Northwest Natural Gas Co. v. Clark County, 48698-1

• Decision Date: 10 February 1983
• Docket Number: No. 48698-1,48698-1
• Citation: 98 Wn.2d 739,658 P.2d 669
• Parties: NORTHWEST NATURAL GAS COMPANY, a corporation, Appellant, v. CLARK COUNTY, a municipal corporation; Klickitat County, a municipal corporation; Skamania County, a municipal corporation; and the Department of Revenue, State of Washington, Respondents.
• Court: Washington Supreme Court

Page 739

98 Wn.2d 739

658 P.2d 669

NORTHWEST NATURAL GAS COMPANY, a corporation, Appellant, v. CLARK COUNTY, a municipal corporation; Klickitat County, a municipal corporation; Skamania County, a municipal corporation; and the Department of Revenue, State of Washington, Respondents.

No. 48698-1.

Supreme Court of Washington En Banc.

Feb. 10, 1983.

Perkins, Coie, Stone, Olsen & Williams, John H. Binns, Jr., Kristin H. Kerth, Seattle, Stoel, Rives, Boley, Fraser & Wyse, Leonard A. Girard, Portland, for appellant.

Kenneth Eikenberry, Atty. Gen., William B. Collins, Asst. Atty. Gen., Olympia, for respondents.

UTTER, Justice.

This appeal presents a challenge to a valuation of property for tax purposes by the State Department of Revenue (Department). Northwest Natural Gas Company (Northwest) challenges the Department's valuation for each of the years 1975 through 1979 on three grounds: (1) that the Department failed to comply with statutory requirements; (2) that even if the Department did comply, its valuations are excessive; and (3) that the Department's valuation formula as applied violates the interstate commerce and/or due process clauses of the federal constitution. We find Northwest's contentions to be without merit and consequently affirm the Superior Court's dismissal of Northwest's claim.

Northwest operates a natural gas distribution service in the states of Washington and Oregon. As required by statute, the Department annually values Northwest's operating property within Washington as a whole and within each county. The valuation process has three stages. First, the Department determines the total value of the entire interstate system based on a weighted average of three figures: (1) historical cost less depreciation; (2) capitalized value of net operating income; and (3) net value of stock and debt. Second, the Department determines what percentage of the total system value should be allocated to Washington. See RCW 84.12.300. Finally, once the Washington share of total system value has been determined, the Department must allocate it among the various counties in which Northwest does business. See RCW 84.12.350.

The focus of Northwest's challenge in this action is the second step of the valuation process, the allocation of system value to Washington. Northwest concedes the accuracy of the Department's computations of total system value and apparently also concedes that the apportionment between counties was proper.

The allocation of total system value to Washington is accomplished by a formula based on three variables. These are historical cost, gross revenue, and volume of gas sold. A factor is constructed for each of these variables by taking the ratio of the amount attributable to Washington and the total amount; for example, the historical cost factor is calculated by dividing the historical cost of all property located in Washington by the historical cost of all system property. Each factor is then assigned a percentage weight (the three weights totaling 100 percent), based on the Department's confidence in the factor, and multiplied by its weight. The resulting products are then summed to produce an overall allocation factor which is multiplied by total system value to produce the system value attributable to Washington. ¹

Northwest claims that the application of this allocation formula to its property violated both statutory and constitutional requirements and significantly overvalued its Washington property. We reject this claim.

I

The apportionment of an interstate utility's total system value is governed by RCW 84.12.300. That provision states in part:

In apportioning such system value to the state, the department of revenue shall consider relative costs, relative reproduction cost, relative future prospects and relative track mileage and the distribution of terminal properties within and without the state and such other matters and things as the department may deem pertinent.

The department may also take into consideration the actual cost, cost of reproduction new, and cost of reproduction new less depreciation, earning capacity and future prospects of the property, located within the state and all other matters and things deemed pertinent by the department of revenue.

Northwest argues that the word "shall" in this section should be construed as mandatory and that the Department's failure to include relative reproduction cost and relative future prospects in its allocation formula therefore violates the section's requirements.

The word "shall" need not always be construed as mandatory. While such a construction is the general rule ( see, e.g., Ballasiotes v. Gardner, 97 Wash.2d 191, 195, 642 P.2d 397 (1982)), this general rule is subject to exception where a contrary legislative intent is indicated ( Niichel v. Lancaster, 97 Wash.2d 620, 625, 647 P.2d 1021 (1982)). In past cases, the proper construction has been at times a subject of intense debate (see, e.g., Niichel, at 628, 647 P.2d 1021 (Dimmick, J., dissenting)).

In the case at bar, there is no need to decide how the word "shall" in RCW 84.12.300 is to be construed, for we conclude that the Department did consider relative reproduction costs and relative future prospects in apportioning Northwest's total system value. The word "consider" in RCW 84.12.300 does not require direct incorporation of the enumerated factors into the Department's formula. It merely requires that the Department "consider" incorporating those factors. Adams Cy. v. Northern Pac. Ry., 115 F.2d 768, 778 (9th Cir.1940). The Department did just that. Its expert testified the Department had considered incorporating relative reproduction cost into its allocation formula but did not do so because data was in general not readily available. With respect to relative future prospects, or net income, ² there was similar testimony. Since data on net income were not readily available, the Department chose gross revenues as a rough proxy. Certainly RCW 84.12.300 does not require the incorporation of factors for which data does not exist or is unavailable.

The Department under any construction of the word "shall" sufficiently considered all of the factors specified in

RCW 84.12.300.

II

Even when statutory requirements are complied with, however, a valuation for purposes of taxation may be judicially reviewed for correctness. While the valuation is presumed correct, this presumption may be overcome by clear, cogent, and convincing evidence. RCW 84.40.0301. Ordinarily, the taxpayer must also show that the overvaluation is " 'grossly inequitable and palpably excessive' ". Xerox Corp. v. King Cy., 94 Wash.2d 284, 288, 617 P.2d 412 (1980); Boise Cascade Corp. v. Pierce Cy., 84 Wash.2d 667, 672, 529 P.2d 9 (1974). The statute mandates correction of any overvaluation, however, when it is made "on a fundamentally wrong basis". Xerox Corp. v. King Cy., supra at 290, 617 P.2d 412. Thus, a taxpayer who challenges a property valuation for tax purposes must show by clear, cogent and convincing evidence that: (1) there has been an overvaluation; and (2) the overvaluation was either (a) grossly inequitable and palpably excessive or (b) made on a fundamentally wrong basis.

The court below applied this legal standard and found that the Department's valuation was neither grossly inequitable and palpably excessive nor made on a fundamentally wrong basis. Nonetheless, Northwest challenges these findings as unsupported by the evidence.

In such a case, the scope of our review of the lower court's findings must be exceedingly narrow. So long as there exists substantial evidence to support those findings, we must affirm, even though we might have resolved the question differently. Beeson v. Atlantic-Richfield Co., 88 Wash.2d 499, 503, 563 P.2d 822 (1977). This standard of review superimposed upon the requirement that Northwest prove its claim by clear, cogent, and convincing evidence, a burden significantly heavier than preponderance of the evidence ( Bland v. Mentor, 63 Wash.2d 150, 154, 385 P.2d 727 (1963)), requires extremely limited review.

Initially, Northwest contends that the Department's formula penalizes it for rises in gas costs which it simply passes through to its customers. Since merely passing through such costs does not increase profitability, a mere increase in gas costs should probably not affect valuation for tax purposes. Yet a rise in gas costs does increase gross revenues and this, Northwest argues, will cause a corresponding increase in the Department's allocation factor.

Were it clear to us that an increase in gross revenues resulting from an increase in gas costs led inexorably to an increase in the allocation factor as calculated by the Department, it could be argued with more force that the Department's allocation formula was fundamentally wrong. It must be recalled, however, that gross revenues enter the Department's formula only in the form of the ratio of Washington gross revenues to total gross revenues. An increase in gas costs will increase both the numerator and the denominator of this ratio and the net effect on the ratio as a whole is hence uncertain. While a mathematical analysis of the net effect is beyond the scope of...