22 September 2017 Massachusetts Appellate Tax Board upholds city assessor's use of non-traditional approach to value a utility's personal property Massachusetts Appellate Tax Board upholds city assessor's use of non-traditional approach to value a utility's personal property In NSTAR Electric Co. v. Bd. of Assessors of the City of Boston,1 the Massachusetts Appellate Tax Board (Board) upheld the tax assessment made by the Assessor of the City of Boston (Assessor) which was excess of the net book value (NBV) of a utility's personal property, which consisted of electric utility transmission and distribution property throughout the city. The Board found that special circumstances existed to justify the Assessor's use of a valuation method other than (or in addition to) net book value. Such circumstances include that the possibility that the utility company's net earnings may exceed the rate of return approved by the regulatory agency (Department of Public Utilities, DPU) and may exceed that which an investment of comparable risk could bring in the open market. Other circumstances cited included the potential for growth of the utility business and that the applicable regulatory agency had departed from its longstanding policy of prohibiting rate recovery of acquisition premiums associated with prior merger activity, thereby making an investment in the company more attractive than the net book value of the assets upon which a rate of return is applied for ratemaking purposes. Based on these special circumstances, the Assessor valued the subject property using an equal weighting of the net book value reported by the company coupled with the "replacement cost new" less physical depreciation of the subject property. Such valuation was in keeping with the regulatory and legal landscape affecting regulated utilities that could encourage a buyer to pay more than net book cost for regulated utility assets. The net book value of a regulated utility company (rate base value) is important in determining the amount of revenue that a regulated electric utility is permitted to recover in the rates the regulator allows it to charge it customers. A utility also is permitted to earn a reasonable rate of return on its investment, which is calculated as a percentage of the utility's rate base. The cost of utility property may be included in the utility's rate base if it is deemed "used and useful" to customers and if the underlying costs are prudently incurred. For ratemaking purposes, the value of property included in the rate base is its net book value (the original cost of property at the time it was originally devoted to public use, less accrued depreciation). In the context of a sale of utility assets, the DPU has maintained a general policy of limiting rate base to the NBV of the assets in the hands of the seller prior to an ownership transfer, thus ensuring that any amount paid above NBV is not included in the buyer's rate base for future ratemaking purposes (i.e., the buyer would not receive a rate of return on any acquisition premium). In the NSTAR case, NBV was analyzed to determine if this value was a fair representation of the value of the NSTAR property in question. Typically, NBV as the basis of assessment is considered proper, absent special circumstances that would induce a buyer to pay more than NBV (e.g., net earnings exceed approved rate of return, potential for growth in a utility's business, profit available may exceed that of an investment of comparable risk). These circumstances are often referred to as Watertown factors named after its eponymous Massachusetts Supreme Judicial Court decision.2 Many of the cases cited in the present appeal recognized changes in the regulatory environment for utilities which justified the use of a valuation method other than NBV. For instance, the DPU's recent policy of permitting NSTAR to share in cost savings, which stemmed from the merger and consolidation of utilities, resulted in NSTAR achieving incremental earnings that exceeded the profit level than would otherwise have been achieved from application of the traditional approach of relying on the NBV in rate base (referred to by the DPU as "carry-over rate base policy"). In essence, the DPU's policy of facilitating the merger and consolidation effort through a shared-savings rate methodology had implicitly allowed the recovery of an acquisition premium in rates and had the effect of elevating both the utility's net earnings above levels normally derived from applying a rate of return on rate base, and thereby were deemed by the Assessor as having increased the utility's asset values above NBV. NSTAR testified that Federal Energy Regulatory Commission historically relied on the cost-of-service regulation, where the allowed rate of return is applied to the NBV of plant assets. Since the allowed return is calculated as a return on NBV of the assets, NSTAR asserted that NBV is the appropriate basis for establishing the assessed value of those assets. The Assessor asserted justification for using a valuation methodology other than NBV because the regulatory/legal landscape remained essentially unchanged since the Massachusetts Supreme Judicial Court characterized the DPU as having departed from strict reliance on its carry-over rate base policy. The Board ultimately agreed with the Assessor, indicating that the current regulatory/legal landscape now permits a buyer to achieve profit levels that can exceed those derived from the traditional method of applying a rate of return on the NBV of regulated assets. The Board also found convincing evidence showing that NSTAR's return on equity (ROE) exceeded its approved return of 10.5%, thus rendering the value of NSTAR's underlying distribution and transmission property significantly higher than its NBV. The Board found flaws in NSTAR's valuation methodologies as well as those presented by the Assessor. The Board, however, ultimately determined that the Assessor presented sufficient evidence to successfully challenge and refute the utility's assertions that NBV is the controlling factor, and accordingly, found that the utility failed to prove the subject property's assessed values exceeded its NBV. While analysis of recent and applicable sales was conducted, as well as development of a replacement cost new less depreciation model, NSTAR relied predominantly on application of the NBV of the subject property and secondarily, a discounted cash flow approach. The Board found this methodology inconsistent with recent findings regarding the legal and regulatory landscape. Perhaps a less rigid reliance on NBV and a better anticipation of possible outcomes would have resulted in a more comprehensive analysis that, if presented, may have refuted the Assessor's analysis in this case. Moreover, one could argue that the shared savings rate methodology that allowed NSTAR to exceed its authorized ROE represented an unprecedented effort to facilitate the merger and consolidation of many utility systems within Massachusetts, and that the utility's ability to exceed its authorized ROE, which arguably helped to defray the costs of the acquisition after the fact, was an event that is not likely to be repeated in the future, and therefore, should not be deemed to have a permanent consequence as it relates to asset valuation. The key takeaway from this case is that NBV of regulated assets is not necessarily the assessed value of such property. Tax assessors will consider the nature of any transaction, the existing regulatory/legal environment and whether such circumstances would lead to a deviation from pure NBV assertions. Further, the case underscores that a utility must present strong evidence to sustain its burden of proof to demonstrate that an assessor's methodology is unreasonable even when the assessment exceeds the NBV of the property in question. Generally, a taxpayer, whose petition to the Board has been denied, may appeal that decision by filing a Notice of Appeal with the Board or probate court within 60 days of the entry of judgment. Thus, NSTAR must appeal this decision before October 10, 2017. 1 (NSTAR Electric Co. v. Bd. of Assessors of the City of Boston, Mass. App. Tax Bd., Dkt. No. F316346, 08/11/2017). Document ID: 2017-1546 |
