Opinion ID: 1362962
Heading Depth: 1
Heading Rank: 3

Heading: Performance Ratio Used to Project Income.

Text: As described above, defendant utilized a performance ratio, dividing plaintiff's adjusted utility operating income by its average earning plant, then applying the ratio to plaintiff's total year end plant to achieve a value of probable future annual operating income to be capitalized. Plaintiff criticized use of that approach and utilized instead a least squares method which produces a trend line based on past earnings extending into the future. The tax court accepted plaintiff's method of projecting income based on the fact of a long history of plaintiff's operations which provided good data on the amount of income and rate of increase of income each year. The court also accepted, as plaintiff contended, that where a utility is under regulation, trended past income provides the best guide to future income. Finally, the court considered that defendant's estimates exceeded the actual net operating income for 1975 by 33 percent and for 1976 by 27 percent, and applied to a five-year period, exceeded actual net operating income by an average of more than 19 percent. Defendant in its briefs to this court raises several issues. First of all, as discussed under heading # 10, defendant asserts that it is to be expected that future earnings estimates will exceed actual earnings for the assessment year because of CWIP and rate increases. Specifically with regard to the performance ratio as a method of projecting income, defendant contends that this ratio is required to properly take into account the growth of the company. Defendant asserts that the method adopted by the tax court does not take into account that plaintiff is a rapidly growing utility, with $300,000,000 CWIP not in service as of the assessment date, and with new and pending rate increases expected. Defendant cites Mt. Bachelor as authority for the proposition that the growth factor as well as the actual income over past years should be considered in anticipating earnings. However, there was testimony that the least squares method does in fact take into consideration the rate of increase of income. Dr. Ring testified on cross-examination: Q And as I understand your method, you would take the operating income for the year '74 as the income to be expected from that property? A No, sir. Q Well  A I trended it. If you will recall from my exhibit that the income stream at the beginning of the year was $88 million in 1976. I adjusted that upward  Q 1976? A  so at the beginning  yes, January 1, 1976. I adjusted that upward from $88 million to $100 million on the basis of the trend experienced by the company in recent years, an upward trend, and I applied that trend and projected it and it came up with $100 million in current dollars. Though the least squares method may produce a conservative amount where the company is just recently rapidly expanding, we find that it is preferable to the performance ratio in this case. The advantage of the least squares method here is of a history of company operations providing data on past income and rate of increases of income, including a reflection of the current rate of increase, while defendant considered only the operating income for the year preceding each appraisal date in developing its performance ratio.