No. 13273 

IN THE 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 First Judicial 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, Ka lispell, Montana 

Mark H. Peterman argued, Portland, Oregon 

Submitted: October 21, 1976 

Decided : DEC 2 9 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 appeal board 

and the district court held the method 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 in Montana on the basis 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 corporations and systems. A 

three-factor formula of stock and debt, cost of plant, and 

capitalization of income was employed. Each of the factors was 

used to ascertain a TOTAL system value. These were as follows: 

----. INDICATOR OF VALUE - ---. TOTAL UTILITY 

SYSTEM VALUE - - 

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 indicators was weighted by a percentage reflecting 

DORIS evaluation of its relative importance in the overall structure 

of the Utility's electric system. Stock and debt was assigned 

a weight of 10%; plant at 50%; and income at 40%. These values, 

when totaled, resulted in a composite estimated total value for 

the Utility's entire interstate electric generating and transmission 

system of $1,124,198,092. 

The next step in the assessment procedure involved allocation of a proper portion of this system value to the physical plant 

located in Montana. 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 in Montana were 

excluded on the basis they were not a continuous part of the operation of the interstate electric system and accordingly were 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 in a final ratio of 2% representing the 

portion of total system value of Montana operating properties. The 

weighted estimate of total system value was multiplied by this 2% 

figure to obtain the value of Montana property of $22,4839962. 

This value was equalized at 44%, the percentage figure used in 

equalization of computations of electrical utility property, for 

a total assessed value of $9,892,943. 

The Utility objected to the foregoing assessment on the 

ground that it resulted in imposition by Montana of a property 

tax on generating facilities located outside the state. It argued 

this made its system unique and by reason thereof, DORIS method 

of assessment was illegal and inequitable. The Utility contended 

the historic cost of Montana's portion of the system must be utilized 
in computing the cost of plant indicator. The utility's assertion was that a figure of $23,118,600 was a proper figure for 

cost of plant to be "weighted" by 50% to give a total Montana 

plant value of $11,5591300. Totaling of the alternate plant 

cost with the other two figures (stock and debt; capitalized income) 

computed in the same manner as DORY yields a total valuation of 

$19,127,710. This figure, "when equalized" at 44% gives a total 

assessed value of $8,416,192, asserted by the Utility to be the 

correct figure. 

The Utility also objected to DOR's computation of the 

allocation factor used to determine the percentage of total system 

value in Montana. It claimed the only proper elements for comparison were in-state system cost compared to total system cost. 

The Utility claimed any attempt to compare revenue produced in 

Montana to total system revenue would result in taxation of outof-state properties because all its generating facilities were 

located outside Montana. 

A hearing before DOR was held at the'Utilityls request 

and resulted in a refusal to alter DOR's assessment. The Utility 

appealed DOR1s decision to the state tax appeal board (STAB) and 

a majority of STAB determined the Utility's methodology and final 

assessment computations to be correct. The pertinent findings of 

fact of the majority were: 

"The Department of Revenue used a reasonable 

approach to allocate system stock and debt value 

to Montana. 

"The Department of Revenue had information available 

to show the actual historic cost of plant in Montana, 

but they substituted an allocated value of plant that 

resulted in a fictitious amount that was 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: 

" Sys tem 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 subject plant, they substituted 

an allocated value of plant that exceeded the actual 

cost; thereby violating the requirement to determine 

the actual cash value for taxation of that portion of 

the plant and property situa ted in Montana .'I 

Based on these conclusions, STAB ordered DOR to utilize the 1.68% 

ratio and the "correct totals" set forth above. 

STAB member Peterson dissented 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 of what a willing 

and informed buyer would pay a willing and informed seller. 

It is inconceivable that income would not be considered 

in such a hypothetical transaction. Therefore, when income is not considered in calculating the ratio of the 
subject utility company's property in Montana in 

relation to the value of the system in other 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. 

At issue here is a 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 utility property for many years. The 

method has been approved by this Court in the past as a fair and 

appropriate way of determining the value of the Montana portion of 

an interstate entity for property taxation. Yellowstone Pipe Line 

Co. v. State Board of Equalization, 138 Mont. 603, 358 P.2d 55; 

Western Airlines, Inc. v. Michunovich, 149 Mont. 347, 350, 351, 

1 t In discussing the "unitary" or going concern'' approach 

in Western Airlines, Inc., we stated: 

If* * * The 'unitary' method represents an attempt to 

realize a fair assessment value on property which is 

not habitually loca ted 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 in a series of decisions of the Supreme Court of the United States. * * * 

"A good statement of the purpose and operation of the I unitary' method is found in Pullman 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 the whole, it may be taxed according to its 

value as part of the system, although the other parts 

be outside the state; in other words, the tax may be 

yade to cover the enhanced value whichcomes to the 

property in the state through its organic relation to 

the-system."' (Emphasis added.) --- 
The Utility urges this Court to hold the actual cost 

of the physical plant as an appropria te measure of "value" 

for assessment purposes and asserts the method utilized by DOR 

results in an 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, 163 U.S. 1, 16 S.Ct. 1054, 41 L 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 state taxation 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 is no 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 to which 

it is put. * * *I1 

The electric system property of the Utility in Montana, 

although only 1.6% of the total utility 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, in an effort to assess this value, averaged the 

1.6% figure, representing the Montana 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 total value of the utility's property 

within Montana. This reflects a consideration of the worth or value 

of the Montana property as a part of an on-going, profitable enterprise, the value of the parts of which is greater when combined into 
an integrated utility system. To accept the Utility's contention 

that actual cost is controlling (as did STAB and the district 

court) is to ignore totally the "value" flowing from the operation 

of the system. Again, in Western - Airlines, Inc. the Court stated: 

"Thus the 'unitary' method determines not only the 

appropriate share of the entire enterprise which may 

be taxed by each state but also determines the 'enhanced value' attriburable to the equipment used by 

virtue of its being 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 fair market value of its equipment." 

See also: Yellowstone Pipe Line Co. v. State Board 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 are not properly a part of the operating 

interstate electrical system and as such do not affect the valuations of interstate properties dealt with in this opinion. The 

exclusion of these properties requires affirmation of the 1.60% 

figure used by DORY rather than the 1.68% offered as an alternative by the Utility, in applying the unitary assessment method. 

The judgment of the district court is reversed. The 

assessment of DOR is reinstated in conformity with this opinion. 
Hon. L. C. Gulbrandson, ~istrict 

Judge, sitting for Justice Wesley 

Castles.