Opinion ID: 2520803
Heading Depth: 1
Heading Rank: 12

Heading: capitalization rates

Text: ANR argues BOTA erred by accepting the PVD's capitalization rate. The PVD argues that the capitalization rate adopted by BOTA was based upon substantial evidence. Further, the PVD criticizes the alternative capitalization rates proposed by ANR based upon their excessive reliance upon the equity component of the equation at the expense of ignoring the debt component of the overall capitalization rate. Our standard of review is whether BOTA's capitalization rates are supported by substantial competent evidence. In this regard, as noted in the discussion of BOTA's determination of ANR's income for the years in question, appellate courts do not reweigh the evidence or pass on the credibility of the witnesses. If the evidence considered in the light most favorable to BOTA supports BOTA's decision it will not be disturbed on appeal. BOTA had determined in its decision prior to remand that an overall capitalization rate of 12% for 1994 and an overall capitalization rate of 12.7% for 1995 was appropriate. On remand, BOTA reversed itself stating: The Board concludes that it was error for the Board to increase the equity rate in the prior decision. The Board concludes that the 11% capitalization rate for 1994 and 11.5% for 1995 are appropriate in that they appear to account for all risk attributable to FERC 636 and are in line with industry derived rates. BOTA's decision with respect to the capitalization rates are in line with the interstate natural gas pipeline industry. A 1994 capitalization rate study prepared by a subcommittee of the Property Tax Forum was introduced into evidence. This forum is an organization of tax representatives from a majority of the natural gas pipeline companies in the United States with some representation in Canada. ANR is a member company of the Property Tax Forum and was also a member of the Capitalization Rate Subcommittee in 1994. The report indicates that member companies support the formulas and the information as stated in the capitalization study. For the year 1994, the report recommends that an overall capitalization rate of 11.30% is the proper average yield capitalization rate when capitalizing the net operating income of interstate natural gas transmission pipeline companies. BOTA adopted an overall capitalization rate of 11%. ANR proposed an overall capitalization rate of 12% for the year 1994. A 1995 capitalization rate study prepared by a subcommittee of the Property Tax Forum was also introduced into evidence. ANR was also a member company of the Property Tax Forum and was a member of the Capitalization Rate Subcommittee in 1995. The report indicates that these companies support the formulas and the information as stated in this study. For the year 1995, the report recommends that an overall capitalization rate of 12% is the proper average yield capitalization rate when capitalizing the net operating income of interstate natural gas transmission pipeline companies. BOTA adopted an overall capitalization rate of 11.5%. ANR proposed an overall capitalization rate of 12.7% for the year 1995. Goodwin and Ifflander, both expert appraisers for PVD, provided supporting evidence for BOTA's 1994 and 1995 capitalization rates. The capitalization rate is composed of both debt and equity. Goodwin's testimony was critical of the rates used by ANR appraisers Goodman and Davis. According to Goodwin, the capital structure used in the ANR appraisals were based on the actual capital structure of ANR instead of based on optimal or an average capital structure as indicated by comparable companies. The industry average capital structure percentages is closer to 50% debt and 50% equity, which is clearly different from the weighted average based upon the 40% debt and 60% equity structure used by Goodman. The net effect of relying on a skewed capital structure is to bias the weighted average cost of capital upward, resulting in a lower unit value. While ANR presented expert testimony critical of the analysis used by Goodwin and Ifflander, we do not reweigh the evidence. In balance, the rates used by BOTA in its determination of the unit value of ANR's property for 1994 and 1995, based upon the record before us, are supported by substantial competent evidence.