Consumers Power Co. v. Big Prairie Tp., Newaygo County

• Decision Date: 06 February 1978
• Docket Number: Docket No. 3060
• Parties: Page 182 265 N.W.2d 182 81 Mich.App. 120 CONSUMERS POWER COMPANY, Plaintiff-Appellant, v. BIG PRAIRIE TOWNSHIP, NEWAYGO COUNTY, Defendant-Appellee
• Court: Court of Appeal of Michigan — District of US

Page 182

265 N.W.2d 182

81 Mich.App. 120

CONSUMERS POWER COMPANY, Plaintiff-Appellant v BIG PRAIRIE TOWNSHIP, NEWAYGO COUNTY, Defendant-Appellee.

Docket No. 30608-09-10.

Court of Appeals of Michigan.

Feb. 6, 1978.

Released for Publication April 26, 1978.

Robert J. Byers, Jackson, Dukema, Gossett, Spencer, Goodnow & Trigg by Eugene A. Gargaro, Jr., Detroit, for plaintiff-appellant.

Miller, Canfield, Paddock & Stone by Samuel J. McKim, III, Detroit, for defendant-appellee.

Before R. B. BURNS, P. J., and ALLEN and MAHER, JJ.

ALLEN, Judge.

Consumers Power Company appeals of right from an opinion and judgment entered September 30, 1976, by the Michigan Tax Tribunal, assessing the Hardy Dam, a hydroelectric generating station owned by Consumers, and the lands appurtenant thereto for the years 1973, 1974 and 1975. ¹

Despite the bulk of the record and pleadings, conceptually, this is not a difficult case. But within the conceptual framework, two issues of first impression are raised; (1) what is the proper method by which to determine the "true cash value" of a hydroelectric facility, and (2) may the Tax Tribunal adopt an assessed valuation greater than that set by the assessing authority and confirmed by the board of review.

BACKGROUND AND HISTORY

THE DAM

Construction of the Hardy Dam commenced in 1928, and was completed in 1930, and its 32.5 megawatt generating capacity was placed on line in 1931. Although the Federal Power Act, 16 U.S.C. § 791a et seq., requiring a license for the construction of any dam on a navigable waterway, had been in effect since June 10, 1920, Consumers Power Company did not have a Federal Power Commission license authorizing it to undertake this project.

As time passed, the FPC brought more and more unlicensed projects within its regulatory framework. United States v. Appalachian Electric Power Co., 23 F.Supp. 83 (W.D.Va., 1938), reversed on other grounds, 311 U.S. 377, 61 S.Ct. 291, 85 L.Ed. 243 (1940), rehearing denied, 312 U.S. 712, 61 S.Ct. 548, 85 L.Ed. 1143 (1941), petition denied, 317 U.S. 594, 63 S.Ct. 67, 87 L.Ed. 487 (1942). Accordingly, in 1962, Consumers Power Company applied for and was granted a license by the FPC for another 31 years of operation, and its current license for the Hardy Dam therefore expires in 1993. The FPC has authority to issue licenses for any period not to exceed 50 years. 16 U.S.C. § 799.

Until 1973, the tax assessing authorities did not dispute Consumers' method of evaluating the true cash value of Hardy Dam and appurtenant properties by depreciating the dam and other buildings over a 31 year useful life matching that of the FPC license granted. The land, considered not depreciable, was simply carried forward on Consumers' books at original cost. The original cost of the entire project was something over $11,000,000. By 1973, the "book value" of the dam and appurtenant land was down to $3,276,136.

However, in 1973 the Yom Kippur War between Israel and her Arab neighbors led to huge increases in fossil fuel prices, particularly for natural gas and petroleum products. It is alleged by the taxing authorities that as a result of the jump in fossil fuel prices the value of Hardy Dam underwent a sudden upward shift. With fuel prices having run amok, the efficiency of hydroelectric generators vis-a-vis equivalent fossil fuel peaking stations became striking. ² Because of this disparity, since 1973 the assessing authorities have taken the position that Hardy Dam's increased cost efficiency makes the project far more valuable than it was previously. Consumers has disputed this assessment on the grounds that historical depreciated cost is the sole basis on which it is allowed to earn a return by the FPC and Michigan Public Service Commission (MPSC), Consumers having been allowed a 7.47% Rate of return for 1973 and 1974 by the MPSC, and 7.53% For the following two years. That is the crux of this litigation in a nutshell.

Rather than adopt depreciated historical cost, the taxing authorities have opted instead to use an evaluation method known as adjusted depreciated reconstruction cost. This involves calculating what it would cost to rebuild an equivalent hydroelectric facility at current construction prices, then allowing depreciation to reflect the fact that, as of 1973, Hardy Dam was 42 years old. This method was adopted and approved by the Tax Tribunal as applicable to this case. The witnesses on both sides agreed that the manner in which the depreciated reconstruction cost method is applied is through use of the Handy-Whitman Index, a publication, based on elaborate historical cost information and calculations, which allows the user to calculate present construction costs based on historical construction costs, and then to apply appropriate depreciation multipliers. To or from this figure may then be added or subtracted appropriate amounts for various kinds of obsolescence (functional, historical and economic) and other factors, independent of construction costs, which affect the value of the property for ad valorem taxation purposes.

THE APPURTENANT LANDS

Also in dispute is the value of the lands owned by Consumers and surrounding the Hardy Dam reservoir. The total land involved consists of 5,500 acres more or less, of which 2,250 are submerged, 2,210 are uplands within the project boundary and 1,040 are uplands outside the project boundary. All the land is located within the confines of the Manistee National Forest.

Pursuant to FPC regulations, in conjunction with its license application, Consumers included an Exhibit R, a recreational use plan for all lands within the project boundary. FPC regulations generally require that a licensee include within the project boundary all land within 200 feet of the high water mark. In terms of nonsubmerged land, this requirement would subsume at most 381 acres of land. However, the recreational use plan submitted by Consumers and approved by the FPC includes far more land, Consumers having set aside some 780 acres for recreational development (of which 450 have been developed), such as for cabins, docks, county and township parks, club houses, etc., and the remaining 1,430 acres of land as a tree plantation. In disputing its property tax assessment as regards the land, Consumers argues that little value above historical cost can be placed thereon because the land cannot be leased or sold without FPC permission, and based on a sample consisting of all property transfer requests acted upon by the FPC in a one year time span, the chances that any land could be released for more intensive uses by private or public persons or agencies is nearly zero, and the land is so saddled with regulatory restrictions as to be of little market value.

The Tax Tribunal felt that Consumers had included within the project boundary more land than necessary for the attributed purpose of increasing its capital base for rate making purposes, and the Tribunal held that a taxpayer could not be allowed to voluntarily restrict the uses to which its property could be put so as to decrease its liability for property taxes. NeBoShone Association, Inc. v. State Tax Commission, 58 Mich.App. 324, 227 N.W.2d 358 (1975). The Tax Tribunal resolved to assess the nonsubmerged lands within the project at 50% Of the value of similar land open to unrestricted use, or $500 per acre.

PROCEEDINGS

For 1973 and 1974, Consumers' appeal was addressed to the State Tax Commission, but in 1975, pursuant to the provisions of the Tax Tribunal Act, M.C.L.A. § 205.701 et seq.; M.S.A. § 7.650(1) et seq., the matter was transferred to the Tax Tribunal. The 1975 appeal was filed with the Tax Tribunal. In rendering its judgment, the Tax Tribunal assessed the subject property at a higher value than that originally set by the township and approved by the county Board of Review. Big Prairie Township had originally assessed the property for all three tax years in question at an assessed value of $5,669,100 (one-half of true cash value reduced by the appropriate equalization factor). Once the matter was before the Tax Tribunal, however, Newaygo County petitioned to intervene and permission to do so was granted. The County then sought to assess the property at $12,000,000 for each of the three tax years. Ultimately, the Tax Tribunal adopted an assessed value of $8,190,637 for 1973, $8,483,332 for 1974, and $9,315,574 for 1975. Not surprisingly, Consumers feels aggrieved at having ended up 2 1/2 to 3 1/2 million dollars of assessed value worse off than it was before it undertook this expansive litigation. Three basic issues are presented:

I. DID THE TAX TRIBUNAL ERR IN UTILIZING THE ADJUSTED DEPRECIATED RECONSTRUCTION COST METHOD IN ASSESSING THE HYDROELECTRIC GENERATING FACILITY ITSELF?

II. DID THE TAX TRIBUNAL ERR IN ITS ASSESSMENT OF THE REAL ESTATE INVOLVED, CONSIDERED SEPARATELY FROM THE ASSESSMENT OF THE GENERATING FACILITY?

III. DID THE TAX TRIBUNAL EXCEED ITS JURISDICTION IN ADOPTING AN ASSESSED VALUATION GREATER THAN THAT ORIGINALLY SET BY APPELLEE BIG PRAIRIE TOWNSHIP AND CONFIRMED BY THE BOARD OF REVIEW?

ASSESSMENT OF THE HYDROELECTRIC FACILITY (ISSUE I)

It was the duty of the Tax Tribunal, as the Legislature's designated agent for that purpose, to determine the true cash value of Hardy Dam and appurtenant property, following which it was bound to apply ministerially the requisite equalization factor. Const.1963, Art. 9, § 3; see also Art. 9, § 5. Although the legislatively supplied definition of "true cash value" is "the usual selling price at the place where the property to which the term is applied shall be at the time of assessment, being the price which could be obtained for the property at private sale, and not at forced or auction sale", M.C.L.A. § 211.27; M.S.A. § 7.27, the legislative test has been held not to be exclusive. For example, evidence of actual sales price at a private sale, following an arms length transaction, has been...