Boston Gas Co. 1 v. Bd. of Assessors of Boston.

• Decision Date: 20 January 2011
• Docket Number: SJC–10691.
• Citation: 941 N.E.2d 595,458 Mass. 715
• Parties: BOSTON GAS COMPANY 1v.BOARD OF ASSESSORS OF BOSTON.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

458 Mass. 715

941 N.E.2d 595

BOSTON GAS COMPANY 1

v.BOARD OF ASSESSORS OF BOSTON.

SJC–10691.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Oct. 5, 2010.Decided Jan. 20, 2011.

Stephen W. DeCourcey(John M. Lynch with him), Boston, for the plaintiff.David L. Klebanoff, Boston, for the defendant.Present: MARSHALL, C.J., IRELAND, SPINA, COWIN, CORDY, BOTSFORD, & GANTS, JJ.²

COWIN, J.

Boston Gas Company, doing business as Keyspan Energy Delivery New England (company), made timely application to the board of assessors of Boston (assessors) for abatement of the tax imposed on its rate-regulated ³ utility property in the city of Boston(city) in fiscal year 2004.⁴At issue are separate assessments of the company's personal property and real property.After being denied abatements by the assessors, the company appealed to the Appellate Tax Board(board).With respect to the personal property, the board determined that a valuation methodology according equal weight to the property's net book value and its reproduction cost new less depreciation (RCNLD) provided a reliable estimate of the fair cash value of the property.As that value was in excess of the assessed value, the board denied the company relief.With respect to the real property, the board concluded that neither the company nor the assessors had provided a sufficient basis for valuing the property, and so left the assessed value undisturbed.

The plaintiff filed a notice of appeal from the decision of the board, and we granted direct appellate review.On appeal, the plaintiff claims (1) the board lacked substantial evidence in support of its determination that a valuation method other than net book value was permissible, and that the board therefore erred in according equal weight to net book value and RCNLD; (2) the board lacked substantial evidence to support the analysis of earnings before interest, taxes, depreciation, and amortization (EBITDA) in the income capitalization approach for valuing the personal property; (3) the board erred in failing to use a tax factor to account for property taxes in the income capitalization approach; (4) the board erred in its weighing of certain evidence and in its assessment of the credibility of a key witness; and (5) the board erred in concluding that there was insufficient evidence to determine the value of the real property.We remand to the board for further consideration of the use of a tax factor in the income capitalization approach, and of certain subsidiary conclusions related to the EBITDA analysis in that approach.On all other issues, we affirm the board's decision.

1. Background. a. The legal framework.City assessors are charged with making a “fair cash valuation” of property that is subject to taxation.G.L. c. 59, § 38.We have determined “fair cash value” to mean “fair market value,” or “the price an owner willing but not under compulsion to sell ought to receive from one willing but not under compulsion to buy.”Boston Gas Co. v. Assessors of Boston,334 Mass. 549, 566, 137 N.E.2d 462(1956).When challenging an assessment before the board, the taxpayer bears the burden of establishing its right to an abatement of the assessed tax.SeeSchlaiker v. Assessors of Great Barrington,365 Mass. 243, 245, 310 N.E.2d 602(1974), quotingJudson Freight Forwarding Co. v. Commonwealth,242 Mass. 47, 55, 136 N.E. 375(1922).The assessment is valid unless the taxpayer sustains its burden of proving otherwise.SeeSchlaiker v. Assessors of Great Barrington, supra at 245, 310 N.E.2d 602.

Various methods are used to value taxable utility property.These include (1) a determination of the property's net book value, (2) an income capitalization valuation, (3) a sales comparison valuation, and (4) a determination of RCNLD.⁵SeeTennessee Gas Pipeline Co. v. Assessors of Agawam,428 Mass. 261, 263, 700 N.E.2d 818(1998), citingMontaup Elec. Co. v. Assessors of Whitman,390 Mass. 847, 850, 460 N.E.2d 583(1984).

The Department of Public Utilities(DPU) regulates the rates that gas companies charge to consumers.SeeG.L. c. 164, § 94.The net book value of regulated utility property, also known as the “rate base” value, plays an important role in the DPU's calculation of the revenue that a regulated gas utility is permitted to earn.SeeTennessee Gas Pipeline Co. v. Assessors of Agawam, supra at 263, 700 N.E.2d 818.The DPU allows a utility to recover, through the rates charged to consumers, its reasonable operating expenses, taxes, depreciation and amortization, and other costs.Boston Gas Co. v. Department of Telecomm. & Energy,436 Mass. 233, 234, 763 N.E.2d 1045(2002), quotingTheory and Implementation of Incentive Regulation, D.P.U. 94–158at 3(1995);Boston Gas Co., D.T.E. 03–40–Bat 13–20(2004)(breaking out the components of Boston Gas's revenue requirements).A utility is also permitted to earn a reasonable return on investment, which is calculated as a percentage return on the utility's rate base.SeeBoston Gas Co. v. Department of Telecomm. & Energy, supra at 234, 763 N.E.2d 1045;Boston Gas Co., supra at 16(calculating return on rate base for company).The cost of utility property may be included in the utility's rate base if the property is “used and useful to customers” and if the costs were “prudently incurred.”SeeHingham v. Department of Telecomm. & Energy,433 Mass. 198, 202, 740 N.E.2d 984(2001).For ratemaking purposes, the value of property included in the rate base is its net book value, which has been defined as “the original cost of the property at the time it was originally devoted to public use, less accrued depreciation.”Tennessee Gas Pipeline Co. v. Assessors of Agawam, supra at 263, 700 N.E.2d 818.

In the context of a sale of utility assets, the DPU has maintained a general policy of limiting the net book value of the assets in the hands of the buyer to the existing net book value in the hands of the seller.Seeid.In this way, any acquisition premium paid for the assets—that is, an amount paid above net book value ⁶—would be excluded from the buyer's rate base, and the buyer would thus not earn the DPU-specified rate of return on the premium; as of 2003, the DPU stated that such exclusion remains the norm.SeeBoston Gas Co., D.T.E. 03–40at 323(2003).This policy has been referred to as the “carry-over rate base principle.”Montaup Elec. Co. v. Assessors of Whitman, supra at 852–853, 460 N.E.2d 583.

As a result of this regulation, we have stated that the net book value of utility assets is the proper value for assessment purposes, absent “special circumstances” that would induce a buyer to pay more than net book value.Tennessee Gas Pipeline Co. v. Assessors of Agawam, supra at 263–264, 700 N.E.2d 818.Such circumstances may include (1) that “the utility company's net earnings actually may exceed the rate of return approved by the regulatory agency”; (2) that “the profit available from this transaction may exceed that which an investment of comparable risk could bring in the open market”; (3) that “the applicable regulatory agency may change its policies and abandon the carry-over rate base principle, thereby making an investment in the company more attractive,”⁷Montaup Elec. Co. v. Assessors of Whitman, supra at 852–853, 460 N.E.2d 583; or (4)“[t]he potential for growth in a utility's business.”Boston Edison Co. v. Assessors of Watertown,387 Mass. 298, 305–306, 439 N.E.2d 763(1982).The special circumstances that could induce a buyer to pay more than net book value are not limited to the examples enumerated above.Seeid. at 306, 439 N.E.2d 763.

b. Facts.With this understanding of the legal framework for valuing regulated utility property, we turn to the facts of the present case.We recite the basic facts here, reserving a more detailed discussion of some of the facts for our subsequent analysis.

The personal property at issue consists primarily of the pipes, lines, and meters used to transport and monitor the distribution of natural gas to the company's customers within the city.The pipes, or “mains,” represent about eighty percent of the value of the personal property.Approximately two-thirds of the mains are made of cast iron—a material used between 1850 and 1950—and the remainder consists of steel, which was introduced in the 1930's, and plastic, which was introduced by 1970.

The real property at issue is a parcel known as Commercial Point.The majority of the parcel is used as a liquid natural gas storage and distribution facility, and is improved with a 1.13 billion cubic foot storage tank, a cooling tower, a containment dike, and a monitoring and control building.

For fiscal year 2004, the assessors valued the personal property at $223.2 million and the real property at $28 million.The net book value of the personal property was approximately $159.2 million, and the net book value of the real property was approximately $1.8 million.The plaintiff paid the assessed taxes and, as stated, timely filed applications for abatement with the assessors for both the real and personal property.The assessors denied the applications, and the plaintiff appealed both matters to the board.

At the hearing before the board, the assessors' expert, George Sansoucy, presented his appraisal report for the personal property.He derived a value for the property based on three valuation methodologies: an income capitalization approach,⁸ a sales comparison approach,⁹ and a RCNLD approach.¹⁰The board ultimately concluded that an equal weighting of the RCNLD value (once adjusted for a discovered error) and the net book value provided a reliable estimate of the fair cash value of the property.That weighting yielded a value of $248 million, exceeding the assessed value of the personal property of $223.2 million.The board accordingly concluded that the plaintiff had not met its burden of showing that the property was assessed at a value above...