because the Owners did not argue for low-throughput economic
obsolescence, the threshold issue — whether factors external to the integrated enterprise
caused the low throughput and resulting excess capacity — was not litigated at trial.




       12
              See A M . SOC ’Y OF A PPRAISERS , supra note 7, at 98 (“If the plant is not
operating at capacity for economic reasons, the inutility is caused by economic
obsolescence. If there is an imbalance in the productive capacity (e.g., a production
bottleneck), the inutility is caused by functional obsolescence.”).
       13
              See supra notes 5, 7, 8, 12, and accompanying text.
       14
            Op. 32. This statement also is inconsistent with our affirmance of the
superior court’s determination that a functional obsolescence deduction was not
warranted.

                                            -45-                                       6867

               2.	   As a matter of procedural fairness, the parties should be allowed
                     to litigate whether a separate economic obsolescence deduction
                     is appropriate.
               The North Slope Borough and the Fairbanks North Star Borough (the
Boroughs) rightfully contend that the superior court erred by allowing the economic
obsolescence deduction for low throughput when “[n]o one argued or presented evidence
. . . that TAPS should be scaled as a result of a lack of supply.” The court nonetheless
rejects this contention, reasoning that because the claim for “a scaling deduction for
excess capacity” was litigated and because the scaling calculation is similar for both
types of obsolescence, the parties adequately litigated the substance of a low-throughput­
based economic obsolescence deduction.15
               Although the scaling calculation may be used to measure either functional
or economic obsolescence,16 as discussed above the two forms of obsolescence stem
from different sources and litigating one did not adequately prepare the superior court
to rule on the other. Although some arguments and testimony touched on the issue of
oil field decline, low throughput was raised only tangentially to functional obsolescence
arguments.17




       15	
               Op. 33.
       16
             See A M . SOC ’Y OF A PPRAISERS , supra note 7, at 98 (explaining that cost-to­
capacity calculation may be used to calculate impact of inutility from either functional
or economic obsolescence sources).
       17
              For example, the Owners argued for an underutilization deduction due to
declining oil fields but characterized this as functional obsolescence and focused on
resulting increased operating costs. This begged the question of the low throughput’s
cause.

                                           -46-	                                      6867

              We have held that we may affirm “on any basis supported by the record,
even if that basis was not considered by the court below or advanced by any party.”18
But we also have held that “[b]ecause basic fairness requires an opportunity to present
relevant evidence, applying an unanticipated body of law could be an abuse of discretion
if doing so were to make different outcome-determinative facts relevant.”19 Here the
Boroughs argue that to receive a separate economic obsolescence deduction, the Owners
had (but failed to meet) the burden of raising the issue and proving the cause and
quantity of economic obsolescence due to low throughput.20 The Boroughs also argue
that if the Owners had advanced a claim for economic obsolescence based on low
throughput, the Boroughs would have had an opportunity to present evidence and
arguments rebutting it. I agree — because the threshold factor for an economic
obsolescence deduction was not directly litigated, a remand on this issue is necessary as
a matter of procedural fairness.




       18
            Powercorp Alaska, LLC v. Alaska Energy Auth., 290 P.3d 1173, 1183 n.25
(Alaska 2012) (quoting Smith v. Stafford, 189 P.3d 1065, 1070 (Alaska 2008)).
       19
              Frost v. Spencer, 218 P.3d 678, 682 (Alaska 2009); see also Powercorp,
290 P.3d. at 1193 (Winfree, J., dissenting) (disagreeing with ruling on issue not litigated
before the superior court because parties had not submitted evidence on issue); Crowley
v. State, Dep’t of Health & Soc. Servs., 253 P.3d 1226, 1232 n.31 (Alaska 2011)
(declining to consider arguments not raised before trial court if issue is dependent on new
or controverted facts).
      20
            See AS 43.56.130(e); N. Star Alaska Hous. Corp. v. Fairbanks N. Star
Borough Bd. of Equalization, 844 P.2d 1109, 1110-12 (Alaska 1993).

                                           -47-                                      6867

      C.	       There May Have Been Double Counting Of Economic Obsolescence,
                But It Also Was Not Adequately Litigated Below.
                Economic age-life is a method of measuring depreciation based on the ratio
of a property’s effective age to its economic life expectancy.21 The superior court
concluded that TAPS’s physical life “is virtually unlimited if properly maintained,” but
TAPS’s proven economic life will not extend past 2047 when decreased production due
to declining reserves will make TAPS no longer technically and economically viable.
                The superior court recognized that economic age-life calculations measure
all forms of depreciation, including functional and economic obsolescence,22 and
determined that SARB’s and the Department of Revenue’s characterizations of economic
age-life depreciation as capturing only physical depreciation was improper. But the
superior court then categorized its own economic age-life analysis as measuring only
physical depreciation and made its separate deduction for economic obsolescence due
to declining throughput. Assuming that the superior court’s application of a separate
economic obsolescence deduction was correct, it may have double counted economic
depreciation.
                The court, citing State Assessor Randall Hoffbeck’s testimony and The
Appraisal of Real Estate, concludes that the superior court did not double count
economic obsolescence because “while economic age-life captures more than just
physical depreciation” the court is allowed to take a second look at other types of




      21	
                A PPRAISAL INST ., supra note 5, at 420-22.
      22
              See id. at 420 (describing the economic age-life method as measuring “total
depreciation”); see also A M . SOC ’Y OF A PPRAISERS , supra note 7, at 39-40 (recognizing
age-to-life ratios may be used to estimate total depreciation).

                                            -48-	                                   6867
obsolescence.23 The court acknowledges that “the superior court took into account
projections for declining throughput in determining economic life” but states that “the
economic age-life calculation did not take into account the fact that the design capacity
of the pipeline . . . is considerably greater than necessary to handle projected
throughput.”24
             This is an incorrect analysis. The Appraisal of Real Estate provides for
additional economic obsolescence depreciation only when it is not included in the
economic age-life calculation.25 But no witness, including Hoffbeck, testified that the
superior court’s age-life calculation excluded economic obsolescence. In fact, economic
obsolescence was not excluded in the superior court’s age-life calculation — because the
superior court’s economic age-life calculation was based entirely on declining
throughput due to dwindling reserves, it already took economic obsolescence into
account. And, as discussed above, TAPS’s excess capacity itself does not cause a loss
in value — any economic obsolescence must be due to external factors causing low
throughput. Therefore the separate economic obsolescence deduction due to declining
production, over and above the economic age-life depreciation deduction, may have been
an erroneous double counting.




      23
             Op. 34.
      24
             Op. 34-35.
      25
              A PPRAISAL INST ., supra note 5, at 423 (“[I]f external obsolescence is
affecting the subject property and there are no sales in the subject market similarly
affected, the appraiser can estimate total depreciation and economic life without the
external obsolescence using the . . . economic age-life method and then estimate external
obsolescence using techniques from the breakdown method.”).

                                          -49-                                     6867

              This issue was not fully presented or argued because the superior court
applied its separate economic obsolescence deduction sua sponte after trial and without
notice to the parties. This issue should be remanded to the superior court for further trial
proceedings to determine the appropriateness of deducting for economic obsolescence
based on decreased throughput after already accounting for decreased throughput when
determining TAPS’s economic life.
III.   CONCLUSION
              In affirming the superior court’s determination that the Owners are entitled
to a depreciation deduction for economic obsolescence due to TAPS’s low throughput,
the court leaves two critical questions unanswered. If the Owners are legally and
contractually required to maintain the current capacity, how can there be any form of
obsolescence depreciation? And if there could be economic obsolescence based on
TAPS’s low throughput, what factors external to the integrated enterprise are causing the
declining production and delivery to the pipeline?
              I would vacate the superior court’s determination that the Owners are
entitled to an economic obsolescence deduction based on TAPS’s excess capacity and
remand for a new trial on that issue. Therefore, I respectfully dissent.




                                           -50-                                       6867

