Opinion ID: 2103158
Heading Depth: 1
Heading Rank: 2

Heading: The Effect of PUC Regulation on Assessment of Utility Property

Text: Maine's Constitution requires that property be assessed for purposes of taxation equally according to the just value thereof. Me. Const. art. IX, § 8. CMP contends that the assessment adopted by the Town and affirmed by the Board amounts to legal error because the assessment methodology failed to take into account the effect of PUC regulation on the property's just value. According to CMP, the PUC would use its authority to prevent CMP from ever selling Wyman to another regulated utility at anything greater than net book cost, and would veto a sale to an unregulated entity unless the sale price were great enough to permit CMP to replace Wyman's power output, a price that would be impossible for any rational market participant to pay. Accordingly, CMP contends that net book cost is the only possible measure of the property's just value, and the Board was therefore compelled to assess Wyman at its net book cost of $970,000. In support of its position, CMP points out that the PUC has statutory authority both to prevent a utility from selling any utility property that is necessary or useful in the performance of [the utility's] duties to the public, 35-A M.R.S.A. § 1101(1)(A) (1988), and to prevent a utility from taking out of public service all or part of its plant, property or system necessary or useful in the performance of its duties to the public. Id. § 1104. In testimony before the Board and again in an amicus brief filed with this Court, the PUC agrees with CMP that it is highly unlikely that the Commission would ever approve the sale of Wyman to a nonregulated entity that would then take the hydroelectric project out of public service. The PUC's expert testified before the Board that replacement power would cost CMP ten times the current cost of Wyman power; thus, the PUC contends, it would approve a sale of Wyman to a nonregulated entity only at a price high enough to allow CMP to cover the cost of replacement power, a price the expert testified would be clearly beyond the realm of possibility. The PUC also agrees that the effect of regulation would preclude another utility subject to PUC regulation from purchasing Wyman at anything greater than net book cost. This is because the ratepayers have already paid for Wyman's original cost and the PUC would therefore prevent the purchaser from earning a return on any investment greater than net book cost. See, e.g., Re Hampden Telephone Co., Proposed Purchase of Lincoln Telephone Co., No. 82-118 (Me. P.U.C. Dec. 30, 1982). As the PUC noted in the Hampden Telephone Co. case, to do otherwise would be to force ratepayers to pay twice for the same assets solely by virtue of a change in ownership of the assets. Id. at 2. This limit on the return that an owner of such a utility property may earn on its investment is a factor that should be taken into account in the valuation of such a property for tax purposes. See Kittery Elec. Light Co. v. Assessors of Kittery, 219 A.2d 728, 737 (Me.1966). But this does not compel a municipal assessor, or an administrative agency reviewing the determination of a municipal assessor, to value the property using the same methodology as the PUC does for ratemaking purposes. In general, `local assessors [have] considerable leeway in choosing the method or combinations of methods to achieve just valuations.' South Portland Assocs. v. City of South Portland, 550 A.2d 363, 366 (Me.1988) (quoting Shawmut Inn, 428 A.2d at 390). In Kittery Elec. Light Co., we affirmed the denial in part of a request for an abatement to a utility where the local assessors had refused to value the property at net book cost, Kittery Elec. Light Co., 219 A.2d at 744, rejecting the taxpayer's argument that the assessors were compelled to use that assessment methodology. Id. at 737. [B]lind adherence to or automatic adoption of the public utility commission's valuations by the assessors in the exercise of their functions would undoubtedly be not only neglect of their duties but a flagrant disregard of the constitutional mandate [to tax property according to its just value]. The value of property for tax purposes and its value for rate-making purposes need not be the same. . . . . The duty to ascertain the just value for taxation purposes of the property of public utilities has been placed upon the assessors by law ... and not on the Public Utilities Commission. Id. at 735 (citations omitted). In that case, we did recognize that [t]he reasonably foreseeable prospects of [PUC] approval of sale or rate increases are considerations affecting the market value of property of public utilities. Id. at 737. In its decision, the Board addressed CMP's argument that there could be no market sale of the dam. The Board's decision reflected a conclusion that such a sale was not beyond the likelihood of reality. CMP contends that the language in the Board's decision impermissibly allocates to a utility in an assessment case a nearly insurmountable burden of proving no possibility of a market rate sale. CMP would be correct if the Board had been making a de novo determination of Wyman's just valuation and, as its sole basis for de novo deciding against CMP, had concluded that CMP failed to prove that there was no possibility that the property could be sold at a higher price than CMP's proposed valuation at net cost. Such is not the case, however. The Board's decision makes clear that it was fully aware of our decision in Kittery Elec. Light Co. that CMP's status as a regulated utility is a factor that has to be considered in assessing its property, but emphatically not automatically determinative of the facility's just valuation. The Board was also aware that the Town's assessment was not based solely on a possible but highly unlikely market sale of the dam. The Town's assessor used as his primary indicators his calculation of the facility's replacement value and its going concern value, with reference to the cost to CMP of replacing Wyman's power from four alternative sources, and used five other calculations as a check on his primary indicators. [5] The decision refers to these various methods of valuation used by the Town and its appraiser. We disagree with CMP's contention that the views of the appraiser are irrelevant in light of Wyman's status as a PUC-regulated property. One particularly useful assessment methodology, used by the appraiser as a check on his primary indicators, is the reproduction cost less depreciation method. This method yielded an estimate of $57,094,000 for the value of that part of Wyman within the Town of Moscow. Reproduction cost less depreciation, also commonly referred to as the cost approach to valuation, is a method of assessing real estate. Shawmut Inn, 428 A.2d at 392. Such a valuation method has relevance in the determination of a utility property's just valuation. The calculation of the property's replacement value need not necessarily replicate the PUC's calculation, based on similar considerations, of the property's net book cost. As the New Jersey Supreme Court noted in Transcontinental Gas Pipe Line Corp. v. Bernards Township, 111 N.J. 507, 545 A.2d 746 (1988), replacement cost may greatly exceed net book cost in these circumstances because the life of a generating plant may greatly exceed the period of time during which a utility may be allowed to depreciate its property. Id 545 A.2d at 759. A key aspect of the cost method is that it captures for property tax purposes the difference between the replacement value and the net book cost, a sum that the New Jersey court refers to as the property's residual value. Id. As that court noted, because the utility's owners cannot recover anything on this residual value, this value is properly attributed to the ratepayers, id., because, [w]hile an investor would not pay for this residual value ... the ratepayers would definitely pay to replicate this capacity if by chance the [facility] were to be destroyed. Id. at 760. Similarly, the Supreme Judicial Court of Massachusetts has observed that in a dispute such as this one, the true contestants are not the utility and the municipality but local taxpayers and consumers of electricity. If [the utility] pays more in local property taxes, that amount is reflected in [the utility's] rate to its customers, and other local taxpayers pay less. The lower [the utility's] local taxes, the lower its rates to its customers and the higher the local tax burden on other taxpayers. . . . Boston Edison Co. v. Bd. of Assessors of Watertown, 387 Mass. 298, 439 N.E.2d 763, 769 (1982). Thus, the question whether a municipality should not be permitted to tax the residual value of an electrical generating facility is fundamentally a policy determination. Our review is limited to whether the record in this case supports the Board's determination that the assessment adopted by the Town was not manifestly wrong, and whether the Board committed legal error or abused its discretion in reaching that determination. The root of CMP's objection to the valuation proposed by the Town's appraiser, adopted by the Town and ultimately affirmed by the Board, lies in the implicit contention of CMP that Wyman's residual value should not be included in the property's valuation for property tax purposes. Such a question is the province of the legislature. The Board's determination is supported in the record, and we find no error or abuse of discretion in its decision. The entry is: Judgment affirmed. WATHEN, C.J., and ROBERTS, GLASSMAN and DANA, JJ., concurring.