Court Opinion

ID: 5173201
Source: CourtListenerOpinion
Date Created: 2022-01-02 05:11:37.075497+00
Date Added: 2024-06-11T08:26:10.511789
License: Public Domain

BAKES, Justice,
dissenting:
I dissent from the commission’s devaluation of the company’s property acquired from C.P. National for purposes of the rate base. The commission disallowed a portion of the purchase price from the rate base by placing the value, not at what the utility paid for the asset, but by valuing the asset on the basis of the seller’s adjusted basis for tax purposes, i.e., C.P. National’s book value derived from cost less accelerated depreciation. For the reasons which follow, I fail to see how the seller’s book value has any relevance to the market value of the asset where a utility has purchased an asset in an arm’s length transac*455tion, particularly where that book value reflects accelerated depreciation.
Generally accepted accounting principles permit — even require — that an asset be depreciated on the books of the corporation to reflect its diminishing useful life. That depreciation is regularly reflected in a straightline basis over the useful life of the asset. However, the United States Congress has enacted legislation permitting purchasers of new plant and equipment to depreciate assets more quickly than the useful life of the asset. This “accelerated depreciation” is allowed in order to encourage investment in plant and equipment, usually during recessionary periods. Accelerated depreciation permits purchasers of new plant and equipment to take extraordinarily high amounts of depreciation during the early years in order to encourage investment in new plants and equipment. As an even greater encouragement to invest in new plants and equipment, the federal tax laws permit a taxpayer to take as a direct credit against the federal income tax a certain percentage of the amount of the purchase price of certain types of new plant and equipment. Accelerated depreciation artificially lowers the value of an asset on the books of the corporation by depreciating it much more quickly than the asset actually physically deteriorates. Accordingly, where an owner of an asset has taken accelerated depreciation, the value of the asset on the books of the corporation will in nearly every case be substantially less than its fair market value.
In the event a corporation which has taken accelerated depreciation and investment tax credit disposes of an asset prior to the end of its useful life, there must be a recapture of at least some of the accelerated depreciation and tax credits previously claimed by the seller of the asset. Recapture of accelerated depreciation, by its very definition, only occurs when the asset’s sale price on disposition exceeds the amount of accelerated depreciation previously taken. This federal statutory tax scheme reflects the obvious conclusion that accelerated depreciation recapture reflects a lower book value than the actual market value of an asset.
Therefore, when two parties negotiate the purchase of an asset which has been the subject of accelerated depreciation and investment tax credits, while both are obviously looking to obtain the best price possible, the seller must also consider, as C.P. National did in this case, the tax consequences that it must face from the recapture of accelerated depreciation taken and the repayment of investment tax credits in arriving at a price for which it will willingly sell the asset.
That is what occurred in this case. C.P. National was willing to sell the asset in question to Utah Power & Light for $27,-949,191 which to C.P. National reflected both the $21,473,688 book value of the asset, i.e., its cost less accelerated depreciation, plus accelerated depreciation and investment tax credit which it would be required to recapture in the amount of $6,475,508. The addition of those recaptured items merely brought the value of the asset up to and nearer in line with what the book value would have been if the asset had been depreciated on a cost-lessstraightline depreciation over the useful life, rather than on an accelerated basis. Since there is no evidence that the purchase price was anything other than the result of arm’s length bargaining, and since the commission seems to agree that the purchase benefited Idaho as demonstrated by the commission’s inclusion of at least $21,473,688 of the purchase price into the rate base, then I believe that our cases require that the entire purchase price be included in the rate base.
In determining at what value an asset should be included in the rate base, this Court stated in Boise Artesian Water Co. v. Public Utilities Comm’n, 40 Idaho 690, 236 P. 525 (1925), that the commission should “give fair consideration to all the evidence relating to value.” 40 Idaho at 701, 236 P. 525. In an analogous situation, in determining whether a utility’s expenditures are reasonable, we have stated that *456“the pressures of a competitive market and the fact of arm’s length bargaining for goods and services allows us to assume, in the absence of a showing to the contrary, that such operating expenditures are legitimate.” Boise Water Corp. v. IPUC, 97 Idaho 832, 838, 555 P.2d 163, 169 (1976). By analogy, the value at which an asset is purchased by a utility in an arm’s length transaction, in the absence of a showing to the contrary, should be the value included in the rate base. Here Utah Power’s evidence disclosed that it purchased C.P. National’s assets for $27,949,191.00 in an arm’s length transaction. There is no showing to the contrary. The fact that the seller of the asset, C.P. National, was permitted by federal tax law to depreciate the asset faster than its useful life, and in the sale insisted that the purchase price reflect the fact that it must recapture that depreciation, is not any relevant evidence of a contrary showing that the value of this asset was anything less than the price arrived at in the arm’s length bargaining between the two parties. This conclusion is supported by the fact that in the past the commission has permitted inclusion of assets on the actual sales basis and has not required reduction in the rate base to reflect the acquisition adjustment. Re Washington Water Power Co., 33 P.U.R.3d 88 (1960); Camas County v. Idaho Telephone Co., 54 P.U.R.3d 432 (1963); Re Boise Water Corp., 59 P.U.R.3d 86 (1965). Accord, Hobbs Gas Co. v. New Mexico Public Service Comm’n, 94 N.M. 731, 616 P.2d 1116 (1980). In Re Washington Water Power Co. the Idaho commission was required to determine the value of electric properties purchased by Washington Water Power Company from Bunker Hill Company. The commission stated:
“The acquisition adjustment amount is the difference of the original cost and the amount paid by the company for the electric properties of the Bunker Hill Company in Kellogg, Idaho. This purchase was a result of an arm’s length transaction and is the result of the actual purchase price in which valuable considerable was paid for tangible assets. ... We will allow the acquisition adjustment to remain in the rate base .... ” 33 P.U.R.3d at 93.
The commission’s valuation was not based upon competent evidence and therefore should be set aside with directions to include the entire purchase price in the rate base. Boise Artesian Water Co. v. IPUC, supra.
SHEPARD, J., concurs.