PacifiCorp v. State

May 4 2011

DA 10-0182

IN THE SUPREME COURT OF THE STATE OF MONTANA

2011 MT 93

PACIFICORP,

Plaintiff, Appellee and Cross-Appellant,

v.

STATE OF MONTANA, Department of Revenue,

Defendant and Appellant.

APPEAL FROM: District Court of the First Judicial District,
In and For the County of Lewis & Clark, Cause No. ADV 07-709
Honorable Dorothy McCarter, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Derek R. Bell, Special Assistant Attorney General, Montana Department
of Revenue, Helena, Montana

Peter J. Crossett, Hiscock & Barclay, LLP, Syracuse, New York

For Appellee:

Michael Green, Crowley Fleck PLLP, Helena, Montana
David J. Crapo, Crapo Smith, Salt Lake City, Utah

Submitted on Briefs: February 16, 2011
Decided: May 4, 2011

Filed:

__________________________________________
Clerk
Justice Brian Morris delivered the Opinion of the Court.

¶1 Montana Department of Revenue (Department) appeals the judgment of the First

Judicial District Court, Lewis and Clark County, reversing the State Tax Appeal Board’s

(STAB) conclusion that the Department had applied a “commonly accepted” method to

assess the value of PacifiCorp’s Montana properties. PacifiCorp cross-appeals the

District Court’s conclusion that sufficient evidence existed in the record to support

STAB’s conclusion that additional obsolescence did not exist to merit further adjustments

to the Department’s original-cost-less-depreciation indicator of value.

¶2 We review the following issues on appeal:

¶3 Does substantial evidence demonstrate common acceptance of the Department’s

direct capitalization method that derives earnings-to-price ratios from an industry-wide

analysis?

¶4 Does substantial evidence support STAB’s conclusion that additional

obsolescence did not exist to warrant consideration of further adjustments to

PacifiCorp’s taxable value?

FACTUAL AND PROCEDURAL BACKGROUND

¶5 The Department centrally assesses about 130 companies every year. The

Department issued its final 2005 ad valorem assessment of PacifiCorp’s Montana

operating properties on May 26, 2005. PacifiCorp appealed the 2005 assessment to

STAB. STAB upheld the Department’s assessment after a six-day hearing. PacifiCorp

appealed. The District Court rejected the Department’s earnings-to-price ratios method

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for appraising PacifiCorp’s property and upheld the Department’s conclusion that

additional obsolescence did not exist.

¶6 PacifiCorp, a regulated electric utility company, owns electric generation property

in Montana and nine western states. PacifiCorp provides electricity to 1.6 million

consumers. PacifiCorp Holdings, Inc., a Delaware corporation, wholly owned PacifiCorp

as of January 1, 2005. At that time, ScottishPower, a Scotland corporation, owned

PacifiCorp Holdings, Inc.

¶7 ScottishPower announced on May 24, 2005, that it would sell all of the common

stock that it owned in PacifiCorp to MidAmerican Energy Holdings Company

(MidAmerican). MidAmerican agreed to purchase ScottishPower’s common stock in

PacifiCorp for $5.1 billion and assume approximately $4.3 billion of PacifiCorp’s debt

for a total sales price of $9.4 billion. The transaction closed on March 21, 2006.

¶8 The Department centrally assessed PacifiCorp’s operating property in 2005

according to the unit method of valuation. The Department used four methods to

calculate a correlated unit value for PacifiCorp’s properties: (1) original cost less

depreciation, (2) direct capitalization of net operating income, (3) direct capitalization of

gross cash flow, and (4) yield capitalization. PacifiCorp takes no issue with the

Department’s calculations under the direct-capitalization-of-gross-cash-flow method or

the yield-capitalization method.

¶9 The Department assessed PacifiCorp’s value to be $8,581,317,664 according to

the original-cost-less-depreciation method. The Department weighted the original-cost-

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less-depreciation indicator at 50%. The Department’s assessment based on the direct-

capitalization-of-net-operating-income indicator yielded a value of $7,359,184,623. The

Department weighted the direct-capitalization-of-net-operating-income indicator at 40%.

The Department weighted the other two uncontested indicators at 5% each. The

Department reached a $7,837,244,000 correlated unit value for PacifiCorp’s properties.

¶10 The Department reduced the correlated unit value by 10% for non-taxable

intangibles. Section 15-6-218, MCA; Admin. R. M. 42.22.110. The Department

multiplied PacifiCorp’s taxable value of $7,053,520,000 by a 1.5757 allocation

percentage. The allocation percentage represents the value of PacifiCorp’s Montana

properties in relation to PacifiCorp’s total value. The Department made other deductions

and additions and concluded that PacifiCorp’s Montana market value equaled

$117,286,836. PacifiCorp does not challenge these other deductions and additions, the

default 10% intangible deduction, or the 1.5757 allocation percentage.

¶11 PacifiCorp raised several issues before STAB regarding the Department’s

assessment. PacifiCorp challenged the Department’s use of earnings-to-price ratios to

calculate a direct-capitalization-of-net-operating-income indicator of value. PacifiCorp

also argued that the Department’s use of the original-cost-less-depreciation method did

not comply with Montana law because the Department’s method failed to adjust for

obsolescence.

¶12 STAB heard lay and expert testimony from both parties during the six-day

hearing. STAB decided that the Department had not overvalued PacifiCorp’s properties.

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STAB upheld the Department’s use of earnings-to-price ratios. STAB agreed that no

additional obsolescence existed, even though STAB concluded that the Department had

not separately analyzed obsolescence. STAB noted that PacifiCorp’s $9.4 billion sale to

MidAmerican supported the Department’s conclusion that no obsolescence existed to

warrant additional deductions to the Department’s appraised value of $7.8 billion.

¶13 PacifiCorp appealed to the District Court. The court reversed STAB’s decision

regarding the earnings-to-price ratios method based on the court’s conclusion that

substantial evidence did not show common acceptance of the method. The court further

determined that STAB wrongly had relied on the sales price of PacifiCorp to

MidAmerican. The court concluded nonetheless that substantial, credible evidence in the

record otherwise supported STAB’s decision that no economic obsolescence existed.

¶14 The Department now appeals the court’s conclusion regarding its use of earnings-

to-price ratios. PacifiCorp cross-appeals the conclusion that no additional obsolescence

existed to merit an additional deduction.

STANDARD OF REVIEW

¶15 We review a district court’s conclusions of law for correctness. State v. PPL

Mont., LLC, 2007 MT 310, ¶ 19, 340 Mont. 124, 172 P.3d 1241. We review a district

court’s order affirming or reversing an administrative decision of STAB to determine

whether the findings are clearly erroneous and to determine whether STAB correctly has

interpreted the law. Id. We defer to STAB’s findings unless they are clearly erroneous,

because STAB is particularly suited for settling disputes over the appropriate valuation of

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property. Id. at ¶ 45. A decision of STAB may be reversed or modified if STAB’s

findings, inferences, or conclusions are clearly erroneous in view of the reliable,

probative, and substantial evidence on the whole record. Dept. of Revenue v. Grouse Mt.

Dev., 218 Mont. 353, 355, 707 P.2d 1113, 1115 (1985).

DISCUSSION

¶16 Does substantial evidence demonstrate common acceptance of the Department’s

direct capitalization method that derives earnings-to-price ratios from an industry-wide

analysis?

¶17 The Department must assess all of a company’s taxable property at 100% of its

market value. Section 15-8-111(1), MCA. For the 2005 tax year, the Department

centrally assessed PacifiCorp’s value according to the unit method of valuation. Section

15-23-101, MCA; Admin. R. M. 42.22.102 to 42.22.111. The unit method of valuation

calculates the value of a business’s entire operating system as a going concern and as a

single entity, including all tangible and intangible operating assets of the company.

Admin. R. M. 42.22.101(30)-(31). The unit method authorizes the appraiser to consider

cost, income, and market approaches to determine a business’s market value. Admin. R.

M. 42.22.111(1). The appraiser then applies correlation percentages to the different

approaches to establish an overall system market value. Admin. R. M. 42.22.111(2)-(3).

¶18 The Department must make its tax assessment according to commonly accepted

methods and techniques for determining market value. Admin. R. M. 42.22.111(1). The

Department used the direct-capitalization-of-net-operating-income method as one of its

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four appraisal methods. This method calculates a company’s value by dividing the

company’s annual income by a “capitalization rate.” PacifiCorp does not dispute that the

direct-capitalization-of-net-operating-income method has been commonly accepted as a

valuation method. PacifiCorp disputes the Department’s use of earnings-to-price ratios in

determining the capitalization rate.

¶19 The Department typically derives a capitalization rate from comparable sales of

similar properties. The unavailability of comparable sales information required the

Department to use earnings-to-price ratios to calculate the capitalization rate for

PacifiCorp’s assessment. The Department followed the band of investment theory to

derive a weighted average direct capitalization rate. Admin. R. M. 42.22.114(2). The

band of investment theory compares the capital structure of businesses in the same

industry with the capital structure of the assessed company, including comparisons of

common equity, preferred stock, and debt.

¶20 The Department separately had conducted its 2005 industry-wide Capitalization

Rate Study for Electric Utilities. The Department relied on the study for PacifiCorp’s

assessment. The Department first selected comparable companies from the electric utility

industry group in the Value Line Investment Survey. The Department then collected data

related to those companies’ earnings and stock prices. The Department gathered its

“earnings” data from the Value Line Investment Survey and its “price” data from Yahoo

Finance. The Department used this information to derive earnings-to-price ratios.

Earnings-to-price ratios represent the annual earnings per share of common stock divided

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by the average market price per share for common stock. The Department’s earnings-to-

price ratios represent, in its estimation, the calculations that would be used by willing

buyers and sellers of electric utilities in the market. The Department used the earnings-

to-price ratios to derive a capitalization rate of 6.5% that would be used in PacifiCorp’s

assessment.

¶21 The Department must rely on information derived from industry-wide analyses in

part because the Department has no other way to obtain more relevant information for its

tax assessment. The Department obtained some information from PacifiCorp’s property

tax manager, Norman Ross, at an informal hearing. Otherwise the Department had to

rely on information from PacifiCorp’s public filings with the Federal Energy Regulatory

Commission (FERC) and the Securities and Exchange Commission (SEC).

¶22 Sections 15-23-103 and 15-23-301, MCA, required PacifiCorp to file its return

with the Department by March 31, 2005, and to provide the Department with the

information needed to prepare the assessment. Admin. R. M. 42.22.105. PacifiCorp filed

its return on March 30, 2005, but did not provide all the information requested by the

Department for the preparation of its assessment. STAB catalogued the missing items in

one of its findings. These missing items included a finalized FERC Form 1, the Montana

Form E-47, information on PacifiCorp’s projected cash flows, and other documents. The

Department, as a result of the missing items, turned to its industry-wide capitalization

rate study and the income method to derive an estimate of PacifiCorp’s value on the

information otherwise available.

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¶23 As a regulated electric utility, PacifiCorp must file financial information with

FERC. PacifiCorp provides audited statements of its financial status in a public filing

called FERC Form 1. The Department used information from PacifiCorp’s 2003 and

2004 FERC Form 1 filings to calculate PacifiCorp’s average net operating income of

$462 million. The Department divided PacifiCorp’s average net operating income by the

6.5% capitalization rate to reach an estimated value for PacifiCorp of $7.1 billion. The

Department made additional adjustments and reached a direct-capitalization-of-net-

operating-income indicator of $7.3 billion.

¶24 PacifiCorp argues on appeal that other jurisdictions and appraisal textbooks

generally have not accepted the use of an industry-wide analysis to derive a capitalization

rate for appraising centrally assessed utility properties. The Department counters that

expert testimony, textbook authority, and the Department’s long-standing practice

support its use of earnings-to-price ratios in calculating value. We agree.

¶25 Department employees and expert witnesses testified in support of the

Department’s use of earnings-to-price ratios. Department employees testified that the

earnings-to-price ratios represent a standard methodology that the Department has used

for several industries over several years. The Department’s witnesses identified the Unit

Valuation Standards of the National Conference of Unit Value States (NCUVS) as the

Department’s authority for use of the earnings-to-price ratios method. The Department

admitted NCUVS’s Unit Valuation Standards as a trial exhibit.

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¶26 The Department presented the expert testimony of Brent Eyre, an Accredited

Senior Appraiser with the American Society of Appraisers. Eyre testified that the

earnings-to-price ratios method has been used widely to appraise centrally-assessed

companies. He testified that 36 or 37 states conduct unit valuations of centrally assessed

properties. Eyre confirmed that the NCUVS standards provide the basis for using

earnings-to-price ratios in appraising property owned by centrally assessed companies.

Eyre provided that the Department performed the “correct analysis” when it analyzed

earnings-to-price ratios to derive a capitalization rate in light of the fact that complete

sales of electric companies rarely occur. Eyre cited three appraisal textbooks that support

use of the earnings-to-price ratios method under these circumstances, including one

textbook described as “one of the most widely read textbooks on corporate valuation.”

¶27 Eyre also authored an expert report that evaluated the Department’s appraisal.

Eyre’s report validated the Department’s use of earnings-to-price ratios. Eyre conducted

an independent appraisal of PacifiCorp. Eyre analyzed thirteen selected guideline

companies and derived a capitalization rate of 6.3%. The Department had derived a rate

of 6.5%. The similarity in rates, as well as Eyre’s expert testimony and report, supports

the reasonableness and validity of the Department’s appraisal method.

¶28 The Department’s expert, James Ifflander, also testified that the Department

appropriately calculated value according to the direct-capitalization-of-net-operating-

income method. Ifflander provided that sound financial theory supported the

Department’s method. Ifflander explained that financial analysts and investment banks

10
routinely use earnings-to-price ratios to derive values of complex, integrated units, such

as PacifiCorp. Both sophisticated buyers and sellers of electric utility assets, according to

Ifflander, widely use the method employed by the Department. Ifflander provided three

examples of mergers of electric utility companies where the parties had calculated value

according to an earnings-to-price ratios method. Ifflander testified that even

MidAmerican had used an earnings-to-price ratios method similar to the Department’s

when it sought to determine a value for its 2006 purchase of PacifiCorp.

¶29 PacifiCorp challenged the Department’s earnings-to-price ratios method.

PacifiCorp’s tax manager, Norman Ross, testified that none of the other states in which

PacifiCorp operates used an earnings-to-price ratios method like that used by the

Department in 2005. PacifiCorp’s experts Hal B. Heaton and Thomas Tegarden testified

that the general appraisal literature did not support the Department’s use of earnings-to-

price ratios in the direct capitalization method.

¶30 The District Court concluded that the NCUVS standards provided weak authority

for upholding the Department’s use of earnings-to-price ratios as a commonly accepted

methodology. The court specifically expressed concern with an “admission” made by the

Department’s expert, Wilson, that he had not heard of NCUVS. Our review of the record

reveals, however, that Wilson’s “admission” arose randomly in the middle of unrelated

testimony regarding depreciation and obsolescence. PacifiCorp’s counsel stated

immediately after Wilson’s “admission” that he would follow-up on “that in just one

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moment then.” PacifiCorp failed to follow-up or ask Wilson about the “acceptance” of

using earnings-to-price ratios by the appraisal community.

¶31 Wilson’s expertise included public utility company issues, especially those issues

relating to rate regulation. Wilson testified for the Department regarding whether the

Department should have included obsolescence in its assessment of PacifiCorp. We

disagree with the District Court that Wilson made an “admission” on the separate issue of

the appropriateness of earnings-to-price ratios in the Department’s assessment of

PacifiCorp that requires reversal of STAB’s conclusion. The remaining evidence in the

trial record supports STAB’s determination.

¶32 For example, the Department’s expert on earnings-to-price ratios, Brent Eyre,

testified that the NCUVS standards promoted the use of earnings-to-price ratios. Further,

the Department admitted the NCUVS standards into evidence as a trial exhibit. The

NCUVS standards explicitly advocate for the use of earnings-to-price ratios in a direct

capitalization model. Other Department witnesses testified regarding their familiarity

with NCUVS, including Kory Hofland, who currently served as the vice chair of

NCUVS, and Department expert, James Ifflander, who had presented at NCUVS

conferences. We disagree with the District Court that the isolated, out-of-context

“admission” by Wilson, who testified primarily on obsolescence, provides grounds to

reverse STAB’s decision.

¶33 The District Court also relied on testimony from PacifiCorp’s expert, Hal Heaton,

that four other states disfavored use of the earnings-to-price ratios in the direct

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capitalization method. Heaton’s testimony and his accompanying trial exhibit

demonstrate that these states disfavored use of the method based on their concern that it

too effectively captures the value of non-taxable intangible property and overestimates

the taxable value of a company. The District Court misapprehended the record when it

assumed that these other states disfavored the method because it caused inaccurate

assessments altogether.

¶34 Montana appraisers initially must assess a business’s entire operating system,

including intangibles, at 100% market value and then deduct and adjust for exempt

properties like intangibles. Sections 15-8-111, 15-6-218, MCA. Montana’s mandate to

appraise at 100% market value makes an approach that effectively captures intangible

value all the more favorable. As the Department’s expert, Brent Eyre, explained, these

other states’ concern that the earnings-to-price method too effectively accounts for non-

taxable intangible value further supports the Department’s use of the method in fulfilling

its statutory mandate to appraise initially at 100% market value.

¶35 The court also failed to recognize Eyre’s explanation that the states identified by

Heaton may have statutory schemes that adjust for intangible value differently than

Montana’s. Eyre compared Montana and Utah as an example. Both Utah and Montana

exempt intangible property from taxation. Unlike Montana’s requirement to initially

value at 100% market value, however, Utah’s statutory scheme requires the appraiser to

exclude the value of exempt intangible property throughout its initial assessment. Eyre’s

explanation of the statutory distinction illustrates why some states may disfavor the direct

13
capitalization approach that relies on earnings-to-price ratios. We also point out that

neither Heaton, nor PacifiCorp’s other experts, offered a counter argument to Eyre’s

explanation.

¶36 STAB sat in the best position to draw a conclusion from conflicting evidence.

PPL Mont., LLC, ¶ 45. The District Court exceeded its scope of review and second-

guessed STAB’s decision. Section 2-4-704(2), MCA. The Department’s lay and expert

witness testimony, expert reports, and trial exhibits comprise substantial evidence to

uphold STAB’s conclusion that the Department’s earnings-to-price ratios method of

valuation has been commonly accepted in the appraisal community.

¶37 Does substantial evidence support STAB’s conclusion that additional

obsolescence did not exist to warrant consideration of further adjustments to

PacifiCorp’s taxable value?

¶38 Section 15-8-111(2)(b), MCA, requires that the Department “shall fully consider

reduction in value caused by depreciation, whether through physical depreciation,

functional obsolescence, or economic obsolescence.” PacifiCorp argued during the

STAB hearing that the Department had failed to “fully consider” and adjust for

obsolescence. PacifiCorp specifically faulted the Department for not conducting a

separate study on obsolescence that might have unveiled additional deductible

obsolescence not accounted for under the Department’s original-cost-less-depreciation

method of appraisal.

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¶39 STAB concluded that the Department had failed its statutory duty to “fully

consider reduction” in value for obsolescence. Nonetheless, STAB concluded that the

Department’s $7.1 billion appraisal reasonably reflected PacifiCorp’s taxable value as

shown by substantial evidence in the record and the $9.4 billion sales price. The District

Court reversed in part and affirmed in part. The court reversed STAB’s conclusion that

STAB could consider the $9.4 billion sales price to verify the reasonableness of the $7.1

billion appraisal. The court affirmed STAB’s decision to uphold the Department’s $7.1

billion appraisal, however, based on substantial evidence in the record that otherwise

supported the Department’s conclusion that additional obsolescence deductions were not

warranted.

¶40 PacifiCorp now raises three challenges to the Department’s treatment of

obsolescence. PacifiCorp first argues that the Department neglected its affirmative duty

under § 15-8-111(2)(b), MCA, to measure for obsolescence and make additional

deductions. Second, although PacifiCorp did not appeal STAB’s rejection of the income

shortfall method—the method advanced by PacifiCorp to demonstrate that about $2.6

billion worth of additional obsolescence existed—it argues that rejection of that method

cannot be used as affirmative evidence that obsolescence did not exist. PacifiCorp finally

argues that STAB placed too much reliance on the $9.4 billion sales price to verify the

reasonableness of the $7.1 billion tax appraisal. PacifiCorp bears the burden of showing

that the Department’s method resulted in an overstated value of its properties. Farmers

Union C. Exch. v. Dept. of Revenue, 272 Mont. 471, 474, 901 P.2d 561, 564 (1995).

15
¶41 PacifiCorp bases its first argument that the Department neglected its affirmative

duty under § 15-8-111(2)(b), MCA, on its theory that the Department should have

separately conducted a depreciation study to consider whether additional obsolescence

existed. STAB found that Angie Haller, the Department’s utility assessor, deducted

$5.81 billion for depreciation as reported in PacifiCorp’s FERC Form 1 filing. STAB

found that Haller did not have any evidence of additional depreciation and did not

conduct any additional studies. STAB found that Haller believed that the depreciation

deduction that she had made in accordance with PacifiCorp’s FERC Form 1 reporting

accounted for all forms of depreciation, including obsolescence. Haller did not believe

that the statute charged the Department “to go out and perform” additional depreciation

studies.

¶42 Haller used information reported by PacifiCorp on FERC Form 1 to complete the

original-cost-less-depreciation method of appraisal. She took the “original cost” value of

$13.6 billion from PacifiCorp’s FERC Form 1. She relied on PacifiCorp’s reported

depreciation value of $5.81 billion from PacifiCorp’s FERC Form 1. Haller subtracted

the reported depreciation value from the reported original cost value, made other

adjustments, and reached a value indicator of $7.7 billion. PacifiCorp does not dispute

the propriety of Haller’s reliance on these figures from FERC Form 1.

¶43 Haller’s supervisor, Kory Hofland, testified that the federal definition of

depreciation that PacifiCorp used in its FERC Form 1 reporting included both functional

and economic obsolescence. The federal definition of depreciation for the FERC filings

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includes “wear and tear, decay, action of the elements, inadequacy, obsolescence,

changes in the art, changes in demand and requirements of public authorities.” 18 C.F.R.

pt. 101, def. 12 (2010) (emphasis added). Hofland testified that Haller’s depreciation

deduction in reliance on PacifiCorp’s FERC filings accounted for all depreciation,

including obsolescence, under the Department’s original-cost-less-depreciation method.

Hofland further testified that an appraiser’s adjustment both for depreciation as deducted

by Haller and for obsolescence as proposed by PacifiCorp would have resulted in

obsolescence having been deducted twice.

¶44 Depreciation studies by PacifiCorp’s accountants as part of the FERC Form 1

filing reported that PacifiCorp’s properties had depreciated $5.81 billion. As the

Department observes, the $5.81 billion of depreciation reported by PacifiCorp would

have included the types of economic forces that PacifiCorp claims could result in a loss

of value, such as “changes in demand and requirements of public authorities.” Id.

PacifiCorp would have the Department undertake a similar depreciation study to

determine whether additional obsolescence existed that PacifiCorp’s accountants had

failed to account.

¶45 The Department employed three appraisers to assess annually the roughly 130

companies subject to central assessment. Haller and Hofland testified that they have

never conducted or ordered a full depreciation study like the analysis that PacifiCorp

would have them do. Haller and Hofland rely on the taxpayers’ public filings. They

further testified that taxpayers have an opportunity to provide information regarding

17
additional depreciation. Haller and Hofland testified that they would make further

reductions or adjustments if a taxpayer could show that additional depreciable value

existed.

¶46 Haller released her initial appraisal for PacifiCorp on April 29, 2005. PacifiCorp

had an opportunity to respond to the initial appraisal and provide additional information.

PacifiCorp responded with written submissions, participated in an informal hearing with

the Department, and exchanged several emails with Haller. PacifiCorp asserted at these

opportunities that the Department had failed to capture physical, functional, and

economic obsolescence. PacifiCorp did not provide the Department, however, with a

figure for how much obsolescence had not been captured. PacifiCorp likewise does not

suggest on appeal that any additional obsolescence would have been found had further

study been undertaken. PacifiCorp only provided the Department with an estimate of

what PacifiCorp believed its taxable value should be.

¶47 PacifiCorp argued to STAB that about $2.6 billion of additional obsolescence

existed. PacifiCorp based its argument on the testimony and report of its expert, Thomas

Tegarden. Tegarden calculated obsolescence according to the income shortfall method.

STAB rejected Tegarden’s income shortfall approach because, among other reasons, it

failed to account for income from properties that PacifiCorp had purchased with deferred

income taxes. PacifiCorp has not challenged that decision. It contends on appeal,

however, that STAB’s rejection of the income shortfall method cannot be used as

affirmative evidence that obsolescence did not exist.

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¶48 Nothing in the record indicates that STAB used the rejection of the income

shortfall method as affirmative evidence. STAB rejected the income shortfall method for

its inaccuracies. Absent the evidence based on the rejected income shortfall method,

STAB had no evidence before it that suggested that unaccounted-for obsolescence

existed. Though PacifiCorp suggests that other methods remained available to measure

obsolescence, it failed to present evidence of such alternative methods or any other

evidence of additional obsolescence. PacifiCorp failed its burden of showing that the

Department’s original-cost-less-depreciation method resulted in an overstated value of its

properties. Farmers Union C. Exch., 272 Mont. at 474, 901 P.2d at 564.

¶49 Given the absence of evidence that any alternative methods available to measure

for obsolescence would have produced a different result once STAB rejected the income

shortfall method, and given STAB’s further finding that no economic obsolescence

existed, we disagree with STAB’s conclusion that the Department failed to fully consider

all forms of depreciation in this case. STAB’s sole finding of fact that “Haller did not do

any additional study or analysis to determine if there was additional depreciation” does

not support STAB’s conclusion that the Department abrogated its obligation to “fully

consider reduction in value caused by depreciation.” We also point out that STAB

prefaced this finding of fact with the explanation that “Ms. Haller did not have any

evidence of additional functional depreciation,” which resonates with Haller’s testimony

that she did not order an additional study because nothing indicated that unaccounted-for

depreciation existed.

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¶50 STAB nonetheless concluded that “[t]he Department’s appraiser testified that she

did not specifically analyze whether all forms of obsolescence, including economic

obsolescence, existed.” STAB’s conclusion that Haller did not “specifically analyze”

does not follow from its finding that Haller “did not do any additional study or analysis.”

We have searched the record to understand the basis for STAB’s determination on this

issue. The record contains no factual evidence or legal argument to support STAB’s

conclusion that the Department must “specifically analyze” obsolescence and failed to do

so in this case. To the contrary, Haller testified that she did not believe the statute

“charged [the Department] to go out and perform” additional obsolescence studies to

fulfill its obligation to “fully consider reduction.”

¶51 The Concurrence correctly notes that this Court often gives deference to STAB’s

expertise on taxation matters. See e.g. Opinion, ¶¶ 15, 36. Such deference does not

allow STAB, however, to make legal determinations unmoored from its own findings and

the evidence in the record. PacifiCorp urged STAB to adopt the income shortfall method

to measure possible obsolescence. STAB rejected this method. PacifiCorp bore the

burden of proving the Department’s method inadequate. PacifiCorp came forward with

no evidence of additional obsolescence that the Department had failed to analyze.

¶52 The Concurrence believes it “unwise” to determine whether the Department

satisfied its statutory duty to “fully consider reduction” because the Department has not

appealed STAB’s erroneous conclusion on this point. We disagree. PacifiCorp raised

the obsolescence issue before STAB, the District Court, and this Court. STAB and the

20
District Court concluded that the Department failed to analyze obsolescence adequately,

but both ruled in the Department’s favor anyway. The Department’s decision not to

appeal the erroneous conclusions makes sense in light of the fact that it prevailed on this

issue before STAB and the District Court.

¶53 PacifiCorp specifically asserted as its first argument in its cross-appeal to this

Court that “the Department ignored its affirmative, statutory duty to fully consider

obsolescence in the cost approach.” PacifiCorp’s Opening Br. 33. The Department

argued in response that it had considered the effects of obsolescence when it calculated

value under its original-cost-less-depreciation approach. The parties have raised, argued,

and briefed the issue of whether the Department fulfilled its statutory obligation to “fully

consider reduction in value” before STAB, the District Court, and this Court. The record

and the briefs do not support the Concurrence’s assertion that they have not. The

Concurrence focuses solely on PacifiCorp’s statement of the issue at the start of its brief.

Concurrence, ¶ 66. PacifiCorp’s three-part argument set out at pages 33-40 of its brief

specifically argues that the Department ignored its statutory duty to consider

obsolescence. The Concurrence fails to explain why the Court should refuse to address

PacifiCorp’s argument that “the Department ignored its affirmative, statutory duty.”

¶54 The Department only has requested that this Court affirm the District Court. We

may affirm a district court decision that is correct regardless of the district court's

reasoning in reaching its decision. Conagra, Inc. v. Nierenberg, 2000 MT 213, ¶ 33, 301

Mont. 55, 7 P.3d 369. We affirm the District Court, but we will not affirm its adoption of

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STAB’s incorrect determination that the Department had failed to analyze all forms of

depreciation.

¶55 PacifiCorp finally argues that STAB placed too much reliance on the May 24,

2005, sales price. STAB concluded that PacifiCorp’s $9.4 billion sales price provided a

good indication that additional obsolescence did not exist to merit additional deductions

to the Department’s tax assessment of $7.1 billion. STAB found that the $9.4 billion

sales price reflected the market value as defined in § 15-8-111, MCA, that the sale

constituted an arm’s length transaction, and that no evidence suggested that PacifiCorp’s

value materially had changed between the tax lien date and the closing of the transaction.

STAB concluded that it could rely on PacifiCorp’s $9.4 billion sales price “to verify the

essential reasonableness of the Department’s final estimate of value” of $7.1 billion.

¶56 The District Court rejected STAB’s conclusion that STAB could consider the sales

price of PacifiCorp. The court relied on Thomas Tegarden’s statement that an appraiser

generally may consider only information known or knowable as of the assessment lien

date. The court concluded that this known or knowable principle applied to STAB. We

disagree.

¶57 Section 15-7-102(6), MCA, expressly authorizes STAB to “consider the actual

selling price of the property, independent appraisals of the property, and other relevant

information” in determining the market value of the property. The court disregarded this

statute because PacifiCorp had announced the sale on May 24, 2005, about five months

22
after the tax lien date of January 1, 2005. The court incorrectly interpreted § 15-7-102(6),

MCA.

¶58 PacifiCorp’s appeal of the Department’s appraisal required that STAB hear the

appeal and render a final, binding decision. Sections 15-2-201(d), -302(5), MCA. STAB

had the authority to issue summonses to witnesses, to administer oaths, and to compel

testimony and the production of records, books, and other documents. Section 15-2-

201(2), MCA. STAB must hear the appeal in accordance with the contested case

provisions of the Montana Administrative Procedure Act. Section 15-2-302(4), MCA.

This Court has concluded that STAB must be able to receive additional testimony and

evidence to perform its duty to hear the appeal and issue a final decision. Dept. of

Revenue v. Burlington N. Inc., 169 Mont. 202, 213, 545 P.2d 1083, 1089 (1976). STAB

properly considered the $9.4 billion sales price of PacifiCorp to MidAmerican in

evaluating the reasonableness of the Department’s $7.1 billion assessment.

CONCLUSION

¶59 We affirm in part and reverse in part. Substantial evidence supports the

Department’s use of earnings-to-price ratios in its direct capitalization approach. We

affirm the District Court’s conclusions that additional depreciation deductions were not

warranted and that the Department did not overvalue PacifiCorp’s property.

¶60 We hold that § 15-8-111(2)(b), MCA, does not require the Department to conduct

a separate, additional obsolescence study when no evidence suggests that obsolescence

exists that has not been accounted for in the taxpayer’s FERC Form 1 filing. We further

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hold that STAB correctly determined that the actual $9.4 billion sales price of PacifiCorp

verified that the Department’s $7.1 billion assessment had not overvalued PacifiCorp’s

properties.

/S/ BRIAN MORRIS

We Concur:

/S/ MIKE McGRATH
/S/ MICHAEL E WHEAT
/S/ PATRICIA COTTER
/S/ BETH BAKER

Justice Jim Rice, concurring.

¶61 The Department challenges the District Court’s reversal of STAB’s finding that

earnings-to-price ratios may be used within the “direct capitalization of net operating

income” method of valuation under Admin. R. M. 42.22.111. This regulation requires

the Department to employ “commonly accepted methods and techniques of appraisal to

determine market value.” Admin. R. M. 42.22.111(1). PacifiCorp defends the District

Court’s determination and argues that STAB’s finding was not supported by substantial

evidence. Neither a definition nor standards which further explain the term “commonly

accepted method” are provided within the regulations, but an agency’s interpretation of

its own regulation is entitled to deference. See Roy v. Blackfoot Tel. Coop., 2004 MT

316, ¶ 26, 324 Mont. 30, 101 P.3d 301 (citing Thomas Jefferson Univ. v. Shalala, 512

U.S. 504, 512, 114 S. Ct. 2381, 2386 (1994) (“We must give substantial deference to an

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agency’s interpretation of its own regulations.”)). In light of the deference to be given to

the Department’s application of its regulation and the evidence discussed by the Court, I

concur that STAB’s finding was supported by substantial evidence.1

¶62 In the cross appeal, PacifiCorp challenges the District Court’s affirming of

STAB’s obsolescence determination, arguing that the Department’s approach failed to

satisfy the requirement in § 15-8-111(2)(b), MCA, to “fully consider” both functional and

economic obsolescence. The Court delineates testimony which was offered by the

Department in support of its treatment of obsolescence, Opinion, ¶¶ 41-46, and then

reverses both STAB and the District Court’s legal conclusion that the Department failed

to properly consider obsolescence. Opinion, ¶ 49. I have concerns about the Court’s

approach and cannot agree with it.

¶63 The evidence cited by the Court was considered by STAB during the proceedings

before it. STAB concluded that the Department “fail[ed] to consider economic

obsolescence in its cost indicator as specifically required by statute. Section 15-8-

111(2)(b), MCA. . . . ‘[T]he Board does not condone this failure on the part of the

Department. There is a clear statutory duty for the Department to consider all forms of

depreciation . . . .’” STAB Order, 35 (internal citation omitted); see also STAB Order,

33. The District Court affirmed this conclusion, stating that “the Department’s cost

approach calculation did not include a separate consideration of any reduction in value

1
In fairness to the District Court, its decision was premised on what it described as the
Department’s failure to “cite the Court to any testimony or exhibit establishing that the earnings-
to-price ratio method . . . is a commonly accepted method of determining market value,” noting
that the transcript ran over 1,200 pages. District Court Order, 15 (emphasis added). The
Department’s argument, and not the evidence, may have been lacking in the District Court.
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for obsolescence.” District Court Order, 10 (emphasis added). Then, the Department did

not appeal this determination. The obsolescence issue undertaken by the Court—on

which it reverses STAB and the District Court—has not been challenged on appeal and is

not the focus of the parties’ briefing.

¶64 STAB ultimately concluded that the error in the Department’s valuation method

was essentially harmless under the circumstances, because post-lien date sale information

demonstrated that no additional obsolescence existed. Nonetheless, STAB warned that

“[i]n other cases, the Department’s failure to consider economic obsolescence in its cost

approach could prove seriously detrimental to the Department’s valuation.” STAB

Order, 35. I believe that the Court’s wading into this issue is unwise. The Court is

reversing complex evidentiary determinations which were not the focus of the appeal,

were not briefed, and which fall within the expertise of the taxing authorities. I would

not do so.

¶65 In response, the Court offers the vague assertion that the parties “have raised,

argued, and briefed the issue of whether the Department fulfilled its statutory obligation

to ‘fully consider reduction in value’ before STAB.” Opinion, ¶ 53. A careful search of

the briefing would be a vain attempt to locate where this issue was “raised, argued and

briefed” in this case. The “obsolescence” issue which the Court reaches and decides

today—the proper interpretation of § 15-8-111(2)(b), MCA, and the requirements it

imposes upon the Department regarding obsolescence—was certainly not raised or

briefed on appeal. There is no analysis whatsoever, in any of the briefing, from either

26
party, about the text, history, or meaning of § 15-8-111(2)(b), MCA, or the obligations

imposed by that statute.

¶66 The Department’s opening brief made only a passing reference to § 15-8-

111(2)(b), MCA, and its reply and response brief did not make a single reference to the

provision. While referencing obsolescence in the context of the issue it did raise,

PacifiCorp offers no argument about obligations imposed by the statute regarding

obsolescence. To obscure this fact and support its desire to interpret the statute, the Court

resorts to restating the parties’ actual issues. The Court states that “PacifiCorp

specifically asserted as its first argument in its cross-appeal to this Court that ‘the

Department ignored its affirmative, statutory duty to fully consider obsolescence in the

cost approach.’” Opinion, ¶ 53. This is an incomplete statement of PacifiCorp’s

position. Its actual issue is “whether the district court erred when it affirmed the

Department’s cost indicator even though the Department willfully failed to consider

obsolescence.” PacifiCorp’s Opening Brief, 1 (emphasis added). Because the

Department had failed to appeal the interpretation of § 15-8-111(2)(b), MCA, rendered

by STAB and the District Court, PacifiCorp based its arguments solely on the assumption

that this statutory interpretation was correct. To top it off with the appropriate irony, the

Court criticizes this Concurrence for failing to acknowledge “PacifiCorp’s three-part

argument set out at pages 33-40 of its brief” which “specifically argues that the

Department ignored its statutory duty to consider obsolescence.” Opinion, ¶ 53.

However, there is no such discussion in the cited pages of PacifiCorp’s brief. There is

27
such a discussion in those numbered pages of the District Court’s order—and that is

precisely the point: the Department did not appeal from that discussion and thus no

briefing has been offered here by the parties on the issue.

¶67 The Court’s decision today blindsides the parties, but prejudices PacifiCorp, which

loses on the basis of an issue it never briefed. PacifiCorp did not brief the statutory

interpretation issue because, under the statutes and rules governing the appeal process, it

was unnecessary to do so. Today, PacifiCorp has learned the hard way that it cannot

place its trust in the rules governing the appellate process in Montana.

¶68 Finally, the Court approves STAB’s consideration of the post-lien date sale

information, citing § 15-7-102(6), MCA, which permits STAB to consider “the actual

selling price of the property.” As the statute does not differentiate between pre- and post-

lien date sale information, I concur that STAB could properly consider this evidence,

despite the fact that consideration of post-lien date sale information apparently

contradicts what the District Court described as “a well accepted rule” in the appraisal

industry. If the statute does not reflect best industry practices, it may need to be revised.

However, it serves today to render any flaw in the Department’s cost approach as

harmless error.

¶69 I concur in the result reached by the Court.

/S/ JIM RICE

Justice James C. Nelson joins in the concurring Opinion of Justice Jim Rice.

/S/ JAMES C. NELSON

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Justice James C. Nelson, specially concurring.

¶70 I join Justice Rice’s Concurrence. His comments at ¶¶ 65 to 67 are correct.

Unfortunately, this is not the first time in recent experience that this Court has taken a

case and reframed the issues, arguments, and theories on appeal to achieve a particular

disposition—in the process, blindsiding the losing party with an issue it never raised or

briefed. This is exactly what happened in Western Sec. Bank and Glacier Bancorp, Inc.

v. Eide Bailly LLP, 2010 MT 291, 359 Mont. 34, 249 P.3d 35. In that case, appellant

Glacier Bancorp alleged, litigated, and argued a professional negligence claim, not the

negligent misrepresentation claim this Court decided on appeal. Western Sec. Bank,

¶¶ 72-82 (Nelson, J., concurring in part and dissenting in part). As I observed there, “[i]t

will surely come as a surprise to Glacier . . . when it learns that it has lost this case

because it failed to adequately support a claim that it never even raised!” Western Sec.

Bank, ¶ 73. I have no doubt that Pacificorp will be equally astonished.

/S/ JAMES C. NELSON

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