Freeport-McMoran Resource Partners v. County of Lake

• Decision Date: 19 January 1993
• Docket Number: FREEPORT-M,No. A055683,A055683
• Citation: 12 Cal.App.4th 634,16 Cal.Rptr.2d 428
• Court: California Court of Appeals Court of Appeals
• Parties: , 142 P.U.R.4th 543 cMORAN RESOURCE PARTNERS, Plaintiff and Appellant, v. COUNTY OF LAKE, Defendant and Respondent.

Page 428

16 Cal.Rptr.2d 428

12 Cal.App.4th 634, 142 P.U.R.4th 543

FREEPORT-McMORAN RESOURCE PARTNERS, Plaintiff and Appellant, v. COUNTY OF LAKE, Defendant and Respondent.

No. A055683.

Court of Appeal, First District, Division 2, California.

Jan. 19, 1993.

As Modified on Denial of Rehearing Feb. 18, 1993.

Review Denied April 15, 1993.

Peter W. Davis, John E. Carne, Peter L. Shaw, Crosby, Heafey, Roach & May, San Francisco, for plaintiff and appellant.

Cameron L. Reeves, County Counsel, Anita L. Grant, Deputy County Counsel, Lakeport, for defendant and respondent.

Donald R. Lincoln, Henry E. Heater, Endeman, Lincoln, Turek, & Heater, San Diego, Thomas M. Fries, Allen Lenefsky, County of Imperial, El Centro, for County of Imperial amicus curiae for respondent.

KLINE, Presiding Justice.

This case arises from a dispute regarding the property tax assessment of geothermal power plants owned by appellant Freeport-McMoran Resource Partners (Freeport). Appellant contends the county overvalued the property by basing its assessment on capitalization of the income stream of fixed price contracts under which appellant sells electricity to Pacific Gas and Electric Company (PG & E) at rates well above present market rates.

STATEMENT OF THE CASE AND FACTS

Under the Public Utility Regulatory Policies Act of 1978 (PURPA), 16 U.S.C. section 796, et seq., and Federal Energy Regulatory Commission (FERC) rules, utilities are required to purchase electricity from "qualifying facilities" (facilities that meet FERC requirements) at a price no greater than the utility's "avoided cost" (the cost the utility would have incurred by generating the electricity itself). (16 U.S.C. § 824a-3 (1985); 18 C.F.R. § 292.101(b)(6)(1990).) As a result of PURPA, the California Public Utilities Commission (CPUC) approved "standard offer" contracts to encourage qualifying facilities to sell energy to public utilities on standardized terms. The energy prices in these contracts were developed by public utilities and approved by the CPUC in 1983 based on then current forecasts of future market prices for fuel. Four types of standard offer contracts were developed, of which two are relevant here. Standard Offer 1 agreements (SO1) provided for payments to be adjusted throughout the contract term to reflect changes in the utility's short-run avoided costs; Standard Offer 4 agreements (SO4) were long-term energy supply contracts that contained various payment options including a fixed price option.

As of the lien date, March 1, 1989, appellant owned and operated two geothermal power plants in Lake County that were qualifying facilities under PURPA (West Ford Flat and Bear Canyon Creek). Appellant had previously acquired from third parties SO4 contracts with 20-year terms and the plants began supplying energy to PG & E under the terms of these contracts in 1989. ¹ The contracts provided for a fixed price for the first ten years based upon 1983 projections of PG & E's avoided costs over the contract term, the principal component of these long-run avoided costs In 1985, the CPUC suspended approval of new SO4 agreements with fixed energy prices, after determining that the fixed prices did not reflect market prices for energy because they were based on overestimates of the utilities' long-run avoided operating costs due to incorrect assumptions that market prices for natural gas would continue to rise. As of March 1, 1989, the only new standard offer contracts available to geothermal plants from PG & E were the adjustable SO1 agreements. Existing SO4 contracts remained in force.

being the market price of natural gas purchased by PG & E to generate electricity. Payment during the subsequent ten years was to be based on PG & E's short-run avoided operating costs, which are adjusted from time to time to reflect changes in the market price of natural gas.

The County's witnesses testified before the Lake County Board of Supervisors, acting as the Board of Equalization (Board) that the terms of the SO4 contracts could not be changed during the contract term; that the contracts were assignable; that appellant's properties would be offered for sale only in conjunction with the SO4 contracts that provided the terms for sale of electricity and so were necessary to make the projects economically viable; that a project with an SO4 agreement would sell at a higher price than one with an SO1 agreement because the former guarantees a higher income; and that an SO4 contract in and of itself (not attached to a project) would not have value in the marketplace. Appellant's witness testified that geothermal plants and SO4 contracts are distinct assets that can be sold separately and have separate values, but acknowledged that as a general rule purchasers of the projects simultaneously purchase the contracts.

In determining the assessed value of appellant's plants, the assessor calculated the income stream for the years 1989-1998 by reference to the fixed energy prices in the SO4 agreements. The West Ford Flat plant was valued at $166,163,000 and the Bear Canyon Creek plant was valued at $100,630,000. Appellant applied for changed assessment, contending the assessor should have based his valuation on the market prices for energy in effect in 1989, which were much lower than the prices in the SO4 contracts. According to appellant, the two plants should have been valued at $55,412,000 and $22,908,700 respectively. The Board held a hearing on appellant's applications on November 29 and 30, 1989, and issued findings of fact on May 22, 1990, upholding the assessor's method of forecasting income. The Board determined that the taxable values of the plants were $157,108,287 and $93,801,278 respectively.

On November 13, 1990, appellant filed a complaint in superior court for refund of taxes and declaratory relief. The parties stipulated to the relevant facts and submitted the matter on cross motions for summary judgment. The parties agreed that the capitalized income approach was the proper one to use in determining the value of geothermal properties but disagreed as to the proper method for determining the income stream to be utilized under this approach. The parties further agreed that if appellant's method of determining the income stream was accepted the correct values of the two properties would be $55,412,000 and $22,908,700, while if the Board's method was accepted the correct values would be $157,108,287 and $93,801,278.

On August 28, 1991, the court granted the County's motion for summary judgment, ruling that the income approach was the appropriate method by which to determine the fair market value of the properties, that the assessor's and Board's valuation method was valid and that substantial evidence supported the Board's determination concerning the proper application of the income approach to valuation.

A timely notice of appeal was filed on November 15, 1991.

DISCUSSION

I.

The parties dispute whether this court should employ a de novo or a substantial evidence standard of review in this case. Where a taxpayer challenges the validity of the valuation method used by an assessor, the trial court must determine as a matter of law "whether the challenged method of valuation is arbitrary, in excess of discretion, or in violation of the standards prescribed by law." (Bret Harte Inn, Inc. v. City and County of San Francisco (1976) 16 Cal.3d 14, 23, 127 Cal.Rptr. 154, 544 P.2d 1354.) Our review of such a question is de novo. (Dennis v. County of Santa Clara (1989) 215 Cal.App.3d 1019, 1025-1026, 263 Cal.Rptr. 887.) By contrast, where the taxpayer challenges the application of a valid valuation method, the trial court must review the record presented to the Board to determine whether the Board's findings are supported by substantial evidence but may not independently weigh the evidence. (Bret Harte Inn, Inc. v. City and County of San Francisco, supra, 16 Cal.3d at p. 23, 127 Cal.Rptr. 154, 544 P.2d 1354; Dennis v. County of Santa Clara, supra, 215 Cal.App.3d at p. 1026, 263 Cal.Rptr. 887.) This court, too, reviews a challenge to application of a valuation method under the substantial evidence rule. (Dennis v. County of Santa Clara, supra, 215 Cal.App.3d at p. 1026, 263 Cal.Rptr. 887.)

In the present case, the assessor employed the income approach to valuation, which "estimates current fair market value of a property by attempting to determine the amount that an investor would be willing to pay for the right to receive the future income the property is projected to produce." (Union Pacific Railroad Co. v. State Bd. of Equalization (1991) 231 Cal.App.3d 983, 989-990, 282 Cal.Rptr. 745.) The parties stipulated that they "agree that the 'income approach to value,' referred to in Rule 8 [California Code of Regulations, title 18, section 8], is the proper approach for assessing properties of this kind" and that the only dispute in the case is "about the proper method for determining the income stream for these properties under an income approach to valuation." Appellant views this as a case for de novo review, characterizing the issue as whether the valuation method used by the County and Board was proper; the County views the disputed issue of which income stream to utilize as a question of "application" of the income method of valuation.

The determination whether a challenge is to "method" or "application" is not always easy. In Union Pacific Railroad Co. v. State Bd. of Equalization, supra, 231 Cal.App.3d 983, 989, 282 Cal.Rptr. 745, railroad operating assets had been assessed by means of the " 'income' or 'capitalized earnings ability' approach." The parties agreed this was the best general approach for valuing the assets in question but disputed issues regarding the size of the income stream--whether certain costs should be deducted as expenses and whether the income stream should be projected as a perpetuity or a limited lifetime. (Id., at pp. 989-990, 282...