Opinion ID: 2520803
Heading Depth: 1
Heading Rank: 10

Heading: did bota err by failing to consider the forecast of anr's future income in light of ferc order 636?

Text: ANR argues that BOTA erred because it failed to base its valuation upon a forecast of future income. According to ANR the failure to forecast future income violated the principle that valuation should be determined by using the well-informed buyer standard and the principle that generally accepted appraisal procedures should be used. Finally, ANR claims that BOTA's stated reasons for not using future income forecasts in its valuation are inadequate. ANR would have this court apply an unlimited standard of review and determine that BOTA's income determination was erroneous as a matter of law because it was based on historical income data instead of forecasted future income. However, BOTA did not base its determination solely on historical data but considered other evidence regarding ANR's future income that ANR would like to ignore. The question we must resolve is whether BOTA's determination of ANR's income is supported by substantial competent evidence; thus, our standard is not unlimited. BOTA recognized the shortcomings of the PVD's determination and that the income approach to value depends upon a forecast of future income: 29. PVD and its experts relied exclusively on historic income in the development of income to be capitalized. PVD admits that if an appraiser has reason to believe that income will decline into the future, even though it has not yet happened, this has to be taken into account in order to avoid over-valuation. A well-informed buyer would adjust the purchase price to reflect declining future income. Even though PVD relied on historic income, PVD reviewed market place income, betas, and bond ratings in an attempt to determine the effect, if any, of FERC Order 636 on large natural gas transmission companies in future years. 30. PVD for the years at issue herein used the same practices and procedures and capitalization rate for all large natural gas transmission companies. 31. Generally accepted appraisal procedures require that income to be capitalized must be a forecast of future earning to the best of the appraiser's judgment. Failure to consider future income contradicts the principle of anticipation, which holds that value is the present worth of future benefits. 32. The Taxpayer's income pattern on the assessment dates was known and stable. None of the traditional income projection techniques used by PVD, its experts or the Taxpayer's experts, discerned any significant declines in income from the existing data. Even after all of the Taxpayer's assumptions regarding Order 636, PVD capitalized the correct income. John H. Hughes II, the expert appraiser for the PVD, did the actual valuation of ANR's property on January 1, 1994, and January 1, 1995. He learned of FERC Order 636 and considered in great detail its impact on the industry as a whole as well as its impact on ANR. He acknowledged that FERC Order 636 caused great uncertainty because there was uncertainty when or how it might impact the natural gas pipeline companies. He considered stock betas, which are a good measure of risk. Betas measure the volatility of a particular stock compared to the stock market as a whole. Hughes testified that he did not see a major change in [the] beta[s] for the industry, meaning that the market was not predicting a negative impact on those corporations affected by FERC Order 636. He also examined the bond ratings of the large natural gas pipeline companies and found no significant changes as a result of FERC Order 636. He examined the large natural gas pipeline companies' own capitalization rate study to see if the industry itself was signaling increased risk to the income streams. He found no trends in the industry's own recommended capitalization rates indicating that they perceived that the future incomes of the large natural gas pipeline companies were at risk as a result of FERC Order 636. Hughes examined ANR's reported incomes to see if they had significantly declined in 1993. He found that ANR earned $185,364,501 in 1993 and $183,539,635 in 1994, representing a less that 1% decline in ANR's incomes from 1993 to 1994, which did not signal a risk to ANR's future income stream. Hughes concluded: There was no indication in the marketplace that we could see at that time showing that their incomes were actually, were not dropping, their bond ratings didn't change, you know, whatever betas hadn't changed. I mean, the industry as a whole, everybody in that market did not show  there's some companies that incomes were going up, some companies, incomes were going down. There was no actual pattern or trend to be found. . . . . Q. [By Presiding Officer Goering] But if I hear you right, what you're saying is we had no hard numbers to rely on to, to be sure that that prediction would in fact occur based on what Mr. McKelvy [ sic ] was telling you at the valuation, during the valuation proceedings? A. Right, we had no numbers  you know, I guess in preface, it started in '92 [FERC Order 636] that, you know, 636 was going to change, our incomes are going to go down. By the time we hit the '95 year and their income hadn't dropped one percent of the three years of hearing this that it's going to go down, it looked to us that 636 was actually going to decrease ANR's income. As an industry as a whole the incomes were probably up for the same two year period. You know, numbers wise there was no actual, for '95, to show it, even though, you know, it's out there and it's possible and it's said, there's no way to quantify it and I don't believe there still is today. Q. And I understand your position and respect that very much. I mean, you certainly have the expertise to make those comments and that's why we're here with you, but let me follow up just a minute `cause I think what you're saying, and I understood your testimony to be that the typical benchmarks that you look at in valuing this type of a property were giving you no reason to believe that the risk that everyone was talking about was actually being affected in the marketplace as of that time. Is that a fair summary of what's you're saying? A. Yeah. There was no, there was no evidence of these additional risks showing up in the marketplace for the different aspects that we looked at. The evidence supports BOTA's determination of ANR's income for the years in question notwithstanding the PVD's use of historical evidence of ANR's income. The historical evidence provides some evidence regarding future income and together with the PVD's attempts to determine the effect of FERC Order 636 in the marketplace along with other evidence provides substantial competent evidence supporting BOTA's income determinations. The PVD bolstered its case by showing through ANR's own internal documents that it did not forecast a significant decrease in its income. Other evidence in the form of statements from the President, Chief Executive Officer, and Director of ANR indicates that there were opportunities associated with Order 636 that could lead to increased income. BOTA considered ANR's income projections but rejected them. John Goodman's appraisals, as well as ANR's other appraiser, used an obsolescence approach which is not one of the generally accepted appraisal procedures provided for in K.S.A. 79-5a04. ANR's use of the income shortfall method does not rely on a comparison to other properties to obtain the rent loss; a discount rate was used rather that a direct capitalization rate; and the method used forces the cost approach to equal the income approach if both approaches are consistently applied. Last, evidence before BOTA indicated that the capitalization rate component of the income approach incorporated any additional risk associated with FERC Order 636. BOTA was acting within its area of expertise, and its decision to adopt the PVD's income figures for the years in question is entitled to great weight and deference. While the evidence in this case was conflicting, we conclude that BOTA's decision is supported by substantial evidence and is not unreasonable, arbitrary, or capricious.