Enbridge Energy, Ltd. P'ship v. Comm'r of Revenue, A19-1875

• Citation: 945 N.W.2d 859
• Decision Date: 08 July 2020
• Docket Number: A19-1875
• Parties: ENBRIDGE ENERGY, LIMITED PARTNERSHIP, Relator, v. COMMISSIONER OF REVENUE, Respondent.
• Court: Supreme Court of Minnesota (US)

945 N.W.2d 859

ENBRIDGE ENERGY, LIMITED PARTNERSHIP, Relator,

v.COMMISSIONER OF REVENUE, Respondent.

A19-1875

Supreme Court of Minnesota.

Filed: July 8, 2020

Paul B. Kilgore, Eric S. Johnson, Fryberger, Buchanan, Smith & Frederick, P.A., Duluth, Minnesota, for relator.

Keith Ellison, Attorney General, Jennifer A. Kitchak, Assistant Attorney General, Saint Paul, Minnesota, for respondent.

Andrew M. Carlson, Claire V.J. Joseph, Brandon L. Blakely, Taft Stettinius & Hollister LLP, Minneapolis, Minnesota; and

Darla S. Zink, Northern Natural Gas Company, Omaha, Nebraska, for amicus curiae Northern Natural Gas Company.

Considered and decided by the court without oral argument.

OPINION

McKEIG, Justice.

This case concerns the valuation of a pipeline system for tax years 2015 and 2016. The tax court increased the assessed unit value of the pipeline system for both years. The taxpayer appeals from the tax court's market value determination, asserting that the tax court erred in its treatment of construction work in progress and external obsolescence in the computation of the cost indicator of value. The taxpayer also appeals the weight that the tax court assigned to the cost indicator of value, as opposed to the income indicator, when it calculated the unit value of the pipeline system. Because the tax court did not err in its calculations for the cost indicator of value, we affirm. But, because the tax court erred by concluding that it had no discretion to adjust the default weightings prescribed by Minnesota Rule 8100.0300, subpart 5 (2019) for the cost and income indicators of value, we remand the case for the tax court to determine whether the circumstances of the unit valuation dictate the need for adjusted weightings. We therefore affirm in part, reverse in part, and remand for a unit valuation consistent with this opinion.

FACTS

Enbridge Energy, Limited Partnership (Enbridge) owns and operates the Lakehead System, a pipeline system for the transportation of petroleum products. The Lakehead System is the U.S. portion of an operationally integrated pipeline system spanning roughly 2,200 miles from western Canada to the U.S. Great Lakes region and eastern Canada. In Minnesota, the Lakehead System extends 283 miles across portions of 13 counties. Under Minnesota law, pipeline systems are valued according to the unit-rule method. See generally Comm'r of Revenue v. Enbridge Energy, Ltd. P'ship (Enbridge I ), 923 N.W.2d 17, 20 (Minn. 2019) (describing the valuation process for pipeline systems); Minn. R. 8100 (2019).

This case concerns the valuation of the Lakehead System for tax years 2015 and 2016; Enbridge's challenges to each valuation are considered together on appeal. During a 5-day trial before the tax court, the parties offered conflicting expert testimony on the market value of the Lakehead System. The experts’ calculations for some indicators of value and their assigned weightings to the cost and income approaches to valuation are relevant to this appeal and summarized below.

Enbridge's expert appraiser, Thomas K. Tegarden, prepared appraisals of the unit value of the property in 2015 and 2016 under the cost and income approaches. Tegarden's calculations for the 2015 cost indicator of value included $1,107,446,503 for construction work in progress (CWIP). Tegarden recognized that the pipeline property suffered external obsolescence representing a loss in value of 36.89 percent in 2015 and 43.9 percent in 2016. Because Tegarden determined that the existence of external obsolescence reduced the reliability of the cost approach, Tegarden placed less weight on that approach as compared to the income approach. With 80 percent weight attributed to the income approach and 20 percent weight attributed to the cost approach, Tegarden estimated Enbridge's pipeline property had a unit value of $5,300,000,000 in 2015 and $5,500,000,000 in 2016.

Enbridge's Expert's Appraisal (the Tegarden Appraisal)
Cost	Income	Weighting	Unit Value
2015	$5,922,000,000	$5,146,000,000	20-80	$5,300,000,000
2016	$6,040,000,000	$5,366,000,000	20-80	$5,500,000,000

The Commissioner's appraiser, T. Scott Vandervliet, estimated that the property was more valuable than the Commissioner had originally assessed, and nearly twice as valuable as Tegarden's estimates. Vandervliet's 2015 cost indicator of value included $3,682,488,025 for CWIP. Vandervliet determined that no external obsolescence affected the property as of either assessment date, and applied equal weight to the cost and income approaches.

The Commissioner's Expert's Appraisal (the Vandervliet Appraisal)
Cost	Income	Weighting	Unit Value
2015	$9,597,600,000	$9,543,200,000	50-50	$9,570,400,000
2016	$10,961,800,000	$10,609,300,000	50-50	$10,785,600,000

Ultimately, the tax court determined that the Commissioner had undervalued the property in each year. Because the Commissioner agreed post-trial that Te garden used the appropriate CWIP balance for 2015, the tax court adopted his figures for CWIP. The tax court rejected Enbridge's arguments regarding external obsolescence, and weighted the cost and income indicators of value equally.¹

The Tax Court's Appraisal
Cost	Income	Weighting	Unit Value
2015	$9,372,811,623	$5,322,912,000	50-50	$7,347,861,812
2016	$10,763,859,982	$5,524,483,000	50-50	$8,144,171,725

Enbridge appealed, contending that: (1) the tax court (and Enbridge's own expert) overstated the amount of the construction work in progress; (2) Enbridge is entitled to a reduction in market value to accurately reflect the impact of external obsolescence; and (3) the tax court erred by weighting the cost and income indicators of value equally to determine the unit value of the pipeline system. We address each argument in turn.

ANALYSIS

Our review of the tax court's decision is limited and deferential. Minn. Energy Res. Corp. v. Comm'r of Revenue (MERC I ), 886 N.W.2d 786, 792 (Minn. 2016). We determine only whether the tax court lacked jurisdiction, whether the tax court's order is supported by the evidence and in conformity with the law, and whether the tax court committed any other error of law. Minn. Stat. § 271.10, subd. 1 (2018) ; Medline Indus., Inc. v. Cty. of Hennepin , 941 N.W.2d 127, 131 (Minn. 2020). "We generally defer to the tax court's valuation decision in light of the inexact nature of real property appraisal." Inland Edinburgh Festival, LLC v. Cty. of Hennepin , 938 N.W.2d 821, 825 (Minn. 2020). "When the tax court has ‘clearly misvalued the property’ or ‘completely failed to explain its reasoning,’ we accord the tax court no deference." Id. (quoting Nw. Nat'l Life Ins. Co. v. Cty. of Hennepin , 572 N.W.2d 51, 52 (Minn. 1997) ). We review the tax court's market value determinations for clear error and its legal determinations de novo. Lowe's Home Centers, LLC (Plymouth) v. Cty. of Hennepin , 938 N.W.2d 48, 53–54 (Minn. 2020).

Minnesota's property-tax system rests on the principle that all property must be "valued at its market value." Minn. Stat. § 273.11, subd. 1 (2018). Generally, each item of personal property is separately and independently valued, and property tax is assessed by local taxing authorities. Enbridge I , 923 N.W.2d at 20 (citing Minn. Stat. § 273.17, subd. 1 (2018) ; Minn. Stat. § 273.062 (2018) ). To address the unique character of public utility companies, the Minnesota Legislature adopted an alternative method for assessing the value of railroads, utilities, and pipelines operating within the state. See Cty. of Aitkin v. Blandin Paper Co. , 883 N.W.2d 803, 811–12 (Minn. 2016) ; see generally Minn. R. 8100.0200. This method starts by assessing the value of the system plant as a whole (the "unit value") before dividing the unit value among the states in which the utility company operates. Minn. R. 8100.0200. After making additional adjustments, the Minnesota portion of the unit value is distributed amongst the relevant local taxing districts. Id. This appeal focuses on the tax court's determination of the unit value.

Chapter 8100 prescribes the process for assessing the unit value of utility company property. Minn. R. 8100.0300, subp. 1. Under the default process, an assessor utilizes the cost and income approaches to determine the cost and income indicators of value.² These indicators of value are then weighted to calculate the unit value. Minn. R. 8100.0300, subp. 5. The default weighting of the indicators of value places equal weight on the cost and income indicators (50 percent each). Id.

One of the components of the cost indicator of value is construction work in progress (CWIP).³ Minn. R. 8100.0300, subp. 3. CWIP represents "that cost of property that is not in service or has not been placed in a Plant in Service account as of the assessment date." Brent Eyre, A Review of MN Rules Chapter 8100 Pertaining to the Valuation & Assessment 17 (2005). "Since most cost approaches begin with an analysis of Plant in Service accounts, an addition must be made to the cost approach in order to properly account for the value of CWIP." Id.

Finally, obsolescence may affect the reliability of the cost indicator of value. If the commissioner finds that obsolescence exists, the commissioner has the discretion to adjust the weightings or make other adjustments in its methodology consistent with the rules and applicable statutes. Minn. R. 8100.0300, subp. 4aB.

I.

We start with Enbridge's claim that the tax court erred in its treatment of CWIP expenses in the calculations made under the cost approach. Enbridge makes three arguments. First, Enbridge argues that the tax court acted outside the scope of its statutory authority by assessing the value of property that was not "attached" to the pipeline system of mains, pipes, and equipment when it determined the unit value of the property. See Minn. Stat. § 273.33, subd. 2 (2018) ("The personal property, consisting of the pipeline system of mains, pipes, and equipment attached thereto , of pipeline companies and others engaged in the operations or business of transporting products by...