Opinion
21-P-596
04-01-2022
WESTERN MASSACHUSETTS ELECTRIC COMPANY v. BOARD OF ASSESSORS OF SPRINGFIELD.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
This appeal arises out of taxes assessed on personal property owned by Western Massachusetts Electric Company (WMECO), including poles, overhead and underground lines, and transformers. For fiscal years 2012 and 2013, the board of assessors of Springfield (assessors) valued the property at more than its net book value. WMECO sought abatements from the Appellate Tax Board (board). WMECO argued that (1) there were no special circumstances that would have induced a willing buyer to pay more than net book value for the property and (2) consequently, the fair cash value of the property equaled its net book value. The board ruled in favor of the assessors, and this appeal followed. We affirm.
We acknowledge the amicus letter submitted by the Department of Public Utilities.
The assessors were responsible for making "a fair cash valuation" of the property. G. L. c. 59, § 38. "Fair cash value" means "fair market value, or the price an owner willing but not under compulsion to sell ought to receive from one willing but not under compulsion to buy" (quotations omitted). Boston Gas Co. v. Assessors of Boston, 458 Mass. 715, 717 (2011).
In the 1980s, the Supreme Judicial Court concluded that, absent special circumstances, the fair cash value of utility property equaled its net book value. See Montaup Elec. Co. v. Assessors of Whitman, 390 Mass. 847, 850-853 (1984) ; Boston Edison Co. v. Assessors of Watertown, 387 Mass. 298, 303-307 (1982). The court reached this conclusion because of "governmentally-imposed restriction[s] affecting [the property's] value or its earning power." Boston Edison Co., supra at 304. In particular, the Department of Public Utilities (DPU), which set the rates utilities could charge consumers, had two intertwined policies that affected the value or earning power of utility property. First, "if a regulated utility [sold] an asset to another regulated, public utility, the [net book value] of that asset in the hands of the transferee remain[ed] the same as that of the transferor." Id. at 301. This rule was known as the carry-over rate base principle. Second, the DPU permitted regulated utilities to earn a rate of return on the net book value of acquired assets, but not on any additional sums of money spent acquiring assets, i.e., acquisition premium. See id. For these reasons, the court concluded that, absent special circumstances, a buyer "would not choose freely to pay more than [net book value] for the property since a better return could be obtained by investing the same money elsewhere."Montaup Elec. Co., supra at 852, citing Boston Edison Co., supra at 305. Those special circumstances included the possibility that the DPU would change its policies "so as to make an investment in the company more attractive." Boston Edison Co., supra at 306.
As has been stated repeatedly since then, in 1994 the DPU did change its policies. In 2011, the Supreme Judicial Court explained the DPU policy change as follows:
"The DPU formalized a shift in its policy with respect to the carry-over rate base principle in a 1994 order regarding mergers and acquisitions of utilities. There, the DPU stated that it would ‘no longer follow the practice of denying acquisition premium recovery on a per se basis,’ concluding that ‘[m]erger proposals that include an acquisition premium will henceforth be judged on a case-by-case basis.’ The DPU discussed proposals regarding the precise treatment of the premium ... but concluded only that ‘the [DPU] will consider [the] appropriate level of a recoverable acquisition premium on a case-by-case basis’ " (citations omitted).
Boston Gas Co., 458 Mass. at 722-723. Moreover, prior to Boston Gas Co., the court already had acknowledged the same policy change in two opinions, Attorney Gen. v. Department of Telecomms. & Energy, 438 Mass. 256, 263 (2002), and Stow Mun. Elec. Dep't v. Department of Pub. Utils., 426 Mass. 341, 347 (1997), which prompted it to remark in Boston Gas Co., supra at 724, that "this court has repeatedly and recently acknowledged [the] policy change."
With this background in mind, we review the board's decision for substantial evidence and a correct application of the law. See Boston Gas Co., 458 Mass. at 721. "Substantial evidence is such evidence as a reasonable mind might accept as adequate to support a conclusion" (quotation omitted). Id. "Our consideration of the substantiality of the evidence must take into account whatever in the record fairly detracts from its weight" (quotation omitted). Id. We defer to the board's judgment where there is substantial evidence, but we must set aside a finding where "the evidence points to no felt or appreciable probability of the conclusion or points to an overwhelming probability of the contrary" (quotation omitted). Id. at 721-722.
In conducting our review, we are also mindful of which party had the burden of proof. At the outset, the assessors had the burden of introducing "some evidence ... to show that, because of [special] circumstances, the relevance of [net book] value [was] put in question." Montaup Elec. Co., 390 Mass. at 855. "Once the assessors put the exclusive use of net book value in question, [WMECO] could have prevented the use of methods other than net book value by rebutting the assessors’ evidence." Boston Gas Co., 458 Mass. at 729. Moreover, WMECO had the ultimate "burden of establishing its right to an abatement of the assessed tax." Id. at 717.
WMECO's argument that there were no special circumstances effectively turns on whether there was a DPU policy change that "ma[de] an investment in the company more attractive." Boston Edison Co., 387 Mass. at 306. In particular, WMECO argues that despite the repeated assertions in case law dating back to 1997 that there was a DPU policy change, no such policy change actually occurred. WMECO relies on its experts, who testified that they were unaware of any instances where the DPU did not apply the carry-over rate base principle, by which they meant that they were unaware of any instances where there was an increase in the net book value of sold property. We are unpersuaded, both because the DPU policy change was more nuanced than that and because the Supreme Judicial Court has rejected a similar argument.
First, as explained in an amicus letter submitted on behalf of the DPU, the DPU policy change did not allow for an increase in the net book value of sold property, and thus did not permit buyers to earn a return on acquisition premium, but the policy change did permit buyers to recover acquisition premium in other ways, on a case-by-case basis. The DPU clarified how, in practice, that works:
The amicus letter was submitted to this court, not the board, and is not part of the evidentiary record, but neither party argues that we may not consider it. There was, however, other evidence of a DPU policy change that was before the board, including through the testimony of various expert witnesses.
"When a regulated utility is involved in a merger or acquisition transaction that results in an acquisition premium, the acquiring utility records the acquisition premium in a capital account (Goodwill) with a corresponding entry to an intangible asset account. If the [DPU] approves the utility's recovery of the acquisition premium expense in rates, the acquisition is recovered in rates through amortization [footnote omitted]."
The DPU policy change, as articulated in the amicus letter, is consistent with how the policy change is discussed in case law. In Department of Telecomms. & Energy, 438 Mass. at 265-266, the court noted that the DPU "allowed ... distribution companies to amortize ... merger costs, including the acquisition premium, and to recover those costs in future proceedings based on current savings estimates." In Boston Gas Co., 458 Mass. at 724, the court noted that the DPU had "allowed the recovery of a[n] [acquisition] premium in a utility merger" and concluded that this policy change was "the type of regulatory change ... justifying the use of a valuation methodology other than net book value." Given the well-established policy change, there was substantial evidence to support the board's conclusion that the policy change qualified as a special circumstance that would have induced a willing buyer to pay more than net book value for WMECO's property.
It is certainly true that (1) the court in Boston Gas Co., 458 Mass. at 723, contemplated that the DPU policy change might also permit buyers to earn a return on acquisition premium and (2) the DPU, in its amicus letter, stated that it did not permit buyers to do so. However, going back to Boston Edison Co., 387 Mass. at 306, in describing the sort of policy change that would warrant a departure from net book value, the Supreme Judicial Court stated that the policy change had to be one that would "make an investment in the company more attractive." WMECO has not persuaded us that, on the evidence before the board, the board erred in concluding that DPU policy change satisfied the standard articulated in Boston Edison Co.
Second, putting aside the nuances of the DPU policy change, we note that in Boston Gas Co., 458 Mass. at 724, the court rejected an argument that, as a matter of practice, the DPU did "not allow[ ] an increase in [net book] value following an acquisition." The court stated that "[s]uch an argument may speak to a diminished probability of a buyer earning a return on an acquisition premium, but factors bearing on valuation need not be certainties before the board may consider how they would manifest in a hypothetical sale." Id.
We note that the board mentioned additional special circumstances that WMECO also argues were unsupported by substantial evidence. It is apparent, however, that the board's conclusion of special circumstances turned on the DPU policy change, and we therefore need not address WMECO's arguments regarding the additional special circumstances mentioned by the board.
Separately, WMECO also argues that (1) assuming there were special circumstances, the existence of those special circumstances merely opened the door to valuation methods other than net book value and (2) where the board rejected the other valuation evidence, "what was left was the unrefuted evidence of the net book value of the property." This line of argument is unavailing. Once the evidence established that there were special circumstances that would have induced a willing buyer to pay more than net book value for WMECO's property, WMECO had the burden of establishing that the assessors overvalued the property. See Boston Gas Co., 458 Mass. at 717. Where the board did not credit WMECO's valuation evidence, WMECO failed to meet its burden.
Decision of the Appellate Tax Board affirmed.