Pacific Power & Light Co. v. Department of Revenue, State of Or.

• Decision Date: 31 May 1989
• Citation: 308 Or. 49,775 P.2d 303
• Court: Oregon Supreme Court
• Parties: PACIFIC POWER & LIGHT COMPANY, Appellant/Cross-Respondent, v. DEPARTMENT OF REVENUE, STATE OF OREGON, Respondent/Cross-Appellant. OTC 2192; SC S34075.

Page 303

775 P.2d 303

308 Or. 49

PACIFIC POWER & LIGHT COMPANY, Appellant/Cross-Respondent, v. DEPARTMENT OF REVENUE, STATE OF OREGON, Respondent/Cross-Appellant.

OTC 2192; SC S34075.

Supreme Court of Oregon.

Argued and Submitted March 3, 1988.

Decided May 31, 1989.

Thomas H. Nelson, Portland, argued the cause for appellant/cross-respondent. With him on the brief were Leonard A. Girard and Stoel Rives Boley Jones & Grey, Portland.

James C. Wallace, Asst. Atty. Gen., Salem, argued the cause for respondent/cross-appellant. With him on the briefs was Dave Frohnmayer, Atty. Gen., Salem.

Before PETERSON, C.J., and LENT, ^* LINDE, CAMPBELL, ^** CARSON and JONES, JJ. GILLETTE, Justice, participated by listening to tapes

GILLETTE, Justice.

This is an ad valorem tax case involving the electrical generating facilities of Pacificorp, a Maine corporation doing business as Pacific Power & Light Company (Pacific). The evidence, including testimony from several expert witnesses and over one hundred exhibits, is extensive and complex. The Tax Court found the appropriate true cash value of Pacific for Oregon ad valorem tax assessment purposes to be $2,545,951,100. PP & L v. Dept. of Rev., 10 OTR 417, 1987 WL 15946 (1987). From that determination both Pacific and the Department of Revenue (Department) appeal. On de novo review, see ORS 305.445, 19.125, we find that the true cash value of Pacific is $2,611,385,650.

The evidence suggests that Pacific is one of the most diversified electric utilities in the United States. It engages not only in electrical generation in six northwest states but also in coal mining, telecommunications, and other ventures. The electrical generation activity, which constitutes roughly half of Pacific's business, is closely regulated by the public utility commissions of each of the six states in which Pacific does business as well as by the Federal Energy Regulatory Commission (FERC).

Ad valorem taxes are levied on the true cash value of the Oregon property of Pacific. ORS 308.515(1)(a); 308.540. Because Pacific's electricity generation and distribution is integrated throughout its six-state service area, Pacific's entire system is first valued as a unit, a portion of which then is allocated to Oregon. ORS 308.550; 308.555; see also United Telephone Co. v. Dept. of Rev., 307 Or. 428, 430, 770 P.2d 43 (1989) (describing similar process for valuation of assets of telecommunications company).

By regulation, Pacific's property is appraised using three different approaches to valuation. See OAR 150-308.205-A. The results then are weighted to produce a final, composite valuation. These three approaches are the comparable sales approach, the cost approach, and the income approach. OAR 150-308.205(2); see also United Telephone Co. v. Dept. of Rev., supra, 307 Or. at 432, 770 P.2d 43. Much of the record in this case is taken up with testimony concerning the way the parties' appraisal experts carried out their valuation tasks under each of these approaches, including critiques by each side of the other's methodology, analysis, and results. Many of the issues involved at that trial stage survive in this appeal. Those issues will be examined below in connection with our discussion of each of the three approaches to value.

Before we can deal with those questions, however, two preliminary matters must be considered. These involve establishing a brief glossary of terms pertinent to the balance of the opinion and answering certain procedural arguments advanced by the parties. We deal first with the glossary.

A. Glossary of Terms ¹

As a general proposition, electric utilities hold franchises from states to provide electric service to specified areas within the states. Within these areas, the utilities have a monopoly. In return for the monopoly, the utilities are permitted to charge for their products no more than is authorized by the state regulators. The regulators establish rates sufficiently high to permit investors in the utilities to realize a reasonable return on their investment, i.e., a return sufficient to attract continued investment in the utilities. The return is calculated by multiplying the value of the portion of a utility's property that is devoted to providing electric service (a figure called the "rate base") by a figure called the "rate of return," expressed as a percentage. The utility is permitted to earn its return only on property devoted to providing electric service and, in certain cases, not even all of that property (as we will explain below).

Utilities must file periodic reports with their regulators detailing the property owned or leased by the utility and the purposes to which that property is put. ORS 308.520; 308.525. Commonly, such reports will show that a utility owns property that it is not currently devoting to electric service. In addition, special regulatory accounting is required for the following types of property:

1. "Zero capital cost" property. A basic premise of regulatory philosophy is that utilities are allowed to earn a reasonable rate of return on invested capital. If property has no capital cost, however, no return is allowed. There are three types of properties pertinent to this case that are treated by the regulators as having no capital cost. First, there is property purchased with funds held for "deferred income taxes" (DIT). Federal tax laws permit depreciation of certain kinds of property to be reported at a rate accelerated more than that actually experienced by such property. Thus, the utility creates an account for DIT. The savings may be invested in many ways, including in property to produce and transmit electricity. From the point of view of the regulators, however, property purchased in this way actually costs the utility nothing, so no return needs to be earned on that property.

A second tax-related phenomenon treated the same way as is DIT for regulatory purposes is investment tax credits (ITC). These are credits given under the Internal Revenue Code for the purchase of certain kinds of property for business use. Where funds derived from such credits are used to purchase electrical generating property, regulators again keep such property out of the rate base for the same reason property purchased with DIT is excluded.

The third category of zero capital cost property is known as "contributions in aid of construction" (CIAC). Pacific is required to furnish service to any customer within its service area. But where, for example, putting in new lines to a remote customer would cost more than any conceivable income to be derived from the service provided, the customer may be required to pay for a portion of the capital cost associated with bringing the service to the customer. The regulators do not allow Pacific to earn a return on that portion of the capital cost paid by the customer.

2. "Property not in service." A second basic premise of utility regulation is that a utility should be permitted to earn a return only on property that is reasonably necessary to and actually providing utility service. See ORS 757.355. ² The largest type of property in the property-not-in-service category is construction work in progress (CWIP). When a utility constructs new property, such as a generating facility, that property is not included in the utility's rate base until it actually is placed in service and, even then, the regulators may not allow it in the rate base until the utility establishes that the property is reasonably necessary to provision of electrical service.

Another significant type of property in this category is property held for future use (PHFU). This is property--usually unimproved realty--which the utility anticipates it will need in the future but which it is not presently using to provide electric service. As long as such property is not used, the regulators will not allow the utility to earn a return on it.

3. "Leased property." This category is the most straightforward. Because leased property used to provide electrical service is not owned by the utility, it is not included in the rate base. (Instead, the lease expense is treated as an allowable operating expense that should be recovered under the utility's rate of return.) Nonetheless, ORS 308.517(1) specifically provides that such leased property shall be assessed "to the property user," i.e., to the utility, for ad valorem tax purposes. Thus, the property is treated as the utility's for tax purposes although it is not so treated for regulatory purposes.

All the foregoing terms play a role in the parties'--and this court's--analysis of the true cash value of Pacific. We turn next to the parties' procedural arguments.

B. Procedural Arguments

Pacific contends that this court should disregard the appraisal submitted by the Department's expert, Mr. Roger Maude, because Maude failed to specify how much weight he would give to his valuation under each of the three required valuation approaches in formulating his final, composite valuation. We reject this contention. Maude's failure to indicate what weight he gave each approach may cause us to disregard his ultimate composite valuation, but it does not affect the relevance of the analysis he conducted or the results he obtained under each of the three approaches.

Pacific next argues that the Tax Court erred in not requiring the Department to carry the burden of proving that its appraisal, which suggested a value significantly greater than that found by the Director of the Department of Revenue at an earlier, administrative step in this case, should beadopted. Pacific cites no binding authority for this proposition, which contradicts the basic idea that the burden in an appeal by a taxpayer to the Tax Court is on the taxpayer. ORS 305.427. The Tax Court did not err. To the extent that Pacific is also asking that this court impose such a burden on the Department in this court, the request is denied. The burden is the...