Stakes high as Enbridge, Xcel and others challenge property tax bills

Minnesota local governments are increasingly worried about challenges to property tax values they had no role in setting that could cost them tens of millions of dollars.

The largest and most public of the overvaluation claims, Enbridge's appeal of its pipeline property tax bills, alone could force northern Minnesota counties and cities to fork over $45 million in refunds while significantly eroding their future tax base.

The Enbridge case is one of 62 challenges filed in Minnesota Tax Court by pipeline and utility companies over the past six years. The tax court ruled in Enbridge's favor in 2018 and just last month sided with another large pipeline operator in a decision that could force a $17 million refund.

"What started out as a wave has turned into a tsunami," said Matthew Hilgart, government relations director for the Association of Minnesota Counties. "You don't budget for this sort of thing."

Pipeline and utility property tax appeals that don't reach tax court can also become an issue with local governments. Last year, Xcel Energy, the state's largest property tax payer, won a 7 to 8 percent reduction in its valuation through an in-house appeals system at the Minnesota Department of Revenue.

Xcel's case involved no tax refunds, but it's likely to affect budgets of counties and cities hosting its larger power plants.

The Revenue Department assesses utilities, pipelines and railroads. Tax money is then parceled out to host counties, cities and school districts. The state also gets a piece of that revenue. Such centralized state assessment is common nationally for sprawling assets like pipelines.

But from 2013 through 2016, an average of 7.5 challenges were filed annually in Tax Court, a number that jumped to 18 in 2017, according to the study, which was commissioned by pipeline and utility companies. In 2018, another 14 appeals were filed, the tax court told the Star Tribune.

The cascade of cases "suggests mounting industry frustration over the interpretation and application of administrative rules governing utility and pipeline evaluation," the study concluded.

That frustration could be seen in Northern Natural Gas' property tax appeals for 2015 through 2018. Omaha-based Northern, owned by Warren Buffett's Berkshire Hathaway Energy, runs the nation's largest interstate gas pipeline system and is Minnesota's largest natural gas transporter.

The Minnesota Tax Court in February ruled that the Department of Revenue overvalued Northern Natural Gas' system by nearly $1 billion in 2015 and 2016 — or 24 and 33 percent respectively. The company estimates it will be owed a refund of $17 million for all four years of its tax appeals.

"The Revenue Department's administration of centrally assessed valuation is fundamentally flawed," Joann Wright, Northern's property tax manager, said recently in legislative testimony.

The top five counties effected by the Northern ruling would be Dakota, Rice, Freeborn, Carlton and Steele. Carlton County is besieged by appeals of state valuations, including the Enbridge case.

The Tax Court ruled in May that the state overvalued Enbridge's oil pipeline system by $3.2 billion for 2012, 2013 and 2014 combined. Calgary-based Enbridge, which ferries Canadian oil through six pipelines across northern Minnesota, has also appealed its property taxes through 2017.

If Enbridge prevails on its appeals from 2015 through 2017, the company would be due a total of $44.9 million in refunds from counties and other local governments and $23.6 million directly from the state, according to the Minnesota Center for Fiscal Excellence report.

"Enbridge is a behemoth, and that has county commissioners terrified," Hilgart said.

Enbridge's pipelines cross 13 counties, including lightly populated Clearwater and Red Lake Counties. Both could end up refunding more money than they raise annually from all taxpayers.

That was the word last fall in a public missive from the Carlton County Assessor's Office, which broke down potential fiscal effects from several pipeline, utility and railroad tax appeals. Eight of the county's top 10 taxpayers are in those three industrial categories.

The Enbridge case alone would "pretty much wipe out our entire reserve," said Kyle Holmes, Carlton County Assessor. Meanwhile, Carlton's bond rating — like those of other counties facing an Enbridge tax shock — is under review.

The counties got a faint ray of hope in February.

The Minnesota Supreme Court, responding to a petition from the Revenue Department, reversed the Tax Court's Enbridge decision and remanded it back to the lower court. The Revenue Department had objected to the Tax Court's conclusion that it wasn't bound by a key administrative rule, and the Supreme Court agreed.

"It gives us a little hope because it's the first decision to go in favor of Revenue," Holmes said. However, with the intricacies of tax assessment, the Tax Court could comply with the high court's ruling and still end up with a similar decision.

The Enbridge case may not be resolved for a year or longer. So, there's now less urgency for pending legislation that would use the state's general fund to cover refunds owed by local governments to pipelines, utilities and railroads.

Bills were heard in House and Senate committees and laid over for possible inclusion in omnibus tax legislation. But the measure would cost an estimated $31 million over four years. A House property tax subcommittee report last week didn't include refund language.

The pipeline and utility tax issue has previously surfaced in the Legislature.

Pursuant to the 2017 omnibus tax bill, the Revenue Department made some changes to its in-house tax appeals process, according to the Center for Fiscal Excellence's study. The changes didn't deal with core assessment methodology, though they were aimed at reducing challenges in Tax Court.

Minneapolis-based Xcel, which has not gone to the Tax Court in recent years, availed itself of the Revenue Department' revamped appeals process in 2018. The ensuing settlement reduced the valuation of Xcel's statewide electric system by about $480 million to $5.9 billion.

"It has a rather dramatic effect," said Wayne Oberg, finance director for Monticello, where one of Xcel's two Minnesota nuclear power plants is located.

Xcel's plant comprised about 60 percent of Monticello's tax capacity last year. The company's appeal was the main factor in a nearly $81 million or 9 percent drop in the plant's valuation, according to Monticello's 2019 budget report. City property tax revenue from the plant declined by about $212,000.

"What Xcel isn't paying," Oberg said, "other commercial and residential property has to pick up."

Mike Hughlett • 612-673-7003