No. 13273 INTHE SUPREME COURT OF THE STATE OF MONTANA 1976

THE DEPARTMENT OF REVENUE OF THE STATE OF MONTANA, Appellant,

PACIFIC POWER AND LIGHT COMPANY, Respondent.

Appeal from: 

### District Court of the FirstJudicial District, Honorable Peter G. Meloy, Judge presiding. Counsel of Record: For Appellant: Robert A. Poore argued, Butte, Montana R. Bruce McGinnis argued, Helena, Montana For Respondent: Murphy, Robinson, Heckathorn and Phillips,

Kalispell, Montana Douglas 

### D. Dasinger argued, Kalispell, Montana Mark H. Peterman argued, Portland, Oregon

Submitted: October 21, 1976 Decided :

## DEC

## 29 

## 1976

### Mr. Justice Frank 

### I. Haswell delivered the Opinion of the Court.

This appeal involves the validity of the Montana Department of Revenue's method of assessment of taxes on the Montana property of an interstate electric utility. The state tax appealboard and the district court held themethod of assessment invalid, reduced the assessment,and a 1974 tax reduction of approximately $100,000 resulted. We reverse. By way of overview, the general method of assessment by the Department of Revenue (DOR) was the unitary method of assessment. DOR used a formula calculated to value the utility's operating property inMontana on thebasis of its value as a part of the utility's total interstate electric generating and transthe mission system. The validity of/method of assessment by use of this formula is the underlying issue on appeal. Pursuant to statute,Pacific Power & 

### Light Company (Utility) submitted its annual statement of earnings, stock, and debt information to DOR for use in assessing its Montana properties. DOR assessed the Utility based on information contained in the statement using the "unitary" method of assessment employed in valuing the property of interstate corporationsand systems. A three-factor formula of stock and debt, cost of plant, and capitalizationof incomewas employed. Each of the factorswas used to ascertain a 

### TOTAL system value. These were as follows: INDICATOR OF VALUE ----. 

## - ---. 

### TOTALUTILITY SYSTEMVALUE 

## -- 

### Stock and debt $1,076,198, 551 Plant at Cost $1,347,395, 000 

### Income (Capitalized at 8.25% over 2 years) $ 

### 857,201,842, Each of these indicatorswas weighted by a percentage reflecting DORIS evaluation of its relative importance inthe overall structure of the Utility's electric system. Stock and debtwas assigned

a weight of 10%;plant at50%; and income at40%. These values, when totaled, resulted ina composite estimated totalvalue for the Utility's entire interstate electric generating and transmission system of $1,124,198,092. The next step inthe assessment procedure involved allocation of a proper portion of this systemvalue tothe physical plant located inMontana. DOR calculated the ratio of the cost of the Montana plant to the total plant and obtained a percentage of 1.60%. The value of the two water plants of the Utility inMontana were excluded on thebasis they were not a continuous part of the operation of the interstate electric system and accordinglywere taxed at the county level. DOR also computed the ratio of Montana plant to total plant on a revenue producing basis and determined Montana produced 2.37% of total system revenue. These two ratios were averaged and resulted ina finalratioof 

### 2%representing the portion of total systemvalue of Montana operating properties. The weighted estimate of total system valuewas multiplied by this 2% figure to obtain the value of Montana property of $22,4839962. This value was equalized at44%, the percentage figure used in equalization of computations of electrical utilityproperty, for

a total assessed value of $9,892,943. The Utility objected tothe foregoing assessment on the ground that it resulted inimposition by Montana of a property tax on generating facilities located outside the state. It argued thismade its system unique and by reason thereof, DORIS method of assessment was illegaland inequitable. The Utility contended thehistoric cost of Montana's portion of the system must be utilizedincomputing the cost of plant indicator. The utility's assertionwas that a figure of $23,118,600 was a proper figure for cost of plant tobe "weighted" by 50%togive a totalMontana plant value of $11,5591300. Totaling of the alternateplant costwith the other two figures (stock and debt; capitalized income) computed inthe same manner asDORYyields a totalvaluation of $19,127,710. This figure, "when equalized" at44%gives a total assessed value of $8,416,192, assertedby the Utility tobe the correct figure. The Utility alsoobjected toDOR's computation of the allocation factor used to determine the percentage of total system value inMontana. It claimed the only proper elements for comparison were in-state system cost compared to total system cost. The Utility claimed any attempt tocompare revenue produced in Montana tototal system revenue would result intaxation of outof-state properties because all

### its generating facilitieswere located outsideMontana. A hearing before DOR was held atthe'Utilitylsrequest and resulted in a refusal to alterDOR's assessment. The Utility appealed DOR1sdecision to the statetax appeal board (STAB) and

a majority of STAB determined the Utility's methodology and final assessment computations tobe correct. The pertinent findings of fact of the majority were: "The Department of Revenue used a reasonable approach to allocate system stockand debt value toMontana. "The Department of Revenue had information available to show the actualhistoric cost of plant inMontana, but they substituted an allocated value of plant that resulted ina fictitious amount thatwas in excess of the actual cost of plant.

### "The Department of Revenue plant cost values and the corrected values are as follows: "The Department of Revenue computations: 

## "System Montana Ratio

$1,335,568,826 $21,310,719 1.60% "Whereas, the correct total of all properties should be: "System Montana Ratio $1,372,463,365 $23,118,600 1.68% "Difference: 

### "System



## --- 

### Montana 

## -- Ratio - 

### $36,894,539 $1,807,881 

### .08%11 The STAB majority concluded: "The unitary approach to value is a proper method to be utilized but in some instances must be modified to produce equitable results.

"The Department of Revenue adopted a fundamentally wrong principle of assessment when, knowing the actual historic cost of the subjectplant, they substituted an allocated value of plant that exceeded the actual cost; thereby violating the requirement to determine the actual cashvalue for taxation of that portion of the plant and property situated in Montana.'I Based on these conclusions, STAB ordered DOR to utilize the 1.68% ratio and the "correct totals" set forthabove. STAB member Petersondissented and submitted findings and conclusions in dissent,asserting the methodology employed by DOR to be correct. The pertinent part of the dissent was expressed in this language: 

### "Market value is based on the concept ofwhat a willing and informed buyer would pay a willing and informed seller. 

### It is inconceivable that incomewould notbe considered in such a 

### hypothetical transaction. Therefore,when income is not considered in calculating the ratio of thesubject utility company's property inMontana in relation to the value of the system inother states which the company operates, the effect 

### is to export value out of Montana.'1 DOR appealed the STAB decision to the district court, Lewis and Clark County, which upheld the STAB decision. 

### DOR appealed to this Court. Atissuehere 

### isa determination of the proper method of valuation of the Utility's Montana operating properties. Montana has utilized the 3-factor, unitary assessment approach for appraisal of interstate utilityproperty for many years. The method has been approved by this Court inthe past as a fairand appropriateway of determining the value of theMontana portion of

an interstate entity for property taxation. Yellowstone Pipe Line Co. v. StateBoard of Equalization, 138Mont. 603, 358 P.2d 55; Western Airlines, Inc. v. Michunovich, 149Mont. 347, 350, 351,

1t Indiscussing the "unitary" or going concern'' approach inWestern Airlines, Inc., we stated:

If* 

# ** The 'unitary' method represents an attempt to realize a fair assessment value on property which 

### is not habitually located in any given state, but which is used extensively in interstate commerce. The underlying philosophy of the 'unitary' method 

### is that property so used forms a part of an organic system and may be assessed in terms of the economic contribution which each compenent makes to the entire system. This approach has been firmly established ina series of decisions of the Supreme Court of the United States.

# ***

"A good statement of the purpose and operation of the Iunitary' method isfound inPullman Co. v. Richardson, 261

### U.S. 330, 338, 43 S.Ct. 366, 368, 67 L ed 682. "'And, if the property be part of a system and have an augmented value by reason of a connected operation of thewhole, itmay be taxed according to its value as part of the system, although the other parts be outside the state; in other words, the taxmay be yade tocover the enhanced value whichcomes to the property in the statethrough 

### its organic relation to the-system."' (Emphasis added.) ---The Utilityurges this Court tohold the actual cost of the physical plant as an appropriate measure of "value" for assessment purposes and asserts the method utilizedby 

### DOR results inan artificial and contrived "value". Section 84- 401, R.C.M. 1947, requires assessment of property at

### its "full cash value". Value does not equal cost. Western Union Telegraph Co. v. Taggart, 163U.S. 

### 1, 16 S.Ct. 1054, 41L ed 49; Cleveland &c Railway Co. v. Backus, 154 U.S. 439, 445, 14 S.Ct. 1122, 

### 38 L ed 1041. In Cleveland a decision involving statetaxation of interstate railway property, the United States Supreme Court said: 

### "*

# ** the value of property results from the use to which it 

### is put and varies with the profitableness of that use, present and prospective, actual and anticipated. There isno pecuniary value outside of that which results from such use. The amount and profitable character of such use determines the value, and if the property is taxed at 

### its actual cash value it 

### is taxed upon something which is created by the uses towhich it 

### isput. 

# ** *I1 The electric system property of the Utility inMontana, although only 1.6%of the totalutility system, provides 2.37% of the total annual revenue of the Utility. Any measure of the value of this property must include consideration of the use to --.- 

## - which the property 

### is put and the income contributed to the system. 

### DOR, inan effort to assess this value, averaged the 1.6%figure, representing theMontana share of the physical plant within the total electrical system, with the 2.37% figure representing the income provided by Montana through effective, efficient

use of the plant. This averaging yielded the 2%used as an appropriate percentage of totalvalue of the utility's property within Montana. This reflects a consideration of theworth or value of the Montana property as a part of an on-going, profitable enterprise, the value of the parts of which 

### isgreater when combined intoan integrated utility system. To accept the Utility's contention that actual cost 

### iscontrolling (as did STAB and the district court) is to ignore totally the "value" flowing from the operation of the system. Again, inWestern - Airlines, Inc. the Court stated: "Thus the 'unitary' method determines not only the appropriate share of the entireenterprise which may be taxed by each statebut also determines the 'enhanced value' attriburable to the equipment used by virtue of 

### itsbeing a component part of the system. The 'unitary' method assumes that the value of the entire system, as a going concern, 

### is somewhat greater than the total fairmarket value of 

### its equipment." See also: Yellowstone Pipe Line Co. v. StateBoard of Equal., supra. We further hold that DOR correctly excluded the waterplant facilities that are taxed locally by the counites where they are located. These water plants arenot properly a part of the operating interstate electrical system and as such do not affect the valuations of interstate properties dealtwith in this opinion. The exclusion of these properties requires affirmation of the 1.60% figureused by DORYrather than the 1.68% offered as an alternativeby the Utility, in applying the unitary assessment method. The judgment of the district court isreversed. The assessment of DOR is reinstated inconformity with this opinion.

### Hon. 

### L. C. Gulbrandson, ~istrict Judge, sitting for 

### JusticeWesley Castles.