Opinion ID: 184742
Heading Depth: 2
Heading Rank: 3

Heading: Ad Valorem Taxes

Text: 41 Next, we address Williston Basin's proposed ad valorem tax expense, which the Commission rejected as inconsistent with test period principles. In its filing, Williston Basin sought to recover the additional ad valorem taxes associated with plant increases during the test period by applying the effective tax rate for the 1991 year in each state in which it owned property to its total capital investment in those states, as adjusted for additions during the test period. Williston Basin contended that this represented a proper adjustment to reflect changes that were known and measurable within the meaning of the Commission's regulations. See 18 C.F.R. § 154.303(a)(4). The plant additions occurring during the test year will, it argued, produce higher tax assessments by the relevant states for the effective period of the rates. 42 The Commission refused to approve this approach, however, requiring instead that Williston Basin support its filing with the actual ad valorem tax liability incurred during the test period. See Williston Basin, 76 F.E.R.C. at 61,384. In reversing the ALJ on this point, the Commission explained that Williston Basin's proposed tax liability was too speculative: 43 While the plant additions occurred within the test period, the effect on [Williston Basin's] ad valorem taxes of the installation of those facilities is not known and could not be measured with reasonable accuracy during the test period in this case. The determination of the exact ad valorem tax effect is a local matter involving local valuation and tax assessment procedures. Further, because of depreciation, existing facilities may generate lower ad valorem tax liability than as reflected in the test period data, thereby offsetting in some unknown way the potential ad valorem tax liability. 44 Williston Basin, 72 F.E.R.C. at 61,363. According to the Commission, the actual costs for any expense or tax during the test period generally reflects the best evidence of what the company can expect to incur in the future. Williston Basin, 76 F.E.R.C. at 61,384. 45 The Commission's ruling on this issue reduces to its basic position that Williston Basin's proposed calculation was conjecture, because too many variables could influence Williston Basin's actual tax liability during the effective period of the rates. Id. Williston Basin counters that it obviated these concerns by assuming the tax rate in effect during the test period and adjusting only that variable--plant balance--for which changes were known and measurable at the time of filing. According to Williston Basin, this approach is consistent with the methodology approved by the Commission in a prior Williston Basin proceeding, Williston Basin Interstate Pipeline Co., 56 F.E.R.C. p 61,104 (1991) (1991 Order). 46 In the prior proceeding on which Williston Basin relies, Montana had significantly increased the allocation of Williston Basin's pipeline property to that state, but had allowed a phase-in of the higher allocation percentage over a three-year period, from 1986 through 1988. The Commission apparently found that this phase-in produced known and measurable increases in the allocation on which the taxes that Williston Basin owed Montana were based. On this ground, the Commission approved a methodology reflecting the increases that occurred during the applicable test period, which ended January 31, 1988. This approach involved two steps: first, the 1987 ad valorem taxes paid were divided by the 1986 year-end plant balance to determine the relevant tax rate; and second, that rate was applied to a tax base representing the plant balance as of December 31, 1987. See Williston Basin, 56 F.E.R.C. at 61,382-83. As we see it, the new plant capital at issue in this case is analytically equivalent to the phase-in of property allocation permitted in the earlier Williston Basin proceeding. Therefore, the upward adjustment allowed by the Commission in the 1991 Order to reflect increases in plant balance during the test year is apparently of the same variety proposed by Williston Basin in the present case. 47 Although the Commission was not strictly bound to follow the methodology approved in the prior Williston Basin proceeding, it was obligated to articulate a principled rationale for departing from that methodology. See Gilbert v. NLRB, 56 F.3d 1438, 1445 (D.C.Cir.1995) (It is ... elementary that an agency must conform to its prior decisions or explain the reason for its departure from such precedent.); National Conservative Political Action Comm. v. FEC, 626 F.2d 953, 959 (D.C.Cir.1980) (same). In other words, [r]easoned decisionmaking requires treating like cases alike. Hall v. McLaughlin, 864 F.2d 868, 872 (D.C.Cir.1989). The Commission's task on this score was not unduly onerous, for we have held that [w]here the reviewing court can ascertain that the agency has not in fact diverged from past decisions, the need for a comprehensive and explicit statement of its current rationale is less pressing. Id. Thus, an agency's findings will be upheld, though of less than ideal clarity, if the agency's path may reasonably be discerned. Greater Boston Television Corp. v. FCC, 444 F.2d 841, 851 (D.C.Cir.1970). In this case, the Commission failed to satisfy even this relatively forgiving standard. 48 The Commission purported to distinguish the prior Williston Basin proceeding, holding that 49 the salient finding by the Commission was that the State of Montana had prescribed higher tax rates and that it had allowed a phase-in of those rates. Therefore, there was ample rationale for finding there that the expenses claimed by [Williston Basin] were based on adjustments for known and measurable changes that would occur during the period the rates were to be in effect. Here, this is simply not the case. While the plant additions occurred within the test period, the effect on [Williston Basin's] ad valorem taxes ... is not known and could not be measured with reasonable accuracy during the test period. 50 Williston Basin, 72 F.E.R.C. at 61,363. The Commission elaborated on rehearing that there was nothing speculative in the increase because the same valuation of the properties was used and only the percentage allocation to Montana was changed. That type of change is different than an increase in the value of the property which [Williston Basin] claims in this proceeding. Williston Basin, 76 F.E.R.C. at 61,384. 51 The 1991 Order may indeed be distinguishable on the basis of property valuation, which is a critical step in assessing ad valorem tax liability. Property valuation is performed by individual states in accordance with local practice and, often, the discretion of individual assessors. FERC may be right that valuation was speculative in the present case, because the new plant additions had not yet been assessed by the relevant states. In fact, Williston Basin proposed to rely solely on its own investment in plant facilities, even though the valuation process almost certainly includes consideration of other factors. Thus, the impact of the plant increases here may not have been known and measurable, as required by the test period regulations. By contrast, at least as we see it, the plant addition at issue in the 1991 Order resulted simply from the phased-in allocation of existing plant, which had presumably already been valued. In that case, then, there was nothing uncertain: the Commission took the known Montana tax rate during the test period and applied that rate to the known tax base--a higher percentage of the previously-assessed value of Williston Basin's property--during the test period. 52 Assuming the facts as we do, and assuming that our reasoning mirrors the Commission's intended reasoning, we think that this distinction may be compelling. The sticking point for us, then, is the extent to which the Commission's orders compel us to make such assumptions. In other words, we are simply unable, on the record as it now exists, to assure ourselves either that this distinction holds water, or that this analysis does, in fact, capture the Commission's reasoning. For example, the Commission described the 1991 Order variably as involving a phase-in of tax rates and a phase-in of property allocation. Yet, tax rates are not at issue here, because Williston Basin voluntarily assumed the tax rate in effect during the test period. 53 Moreover, even assuming that we have correctly identified the distinction upon which the Commission relied, we are not confident that the record supports this distinction. Our uncertainty derives principally from the lack of clarity in the 1991 Order, and the Commission's failure to explain that order here. Specifically, because we do not know the precise calculations and dollar amounts involved in the prior case, we are not sure that the Commission's prior ruling was based solely upon the phase-in of plant allocation. Indeed, our own rough calculations suggest that approximately $67,000 in disputed ad valorem tax expenses is not explained by the phase-in. The logic of the Commission's holding in the 1991 Order, particularly as it is couched in broad language, might support the inference that this discrepancy reflects additional plant increases of the nature involved in this case. If that is the case, the supposed distinction, based on the uniquely known and measurable character of the phased-in plant allocation, rings hollow. 54 On its face, the 1991 Order refutes the broad principle on which the Commission relied in rejecting Williston Basin's ad valorem tax expense in this case--namely, that a pipeline may only use taxes actually paid during the test period to support its estimate of taxes in its compliance filing. Particularly in light of this contradiction, we believe that the Commission failed to provide a clear and well-supported explanation of why the methodology used in the 1991 proceeding was not appropriate here. We recognize that the Commission may, in fact, have a persuasive ground for distinguishing this case from the 1991 Order. On remand, then, FERC will have an opportunity to offer a coherent rationale to support its judgment and, also, to show that the cited rationale is supported by the record.