Boston Edison Co. v. Board of Assessors of Watertown

• Citation: 439 N.E.2d 763,387 Mass. 298
• Parties: BOSTON EDISON COMPANY v. BOARD OF ASSESSORS OF WATERTOWN.
• Decision Date: 27 August 1982
• Court: United States State Supreme Judicial Court of Massachusetts

Page 763

439 N.E.2d 763

387 Mass. 298

BOSTON EDISON COMPANY v. BOARD OF ASSESSORS OF WATERTOWN.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued May 6, 1982.

Decided Aug. 27, 1982.

George M. Moriarty, Boston (Jeffrey B. Storer, Boston, with him), for plaintiff.

Edward G. Seferian, Boston, for defendant.

Richard L. Brickley, Boston, for Bay State Gas Co. and another, amici curiae, submitted a brief.

Philip H. R. Cahill, Westboro, for Massachusetts Elec. Co. and another, amici curiae, submitted a brief.

Robert V. Cauchon, Boston, for Eastern Edison Co., amicus curiae, submitted a brief.

Robert S. Cummings and Duncan S. Payne, Boston, for Holyoke Power & Elec. Co. and another, amici curiae, submitted a brief.

Gerald V. May, Boston, for Cambridge Elec. Light Co. and others, amici curiae, submitted a brief.

Robert J. McGee, Boston, for Colonial Gas Co., amicus curiae, submitted a brief.

Verne W. Vance, Jr., Boston, for Boston Gas Co., amicus curiae, submitted a brief.

Richard J. Kelliher, West Roxbury, for Massachusetts Municipal Ass'n, amicus curiae, submitted a brief.

Stanley U. Robinson, III, Wayland, amicus curiae, submitted a brief.

Before HENNESSEY, C. J., and WILKINS, NOLAN, LYNCH and O'CONNOR, JJ.

WILKINS, Justice.

Boston Edison Company (Edison) appeals from a decision of the Appellate Tax Board (board) valuing Edison's taxable personal property in Watertown for the fiscal years 1976, 1977, and 1978. Edison's principal challenge is to the board's determination to value Edison's property almost entirely on the basis of the property's depreciated reproduction cost, with only minimum weight given to the net book cost, or rate base value, of the property. The difference between the property's depreciated reproduction cost and its net book cost was substantial in each year. For example, the board found that, on January 1, 1976, the depreciated reproduction cost of Edison's property was approximately $15,600,000, and the net book cost was approximately $8,300,000. The board, for each year, gave 95% weight to the depreciated reproduction cost and 5% weight to the net book cost. Thus, for January 1, 1976, it arrived at a fair market value of approximately $15,230,000. The board granted partial abatements to Edison, and Edison has appealed. We conclude that the board's decision does not support its conclusion to give almost controlling weight to the depreciated reproduction cost method of valuing Edison's taxable personal property in Watertown, and we remand the proceedings to the board for further consideration. ¹

1. There are certain undisputed facts bearing on the question of the fair cash value of Edison's taxable personal property. Edison engages in the transmission and distribution of electricity for sale to customers in Watertown and in other municipalities in eastern Massachusetts. About 2 1/2% of Edison's customers in Massachusetts are in Watertown. Edison's taxable personal property in Watertown consisted of switch-gear and other related equipment in four electrical distribution substations; more than five miles of cable contained in underground conduits; and poles, wires, line transformers, street lights, lines running to customers' premises, and electric meters. The parties agreed before the board to a description of the relevant property. Although there were differences between the parties as to both the depreciated reproduction cost and the net book cost of this property, for the purposes of our decision on the major point in contention, we need not be concerned with those differences. ²

The parties and the board also agree on certain principles which are applicable to this case. There was no reasonable basis for valuing the property by considering sales of comparable property. This is special purpose property as to which there were no comparable sales. Nor could there be any valuation of the property based on a capitalization of income. It was not feasible to allocate a portion of Edison's overall revenue and expenses to Edison's Watertown property. It is for these reasons that the expert for each party used both the depreciated reproduction cost and the net book cost of the property in arriving at his opinion of fair cash value. The depreciated reproduction cost approach involves, for each item of property, a determination of its value based on the current cost of reproducing it, reduced by physical, functional, and economic depreciation. ³ The net book cost, or the rate base value, of property is its cost when first devoted to public use, reduced by accrued depreciation. For property of the character involved in this case, the Department of Public Utilities allowed annual depreciation of 3% of its original cost. Edison's rates, as approved by the Department of Public Utilities, include an intended rate of return limited to a percentage of the "net book cost" of its property. ⁴

Of particular significance to this case is the apparently longstanding position of the Department of Public Utilities that, if a regulated utility sells an asset to another regulated, private utility, the basis of that asset in the hands of the transferee remains the same as that of the transferor for rate-making purposes. Thus, if Edison were to sell any of its taxable personal property in Watertown to another public utility, that other utility would be allowed a return on the transferred property based on that property's net book, or rate base, value, and not on any higher purchase price it might have paid.

The basic principles of law applicable to this proceeding are not in dispute. The assessors must assess Edison's property at its "fair cash value" (G.L. c. 59, § 38), which means its fair market value. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566, 137 N.E.2d 462 (1956). Fair market value means "the price that an owner willing but not compelled to sell ought to receive from one willing but not compelled to buy." Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 63, 34 N.E.2d 623 (1941). Where the property is such that its value cannot readily be determined by comparable sales or by capitalization of income, resort to the property's depreciated reproduction cost is particularly appropriate. Foxboro Assocs. v. Assessors of Foxborough, 385 Mass. 679, 687, 433 N.E.2d 890 (1982). Correia v. New Bedford Redevelopment Auth., 375 Mass. 360, 362-364, 377 N.E.2d 909 (1978). Commonwealth v. Massachusetts Turnpike Auth., 352 Mass. 143, 147-148, 224 N.E.2d 186 (1967). Newton Girl Scout Council, Inc. v. Massachusetts Turnpike Auth., 335 Mass. 189, 194-195, 138 N.E.2d 769 (1956). In valuing Edison's taxable personal property, a variety of factors may appropriately be considered. "[T]he value of [the] property for any special purpose together with its value for all purposes for which it is reasonably adapted may be shown." Boston Gas Co. v. Assessors of Boston, supra 334 Mass. at 566, 137 N.E.2d 462. "Original cost with deductions, if any, for depreciation, replacement cost and productive power are all legitimate elements bearing upon true value, but no one of them is decisive." Assessors of Quincy v. Boston Consol. Gas Co., supra 309 Mass. at 66-67, 34 N.E.2d 623, quoting from Essex Co. v. Lawrence, 214 Mass. 79, 89, 100 N.E. 1016 (1913).

The board's decision must be supported by substantial evidence considering the entire record before the board. See New Boston Garden Corp. v. Assessors of Boston, 334 Mass. 549, --- - ---, Mass.Adv.Sh. (1981) 1023, 1033-1034, 420 N.E.2d 298. Where there is substantial evidence to support the board's decision, we defer to the board's judgment as to what evidence to accept and which method or methods of valuation to rely on. See Foxboro Assocs. v. Assessors of Foxborough, supra 385 Mass. at 690, 433 N.E.2d 890; Assessors of Quincy v. Boston Consol. Gas Co., supra 309 Mass. at 72, 34 N.E.2d 623. The principal issue before us, therefore, is whether, in determining the fair cash value of the property, the board's decision to grant almost complete weight to the depreciated reproduction cost of Edison's property is supported on the record. Here, it becomes necessary to describe the reasoning of the board.

The board rejected Edison's argument that, because the net book cost (rate base value) of its property limits its earnings, the net book cost of the property sets a ceiling on its value for local taxation purposes. We agree with the board that the net book cost of the property does not set an upper limit on the property's value for local taxation purposes. The argument that net book cost must be a ceiling on valuation has largely been rejected elsewhere. ⁵ The contention particularly lacks merit if the buyer's earnings are not limited to a return based on the seller's rate base value. ⁶ This is because the value of property to a seller is not necessarily the true measure of fair market value. See Boston Gas Co. v. Assessors of Boston, supra 334 Mass. at 566, 137 N.E.2d 462.

Even where a buyer may be restricted to a return on the net book cost of the seller, as we shall show subsequently, the net book cost is not a ceiling on fair market value. Although Edison argues that the net book cost should be an absolute limit on the fair cash value of its property, its own expert did not testify to that effect. The major thrust of Edison's argument is that the board did not give sufficient weight to the net book cost of its property, not that it had to give total weight to net book cost.

The board pointed out, quite correctly, that the value of property for rate-making purposes, related, as it is, to assuring provision for an adequate return on a utility's investment, may have little to do with what the property would sell for on a free and open market. The original cost of property, reduced by a fixed annual rate of depreciation, hardly is a guaranteed measure of the fair market value of that property. We agree with the board's statement, as a...