Court Opinion

ID: 9892573
Source: CourtListenerOpinion
Date Created: 2023-10-24 16:09:03.101194+00
Date Added: 2024-06-11T08:23:34.499515
License: Public Domain

IN THE
            ARIZONA COURT OF APPEALS
                            DIVISION ONE

     SAN DIEGO GAS & ELECTRIC COMPANY, Plaintiff/Appellee,

                                   v.

 ARIZONA DEPARTMENT OF REVENUE, et al., Defendants/Appellants.

                         No. 1 CA-TX 21-0008
                           FILED 10-24-2023

                  Appeal from the Arizona Tax Court
                          No. TX2019-001758
                 The Honorable Danielle J. Viola, Judge

                    VACATED AND REMANDED

                              COUNSEL

Mooney, Wright, Moore & Wilhoit, PLLC, Mesa
By Paul J. Mooney
Counsel for Plaintiff/Appellee

Arizona Attorney General’s Office, Phoenix
By Jerry A. Fries, Lisa A. Neuville
Counsel for Defendants/Appellants
                        SAN DIEGO v. ADOR, et al.
                          Opinion of the Court

                                 OPINION

Judge D. Steven Williams delivered the Court’s opinion, in which Presiding
Judge Cynthia J. Bailey and Judge Kent E. Cattani joined.

W I L L I A M S, Judge:

¶1            Arizona’s property tax statutes require the Arizona
Department of Revenue (“the Department”) to annually assess taxes based
on the full cash value of all property owned by public utilities. A.R.S.
§§ 42-14151(A), -14153(A). In this appeal, we analyze how the future cost of
removing electric transmission and distribution property factors into the
full cash value assigned to such property, specifically, whether that future
cost can be included as a component of depreciation under A.R.S.
§ 42-14154(B). Subsection (F) of that statute requires us to construe the
statutory phrase “[t]he related accumulated provision for depreciation” in
accordance with the Federal Energy Regulatory Commission’s (“FERC”)
Uniform System of Accounts (“USOA”). Doing so, we hold that
accumulated depreciation under Arizona’s valuation formula for electric
transmission and distribution property includes the future cost of removal.
We further hold, however, that accumulated depreciation neither reduces
the full cash value of the related asset to a negative number nor decreases
the full cash value of unrelated property. Accordingly, we vacate the tax
court’s summary judgment in favor of San Diego Gas & Electric Company
(“SDG&E”) and remand for proceedings consistent with this opinion.

               FACTUAL AND PROCEDURAL HISTORY

¶2            SDG&E owns an interstate electric transmission line that runs
from the Palo Verde Nuclear Generating Station in western Maricopa
County, through Yuma County, and into California. In compliance with
statutory and administrative regulations governing public utilities, SDG&E
files an annual valuation report with the Department and maintains its
books and records in conformity with the USOA. See A.R.S. § 42-14152(A);
18 C.F.R. § 141.1; A.A.C. R14-2-212(G)(1)-(2).

¶3            In its 2020 annual valuation filing, SDG&E reported an
original plant in service cost of $48,817,396 (after subtracting land rights),
accumulated depreciation of $51,446,397 (after subtracting amortization for

                                      2
                       SAN DIEGO v. ADOR, et al.
                         Opinion of the Court

land rights), and construction work in progress of $3,648,000.1 These
amounts yielded a net plant in service full cash valuation of negative
$2,629,001 and a net property full cash valuation of approximately
$1,020,000. As part of its accumulated depreciation calculation, SDG&E
included the future cost of removal for its electric transmission and
distribution property. The Department accepted SDG&E’s figures for
original plant in service and construction work in progress but rejected
SDG&E’s inclusion of future removal costs in its accumulated depreciation
calculation. Excluding SDG&E’s reported future costs of removal from its
calculation, the Department initially valued SDG&E’s property at
$12,302,121, representing $48,817,396 original plant in service cost, less
$40,163,750 in accumulated depreciation, for a plant in service full cash
value of $8,653,646 plus a construction work in progress amount of
$3,648,475.

¶4            In response, SDG&E filed this action challenging the
Department’s full cash valuation as excessive. SDG&E then moved for
summary judgment, seeking a net property full cash valuation of
$1,019,474, which used a negative plant in service full cash value (after
depreciation) as an offset against construction work in progress on an
unrelated asset. To support its full cash valuation, SDG&E pointed to
FERC’s reporting requirements and argued that Arizona’s statutory
formula for calculating the full cash value of electric transmission and
distribution property necessarily includes the future cost of removal as a
component of accumulated depreciation.

¶5            The Department cross-moved for summary judgment,
asserting that accumulated depreciation does not include the future cost of
removal under Arizona’s statutory full cash valuation formula. Applying a
straight line depreciation method, the Department sought a revised
valuation of $22,101,000, adopting SDG&E’s figures for the original plant in
service cost and construction work in progress, but calculating a further
reduction in accumulated depreciation.

¶6           Following briefing and argument, the tax court granted
summary judgment in favor of SDG&E. Upon denying the Department’s
motion to reconsider, the court entered final judgment in SDG&E’s favor.

1 SDG&E reported actual construction work in progress of $7,296,949, but

that amount was reduced by fifty percent according to statute and then
rounded down by the Department. See A.R.S. § 42-14154(C).

                                     3
                        SAN DIEGO v. ADOR, et al.
                          Opinion of the Court

¶7             The Department timely appealed. We have jurisdiction under
Article 6, Section 9, of the Arizona Constitution and A.R.S. § 12-2101(A)(1).

                                DISCUSSION

¶8           The Department challenges the tax court’s ruling that
accumulated depreciation under Arizona’s statutory full cash valuation
formula includes the future cost of removing electric transmission and
distribution property. The Department alternatively argues that if
accumulated depreciation encompasses the cost of removal, such
accumulated depreciation may not reduce the full cash value of a plant in
service to a negative number or offset the valuation of unrelated
construction work in progress.

¶9            We review de novo the tax court’s ruling on cross-motions
for summary judgment. See Wilderness World, Inc. v. Dep’t of Revenue State of
Ariz., 182 Ariz. 196, 198 (1995). This case involves an issue of statutory
interpretation, which we also review de novo. See Sw. Airlines Co. v. Ariz.
Dep’t of Revenue, 217 Ariz. 451, 452, ¶ 6 (App. 2008).

¶10           Under A.R.S. § 42-14154(B), the Department calculates the full
cash value of a plant in service by determining the “original plant in service
cost” and then subtracting “[t]he related accumulated provision for
depreciation.” The statute defines the “original plant in service cost” as “the
actual cost of acquiring or constructing property including additions,
retirements, adjustments and transfers.” A.R.S. § 42-14154(G)(7). Notably,
the statute does not define “[t]he related accumulated provision for
depreciation,” but it includes the following provisions:

       F. All terms and applications of terms shall be interpreted
       according to the federal energy regulatory commission
       uniform system of accounts for electric and gas utilities in
       effect on January 1, 1989.

       G. For the purposes of this section, unless the context
       otherwise requires:

       ....

       2. “Depreciation” means straight line depreciation over the
       useful life of the item of property.

A.R.S. § 42-14154(F), (G)(2).

                                      4
                         SAN DIEGO v. ADOR, et al.
                           Opinion of the Court

¶11           Pointing to A.R.S. § 42-14154(G)(2)’s definition of
“depreciation”—straight line depreciation over the useful life of the
property—the Department contends that “[t]he related accumulated
provision for depreciation” does not include the unreported, prospective
“cost of removal.”2 SDG&E counters that absent a statutory definition for
“[t]he related accumulated provision for depreciation,” A.R.S.
§ 42-14154(F) requires that the term be interpreted according to the FERC’s
USOA, which expressly includes the “cost of removal” as part of
accumulated depreciation.

¶12           In interpreting a statute, our goal is to discern and “effectuate
the legislature’s intent.” Welch v. Cochise Cnty. Bd. of Supervisors, 251 Ariz.
519, 523, ¶ 11 (2021). “Absent ambiguity or absurdity, our inquiry begins
and ends with the plain meaning of the legislature’s chosen words, read
within the overall statutory context.” Id. (internal quotation omitted). We
are also guided by the principle that tax statutes must be interpreted
“strictly against the state,” with “any ambiguities . . . resolved in favor of
the taxpayer.” Wilderness World, 182 Ariz. at 199; see also State ex rel. Ariz.
Dept. of Revenue v. Capitol Castings, Inc., 207 Ariz. 445, 447, ¶ 10 (2004)
(providing statutes imposing taxes are to be liberally construed “in favor of
taxpayers and against the government”).

¶13            Section 42-14154(F) expressly requires that “all of [the
statute’s] terms and applications be interpreted in accordance with the
FERC accounting rules.” Ariz. Dep’t of Revenue v. Salt River Project Agric.
Improvement & Power Dist., 212 Ariz. 35, 40, ¶ 19 (App. 2006). This broad
legislative mandate “does not state that the FERC USOA is to be used only
to resolve statutory ambiguities; rather, . . . the statute requires that all of its
terms and applications be interpreted in accordance with the FERC
accounting rules.” Id. at 39-40, ¶ 19.

¶14           In Salt River Project, we analyzed the meaning of the term
“original plant in service cost” under A.R.S. § 42-14154(G)(7). Id. at 39-41,
¶¶ 17-22. To do so, we first considered the meaning of the term “actual
cost,” as used within the statutory definition. Id.; A.R.S. § 42-14154(G)(7)
(defining “original plant in service cost” as “the actual cost of acquiring or
constructing property including additions, retirements, adjustments and
transfers”). Neither the Arizona statute nor the FERC USOA defined
“actual cost.” Salt River Project, 212 Ariz. at 39-40, ¶¶ 19-20. And, although

2      The parties do not dispute that SDG&E’s reported original plant in
service cost did not encompass future removal costs.

                                         5
                        SAN DIEGO v. ADOR, et al.
                          Opinion of the Court

the FERC USOA defined “cost,” we recognized that “cost” and “actual
cost” are distinct terms. Id. at 40, ¶ 20.

¶15            Here, the Department urges us to conclude there is no
difference between the terms “depreciation” and “[t]he related
accumulated provision for depreciation.” But if the legislature had
intended to limit “[t]he related accumulated provision for depreciation” to
“depreciation,” it could have done so. Rather than subtract “straight line
depreciation over the useful life of the property” or simply “depreciation”
from the original plant in service cost, the statutory formula subtracts “[t]he
related accumulated provision for depreciation” from the original plant in
service cost to determine the full cash value of the plant in service—without
defining the phrase.

¶16            “Our legislature has expressly adopted a statutory method for
the valuation of utilities in Arizona that incorporates the FERC USOA.” Id.
at 41, ¶ 25; see also A.R.S. § 42-14154(F); A.A.C. R14-2-212(G)(1)-(2)
(providing for the keeping of accounts and records to reflect the cost of the
utility’s properties in conformity with the FERC USOA). Guided by the
“presumption that what the [l]egislature means, it will say,” we decline to
ascribe the statutory term a definition that differs from that in the FERC
USOA. See Padilla v. Indus. Comm’n, 113 Ariz. 104, 106 (1976); see also Salt
River Project, 212 Ariz. at 39-40, ¶ 19 (providing that all terms, including
those unambiguous, must be interpreted in accordance with the FERC
accounting rules).

¶17           Under FERC USOA Account No. 108, Accumulated Provision
for Depreciation of Service Company Property, the “accumulated provision
for depreciation” expressly includes the “cost of removal.” 18 C.F.R.
§ 367.1080. Likewise, FERC Order No. 631 provides: “removal costs . . . are
included as a component of the depreciation expense and recorded in
accumulated depreciation.” 68 Fed. Reg. 19610-01 (to be codified at 18
C.F.R. 35, 101, 154, 201, 346, 352). As defined by FERC USOA Account No.
101(a)(10), the “cost of removal” is “the cost of demolishing, dismantling,
tearing down or otherwise removing service property, including the cost of
transportation and handling incidental thereto.” 18 C.F.R. § 367.1(a)(13).

¶18            The Arizona legislature “knows how to exclude items from
the sweep of the FERC if it chooses to do so.” Salt River Project, 212 Ariz. at
41, ¶ 23 n.9. In fact, the legislature expressly excluded land rights from the
“original plant in service cost,” making those costs non-depreciable under
the statute, even though land rights are part of accumulated depreciation
under the FERC USOA. See A.R.S. § 42-14154(G)(8). Because the legislature

                                      6
                         SAN DIEGO v. ADOR, et al.
                           Opinion of the Court

could have prescribed an exception to the FERC rules for the cost of
removal but chose not to do so, and given our statutory mandate to
interpret terms according to the FERC USOA, we conclude that
accumulated depreciation includes the cost of removal under A.R.S.
§ 42-14154.

¶19            Having so found, we turn to the Department’s secondary,
alternative arguments that accumulated depreciation neither reduces the
full cash value of a plant in service to a negative number nor offsets the
value of unrelated construction work in progress. The Department
characterizes the negative full cash valuation of a plant in service under
Arizona’s statutory formula as “absurd,” “ludicrous,” and legally
“impossibl[e].” For its part, SDG&E does not argue that Arizona’s statutory
full cash valuation formula contemplates the possibility of a negative
taxable basis. Instead, SDG&E notes that the value of its construction work
in progress outweighed the negative full cash value of its plant in service,
resulting in a net positive full cash property valuation.

¶20           “In considering two plausible interpretations of a statute, we
will not credit one that leads to absurd results.” State v. Ariz. Bd. of Regents,
253 Ariz. 6, 13, ¶ 28 (2022). A statutory interpretation is absurd “if it is so
irrational, unnatural, or inconvenient that it cannot be supposed to have
been within the intention of [persons] with ordinary intelligence and
discretion.” Perini Land and Dev. Co. v. Pima County, 170 Ariz. 380, 383 (1992)
(citation omitted).

¶21            Nothing in the plain language of A.R.S. § 42-14154 or the
related valuation statutes, A.R.S. §§ 42-14151 to -14153, expressly provides
for or precludes a negative full cash valuation of a plant in service. But
applying a “sensible construction to avoid absurd results,” Mountainside
MAR, LLC v. City of Flagstaff, 253 Ariz. 448, 450, ¶ 9 (App. 2022), we are not
persuaded that the legislature intended to permit a negative full cash
valuation for a plant in service, and therefore hold that accumulated
depreciation may not reduce the full cash value of a plant in service to a
negative number. That a net negative full cash property valuation was
avoided in this case does not render SDG&E’s proposed construction of
accumulated depreciation (and corresponding calculation of the net plant
in service’s full cash value) reasonable.

¶22            Furthermore, applying the plain and unambiguous language
of A.R.S. § 42-14154(B), we hold that accumulated depreciation may reduce
only the “related” original plant in service cost. In other words, the
“related” accumulated depreciation that A.R.S. § 42-14154(B) expressly

                                       7
                         SAN DIEGO v. ADOR, et al.
                           Opinion of the Court

states shall reduce the original plant in service cost may not reduce the
value of construction work in progress, which is separately calculated
under subsection (C) as “fifty per cent of the amount spent and entered on
the taxpayer’s accounting records as of December 31 of the preceding
calendar year.” Apart from a plain reading of the statute, this construction
is consistent with a distinct but analogous FERC USOA provision, which in
explaining the accounting for asset retirement obligations, states that the
“cost must be depreciated over the useful life of the related asset that gives
rise to the obligations.” 18 C.F.R. § 367.22(b) (emphasis added). Under A.R.S.
§ 42-14154(B), accumulated depreciation represents the expensing of the
plant in service costs over time; therefore, its application is limited to
reducing the valuation of those “related” costs.

¶23           In sum, we hold that accumulated depreciation under A.R.S.
§ 42-14154 encompasses the future costs of removing electric transmission
and distribution property. We further hold that such accumulated
depreciation cannot reduce the full cash value of a plant in service to a
negative number or offset the value of unrelated property. Accordingly, we
vacate the tax court’s summary judgment in favor of SDG&E.3

                               CONCLUSION

¶24             For the foregoing reasons, we vacate the summary judgment
in SDG&E’s favor and remand the matter to the tax court. SDG&E has
requested an award of attorneys’ fees and costs incurred on appeal
pursuant to A.R.S. § 12-348(B) (“[A] court may award fees and other
expenses to any party . . . that prevails by an adjudication on the merits in
an action by the party against this state . . . challenging the assessment
. . . of taxes.”). Although we vacate the summary judgment for SDG&E
because accumulated depreciation may not reduce the full cash value of a
plant in service to a negative number or be used to offset the value of
unrelated property, SDG&E prevailed on the inclusion of the cost of
removal in the calculation of accumulated depreciation. In our discretion,

3 The Department also argues for the first time on appeal that permitting a

negative full cash property valuation “violates the Arizona Constitution’s
Exemptions Clause, which provides that all property in the state not exempt
from taxation under the Federal and Arizona Constitutions shall be subject
to taxation.” Ariz. Const. art. IX, § 2. Given our resolution of the other issues
in this matter, and in our discretion, we decline to address this contention.
See Odom v. Farmers Ins. Co. of Ariz., 216 Ariz. 530, 535, ¶ 18 (App. 2007)
(“Generally, arguments raised for the first time on appeal are untimely and
deemed waived.”).

                                       8
                     SAN DIEGO v. ADOR, et al.
                       Opinion of the Court

we award SDG&E a portion of its reasonable attorneys’ fees and costs
incurred on appeal, contingent upon its compliance with ARCAP 21.

                       AMY M. WOOD • Clerk of the Court
                       FILED: AA

                                    9