Opinion ID: 2520907
Heading Depth: 2
Heading Rank: 3

Heading: allocation methodology

Text: With these principles firmly in mind, we recognize that the primary dispute between the parties in this case centers upon allocation. CIG argued allocation by original cost was error because the Kansas assets are relatively depreciated when compared to CIG's system-wide assets. The PVD argued that original cost allocation was the best measure of the fair market value of CIG's Kansas assets. Contrary to the arguments of CIG, the questions presented with reference to allocation are factual and not legal questions. The method used by the PVD and adopted by BOTA to partially determine the fair market value of CIG's property in Kansas is one identified by Kansas statute, K.S.A. 79-5a04(a). The fundamental issue involves BOTA's selection of an original cost allocation factor in valuing CIG's Kansas property. CIG contends that BOTA erred because it disregarded its mandate from this court in the prior appeal to determine the fair market value of CIG's operating property in Kansas. More specifically, CIG argues that BOTA erred (1) as a matter of law in failing to determine whether original cost allocation achieved fair market value, (2) in failing to address the issue of whether any allocation technique was capable of achieving market value, and (3) in finding original cost allocation reasonable or rational as a matter of fact without substantial competent evidence to support such factfinding. As demonstrated by the facts, the PVD first valued all of CIG's property for the years in question, thereby arriving at the unit value. In order to ascertain the unit value for the years in question, the PVD used an income approach, a cost approach, and the market approach to arrive at a correlated unit value of CIG's property for 1993 of $510,000,000, for 1994 of $465,000,000, and for 1995 of $430,000,000. BOTA examined these values, and based upon the evidence concluded that these unit values accurately reflected CIG's unit values for the years in question. Although unit valuation was a significant issue before BOTA, on appeal CIG takes no issue with unit values and accepts the PVD's correlated unit values for the years in question. The question of how much of the unit value is represented in Kansas to reach the fair market value of public utility property in Kansas is a question addressed in K.S.A. 79-5a04, which provides: The division of property valuation in determining the fair market value of public utility property shall, where practicable, determine the unit valuation, allocated to Kansas, and in doing so shall use generally accepted appraisal procedures developed through the appraisal process and may consider, including but not by way of exclusion, the following factors: (a) Original cost. (b) Original cost less depreciation or reproduction cost less depreciation, or both, or replacement cost new less depreciation, except that where either method is used proper allowance and deduction shall be made for functional or economic obsolescence and for operation of nonprofitable facilities which necessitate regulatory body approval to eliminate. (c) The market or actual value of all outstanding capital stock and debt. (d) The utility operating income, capitalized in the manner and at such rate or rates as shall be just and reasonable. (e) Such other information or evidence as to value as may be obtained that will enable the property valuation department to determine the fair market value of the property of such public utility. BOTA considered the provisions of K.S.A. 79-5a04, the PVD's use of original cost and the evidence supporting original cost, together with CIG's objections to original cost and the evidence offered by CIG. BOTA concluded that original cost allocation was a reasonable method of arriving at the fair market value of CIG's property in Kansas. In its review of PVD's use of original cost allocation, BOTA noted that [the PVD] may use original cost if it is a generally accepted appraisal procedure and it results in the taxpayer's property located in Kansas being valued at fair market value. In its findings, BOTA set forth the appropriate formulas for arriving at an allocation factor in order to determine the portion of the unit value attributable to Kansas as required by K.S.A. 79-5a04 and discussed at length in the record: 40. The original cost, net book, rate base, and income allocation formulas are as follows: (OC = Original Cost; Dep. = Depreciation; DFIT = Deferred Federal Income Taxes) Original Cost: ------------- Kansas allocation % = Original Cost of Kansas Assets ------------------------------ Original Cost of System Assets Net Book: -------- KS allocation % = OC of KS Assets  Dep. on KS Assets ----------------------------------------- OC of System Assets  Dep. on System Assets Rate Base: --------- KS allocation % = OC of KS Assets  Dep. on KS Assets  DFIT ------------------------------------------------------ OC of System Assets  Dep. on System Assets  DFIT Income Based: ------------ KS allocation % = Income from Kansas Assets ------------------------- System Income 41. As shown in the above formulas, a net book allocation formula and a rate base allocation formula are cost-based. The difference between the original cost formula and net book is that net book is original cost minus FERC approved depreciation. The difference between the original cost formula and rate base is that rate base is original cost minus FERC approved depreciation and Deferred Federal Income Taxes. 42. An income based allocation formula may theoretically be the best formula. However, no income based formula was introduced into evidence in this matter; therefore, an income based allocation formula is not an option for the Board to adopt. Further, such a formula would require the income that the taxpayer earned from its Kansas property. There is no evidence of such income in these matters. Thus, according to BOTA only cost-based formulas were available to allocate the unit value to reach the fair market value of CIG's property in Kansas. CIG disagreed and contended that BOTA erred in finding no income-based allocation factors were available. CIG argued that since unit value was determined principally by an income approach, income contribution would then be the most logical approach to allocation. CIG suggested that the record is replete with income-based formulas and immediately launched into the benefits of using rate base or net book cost for allocating system values to Kansas because of their relationship to income. It is difficult to follow this argument, for rate base and net book cost are both cost-based formulas. BOTA rejected an income-based formula because no data supporting an income-based formula was introduced into evidence. The record supports this conclusion. While rate base and net book cost may relate to income, neither are income formulas. To obtain an income allocation factor, one must have evidence of the income CIG generates from its Kansas assets. The record does not contain such evidence, and BOTA correctly concluded that based upon the evidence presented only cost-based formulas are available to determine the fair market value of CIG's property in Kansas. BOTA adopted allocation by original cost as noted above and determined the unit value for 1993 ($510,000,000). The original cost of CIG's Kansas assets is divided by the original cost of CIG's system-wide assets in order to obtain the factor (0.099648), which is then multiplied by CIG's unit value for 1993, to obtain the fair market value of CIG's Kansas property ($50,820,480) for ad valorem tax purposes in Kansas. The same process was used to determine the fair market value of CIG's property allocated to Kansas for 1994 and 1995. The factor used for 1994 was 0.103315 and for 1995 was 0.103604. After each factor was multiplied by the unit value, the fair market value of CIG's property allocated to Kansas for 1994 and 1995 was determined to be $48,041,475 and $44,549,720 respectively. Relying on its experts and the net book cost method of allocation, CIG advocated a factor of 0.0591 for 1993, 0.0598 for 1994, and 0.0617 for 1995, which resulted in value allocated to Kansas of $30,141,000 for 1993, $27,807,000 for 1994, and $26,531,000 for 1995. CIG attacks the original cost method as a method that will never result in a fair market value of its Kansas property. CIG argues that rate base, because it is more closely tied to CIG's income in Kansas, is a far superior allocation method. The same may be said of net book cost according to CIG.
Consistent with our standard of review we conclude that BOTA's decision to use the original cost allocation method is supported by substantial evidence. For BOTA, this was the primary issue to be resolved. Thus, we believe it helpful to set forth those conclusions in the BOTA decision relating to this issue.