USGen New England, Inc. v. Town of Rockingham, 2004 VT 90 (VT 9/17/2004)

• Decision Date: 17 September 2004
• Docket Number: No. 2003-072, January Term, 2004,2003-072, January Term, 2004
• Citation: 2004 VT 90
• Court: Vermont Supreme Court
• Parties: USGen New England, Inc. v. Town of Rockingham

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2004 VT 90

USGen New England, Inc. v. Town of Rockingham

No. 2003-072, January Term, 2004

Supreme Court of Vermont

September 17, 2004

On Appeal from Windham Superior Court, John P. Wesley, J.

Robert E. Woolmington of Witten, Woolmington, Campbell, Boepple & Welford, P.C., Manchester Center, for Plaintiff-Appellant.

Richard H. Saudek and David L. Grayck (On the Brief) of Cheney, Brock & Saudek, P.C., Montpelier, for Defendant-Appellee.

PRESENT: Amestoy, C.J.¹, Dooley, Johnson, Skoglund and Reiber, JJ.

DOOLEY, J.

¶ 1. USGen New England, Inc. (USGen) appeals from a Windham County Superior Court order setting the value of its Bellows Falls hydroelectric facility in the Town of Rockingham (Town) at $90,377,100 for property tax purposes. The facility spans the Connecticut River and is partly in Vermont and partly in New Hampshire. In reaching its decision, the superior court heard testimony from three valuation experts, two presented by the Town — Dr. Richard Silkman and Bruce Biewald — and one presented by USGen — Todd Filsinger. The experts' estimates varied greatly, ranging from Dr. Silkman's estimate of $100,419,000 to Biewald's of $76,505,700 to Filsinger's of $32,706,401. Prior to Dr. Silkman's appearance, USGen moved to exclude his testimony arguing that he was unqualified to offer an opinion as to value and that his valuation methodology did not pass muster under Daubert v. Merrill Dow Pharm., Inc., 509 U.S. 579 (1993). The trial court denied this motion, heard from all three experts, and in its order relied principally on Dr. Silkman's testimony. The trial court's order also accepted the Town's recommendation and allocated 90% of the value of USGen's facility to the Town of Rockingham. USGen now appeals, arguing that the trial court erred when it: (1) admitted Dr. Silkman's testimony; (2) relied on Dr. Silkman's testimony; and (3) accepted the Town's allocation. We affirm.

¶ 2. As the trial court observed, "[t]his is the second installment of a saga of litigation spawned by the partial deregulation of the markets for electrical power." The first installment began in 1998 when the Vermont General Assembly temporarily froze the grand list valuation of hydroelectric generating facilities for property tax purposes. As a result of this freeze, the value of USGen's facility for 1998, 1999, and 2000 remained unchanged from its 1997 value. USGen subsequently challenged the freeze's constitutionality in the Windham Superior Court. In that case, the court ruled that the freeze was constitutional, and we affirmed in USGen New England, Inc. v. Town of Rockingham, 2003 VT 102, ¶ 1, 14 Vt. L. Wk. 299, 838 A.2d 927 (USGen I).

¶ 3. Once the freeze expired, USGen challenged the frozen value for tax year 2001. Accordingly, the Town and then the court had to determine the value of the plant as of April 1, 2001. In USGen I, foreshadowing this case, we discussed the substantial difficulties associated with valuing a hydroelectric plant in a deregulated electrical power market. Id. ¶ ¶ 21-23. As we stated in that opinion, "the income-production of [the] hydroelectric facility will be extremely relevant, if not determinative, to its value." Id. ¶ 21. Consistent with that observation, the parties agreed that the income capitalization method was the preferred method of valuing the facility. See generally Beach Props., Inc. v. Town of Ferrisburg, 161 Vt. 368, 372, 640 A.2d 50, 52 (1994) (discussing the accuracy of the income capitalization method). As this litigation proceeds into its second installment, the battle between the experts in the proceedings below and the arguments USGen now advances in this Court proves the accuracy of our previous observation.

¶ 4. Before delving into the specifics of the experts' testimony, it is helpful to present some background information both about the Bellows Falls facility and the electrical power market. The Bellows Falls hydroelectric facility is located on the Connecticut River and was first placed into service in 1928. In 1999, USGen purchased the plant from New England Power Company (NEPCO). By the Town's estimate, USGen acquired 87% of the property formerly owned by NEPCO. The property consists of the Bellows Falls station, a dam (located almost entirely in Walpole, NH), and a reservoir.

¶ 5. Although the issue in this litigation is the valuation of these capital assets, the value of this unique property must be reached through a determination of the income that these assets will generate. When the price of wholesale power was regulated, that income was stable and predictable. Deregulation of wholesale power prices introduced uncertainty and volatility into power markets, resulting in the difficulty of valuing the assets that produce that power.

¶ 6. According to the evidence in this case, the price of electrical energy is set through bilateral contracts and sales on the spot market. If a plant sells its electrical energy through bilateral contracts, it enters into agreements with buyers in advance of the delivery, specifying the time of delivery, the quantity, and the price. Many of these contracts are arrived at through brokers, who operate a market in energy futures contracts. One of the brokers, Natsource, is frequently consulted for determining the price of energy because it makes its trading information public. The trial court in this case found that "the forward prices being reported by Natsource compared very closely to futures reported by two other trading sources, TFS and Platt's MW Daily, as well as Energy Argus, a source of energy price projections relied upon by [USGen's expert]."

¶ 7. On the spot market, each power generator submits bids stating the price at which it would sell a certain amount of electricity for each hour in the next day. After the bids have been submitted, the regional administrator considers all the bids submitted by various regional power plants and then accepts the bids, starting with the least expensive, to meet the area's power demands. Once the demand for power is satisfied, the regional administrator looks at the cost of the last kilowatt hour needed to meet the demand. The cost of this kilowatt hour sets the "market clearing price" for that hour. The market clearing price then becomes the price that is paid to all suppliers selected to provide power for that hour.

¶ 8. As we explained in Beach Properties, the income capitalization approach to valuation converts the future benefits of property ownership — that is, the income the property will generate — into an expression of present worth. Id. For a business property like the one before us, income to the owner is the reason to hold the property. Valuing the property based on its anticipated income is done as follows:

The income approach is based on the proposition that a rational investor would pay the fair market value for a piece of property, which is the price (P) that, when multiplied by the rate of return available from alternative investments of comparable risk (the capitalization rate or R), is equal to the property's expected net income (I). In other words, if the known factors are capitalization rate and net income, the price of the property may be calculated by dividing the net income by the capitalization rate: P = I/R.

Id.

¶ 9. In this case, the experts agreed on the use of the above methodology, the period over which the expected income should be measured, twenty years, and the capitalization rate. Although not central to this appeal, they disagreed over the costs to be incurred in generating the income. The real disagreement that explains the wide variation in valuations reached by the experts was over the expected income from the plant. This income, in turn, has a number of components, including electrical energy and generating capacity. Almost all of the variations in the experts' valuations can be explained by disagreements over expected income from the sale of electrical energy.

¶ 10. The dispute started when the Town listers relied upon Dr. Silkman's valuation of $102,608,000 for the entire property. The Town then allocated 90% of that value to Rockingham, on the basis that 90% of the asset value was located in the Town. After the allocation, the Town listed USGen's facility at $90,992,200.² Pursuant to 32 V.S.A. § 4467, USGen appealed this assessment to the superior court challenging both the stated value of the facility and the allocation calculation.

¶ 11. During the superior court appeal, both the Town and USGen presented the testimony of the three experts who valued the Bellows Falls plant. The Town presented the testimony of two experts, Silkman and Biewald, although their conclusions conflicted on a number of points. The Town presented additional testimony from Laurie A. Rowell, a lister for the Town, who described its allocation process. USGen presented the testimony of Filsinger.

¶ 12. The admission of Dr. Richard Silkman's testimony is the central point of contention in this appeal. He has a Ph.D. in economics and his primary occupation is as president of a company that brokers energy supply contracts in the New England power market. His qualifications to testify in this case are described in more detail infra. The other expert witnesses have more traditional backgrounds for valuing properties. USGen's expert, Todd Filsinger, is a professional engineer and certified appraiser. He has appraised numerous power plants and has consulted on the financing of power plants in the deregulated market.

¶ 13. In his report, Dr. Silkman exlpained his method of determining expected income from the sale of electrical energy:

I used market-based prices for two components of "electricity" — energy and capacity — in developing the estimate of revenues in the valuation model. The prices of energy were derived from forward prices for energy (per MWh) as these existed on or about April 1, 2001, as reported by Natsource, an electricity broker that publishes...