Idaho Power Co. v. Idaho State Tax Com'n

• Decision Date: 03 March 2005
• Docket Number: No. 29615.,29615.
• Citation: 141 Idaho 316,109 P.3d 170
• Parties: IDAHO POWER COMPANY, Petitioner-Appellant, v. IDAHO STATE TAX COMMISSION, Respondent.
• Court: Idaho Supreme Court

109 P.3d 170

141 Idaho 316

IDAHO POWER COMPANY, Petitioner-Appellant, v. IDAHO STATE TAX COMMISSION, Respondent.

No. 29615.

Supreme Court of Idaho, Boise, December 2004 Term.

March 3, 2005.

Blackburn & Jones, LLP, Boise, for petitioner-appellant. Bruce C. Jones argued.

Hon. Lawrence G. Wasden, Attorney General, Boise, for respondent. Lawrence G. Allen argued.

SCHROEDER, Chief Justice.

Idaho Power Company (Idaho Power) claims that the Idaho State Tax Commission's (Tax Commission) year 2000 appraisal of its operating property included values of certain regulatory assets that are not properly taxable. The Tax Commission denied the exclusions Idaho Power requested. Idaho Power filed a petition for judicial review with the district court which conducted a trial and affirmed the decision of the Tax Commission. Idaho Power appeals the decision of the district court.

I. FACTUAL AND PROCEDURAL BACKGROUND

Idaho Power is a public utility company under Idaho Code §§ 63-201(16) and 61-129 which owns operating property subject to Idaho property taxes. Pursuant to I.C. § 63-401, the Tax Commission annually assesses all of Idaho Power's operating property in the state. Operating property is assessed at its market value on the first day of each tax year. "Operating property" is defined in I.C. § 63-201(11) and includes the equipment, power stations, power sites, lands, generating plants, transmission lines, distribution lines, and other property that is used to generate, transmit, and distribute the electricity that is sold to its customers. The Tax Commission appraised Idaho Power's operating property using the unit method of appraisal, whereby the operating property is viewed as an integrated system and valued in its entirety, rather than appraising individual components of the system. In accordance with the unit method the Tax Commission appraised the operating property by 1) determining values under both a cost and income approach to valuation; 2) averaging the two values to arrive at a unit value; 3) allocating a portion of that value to Idaho Power's operating property in the state of Idaho (Idaho value); and 4) deducting the value of non-taxable assets from the Idaho value to arrive at a final Idaho value.

The cost approach is conducted by (a) determining the historical cost (original cost of the property when it was first placed into utility service) of the operating property; (b) deducting accrued depreciation; and (c) adding certain intangibles. Under the income approach, the value of the property is determined by examining its ability to generate income. The value of the property is equal to the present worth of the future net operating income. The future net operating income is converted to its present worth by a capitalization rate. "Net operating income" means the operating revenue of Idaho Power, derived from its sale of electricity to its customers, less operating, maintenance, depreciation, taxes, and amortization expenses.

After the Tax Commission determines the values of Idaho Power's operating property under both the cost and income approaches, the values are reconciled with equal weight given to each approach to arrive at a total unit value (an "average" of the cost approach and the income approach values). A portion of the total unit value is allocated to the state of Idaho based on the percentage of Idaho Power's operating property located in Idaho. This value is called the Idaho value. Exempt property is then deducted from the Idaho value to arrive at a final Idaho value. The value of the exempt property is determined using the market-to-book ratio. This ratio is used to adjust exempt property reported at historical cost to market value. The market-to-book ratio is the unit value divided by the cost value. It is this adjusted value of exempt property that is then deducted from the Idaho value to arrive at the final Idaho value.

At issue in this case is the Tax Commission's appraisal of Idaho Power's operating property for the 2000 tax year. Under the cost approach the Tax Commission determined the value of Idaho Power's operating property to be $1,786,613,467. Under the income approach, the value determined by the Tax Commission was $1,371,727,749. After reconciling these values, the unit value of Idaho Power's operating property was $1,579,170,000. The Tax Commission determined that 64.258671% of this value, or $1,014,753,650 should be allocated to Idaho as the Idaho value of Idaho Power's operating property. The adjusted values of exempt property (licensed vehicles, pollution control and franchises, rights-of-way, custom software, and certain pensions) were then deducted from the Idaho value to arrive at a final Idaho value of $956,960,711.

On July 31, 2000, Idaho Power petitioned the Tax Commission for a reduction of the appraised value of its operating property, alleging that the valuation improperly included values for business inventory and relicensing costs, as well as values for non-taxable "regulatory assets," specifically, Demand Side Management conservation programs, post-retirement benefits and the American Falls bond refinancing costs. The Tax Commission denied the requested exclusions for business inventory and the regulatory assets, but granted the requested exclusion for relicensing costs, reducing the final Idaho value of Idaho Power's operating property from $956,960,711 to $939,843,684.

Idaho Power filed a Petition for Judicial Review with the district court, arguing that the Tax Commission's appraisal improperly included values for business inventory and regulatory assets. The parties stipulated to a dismissal of the business inventory claim, leaving only the regulatory assets claim before the court. The Tax Commission moved for summary judgment. The parties submitted stipulated facts to the district court. Idaho Power filed a cross-motion for summary judgment.

The district court issued a memorandum opinion noting that Idaho Power did not dispute the methodology employed by the Tax Commission in its appraisal, nor did it dispute the value the Tax Commission arrived at for Idaho Power's operating property under the income approach. Idaho Power only contested the value of the operating property under the cost approach, arguing that the value of the regulatory assets needed to be added into the cost approach value, since the income approach and the cost approach are weighted equally and are designed to reflect the same values, and the income approach necessarily captured income from the regulatory assets. In other words, since the income approach included values from the regulatory assets, the cost of the regulatory assets needed to be added to the cost approach, and then the depreciated cost of the regulatory assets could be deducted from the Idaho value for a final taxable value of $920,564,436, or $19,279,248 less than the Tax Commission's final Idaho value of $939,843,684.

The IPUC permits Idaho Power to charge rates for its services based upon its operating costs and the costs of its property and authorized deferred expenses, with the value of its property and authorized deferred expenses adjusted for accumulated depreciation. For accounting purposes Idaho Power's authorized deferred expenses are recorded on its balance sheet as "regulatory assets." The parties have stipulated that regulatory assets are not property, but the IPUC allows Idaho Power to record them on its balance sheet in order that they may be recovered through the rates Idaho Power charges its customers.

A regulatory asset is an accounting convention that enables Idaho Power to defer an otherwise current expense. A regulatory asset must by authorized by the IPUC. The purpose of the deferral of a current expense is to regularize electricity rates. Spreading out a current expense over a period of years protects against the fluctuation that would occur in the rates charged for electricity if Idaho Power were forced to recognize a large expense and attempt to recover that expense in a short period of time. The IPUC examines the authorized deferred expenses, or regulatory assets, in rate proceedings and determines whether Idaho Power may recover the expenses through the rates it charges for electricity. The regulatory assets are amortized annually and remain on Idaho Power's balance sheet at the unamortized amount until the asset has been completely amortized as an expense.

The three regulatory assets at issue in this case are: 1) Demand Side Management (DSM) programs in which Idaho Power provided financing to customers to encourage the use of energy conservation measures (DSM programs); 2) post-retirement benefits for which Idaho Power changed from a cash method to an accrual method of accounting (post-retirement benefits); and 3) expenses incurred in connection with refinancing bonds issued for the purpose of reconstructing, rehabilitating, replacing and improving the American Falls Dam (American Falls Dam refinancing costs).

In addition to recovery of the expenses associated with each of these regulatory assets, the IPUC authorized a rate structure that includes a rate of return or carrying charge on the deferred amount. With respect to the DSM program costs, the IPUC authorized rates that were designed to yield a return approximating "current market interest rates" on the deferred amount. Thus, the rates were designed to produce a stream of income flowing to Idaho Power in excess of the actual costs incurred by it for the DSM programs. The purpose of the return is to neutralize the penalty effectively imposed from having to amortize rather than expense these costs (i.e., the time value of money). With respect to the post-retirement benefits and the American Falls Dam refinancing costs, the IPUC included the unamortized deferred amounts of these regulatory assets in the rate base which enabled Idaho Power to receive a rate of return on these amounts, similar to other items included in the...