OKC-based Chesapeake wins latest court battle over taxation

Journal Record, The (Oklahoma City), Jun 18, 2007 by Janice Francis-Smith

Chesapeake Energy Marketing Inc. on Friday won the latest round in an ongoing legal battle with the state over how private oil and gas companies should be taxed.

But though Chesapeake won the day, the battle will continue to rage on for the foreseeable future.

Chesapeake sued the state Board of Equalization and the Oklahoma Tax Commission in 2004 because the Tax Commission had redefined the company as a "public service corporation," comparable to a public utility or railroad. The change would result in Chesapeake paying considerably more in property taxes each year.

The state argued that because Chesapeake Energy Marketing (CEMI) was engaged in the business of gathering natural gas and had laid its pipeline under public highways in more than 10 counties in Oklahoma, the company could be considered a public service corporation. The state cited a ruling in a telecommunications case to support its claim. Furthermore, CEMI acquired Enco Gas Gathering Co. in 2003. Unlike CEMI, Enco had been classified as a public service company.

Chesapeake countered that it cannot be considered a public service company because it does not furnish any products to the public - making only business-to-business transactions - and has laid its lines under public highways using permits available to the general public. Chesapeake has also never used the power of eminent domain to occupy a public highway.

Since CEMI's formation in the 1990s, the company's property has been assessed on the local level by county assessors on a county-by- county basis. By regarding the company as a public service corporation, the Tax Commission would be able to assess all of the company's property statewide at a higher rate. The assessment ratio for such statewide assessments is 22.85 percent. But county governments typically assess the same property at rates averaging between 10 percent and 15 percent, said Bill Elias, legal counsel for Chesapeake.

Other oil and gas companies, such as Texaco Exploration, have faced similar legal battles with the state in recent years, the Oklahoma Court of Civil Appeals noted in a ruling issued Friday. The Legislature responded in 2002 by creating a task force to study the issue and make recommendations. The task force's report was originally due Dec. 31, 2003, but the due date has consistently been extended. The new due date for the report is Dec. 31, 2007.

In the meantime, the Legislature imposed a moratorium preventing the Tax Commission from changing a gas-gathering business' status for the sake of altering its taxes for a year. The appeals court took that law to indicate the Legislature's intent to keep the status quo on business's assessments until the issue can be addressed with legislation.

Since CEMI has always in the past been assessed locally, the court ruled that circumstance should continue. Natural gas company EOG has a similar case against the state pending in the courts.