291 P.3d 442 (Idaho 2012), 38307, PacifiCorp v. Idaho State Tax Com'n

Docket Nº:38307.
Citation:291 P.3d 442, 153 Idaho 759
Opinion Judge:W. JONES, Justice.
Party Name:PACIFICORP, Petitioner-Respondent, v. IDAHO STATE TAX COMMISSION, Respondent-Appellant.
Attorney:Hon. Lawrence Wasden, Idaho Attorney General, Boise, for Appellant. Carl E. Olsson argued. Wood Jenkins LLC and Crapo Smith PLLC, Salt Lake City, Utah, for Respondents. David Crapo argued.
Judge Panel:HORTON, J., concurring. Justice EISMANN concurs. J. JONES, Justice, dissenting. Chief Justice BURDICK concurs.
Case Date:December 24, 2012
Court:Supreme Court of Idaho

Page 442

291 P.3d 442 (Idaho 2012)

153 Idaho 759

PACIFICORP, Petitioner-Respondent,



No. 38307.

Supreme Court of Idaho, Boise

December 24, 2012

Page 443

Hon. Lawrence Wasden, Idaho Attorney General, Boise, for Appellant. Carl E. Olsson argued.

Wood Jenkins LLC and Crapo Smith PLLC, Salt Lake City, Utah, for Respondents. David Crapo argued.

W. JONES, Justice.


The Idaho State Tax Commission (" the Commission" ) appeals the Judgment of the district court, holding that PacifiCorp, an Oregon corporation, proved by a preponderance of the evidence that the Commission's

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valuation of its taxable operating property in Idaho was erroneous pursuant to I.C. § 63-409(2). The Commission contends that the district court's decision is not supported by substantial and competent evidence because the appraisal methodologies utilized by PacifiCorp's appraiser are so unreliable as to amount to incompetent evidence.


PacifiCorp is a regulated electric utility that operates hydroelectric, wind, and thermal generating plants in Arizona, California, Colorado, Idaho, Montana, Oregon, Utah, Washington, and Wyoming. It provides electrical power to approximately 7.1 million customers. PacifiCorp also owns, or has interests in, electric transmission and distribution assets.

On March 21, 2006, a wholly owned subsidiary of MidAmerican Energy Holdings Company (" MidAmerican" ) acquired 100% of the common stock of PacifiCorp from a wholly owned subsidiary of ScottishPower, plc, (" ScottishPower" ), a public limited company in the United Kingdom, for a reported value of $9,200,000,000— of which $5,100,000,000 was paid in cash with $4,100,000,000 in net debt and preferred stock to remain outstanding. ScottishPower primarily caused its subsidiary to sell PacifiCorp due to a forecasted $5,000,000,000 investment needed over the next five years to update its infrastructure. As such, PacifiCorp's current business profile did not match well with its investors' expectations for dividends and returns.

As a result of the sale, MidAmerican through its subsidiary now controls all the voting securities of PacifiCorp, including all of its common and preferred stock. MidAmerican is a subsidiary and holding company of Berkshire Hathaway, Inc. (" Berkshire Hathaway" ), and is engaged in the energy business. Berkshire Hathaway primarily caused its subsidiary to purchase PacifiCorp as part of its long term investment strategy in electric power.

PacifiCorp is subject to comprehensive regulation by the Federal Energy Regulatory Commission (" FERC" ) and other local, state, and federal regulatory agencies. FERC requires PacifiCorp to submit a FERC Financial Report. This report includes FERC Form No. 1, which comprises an annual regulatory financial reporting requirement of major electric companies, and FERC Form No. 3-Q, which is a quarterly regulatory requirement that supplements the financial reporting requirement (hereinafter FERC Form No. 1 and FERC Form No. 3-Q shall be referred to collectively as " the FERC Form" ). 18 C.F.R. §§ 141.1, 141.400 (2007). Several provisions in the FERC Form account for depreciation. The Code of Federal Regulations, in 2007, defined " depreciation" as applied to a depreciable electric plant as follows:

[T]he loss in service value not restored by current maintenance, incurred in connection with the consumption or prospective retirement of electric plant in the course of service from causes which are known to be in current operation and against which the utility is not protected by insurance. Among the causes to be given consideration are wear and tear, decay, action of the elements, inadequacy, obsolescence, changes in the art, changes in demand and requirements of public authorities.

18 C.F.R. § 101.12 (2007) (emphasis added). Both parties dispute whether " depreciation" in the FERC Form accounts for (1) all forms of obsolescence, or (2) merely depreciation and functional obsolescence, which is " [o]bsolescence that results either from inherent deficiencies in the property ... or from technological improvements available after the use began." Black's Law Dictionary 1182 (9th ed. 2009).

PacifiCorp's rates are based on a revenue requirement that the Idaho Public Utilities Commission (IPUC) determines should provide it with the opportunity to recover its operating costs and earn a reasonable market return on its invested capital (" the rate base" ).1 The rates are not subject to change unless a new rate case is filed with the IPUC and the IPUC orders a modified rate base. Rate regulation also affects PacifiCorp's

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earnings because the investments allowed to be included in the rate base vary between jurisdictions. For example, the IPUC excludes assets financed with deferred income taxes from the rate base. PacifiCorp has also incurred increased operating costs and engaged in significant investments in property and equipment that are not automatically included in the rate base due to the infrequencies of rate cases and regulatory lag. PacifiCorp contends that primarily because of rate regulation, its average net rate of return on its plant in service has been 7.2% over the five years immediately preceding January 1, 2008, while the investor required rate of return for the regulated electric utility industry has been 9.1%. As a result, PacifiCorp contends that its net rate of return or actual rate of return as of January 1, 2008, was 20.88% less than the market rate of return.

For ad valorem tax purposes, operating property in Idaho is annually assessed at market value as of 12:01 a.m. of the first day in January in the year in which such property taxes are levied. I.C. § 63-205(1). The tax involved in this appeal is the ad valorem property tax on PacifiCorp's operating property in Idaho as of the valuation date of January 1, 2008. With regard to electric utilities, " operating property" includes

[A]ll rights-of-way accompanied by title ... and all immovable or movable property operated in connection with any public utility ... wholly or partly within this state, and necessary to the maintenance and operation of such road or line, or in conducting its business, and shall include all title and interest in such property, as owner, lessee or otherwise .... 2

I.C. § 63-201(15) (2007). Market value is defined as follows:

[T]he amount of United States dollars or equivalent for which, in all probability, a property would exchange hands between a willing seller, under no compulsion to sell, and an informed, capable buyer, with a reasonable time allowed to consummate the sale, substantiated by a reasonable down or full cash payment.3

I.C. § 63-201(14) (2007). In determining market value, an assessor will consider the comparable sales approach, the cost approach, and the income approach. IDAPA Furthermore, with regard to an electric utility's operating property, the unit method of market valuation is preferred. IDAPA The unit method values operating properties by measuring their contribution to the overall unit. Under the unit method, " the value of the tangible and intangible property is equal to the value of the going concern .... For interstate property, allocation factors shall be used to determine what part of the system value is in Idaho." Id. " The appraiser shall attempt to measure obsolescence, if any exists. If obsolescence is found to exist, it may be considered in the cost approach." IDAPA Obsolescence is defined as " [a] diminution in the value or usefulness of property ...." Black's Law Dictionary 1182 (9th ed. 2009). For tax purposes, obsolescence is usually distinguished from physical deterioration or depreciation. Black's Law Dictionary 1182 (9th ed. 2009). External obsolescence (also referred to as economic obsolescence) " results from external economic factors, such as decreased demand or changed governmental regulations." Black's Law Dictionary 1182 (9th ed. 2009).

On June 16, 2008, the Commission completed an appraisal of PacifiCorp's operating property for the tax year beginning on January 1, 2008, which was prepared by Jerott Rudd, Senior Appraiser with the Commission's Central Assessment Bureau. With regard to the cost approach, Rudd utilized the historic cost less depreciation methodology (" HCLD Method" ), which is a commonly employed cost approach. To arrive at his cost approach estimate, Rudd primarily relied on PacifiCorp's FERC Form for the period ending

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in December 31, 2007. Rudd did not provide a separate deduction for external obsolescence. He elaborated that " [he] believe[s] ... [external obsolescence] was accounted for ... in the depreciation [as reported in the FERC Form]. Rudd testified that market to book value is a strong indicator of obsolescence." Rudd also testified that he would have considered accounting for additional external obsolescence if there was market evidence to support such a deduction, but he added " [that] ... the market evidence that [he] had for PacifiCorp ... did not indicate obsolescence."

Rudd's appraisal estimated a cost approach market value of $11,122,536,280. With regard to the income approach, Rudd utilized the yield capitalization of net operating income methodology (" Yield Capitalization Method" ) to arrive at his estimate of $6,761,521,809. Rudd did not employ the comparable sales approach because he contended that there were no comparable sales of similar operating properties. Rudd did not utilize the comparable sales approach's counterpart, the stock and debt approach, which is often used by appraisers when the comparable sales approach is inapplicable, because PacifiCorp's stock is not...

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