STATE TAX COMMISSION OF MISSOURI
| UNION ELECTRIC COMPANY, d/b/a | ) | |
| Ameren Missouri, | ) | |
| Complainant, | ) | |
| ) | ||
| v. | ) | Appeal Number: 13-52002 |
| ) | ||
| CHRISTOPHER ESTES, ASSESSOR, | ) | |
| COLE COUNTY, MISSOURI, | ) | |
| Respondent. | ) |
ORDER AFFIRMING HEARING OFFICER DECISION
UPON APPLICATION FOR REVIEW
HOLDING
This matter is before the State Tax Commission (Commission) on remand from the circuit court of Cole County. Respondent filed an application for review of the Hearing Officer’s decision and order finding $28,031,000 in depreciation of Complainant’s business personal property.[1] The Hearing Officer’s decision and order is AFFIRMED.[2]
FINDINGS OF FACT AND PROCEDURAL HISTORY
Complainant owns a natural gas pipeline. The subject property consists of components of Complainant’s pipeline located in Cole County as of January 1, 2013.
Complainant listed the subject property on a form promulgated by the Commission pursuant to section 138.320. The form required Complainant to “file the original or historical costs[.]” The form further provided the Commission “recommended depreciation assignment follow the IRS guidelines found within IRS Publication 946″ and that the “determination of value is the responsibility of the county assessor.” Consistent with the form, the Commission’s Assessor’s Manual advised companies should “rely on original costs as a starting point. It is important for the assessor to arrive at a reasonable level of depreciation.”
Complainant reported the original costs were $53,252,364. After deducting depreciation, Complainant reported a total value of $20,498,505. Respondent valued Complainant’s property at $53,252,400.
Complainant appealed Respondent’s valuation to the Cole County Board of Equalization. The Board sustained Respondent’s value. Complainant appealed. The Commission affirmed the Board’s decision. The circuit court affirmed the Commission’s decision. The court of appeals reversed the circuit court’s judgment and directed the circuit court to remand the matter to the Commission to calculate the depreciation of the subject property. Union Elec. Co. v. Estes, 534 S.W.3d 352, 376 (Mo. App. 2017). The court of appeals’ directions on remand were clear and unequivocal:
This matter is remanded to the Circuit Court of Cole County for remand to the Commission to calculate the true value in money of Ameren’s real property in service in Cole County as of January 1, 2013 by determining the amount of depreciation to be deducted from $53,252,400, the “Market Value” determined by the Assessor without regard to depreciation.
Id. at 379.
Consistent with the directions on remand, the Hearing Officer conducted a hearing and determined Complainant produced substantial and persuasive evidence showing $28,031,000 in depreciation. The Hearing Officer credited Complainant’s expert appraiser, Robert Reilly, who produced a depreciation report calculating $19,624,000 for physical depreciation and $8,407,000 for economic obsolescence, for a total of $28,031,000 in depreciation. Consistent with the Court’s directions on remand, the Hearing Officer reviewed the evidence of the parties and determined the amount of depreciation ($28,031,000) to be deducted from the original market value ($53,252,400), which meant that as of January 1, 2013, the true value in money (TVM) of the subject property was $25,221,400.
Respondent filed an application for review asserting: (1) the Hearing Officer failed to make sufficient findings of fact regarding economic obsolescence; and (2) there was no substantial and competent evidence of economic obsolescence. Respondent’s application for review does not challenge Reilly’s determination there was $19,624,000 of physical depreciation. Despite not challenging Complainant’s evidence showing $19,624,000 of physical depreciation, Respondent asks the Commission to find the subject property depreciated by only $6,390,288, yielding a TVM of $46,862,112.
Complainant is a rate based regulated utility. The Missouri Public Service Commission sets Complainant’s allowable rates of return.
The subject property consists of components of Complainant’s natural gas pipeline located in Cole County as of January 1, 2013. Complainant listed the subject property on a form promulgated by Commission pursuant to section 138.320. The form required Complainant to “file the original or historical costs[.]” Respondent valued Complainant’s property at $53,252,400. The market value of the subject property prior to deducting depreciation is $53,252,400.
Respondent’s expert appraiser, George Sansoucy, calculated $6,390,228 of depreciation. Sansoucy testified the court of appeals incorrectly required the deduction of depreciation from original costs because market derived depreciation cannot be deducted from historic original costs. Sansoucy testified the court’s approach is inconsistent with generally accepted appraisal principles and amounted to a “jurisdictional exception . . . for developing the cost approach in the appraisal of gas distribution property.”
Contrary to the court of appeals’ directions on remand, Sansoucy testified the proper approach required subtracting depreciation from the reproduction cost or replacement cost new of an asset, not the original cost. Sansoucy testified depreciation may be deducted from original cost of $53,252,400 only if replacement cost new less depreciation (RCNLD) is less than the original cost.
Although Sansoucy testified market derived depreciation cannot be deducted from historic original costs, he proceeded to do just that. Sansoucy calculated depreciation by comparing the sale prices of natural gas distribution properties from which depreciation could be extracted. Sansoucy noted a correlation between sales prices and surviving original cost and testified “[s]ales of state regulated retail gas distribution property tends to fall in a range of 85% and 115% of the surviving original cost.” Sansoucy selected six comparable sales and determined “[T]he mean and median sales price to original costs are 89% and 88%, respectively.” Based on his conclusion the median depreciation was 12%, Sansoucy determined $6,390,288 in depreciation should be deducted from the $53,252,400 original cost, yielding a market value of $46,862,112.
Complainant’s expert, Robert Reilly, is a certified public accountant and real estate appraiser. Reilly testified credibly and produced a credible depreciation report utilizing a “cost approach, historical cost less depreciation method of valuation of the . . . natural gas distribution system.” For rate based regulated utilities like Complainant, historical cost is frequently used to value property for ad valorem tax purposes. Reilly testified historical cost less depreciation (HCLD) is a frequently used valuation method because a regulated utility’s rates are set to recover historical costs.
Depreciation consists of physical deterioration, functional obsolescence, and economic obsolescence. Reilly determined physical deterioration by considering a 2008 depreciation study prepared by Gannet & Fleming, which the Missouri Public Service Commission (PSC) utilized to establish the physical depreciation rates applicable to Complainant. Reilly also relied on the accumulated depreciation reported to the PSC and Federal Energy Regulatory Commission as an estimate of the physical depreciation. The physical depreciation reported is based on property data compiled by a third party specialist familiar with the subject property. Reilly calculated $19,624,000 in physical depreciation. Respondent’s application for review does not challenge Reilly’s physical deterioration analysis or calculation.
The evidence showed that the subject property performs its intended function and is not functionally obsolescent. However, economic obsolescence occurs when the property owner can no longer earn a fair return on investment in the property. Reilly credibly testified four factors established the subject property was subject to economic obsolescence: (1) the allowed rate of return was decreasing; (2) investor owned utilities were failing to earn their allowed rates of return; (3) increased competition, weather conditions, and higher energy efficiency standards were negatively affecting Complainant’s return; and (4) a negative industry outlook.
Reilly’s analysis showed an industry wide downward trend in the allowed rate of return prior to January 1, 2013. In 2008, the rate of return was 10.42%. By 2012, the rate of return decreased to 9.94%. The decreasing rate of return supports a finding of economic obsolescence. Reilly’s analysis credibly demonstrated investor owned utilities were generally failing to earn their allowed rates of return. Reilly’s analysis credibly demonstrated the overall industry outlook was negative. For instance, Standard & Poor’s noted a negative outlook for the natural gas industry due to the utilization of alternative energy sources to satisfy increased demand. Consistent with this industry wide trend, Complainant’s gas distribution system was incurring additional costs while consumer demand declined.
Reilly reported Complainant’s operating income from 2008 through January 1, 2013. Complainant’s operating income decreased at an annualized rate of 8.8% due to weather conditions, efficiency standards, and competition from alternative energy sources.
Reilly quantified economic obsolescence with three applications of the capitalization of income loss depreciation method.
In the first application, Reilly compared five industry wide profitability ratios for each of the five years prior to 2013. Reilly chose the year with the highest profitability as the year with no economic obsolescence, and the lowest profitability year as the year with economic obsolescence. Reilly measured the difference between the highest and lowest profitability ratios. This procedure, found in the Appraisal Handbook of the Western State Association of Tax Administrators, indicated economic obsolescence was 32%.
In the second application, Reilly compared Complainant’s 2012 profitability ratio (the least profitable year) to Complainant’s profitability ratios over the last five years. The median indicated economic obsolescence based on this application was 13%.
In the third application, Reilly compared Complainant’s net operating income return on its natural gas utility plant to a guideline natural gas distribution company return based on five companies reporting to Missouri Public Service Commission from 2008 through 2012. This method indicated economic obsolescence ranging from 37% to 47%. Reilly concluded this approach indicated 42% economic obsolescence.
Reilly calculated economic obsolescence ranging from 13% to 42%. The average economic obsolescence was 29%, and the median was 32%. The average and median of the two economic obsolescence percentage indications specific to Complainant was 27.5%. Reilly reconciled the results and concluded economic obsolescence was 25%, yielding a total depreciation of $28,031,000.
The total depreciation of the subject property was $28,031,000. Subtracting $28,031,000 from the original cost of $53,252,400 as required by the court of appeals’ remand yields a TVM of $25,221,400.
CONCLUSIONS OF LAW
Respondents’ Application for Review
Respondent asserts the following in his application for review:
(1) the Hearing Officer failed to make sufficient findings of fact regarding economic obsolescence; and
(2) there was no substantial and competent evidence of economic obsolescence.
Respondent’s application for review does not challenge Reilly’s determination there was $19,624,000 of physical depreciation. Despite not challenging Complainant’s evidence showing $19,624,000 of physical depreciation, Respondent asks the Commission to find the subject property depreciated by only $6,390,288, yielding a TVM of $46,862,112.
Standard of Review
A party subject to a Decision and Order of a Hearing Officer with the STC may file an application requesting the case be reviewed by the STC. Section 138.432. The STC may then summarily allow or deny the request. Id. The STC may affirm, modify, reverse, set aside, deny, or remand the Decision and Order of the Hearing Officer on the basis of the evidence previously submitted or based on additional evidence taken before the STC. Id.
The Commission reviews the Hearing Officer’s decision and order de novo. Lebanon Properties I v. North, 66 S.W.3d 765, 770 (Mo. App. 2002). “The extent of that review extends to credibility as well as questions of fact.” Id. The Commission “is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled to.” St. Louis Cty. v. State Tax Comm’n, 515 S.W.2d 446, 450 (Mo. 1974).
STC’s Ruling
For the reasons that follow, the STC finds Complainants’ arguments to be unpersuasive. The STC, having thoroughly reviewed the whole record and having considered the Hearing Officer’s Decision, the Application for Review of Respondents, and Complainant’s Response, concludes that the Hearing Officer’s Decision was correct and proper and not erroneous.
- The Hearing Officer’s factual findings were sufficient.
Respondent claims the Hearing Officer failed to make sufficient findings of fact as required by section 536.090. Section 536.090 requires findings of fact and conclusions of law to permit meaningful judicial review of whether the agency decision falls within the scope of the invalid agency actions enumerated in section 536.140.2. Weber v. Firemen’s Retirement Sys., 872 S.W.2d 477, 480 (Mo. banc 1994). The Hearing Officer’s findings of fact, incorporated herein, are sufficient in that they provide an explanation and basis for the Hearing Officer’s decision. Rednam v. State Bd. Of Registration for Healing Arts, 316 S.W.3d 357, 361-62 (Mo. App. W.D. 2010); State ex rel. Laclede Gas Co. v. Public Service Com’n of the State of Missouri, 103 S.W.3d 813, 816 (Mo. App. W.D. 2003); see also Rinehart v. Bateman, 363 S.W.3d 357, 363 (Mo. App. 2012).[3] “An inflexible standard for determining the adequacy of findings of fact has not been espoused in Missouri.” State ex rel. Laclede Gas Co., 103 S.W.3d at 816, citing Glasnapp v. State Banking Bd., 545 S.W.2d 382, 387 (Mo. App. 1976). The Hearing Officer’s findings of fact do not leave the Commission to speculate as to the evidence the Hearing Officer believed and found to be true and which evidence was rejected. See Id. At 816. Respondent’s claim that the Commission should reverse the Hearing Officer’s decision due to allegedly insufficient factual findings is without merit.
- The Hearing Officer’s decision and order is supported by substantial and persuasive evidence.
Respondent claims there was no substantial and competent evidence of economic obsolescence.[4] The record refutes this claim.
At the outset, it is critical to emphasize the court of appeals’ directions on remand.
The court noted the Commission’s 2013 form requiring assessors to use the reproduction cost approach to value natural gas pipeline property was consistent with section 137.122 because the statute “requires use of the reproduction cost approach.” Estes, 534 S.W.3d at 367. Specifically, section 137.122.5 provides “each assessor shall value depreciable tangible personal property by applying the class life and recovery period to the original cost of the property according to the following depreciation schedule.” In other words, the starting point for valuing the subject property is, per the Commission’s 2013 form and section 137.122, the original cost of the subject property.
Once the original cost is determined, depreciation is deducted according to the section 137.122 depreciation schedule, which based on the federal Modified Accelerated Cost Recovery System (MACRS) life table. The depreciation schedule determines the appropriate “class life” of depreciable tangible personal property used in a trade or business or for production of income. Although section 137.122 does not address the valuation of real property, the Commission’s decision to utilize a form requiring assessors to use the same valuation methodology for both real property and tangible personal property owned by natural gas distribution companies was “logically grounded.” Estes. at 369. Given this context, the court’s directions on remand in this case clearly and unequivocally dictate:
This matter is remanded to the Circuit Court of Cole County for remand to the Commission to calculate the true value in money of Ameren’s real property in service in Cole County as of January 1, 2013 by determining the amount of depreciation to be deducted from $53,252,400, the “Market Value” determined by the Assessor without regard to depreciation.
Estes, 534 S.W.3d at 379. The sole issue, therefore, is determining the amount of depreciation to be taken against $53,242,400, as directed by the Court.
Despite the court’s clear direction to calculate depreciation against the original cost of $53,242,400, Respondent’s appraiser, Sansoucy, prefaced his testimony by disputing the court’s directions on remand. Sansoucy testified the court “requires that depreciation be deducted from the historic original cost of the real property” even though market based depreciation cannot be deducted from original costs. Sansoucy testified deducting depreciation from original cost of real property is not a generally accepted appraisal method, and “the Missouri Court of Appeals created a Jurisdictional Exception…for developing the cost approach in the appraisal of gas distribution property.”
Contrary to the court of appeals’ directions on remand, Sansoucy testified the proper approach required subtracting depreciation from the reproduction cost or replacement cost new of an asset, not the original cost. The court of appeals, however, expressly rejected Sansoucy’s “cost new” valuation methodology and reaffirmed original cost is the starting point:
We recognize that “cost new,” the essence of Mr. Sansoucy’s valuation methodology, is essentially “replacement cost” in today’s dollars employing today’s standards, a recognized cost approach methodology. However, to the extent the subject has been addressed, Missouri courts have observed that the reproduction/original cost methodology is generally most applicable to specialized uses of property. See Snider, 156 S.W.3d at 347 (noting that assessor used reproduction cost approach to value specialized use of property “by taking the actual cost of acquiring and improving the property and decreasing that amount to account for … depreciation and depletion”) (emphasis added). It is noteworthy that the Commission’s Decision and Order found a natural gas pipeline system to be a “unique” use of property.
Estes, 534 S.W.3d at 375 n.24. (Emphasis in original). The court further observed “that Mr. Sansoucy’s valuation methodology is plainly inconsistent with section 137.122[.]” Id. at 375 n.25.
Consistent with Sansoucy’s testimony, Respondent concedes that “[f]or the remand, Mr. Sansoucy did not attempt to separately identify economic obsolescence affecting the $53,252,400 original cost value, as set by the appellate court.” Respondent’s Reply, at 9. Instead, Sansoucy used a market extraction method based on comparable sales to estimate the depreciation to be deducted from the original cost. Id. at 11. Complainant, however, notes Sansoucy made no adjustments among the comparable sales and failed to subtract goodwill and working capital from the selected sale prices. Respondent claims Sansoucy fully rebutted these issues, and asserts “Sansoucy demonstrated a greater understanding of the gas utility industry and gas utility industry sales than any witness in the case.” Id. at 12. The Commission, as the finder of fact, is not persuaded by Sansoucy’s testimony.
In contrast to Sansoucy, Complainant’s appraiser, Reilly, did not contest the court’s clear directions on remand. Reilly developed a credible depreciation analysis and determined the total depreciation for January 1, 2013 tax date was $28,031,000. Fully two-thirds of this depreciation ($19,624,000) stemmed from physical deterioration. Reilly calculated physical deterioration by considering a 2008 depreciation study and accumulated depreciation reported to the PSC and Federal Energy Regulatory Commission as an estimate of the physical depreciation. While Reilly attributed $19,624,000 of the $28,031,000 in total depreciation to physical deterioration, Respondent’s application for review does not challenge Reilly’s physical deterioration analysis or calculation. Respondent, therefore, leaves Reilly’s calculation of $19,624,000 in physical deterioration wholly unchallenged while requesting that the Commission find the subject property depreciated by only $6,390,288. While the Commission reviews the Hearing Officer’s decision de novo, the necessity of specifically raising an issue for the Commission’s review “is implicitly embodied in the statutory requirement that the application for review . . . ‘shall contain specific detailed grounds upon which it is claimed the decision is erroneous.'” Tibbs v. Poplar Bluff Assocs. I, L.P., 411 S.W.3d 814, 820 (Mo. App. 2013) (quoting section 138.432). While not dispositive, Respondent’s wholesale failure to challenge the bulk of Reilly’s depreciation analysis or calculation substantially undermines Respondent’s position.
Respondent’s application for review focuses on the claim that Reilly’s calculation of economic obsolescence was flawed. Respondent argues Reilly’s economic obsolescence analysis was based on the erroneous assumption Complainant was earning lower rates of return. Respondent asserts Complainant’s rate of return on its rate base was over 9%. Reilly, however, credibly testified the estimation of economic obsolescence under the cost approach looks to whether the utility is earning a fair rate of return, and not its rate of return on the rate base. Reilly produced credible evidence showing Complainant’s net operating income return on net gas utility plant varied from 4.6% to 7.1% in the five years prior to 2013. The rates of return were less than the 8.06% rate of return authorized by Missouri Public Service Commission.
As noted, Reilly quantified economic obsolescence with three applications of the capitalization of income loss depreciation method. These three approaches indicated economic obsolescence ranging from 13% to 42%. The average economic obsolescence was 29%, and the median was 32%. Reilly reconciled the results and concluded economic obsolescence was 25%, yielding a total depreciation of $28,031,000.
Respondent asserts there is no evidence showing how the 13% economic obsolescence Reilly attributed to Complainant can be reconciled to 25% economic obsolescence. Respondent’s singular focus on the 13% economic obsolescence ignores the fact Reilly’s analysis indicated economic obsolescence of up to 47%, a 29% mean, and a 32% median. These calculations indicate Reilly’s 25% economic obsolescence calculation was a prudent, conservative estimate based on three accepted appraisal methods.
Next, Respondent claims Reilly’s economic obsolescence was “not based on any of the four enumerated factors in the Hearing Officer’s findings of fact.” This claim is a variant of Respondent’s claim that the Commission should reverse the Hearing Officer’s decision and order because the Hearing Officer’s findings were allegedly insufficient. As previously stated in this Decision, the Hearing Officer’s findings of fact were sufficient in that they provide an explanation and basis for the Hearing Officer’s decision.
The Commission’s findings, in conjunction with the findings and evidentiary record detailed in the Hearing Officer’s decision and incorporated herein, detail substantial and persuasive evidence supporting Reilly’s economic obsolescence calculation. Reilly considered four factors.
First, as set forth in the Commission’s findings of fact, Reilly determined the legally allowed rate of return was decreasing. In 2008, the industry wide rate of return was of 10.42%. By 2012, the industry wide rate of return decreased to 9.94%. The decreasing rate of return supports a finding of economic obsolescence.
Second, Reilly determined investor owned utilities were generally failing to earn their allowed rates of return. The fact utilities were not earning the allowed rate of return supports a finding of economic obsolescence.
Third, Reilly determined increased competition, weather conditions, and higher energy efficiency standards negatively affected Complainant’s return. Reilly noted that from 2008 through January 1, 2013, Complainant’s operating income decreased at an annualized rate of 8.8%. This persistent, significant decrease in operating income supports a finding of economic obsolescence.
Finally, Reilly determined the overall industry outlook was negative. For instance, Standard & Poor’s noted a negative outlook for the natural gas industry due to the utilization of alternative energy sources to satisfy increased demand. Reilly also noted Complainant’s gas distribution system was incurring additional costs as consumer demand declined. The negative industry wide decrease in operating income supports a finding of economic obsolescence.
The foregoing four factors supported Reilly’s conclusion the subject property was affected by economic obsolescence. As explained above, Reilly quantified the percentage of economic obsolescence and reconciled his results to determine an overall economic obsolescence of 25%. The record includes substantial and persuasive evidence supporting Reilly’s analysis and results.
While Reilly’s analysis and calculations were persuasive, this does not mean his approach is beyond critique. Determining a reasonable estimate of economic obsolescence requires analysis of multiple factors. In many cases, like this one, no one factor definitively proves of the existence or extent of economic obsolescence. By the same token, a relative lack of evidence supporting a relevant factor typically does not disprove economic obsolescence. Instead, appraisers gather a range of data relevant to value, quantify the effect of that data on value, and, ultimately, utilize informed professional judgment and experience to reconcile the often less than perfectly precise results. Moreover, Reilly’s approach complied with the court of appeals’ directions on remand to determine depreciation according to the cost approach. Reilly did so, and the Commission finds his testimony and depreciation estimate both credible and persuasive.
Consistent with the directions in the Court’s order on remand, the Hearing Officer conducted a hearing in which the parties presented evidence as to the amount of depreciation to be deducted from original costs of $53,252,400. The Hearing Officer determined that Complainant presented substantial and persuasive evidence establishing the total amount of depreciation to be deducted was $28,031,000 for a resulting TVM as of January 1, 2013, of $25,221,400. The Commission finds that a reasonable mind could have conscientiously reached the same result as the Hearing Officer based on a review of the entire record. Hermel, Inc. v. STC, 564 S.W.2d 288 (Mo. 1978); Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998).
ORDER
The Decision of the Hearing Officer is AFFIRMED. The Decision and Order of the Hearing Officer, including the findings of fact and conclusions of law therein, is incorporated by reference, as if set out in full, in this final decision of the STC.
Section 138.432 and sections 536.100 to 536.140 govern judicial review of the Commission’s decision and order. If Assessors seek timely seeks judicial review within thirty days, any protested taxes presently in escrow as a result of this appeal shall be held pending a final decision of the courts, unless disbursed pursuant to section 139.031.8.
If judicial review is not sought within thirty days, this decision and order is deemed final and the county collector, and the collectors of all affected political subdivisions, shall disburse the protested taxes presently held in escrow in accordance with the decision on the assessment underlying this appeal.
SO ORDERED July 2, 2020.
STATE TAX COMMISSION OF MISSOURI
____________________________________
Gary Romine, Chairman
____________________________________
Victor Callahan, Commissioner
____________________________________
Will Kraus, Commissioner
Certificate of Service
I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this 2nd day of July, 2020, to: Complainant(s) and/or Counsel for Complainant(s), the County Assessor and/or Counsel for Respondent and County Collector.
Elaina McKee
Legal Coordinator
State Tax Commission of Missouri
| UNION ELECTRIC COMPANY, d/b/a | ) | ||
| Ameren Missouri, | ) | ||
| Complainant, | ) | ||
| ) | Appeal No. | 13-52002[5] | |
| v. | ) | ||
| ) | |||
| CHRISTOPHER ESTES, ASSESSOR, | ) | ||
| COLE COUNTY, MISSOURI, | ) | ||
| Respondent. | ) |
DECISION AND ORDER AFTER REMAND
HOLDING
Substantial and persuasive evidence was presented to establish the appropriate depreciation to be taken against costs of $53,252,400 is $28,031,000 for a resulting true value in money (TVM) of $25,221,400.
Union Electric Company, d/b/a Ameren Missouri (Complainant) appeared by Counsels Timothy Tryniecki and Erin Edelman.
Christopher Estes, Assessor, Cole County, Missouri (Respondent) appeared by Counsels Richard Reed and Jennifer Wu.
Issue decided by Chief Counsel Maureen Monaghan (Hearing Officer).
Union Electric Company d/b/a Ameren Missouri v.
Christopher Estes, Assessor, Cole County, Missouri,
544 S.W.3d 246 (Mo. App. WD 2017)
In Union Electric Company d/b/a Ameren Missouri v. Christopher Estes, Assessor, Cole County, Missouri, 544 S.W.3d 246 (Mo. App. WD 2017), the Court stated that Section 137.122 provides a statutory standardized methodology for valuing business personal property relying upon the federal Modified Accelerated Cost Recovery System (MACRS) life table to determine the appropriate “class life” of depreciable tangible personal property used in a trade or business or for production of income “to establish uniformity in the assessment of depreciable tangible personal property…” A property is “placed in service” when it is ready and available for a specific use, whether or not actually in use. The methodology presented by Section 137.122 RSMo is a cost approach to value, with more than straight-line (normal) depreciation.
The Assessor’s Manual published by the State Tax Commission (STC), includes forms that assessors might use for natural gas distribution companies to report real and tangible personal property in service. The forms have companies report original costs of their property. The form recommends the depreciation be equivalent to the IRS guidelines found within IRS Publication 946. The methodology set forth in the forms found in the assessor’s manual for valuing the real property of natural gas distribution companies is the methodology set forth in Section 137.122. “Though section 137.122 does not address the valuation of real property, the Commission’s 2013 form required assessors to use the same valuation methodology for both real property and tangible personal property owned by natural gas distribution companies. The Commission’s decision was logically grounded.” Union Electric v. Estes, id 369. The Court found the methodology was logically grounded because fixture components would be tangible personal property but for their incorporation into a pipeline which recent statutory changes designated as real property.
The forms required the reporting of the original or historical costs of the property as found in the Annual Report of Natural Gas Companies to the Missouri Public Service Commission[6] (PSC) and/or the Federal Energy Regulatory Commission[7] (FERC). The forms recommended depreciation be determined using the IRS Publication 946, however, the determination would be left for the discretion and judgment of the assessor.
Given that the form provided for the determination of depreciation by the assessor, the Court directed the STC to determine the amount of depreciation to be deducted from the original costs of $53,242,400 for a resulting TVM as of January 1, 2013.
ISSUE
The appeal was remanded from the Circuit Court of Cole County as directed by the Missouri Court of Appeals, Western District, in Union Electric Company v. Estes, id. The Court reasoned:
Though section 137.122 does not address the valuation of real property, the Commission’s 2013 form required assessors to use the same valuation methodology for both real property and tangible personal property owned by natural gas distribution companies. The Commission’s decision was logically grounded ….
Our grant of Ameren’s first, second and third points on appeal requires us to reverse the circuit court’s Judgment and to remand this matter for a determination of the appropriate depreciation to be taken against the Assessor’s calculated “Market Value” of $53,252,400, an amount Ameren does not contest except for the Assessor’s failure to consider depreciation. Though Ameren would have us calculate depreciation pursuant to the Commission’s 2013 form without remanding this matter, we would be exceeding our authority to do so… We have already explained that the Commission possessed a logical rationale for recommending use of Publication 946, (essentially, the section 137.122 “life of asset” depreciation model applicable to tangible personal property), for both tangible personal property and unique real property – fixtures that are components of natural gas distribution pipelines. However, we recognize that depreciation models vary.
Therefore, the issue before the STC is determining the amount of depreciation to be taken against $53,242,400, as directed by the Court.
The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.
FINDINGS OF FACT
- Jurisdiction. Jurisdiction over this appeal is proper.
- Evidentiary Hearing. A hearing was conducted on September 19, 2018 at the Drury Airport Hotel in St. Louis, Missouri upon agreement of the parties. In addition to the exhibits and evidence, the parties submitted written briefs setting out the applicable facts and legal arguments in the appeal.
- Historic or Original Cost. Original Cost reported by Complainant was $53,252,400[8].
- Complainant’s Evidence. At the original hearing prior to appeal and remand, Complainant advocated that the TVM should be determined utilizing the STC forms. Original costs were determined to be $53,252,364 and depreciation was determined to be $32,753,859, resulting in a TVM of $20,498,505. At the hearing after remand to determine appropriate depreciation, Complainant again presented the STC forms which calculated depreciation in the amount of $32,753,859. Complainant also presented evidence using another approach which calculated depreciation in the amount of $28,031,000.
- The evidence of depreciation presented by Complainant included:
| EXHIBIT | DESCRIPTION |
| A | Exhibit List |
| B | Depreciation Report – Robert Reilly (Reilly) |
| C | Written Direct Testimony (WDT) Reilly |
| D | WDT Pam Harrison (Harrison) |
| E | Depreciation Study – Gannet & Fleming 5/14/10 |
| F | Stipulation and Agreement in Case No. GR-2010-0363– Missouri Public Service Commission (PSC) 1/4/11 |
| G | Appraisal Handbook – Western States Association of Tax Administrators (WSTA) |
| H | Property Taxation |
| I | Valuing Machinery & Equipment |
| J | The Appraisal of Real Estate |
| K | Property Assessment Valuation |
| L | Guide to Property Tax Valuation |
| M | Valuation of Utility Companies – 2013 |
| N | Exhibit withdrawn by Complainant |
| O | Exhibit withdrawn by Complainant |
| P | Respondents’ Joint Responses to Complainant’s Requests for Production, Response dated May 14, 2018 |
| Q | Respondents’ Joint Responses to Complainant’s First Set of Interrogatories, Responses dated May 14, 2018 |
| R | Exhibit withdrawn by Complainant |
| S | Deposition of Rhonda Elfrink, Assessor of Bollinger County, including Exhibits, in 2014-2015 Appeals |
| T | Deposition of Jody Paschal, Assessor of Callaway County, including Exhibits, in 2014-2015 Appeals |
| U | Deposition of Robert Adams, Assessor of Cape Girardeau County, including Exhibits, in 2014-2015 Appeals |
| V | Deposition of Chris Estes, Assessor of Cole County, including Exhibits, in 2014-2015 Appeals |
| W | Deposition of James Lachner, Assessor of Cooper County, including Exhibits, in 2014-2015 Appeals |
| X | Deposition of John McCutcheon, Assessor of Howard County, including Exhibits, in 2014-2015 Appeals |
| Y | Deposition of Kevin Bishop, Assessor of Lincoln County, including Exhibits, in 2014-2015 Appeals |
| Z | Deposition of Melissa Hentges, Assessor of Montieau County, including Exhibits, in 2014-2015 Appeals |
| AA | Deposition of Jerome Overkamp, Assessor of Montgomery County, including Exhibits, in 2014-2015 Appeals |
| BB | Deposition of Donna Prior, Assessor of Pike County, including Exhibits, in 2014-2015 Appeals |
| CC | Deposition of Thomas Ruhl, Assessor of Ralls County, including Exhibits, in 2014-2015 Appeals |
| DD | Deposition of Richard Tregnago, Assessor of Randolph County, including Exhibits, in 2014-2015 Appeals |
| EE | Deposition of Teresa Houchin, Assessor of Scott County, including Exhibits, in 2014-2015 Appeals |
| FF | Deposition of Jody Lemmon, Assessor of Stoddard County, including Exhibits, in 2014-2015 Appeals |
| GG | Deposition of Wendy Nordwald, Assessor of Warren County, including Exhibits, in 2014-2015 Appeals |
| HH | Direct Testimony of John F. Wiedmayer, Jr., June 2010 in connection with Depreciation Study, Gannett and Fleming, May 14, 2010, as of December 31, 2008, with Appendices |
| II | Appraisal Report of the Natural Gas Distribution System Real and Personal Property, for the Valuation Dates January 1, 2014 and January 1, 2015, by George E. Sansoucy (Sansoucy), P.E., LLC and Appendices |
| JJ | Direct Testimony of Sansoucy, P.E., 2014-2015 Appeals |
| KK | Rebuttal Testimony of Sansoucy, 2014-2015 Appeals |
| LL | Surrebuttal Testimony of Sansoucy, 2014-2015 Appeals |
| MM | Uniform System of Accounts Prescribed for Natural Gas Companies subject to Provisions of the Natural Gas Act, 18 C.F.R. Pt. 201 (Gas Plant Instructions, Part 10 – Additions and Retirements of gas plant) |
| NN | IRS Publication 946 |
| OO | Exhibit withdrawn by Complainant |
| PP | Exhibit withdrawn by Complainant |
| Exhibit withdrawn by Complainant | |
| RR | Exhibit withdrawn by Complainant |
| SS | Exhibit withdrawn by Complainant |
| TT | Exhibit withdrawn by Complainant |
| UU | Exhibit withdrawn by Complainant |
| VV | Exhibit withdrawn by Complainant |
| WW | Exhibit withdrawn by Complainant |
| XX | Exhibit withdrawn by Complainant |
| YY | Exhibit withdrawn by Complainant |
| ZZ | Exhibit withdrawn by Complainant |
| AAA | Exhibit withdrawn by Complainant |
| BBB | Written Direct Testimony of Reilly in the matter of Laclede Gas Company v. Cathy Rinehart, Assessor of Clay County & David Cox, Assessor of Platte County, Appeal Nos. 14-32002-32038, 15-32018-32097 (The “Laclede Gas Clay/Platte Counties 2014-2015 Appeals”) (Exhibit H in Clay County Case No. 14-32002 and Clay County Case No. 15-32018, Exhibit F in Platte County Case No. 14-79000 and Platte County Case No. 15-79000). |
| CCC | Appraisal of Reilly in the Laclede Gas Clay/Platte Counties 2014-2015 Appeals, valuation date January 1, 2014, Clay County (Exhibit I in Case No. 14-32002) |
| DDD | Appraisal of Reilly in the Laclede Gas Clay/Platte Counties 2014-2015 Appeals, valuation date January 1, 2015, Clay County (Exhibit I in Case No. 15-32018) |
| EEE | Appraisal of Reilly in the Laclede Gas Clay/Platte Counties 2014-2015 Appeals, valuation date January 1, 2014, Platte County (Exhibit G in Case No. 14-79000) |
| FFF | Appraisal of Reilly in the Laclede Gas Clay/Platte Counties 2014-2015 Appeals, valuation date January 1, 2015, Platte County (Exhibit G in Case No. 15-79013) |
| GGG | Commission Sunshine Act Response – Excerpt from the State Tax Commission of Missouri Assessor Manual, Revision Date 11/1/2012 |
| HHH | Commission Sunshine Act Response – Depreciation Authority Order, November 24, 1987 |
| III | Commission Sunshine Act Response – List of Counties and Natural Gas Providers |
| JJJ | Exhibit withdrawn by Complainant |
| KKK | Exhibit withdrawn by Complainant |
| Rebuttal Exhibits | |
| LLL | WDT Reilly |
| MMM | Valuation of Railroads and Utilities |
| NNN | Unit Approach to Taxation of Railroads and Utilities |
| OOO | Tax Advisor |
| PPP | Appraisal of Railroads |
| QQQ | Written Surrebuttal Testimony of Reilly |
| RRR | Appraisal of Real Estate |
| SSS | STC Manual |
| TTT | Value of Railroads |
| UUU | Appraisal of Real Estate |
| VVV | Property Assessment Valuation |
| WWW | Deposition of Sansoucy 2018 |
| XXX | Subpoena Duces Tecum |
| YYY[9] | Recalculation of Respondent’s Depreciation |
| ZZZ | Deposition of Reilly |
Complainant also relied upon Exhibits filed in the original hearing before the STC upon which a decision was issued on October 20, 2015.
| Original Exhibit | Description |
| Respondent’s Exhibit 1 | Appraisal Report Prepared by Sansoucy (2013) |
| Respondent’s Exhibit 2 | WDT Sansoucy (2013) |
| Respondent’s Exhibit 3 | Rebuttal Testimony of Sansoucy (2013) |
| Respondent’s Exhibit 29 | Detailed WDT Sansoucy (2013) |
| Respondent’s Exhibit 30 | Uniform Standards of Professional Appraisal Practice |
| Complainant’s Exhibits A through W |
Respondent objected to Exhibits T-GG as being irrelevant. The exhibits are deposition testimony of Assessors in fourteen counties other than Cole County. The objection was overruled as the parties agreed prior to hearing that the depreciation calculation determined in the subject appeal (designated as lead case) would be applicable in all appeals remanded to the STC.[10]
Respondent objected to Exhibits BBB-GGG as being irrelevant and hearsay. Complainant responded that the exhibits were not being submitted for the truth of the matter asserted but admitted for the purpose of identifying their witness Reilly as the expert witness in Laclede Gas v. Assessors of Clay and Platte Counties, STC No. 14-32002, 14-79000, 15-32018, 15-79000 and 15-79013 and that the method of calculating depreciation used by Reilly in this hearing was the same method he used in STC No. 14-32002, et al. Respondent’s objections were overruled and the exhibits were admitted for the limited purpose.
Complainant submitted a Depreciation Study (Study) conducted by Gannet & Fleming dated May 14, 2010 (Exhibit E). The Study was submitted as part of the rate case Case No. GR-2010-0363 PSC, in which the PSC issued their decision based upon the agreement of Complainant, Office of the Public Counsel, staff of the PSC and Missouri Department of Natural Resources as to depreciation. (Exhibit F)
Gannet & Fleming conducts studies for rate regulation purposes. (Exhibit E) For the Study, the firm looked at statistical analysis of data, company policy and outlook by managers, survivor curve estimates from prior studies of Ameren and studies of other gas companies. (Exhibit E, p. II-23) The Study found that approximately 95% of Complainant’s mains have been placed in service in the past 40 years. (Exhibit E, p. II-24) The Study found that the average life of mains is 50 years, and the average life of services is 37 years. (Exhibit E, page II-24)
The average service life estimates were based on informed judgment, which incorporated analysis of available historical service life data related to the property, a review of management’s current plans and operating policies, and a general knowledge of service lives experienced and estimated in the gas industry. (Exhibit E, p. I-3 and III-2) Gannet & Fleming compiled historical service life data for the plant accounts or other depreciable groups and analyzed the historical database through the use of accepted techniques for estimating the survivor characteristics for each depreciable account or group. (Exhibit E, p. I-4) The combination of historical data and estimated future trend yielded a complete pattern of life characteristics – a survivor curve – from which the average service life and remaining service life of assets were derived. (Exhibit E, p. I- 3&4)
Complainant submitted Exhibit F, the Unanimous Stipulation and Agreement in Case No. GR-2010-0363. The document is the agreement and stipulation reached by Complainant, staff of PSC, Office of Public Counsel, and the Missouri Department of Natural Resources. (Exhibit F) The agreement and stipulation included depreciation of the gas distribution property. Appendix E of the Unanimous Stipulation and Agreement set forth the average service life of improvements, mains, measuring and regulating stations, meters, and other property of Complainant.
Harrison testified on behalf of Complainant. (Exhibit D) She is the Director of Missouri Gas Operations at Ameren Services Company. (Tr. 7) She supervises and manages staff and is responsible for Gas Operations, Engineering, Compliance and Integrity Management. (Exhibit D p. 2) Her experience includes installation, repair and retirement of plant assets, including mains and services component of plant assets. (Exhibit D p. 2) She is familiar with the typical ranges of useful lives for the plant assets. (Exhibit D p. 2) She concurred with the January 4, 2011 Order of the PSC setting the average service life of mains (44 years) and of services (37 years). (Exhibit D p. 3, Tr. 10) Harrison also testified that the property has negligible salvage value as the equipment, at the end of its service life, is left in place because it costs more to remove items than their value as salvage. (Exhibit D p. 4)
Complainant presented the testimony of Reilly. (Exhibit C) He is a Managing Director of Willamette Management Associates. (Exhibit C p. 1) Reilly estimated the depreciation related to Complainant’s real property located in sixteen counties in the State of Missouri and specifically Cole County as of January 1, 2013. (Exhibit C p.2) He is the author of Exhibit B, Depreciation Analysis. In the report, he estimated the amount of total depreciation “that should be applied in a cost approach, historical cost less depreciation (‘HCLD’) method valuation of the … natural gas distribution system…” (Exhibit C p. 2) Reilly testified that for rate-based regulated utilities, historical cost is frequently used to value property for ad valorem purposes. (Exhibit C p. 12) Regulated utilities’ allowed income is based on historical cost less depreciation. (Exhibit C p. 12) Reilly cites the Western States Association of Tax Administrators Handbook (WSATA) “in a rate base regulated environment, Historical Cost Less Depreciation (HCLD) may be a meaningful cost indicator of value because a utility’s rates are established to recover historical costs…. HCLD, sometimes referred to as ‘net book value,’ is one of the most important indicators of value for rate based regulated public utilities.”
Reilly considered physical deterioration, functional obsolescence, and external obsolescence. (Exhibit C p. 2) For physical deterioration, Reilly considered the 2008 Depreciation Study prepared by Gannet & Fleming (Exhibit E), which was relied upon by the PSC to establish the physical depreciation rates applicable to Complainant. (Exhibit B p. 7) Physical deterioration was defined by Reilly as “a reduction in the value of an industrial or commercial property due to physical wear and tear, the impact of continued use and the elements of nature.” (Exhibit C p. 7) The information is included in the PSC’s Cost of Service Report. (Exhibit B, Appendix B) Reilly also relied on the accumulated depreciation reported to the PSC and FERC as an estimate of the physical depreciation of the subject property. (Exhibit C p. 9) The depreciation reported is based on the actual property data prepared by a third party specialist with familiarity with the subject property. (Exhibit C p. 9)
In addition to physical deterioration, Reilly also analyzed functional obsolescence and external obsolescence. (Exhibit C p. 6) Reilly found the property did not suffer from functional obsolescence, or the loss in value of a property caused by the inability of the property to perform the function for which it is used. (Exhibit C p. 15) Although Reilly did not find functional obsolescence, he did find economic obsolescence. Economic obsolescence occurs when the property owner can no longer earn a fair return on investment in the property. (Exhibit C p. 16) Reilly based his findings of economic obsolescence on four factors: the allowed rate of return was decreasing; increased competition, weather conditions, and higher energy efficiency standards were negatively affecting Complainant’s return; and numerous additional factors negatively affecting the industry outlook. (Exhibit C p. 17) Reilly concluded 25% economic obsolescence for Complainant’s property. (Exhibit C p. 28)
After all calculations and reconciliation, Reilly concluded a depreciation total of $28,031,000. (Exhibit C p. 30)
Reilly was cross-examined as to “book depreciation.” Reilly testified that although The Appraisal of Real Estate states that book depreciation is not market-derived depreciation, the statement is not applicable to public utility assets. (Exhibit C p. 13) It does not apply to the subject property because the depreciation allowed by regulators is market-derived depreciation based on depreciation studies, trends as reported by experts in the field, analysis of historic data, and regulatory authorities’ experience and judgment. (Exhibit C p. 13-14) Since Complainant’s “book depreciation,” is their regulatory depreciation, their book depreciation is market-derived depreciation. (Tr. 26)
- Respondent’s Evidence. Respondent advocated, at the original hearing prior to remand, for a TVM of the property of $52,940,000. Respondent, at the hearing after remand to determine depreciation, presented evidence as to depreciation in the amount of $6,390,288 (Exhibit 1 p. 13) to be deducted from the reported costs of $53,252,400. The evidence presented by Respondent included:
| EXHIBIT | DESCRIPTION |
| 1 | Written Direct Testimony of Sansoucy |
| 2 | Cole County’s 2013 Report of Taxable Real and Tangible Personal Property |
| 3 | Excerpts from The Dictionary of Real Estate Appraisal, 6th Edition |
| 4 | Excerpts from the 2018-2019 Uniform Standards of Professional Appraisal Practice |
| 5 | Excerpts from The Appraisal of Real Estate, 14th Edition |
| 6 | Excerpts from Public Utility Depreciation Practices, August 1996. |
| 7 | Self-Contained Appraisal Report of Natural Gas Distribution System Real and Personal Property Owned by Ameren Missouri for Valuation Date January 1, 2013, Sales Comparison Approach Section, pp 40-49, Sansoucy |
| 8 | Self-Contained Appraisal Report of Natural Gas Distribution System Real and Personal Property Owned by Ameren Missouri for Valuation Date January 1, 2013, Appendix F, Market Sales Approach Supporting Documentation, Sansoucy |
| 9 | Comparable Sales: Sales Price to Original Cost Table |
| Rebuttal | |
| 10 | Reilly’s Appraisal Report 2014 pp 58-65 |
| 11 | Reilly’s Appraisal Report 2015 pp 55-62 |
| 12 | WDT Sansoucy |
| 13 | Institute for Professionals in Taxation |
| 14 | Federal Code of Accounts |
| 15 | Public Utility Depreciation Practices, National Association of Regulatory Utility Commissioners (NARUC) |
| 16 | STC Manual |
| 17 | Ameren Operating |
| 18 | Ameren Margins |
| Surrebuttal | |
| 19 | WDT Sansoucy |
| 20 | Valuation of Railroads |
| 21 | Uniform Systems of Accounts |
| 22 | Ameren Depreciation Study |
| 23 | STC Assessor Manual |
| 24 | Dictionary of Real Estate Appraisal |
| 25 | Appraisal of Real Estate |
| 26 | MO PSC Staff Accounting Schedules, Exhibit 1, Rate Case 2010 |
Respondent also relied upon Exhibits filed in the original hearing before the STC upon which a decision was issued on October 20, 2015.
| Original Exhibit | Description |
| Respondent’s Exhibit 1 | Appraisal Report Prepared by Sansoucy (2013) |
| Respondent’s Exhibit 2 | WDT Sansoucy (2013) |
| Respondent’s Exhibit 3 | Rebuttal Testimony of Sansoucy (2013) |
| Respondent’s Exhibit 4 | Appendix Table J-1 |
| Respondent’s Exhibit 5 | Appendix Table J-2 |
| Respondent’s Exhibit 6 | Appendix Table J-3 |
| Respondent’s Exhibit 7 | Appendix Table J-4 |
| Respondent’s Exhibit 8 | Appendix Table J-5 |
| Respondent’s Exhibit 9 | Appendix Table J-6 |
| Respondent’s Exhibit 10 | Appendix Table J-7 |
| Respondent’s Exhibit 11 | Appendix Table J-8 |
| Respondent’s Exhibit 12 | Appendix Table K-1 |
| Respondent’s Exhibit 13 | Appendix Table K-2 |
| Respondent’s Exhibit 14 | Appendix Table K-3 |
| Respondent’s Exhibit 15 | Union Electric, YE 2002 MPSC Annual Report |
| Respondent’s Exhibit 16 | Union Electric, YE 2003 MPSC Annual Report |
| Respondent’s Exhibit 17 | Union Electric, YE 2004 MPSC Annual Report |
| Respondent’s Exhibit 18 | Union Electric, YE 2005 FERC Form 2 |
| Respondent’s Exhibit 19 | Union Electric, YE 2006 FERC Form 2 |
| Respondent’s Exhibit 20 | Union Electric, YE 2007 FERC Form 2 |
| Respondent’s Exhibit 21 | Union Electric, YE 2008 FERC Form 2 |
| Respondent’s Exhibit 22 | Union Electric, YE 2009 FERC Form 2 |
| Respondent’s Exhibit 23 | Union Electric, YE 2010 FERC Form 2 |
| Respondent’s Exhibit 24 | Union Electric, YE 2011 FERC Form 2 |
| Respondent’s Exhibit 25 | Union Electric, YE 2012 FERC Form 2 |
| Respondent’s Exhibit 26 | Union Electric, YE 2013 FERC Form 2 |
| Respondent’s Exhibit 27 | NARUC Public Utility Depreciation Practices, August 1996 |
| Respondent’s Exhibit 28 | Depreciation Study for Ameren Missouri’s Gas Plant, 12/31/08 |
| Respondent’s Exhibit 29 | Detailed WDT Sansoucy (2013) |
Sansoucy stated the purpose of the remand:
The Missouri Court of Appeals Western District, Union Electric Company D/B/A Ameren Missouri v. Christopher Estes, Assessor, Cole County, Missouri, WD80659, Opinion, September 26, 2017 (“Opinion”), directed the Missouri State Tax Commission “to calculate the true value in money of Ameren’s real property in service in Cole County as of January 1, 2013 by determining the amount of depreciation to be deducted from $53,242,400, the ‘market value’ determined by the Assessor without regard to depreciation.” (Exhibit 1 p.2)
He testified that the “Opinion requires that depreciation be deducted from the historic original cost of the real property in Cole County, NOT the property’s reproduction or replacement cost.” (Exhibit 1 p. 3) He testified that one cannot deduct market derived depreciation from historic original costs. Sansoucy further testified that deducting depreciation from original cost of real property is not a generally accepted appraisal method. (Exhibit 1 p 2) “[T]he Missouri Court of Appeals created a Jurisdictional Exception…for developing the cost approach in the appraisal of gas distribution property.” (Exhibit 1 p. 2)
Sansoucy testified that he developed a market-derived depreciation. He describes it as a measurement of depreciation extracted from the market, based on sales of similar property. (Exhibit 1 p. 3) The depreciation amount, once determined, would be subtracted from the reproduction cost or replacement cost new of an asset, not from the $53,252,400 of original cost, to arrive at an estimate of fair market value. (Exhibit 1 p. 3) After deducting depreciation from reproduction or replacement cost new (replacement/reproduction cost new less depreciation or RCNLD), he compared the result to the historic original cost. (Exhibit 1 p. 4) According to Sansoucy, depreciation may be deducted from historic cost of $53,252,400 if RCNLD is less than the market value/historic cost of $53,252,400. (Transcript p. 210)
If you compare it to the remand order where you are starting with the original cost you’re going to do a direct market extraction for all forms and depreciation to determine if it’s more, equal to or less than the 53 million. (Transcript p.210)
To calculate deprecation, he used compared sales prices of natural gas distribution properties from which depreciation could be extracted. (Exhibit 1 p. 6) He found a correlation between sales prices and surviving original cost. (Exhibit 1 p. 10) “Sales of state regulated retail gas distribution property tends to fall in a range of 85% and 115% of the surviving original cost.” (Exhibit 1 p. 10) Sansoucy selected six comparable sales to calculate a mean and a median percentage of depreciation. (Exhibit 1 p. 12) “[T]he mean and median Sales Price to Original Costs are 89% and 88%, respectively.” (Exhibit 1 p. 12)
Because the median Sales Price to Original Cost is less than 100%, Sansoucy was able to make a deduction for depreciation from original cost of $53,252,400. (Exhibit 1 p. 13) Applying the median Sales Price to Original Costs of 88%, the indication of value is $46,862,112[11]. Expressed another way, depreciation is 12% (100% – 88%) of original cost or $6,390,228[12]. (Exhibit 1 p. 13)
Sansoucy also testified that Complainant should report its original cost by taxing subdistrict and Complainant should be required to report contribution in aid of construction (CIAC) and construction work in progress (CWIP). (Exhibit 1 p. 14)
- Depreciation. Evidence presented was substantial and persuasive to establish depreciation of $28,031,000.
CONCLUSIONS OF LAW AND DECISION
Weight to be Given Evidence
The relative weight to be accorded any relevant factor in a particular case is for the Hearing officer to decide. St. Louis County v. Sercurity Bohomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977); St. Louis County v. STC, 515 S.W.2d 446, 450 (Mo. 1974); Chicago, Burlington & Quincy Railroad Company v. STC, 436 S.W.2d 650 (Mo. 1968).
The Hearing Officer, as the trier of fact, may consider the testimony of an expert witness and give it as much weight and credit as deemed necessary when viewed in connection with all other circumstances. Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. W.D. 1991). The Hearing Officer, as the trier of fact, is not bound by the opinions of experts but may believe all or none of the expert’s testimony or accept it in part or reject it in part. Exchange Bank of Missouri v. Gerlt, 367 S.W.3d 132, 135-36 (Mo. App. W.D. 2012)
Depreciation
The parties presented testimony and exhibits relevant to the determination and calculation of depreciation. The evidence included the testimony and reports of two experts. The experts reviewed, cited and relied upon various sources. Complainant’s approach relied on the subject property’s actual historical cost, studies of their assets, and findings of a regulatory agency. Respondent’s approach reviewed other natural gas distribution properties, their costs, and sale prices.
The Court remanded the appeal directing a finding be made as to the appropriate depreciation to be deducted against the original or historic cost of the property. Respondent’s expert disagrees with the Court’s methodology and further testified that it is not actually a recognized methodology, it is a jurisdictional exception for developing a cost approach for gas distribution property.
Respondent takes issue with the use of original costs stating that reproduction cost new is more appropriate. (A criticism he lodged during the initial proceedings. Union Electric v. Estes, id pp. 362, 375) Respondent’s expert testified that the “Opinion requires that depreciation be deducted from the historic original cost of the real property in Cole County, NOT the property’s reproduction or replacement cost.” (Exhibit 1 p. 3) Complainant counters that while reproduction cost new is useful for the valuation of non-regulated properties, it is not useful with regulated properties. Reproduction cost new estimates are expensive and time consuming when addressing utility properties. Tax authorities find little reason to use them as a basis for ad valorem taxation because regulatory authorities and courts give them little consideration in determining the base for earnings. (Transcript 164. Reilly testifying regarding Exhibit 20 Valuation of Railroad and Utility Property, Arlo Woolery, page 41)
Complainant’s expert used the original cost as directed by the Court and made a determination of depreciation to be taken against the original costs. His determination of depreciation was based upon the subject’s actual property. Complainant used filings, reports and determinations made by the PSC as to the actual property. The PSC Cost of Service Report (Exhibit B, Appendix B) reflects actual physical depreciation of the assets. The report includes depreciation studies of actual historic mortality and salvage data; analysis of trends and developments affecting operations; interviews with Ameren’s personnel, engineers, accounts and other experts; statistical analysis of historical plant data; and the PSC staff experience and judgment. Complainant also relied upon an independent study of the property which was conducted and submitted to the PSC (Exhibit E).
Both the findings of the regulatory agency (Exhibit F) and those familiar with the property (Exhibit D) found the average service life of Complainant’s mains to be 44 years and services to be 37 years. Respondent claims that the life of pipe actually surpasses that which was set by the PSC. However, out of the 17 million feet of pipe owned by Complainant, only about 260 feet exceed the age determination and only 4% of mains are older than 44 years. (Tr 230-234)
Respondent argues that Complainant’s reliance on the regulatory records of depreciation is “book depreciation” or the amount of capital recaptured and deducted from the owner’s books.
Utility companies report cost of their assets to the PSC and the cost of the assets impacts rates as utility companies are allowed to make a return of and on their assets. Utility rates are set at a level that allows them an opportunity, not a guarantee, to earn a reasonable rate of return on their investment.
Complainant, a regulated utility, employs regulatory accounting as required by FERC and PSC. Under generally accepted accounting principles (GAAP), regulated companies do not have separate “book accounting”. Regulated companies may elect to use regulated depreciation as their “book depreciation”. Since regulated depreciation is market derived, Complainant is utilizing market-derived depreciation as their “book depreciation.” (Tr. 26-27)
Respondent’s expert’s issue with the directive from the Court to use original costs caused him to approach depreciation from a starting point other than the original cost for his determination of TVM. Respondent’s depreciation analysis “can be correlated to a subtraction of depreciation from the fair market value of $53,252,400. This was done through the development of a market-derived depreciation in aggregate to determine if it was equal to, less than, or more than the fair market value ($53,252,400) outlined in the remand for Cole County.” Respondent explains the theory of their depreciation calculation using the following example:
“[T]he original cost of an asset is $100, its reproduction cost new is $300, and it is 50% depreciated. Its value is then $150 and its depreciation rate is 50%. The remand order requires one to determine if there is depreciation that should be subtracted from $100. In this example, one would find that there is no depreciation to be subtracted from $100 under the jurisdictional exception required by the remand order, the $100 is therefore the value.” Respondent’s Post-Hearing Reply Brief, page 16
In other words, if, under his approach (RCNLD), the TVM is greater than the original cost of $53,252,400, depreciation is $0.
To make the determination if the original cost of $53,252,400 is greater than, equal to or less than RCNLD, Respondent’s expert compared sales prices with original cost of comparable properties. (Exhibit 19 p 24) Six comparable sales were used to calculate a mean and a median percentage of sales price to original costs to calculated depreciation. (Exhibit 1 p. 12) “[T]he mean and median Sales Price to Original Costs are 89% and 88%, respectively.” (Exhibit 1 p. 12) In other words, depreciation is 11-12% of the original costs of those comparable properties. Since the sales price to original cost is less than 100%, Sansoucy would apply depreciation of 11-12%.
The Court set out that the purpose of the remand and subsequent hearing was to determine the amount of depreciation to be taken against $53,252,400, which was the original or historic cost of the property. Respondent did not concur with the methodology. (Tr.190-191) Respondent argues that such methodology might be appropriate for personal property machinery and equipment but not for real property.
Respondent also took issue with the determination of the original costs or “the Assessor’s calculated ‘Market Value’ of $53,252,400,” and recommended reporting of CIAC and CWIP as well as reporting of the assets of Complainant by subdistrict. This Decision is limited to the directives in the remand: a determination of depreciation.
Complainant’s methodology complies with the directives of the court for determining depreciation. Complainant’s expert understood the directives of the Court and stated “we understand that the remaining overall issue in the dispute is the appropriate amount of depreciation to be applied in the cost approach, historical cost less depreciation (“HCLD”) method to estimate the true value in money.” (Exhibit 12 p. 3)
Historical costs and deprecation found in regulatory filings are appropriate sources to reply upon. Costs and depreciation are found in regulatory filings with the PSC and FERC. Useful lives of the assets are reviewed and determined by the regulators based upon independent studies, studies by the PSC staff, interviews with management regarding the assets and the PSC’s familiarity with such assets. (Tr.149).
Although disagreements may arise as to specifics within the development of an opinion of TVM, the opinion of amount of depreciation rendered by Reilly was substantial and persuasive. Reilly fully considered the Court’s learned opinion and complied with its directives. The Court set out that the purpose of the remand and subsequent hearing was to determine the amount of depreciation to be taken against $53,252,400, which was the original or historic cost of the property. Based upon the directives of the Court and evidence presented, the depreciation is found to be $28,031,000.
ORDER
Pursuant to the Order from the Circuit Court of Cole County as directed by the Missouri Court of Appeals, Western District, in Appellate Number WD80659, the determination of the appropriate depreciation to be taken against the Assessor’s calculated “Market Value” of $53,252,400 is $28,031,000 for a resulting TVM of $25,221,400.
Application for Review
A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service for this Decision. The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous. Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, or emailed to Legal@stc.mo.gov, and a copy of said application must be sent to each person listed below in the certificate of service.
Failure to state specific facts or law upon which the application for review is based will result in summary denial. Section 138.432, RSMo.
Disputed Taxes
The Collector of Cole County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8 RSMo.
Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed. Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.
SO ORDERED this 17th day of May, 2019 .
STATE TAX COMMISSION OF MISSOURI
Chief Counsel
Certificate of Service
I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this 17th day of May, 2019, to: Complainant(s) and/or Counsel for Complainant(s), the County Assessor and/or Counsel for Respondent and County Collector.
Stacey Jacobs
Administrative Secretary
| COUNTY | STC APPEAL NO. |
| Bollinger | 13-44000 |
| Butler | 13-45501 |
| Callaway | 13-46500 and 13-46501 |
| Cape Girardeau | 13-47500 and 13-47501 |
| Cole | 13-52002 |
| Cooper | 13-52501 and 13-52502 |
| Howard | 13-61000 and 13-61001 |
| Lincoln | 13-71500 and 13-71501 |
| Moniteau | 13-72500 and 13-72501 |
| Pike | 13-78500 and 13-78501 |
| Ralls | 13-81000 and 13-81001 |
| Randolph | 13-81500 and 13-81501 |
| Scott | 13-86500 and 13-86501 |
| Stoddard | 13-88000 and 13-88001 |
| Warren | 13-91000 and 13-91001 |
[1] The Hearing Officer’s decision and order is incorporated as if fully set forth herein.
[2] The Commission has authority to decide this appeal. Section 138.432 RSMo 2000. Section 138.432 authorizes the Commission to “affirm, modify, reverse, or set aside the decision and order of the Hearing Officer[.]” All statutory citations are to RSMo 2000, as amended.
[3] When, as in this case, the Commission’s decision incorporates the Hearing Officer’s decision, a court reviews the Commission’s decision as including the Hearing Officer’s decision. Rinehart, 363 S.W.3d at 363; see also Loven v. Greene Cty., 94 S.W.3d 475, 477 (Mo. App. 2003).
[4] The “substantial and competent” evidence standard is drawn from section 536.140.2(3), which governs judicial review of a final agency decision in a contested case. The Commission reviews record de novo to determine if there is substantial and persuasive evidence supporting the Hearing Officer’s decision.
[5] The parties agreed that the findings of this appeal would be applicable in all appeals pending before the STC on remand. A list of the appeals and counties involved are set forth in a table following the Decision and marked as Exhibit A.
[6] The PSC is a state government agency regulating investor-owned electric, natural gas, steam, water and sewer utilities in Missouri. Five investor owned natural gas companies are regulated by the PSC (Ameren Missouri, Empire District Gas Company, Liberty Utilities, Laclede Gas Company – Laclede and Missouri Gas Energy Divisions – and Summit Natural Gas of Missouri.) These companies serve nearly 1.4 million customers. The PSC balances the interest of the public – ratepayers as well as company shareholders. In proceedings before the PSC, rates are set to give a utility company an opportunity, but not a guarantee, to earn a reasonable return on its investment after recovering its prudently incurred expenses. After a rate case is filed, the PSC Staff will conduct an on-site audit of the books and records of the company. At evidentiary hearings, participants present evidence before the PSC in a trial-like setting.
[7]The Federal Energy Regulatory Commission (FERC) is an independent agency that regulates utilities and approves proposals to build interstate natural gas pipelines as well as other utility regulated activities. Industries within its jurisdiction are required to file financial reports.
[8] Union Electric Company v. Estes, id p. 379
[9] The Exhibit was not offered for admission but for demonstrative purpose.
[10] Similar appeals were remanded from the Missouri Court of Appeals – Western, Eastern and Southern Districts – for the purpose of determining depreciation.
[11] $53,252,400 x 88% = $46,862,112
[12] $53,252,400 x 12% = $6,390,228