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Rebuttal to Louisiana Assessor's Proposed Revisions to LTC Rules

This presentation provides a verbal rebuttal to the Louisiana Assessor's Association's proposed revisions to the 2017 LTC rules and regulations. It highlights objections and offers alternative proposals for physical depreciation and other forms of depreciation.

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Rebuttal to Louisiana Assessor's Proposed Revisions to LTC Rules

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  1. Rebuttal to the Louisiana Assessor’s Association’s Proposed Revisions to the 2017 LTC Rules & Regulations Presented by the Louisiana Mid-Continent Oil & Gas Association August 10, 2016 Information included in this presentation is based on information as submitted in writing July 29, 2016 to the Louisiana Tax Commission. This presentation is prepared only to facilitate the verbal rebuttal on August 10, 2016 as indicated in the LTC Docket Number RR-2017, Notice of Hearing.

  2. Discussion Items • LAA’s Proposal for Table 1307.C Physical Depreciation • LMOGA’s Proposal for • Table 1307.C Physical Depreciation • Table 1303.F Other Forms of Depreciation • Definitions: Regulated vs. Non-Regulated Pipeline • Reasons for Objections to LAA Proposal

  3. LAA’s Proposal for Change Table 1307 C.- Physical DepreciationLAA is proposing to extend the service life of locally assessed pipelines to 35 years and raise the depreciation floor to 30%

  4. LMOGA Proposal • LMOGA recommends that the LTC take the following actions:Recommendation #1:Adopt the current depreciation schedule for Chapter 13, Table 1307C-Allowance for Depreciation, that reflects a 26.5 Year Economic Life and a 20% floor rate that would be applied in year 27 that would be consistent with prior years actions by the LTC • Recommendation #2:Adopt changes In Section 1303.F to include additional language identifying functional and/or economic obsolescence as follows:“Evidence of functional and/or economic obsolescence can be in the form of system inutility due to mechanical deficiency, due to oil and gas production decline, due to external economic factors such as low oil and/or gas prices, excess operating cost, and obsolete equipment”

  5. Definition:FERC Regulated Interstate Pipeline Definition • LAA’s proposal could apply to Federal Energy Regulatory Commission (FERC) Regulated (Public service) (State Assessed) Interstate pipelines • What are FERC regulated pipelines? • Pipelines that are typically Interstate systems rather than Intrastate • Larger diameter lines that transport gas, natural gas, fuels, and intermediate feed stocks for the end user market • Pipelines that are income producing assets • Pipeline owners must file proposed rates, tariff, and service agreements with certified filings to FERC • Barriers to Entry: construction and operation of pipeline require FERC authorization • Barriers to Exit: termination and abandonment of pipelines must be approved by FERC • Pipelines that typically have longer lives due to adherence to continuous maintenance programs • Products are not allowed in an Interstate pipeline system that do not meet FERC regulation specifications • FERC regulated pipelines are Common Carriers meaning the pipeline is open to all shippers that will pay a tariff to the pipeline owner

  6. Definition: Non-Regulated Intrastate Pipeline System • LAA’s proposal should not apply to non-regulated Intrastate pipeline systems • What are non-regulated pipelines? • Pipelines that are not regulated by FERC or other regulatory agencies • Pipelines that are typically proprietary owned and operated • Pipelines that are not income producing assets that service oil and gas fields • Pipelines that are typically small in diameter • Typically lease and gathering pipeline systems that connect production facilities to larger diameter pipeline systems

  7. Reasons for Objection to LAA Proposal • The LAA proposed economic life expectancy and depreciation floor formula is not appropriate for locally assessed gathering/transportation pipelines. • The LAA proposed formula is very complex, bringing in many subjective factors including annual company stock returns, bond returns, inflation, maintenance expense, and economic life which are FERC related • The proposal does not recognize other forms of obsolescence such as low through-put utilization • The proposal does not recognize that Locally Assessed pipelines are exposed to corrosive impurities that accelerate physical deterioration • The proposal does not recognize that Locally Assessed Pipelines are dependent on the productive life of producing oil and gas fields that have a much shorter economic life (15 to 25 years depending upon economic health)

  8. Reasons for Objection to LAA Proposal(Continued) • The Proposal does not recognize that Locally Assessed Pipelines have little or no salvage value due to accelerated physical deterioration • The Proposal does not recognize that Locally Assessed Pipelines are generally abandoned in place, rather than salvaged • The Proposal does not recognize that the cost to remove and re-condition Locally Assessed Pipelines and to restore the right-of-way is a liability and exceeds any salvage value

  9. Reasons for Objection to LAA Proposal(Continued) • The Proposal does not recognize that the Oil & Gas Industry has been in continuing decline since 2015 • Lower Oil and Natural Gas Prices • Lower Steel Prices (inherent value of locally assessed pipelines are lower) • Projects stopped or slowed down • Company Layoffs • The Proposal is not aligned with other States valuation methodology and valuation publications that reflect an average economic life of 22 years and a depreciation floor of 20% (See Exhibit A) • The Proposal would cause additional economic HURT that will be inflicted upon all operators especially small operators that are under capitalized (See Exhibit B)

  10. Support for LMOGA Recomendations • Recommended Economic life of 26.5 years • Promulgated by Marshall & Swift World Wide Guidelines • Marshall & Swift supported by IRS Code 946 • Economic Life more than reasonable when compared to average economic life of other states (22 years) • Economic Life more than reasonable when compared to economic life of oil & gas fields (15 to 25 years) that are serviced by locally assessed pipelines • Recommended Depreciation Floor of 20% • Depreciation Floor is more than reasonable when compared to the average depreciation floor of other states (16%) • Depreciation Floor recognizes accelerated physical deterioration and recognizes the inutility due to the economics of older depleting oil and gas fields

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