[GAVEL]
>> ALL RISE FOR THE HONORABLE
JUDGE.
WE HAVE TWO CASES FOR ARGUMENT
THIS MORNING,
COMMISSIONER OF REVENUE VS.
CENTERPOINT ENERGY AND
STATE OF MINNESOTA V.
MICHAEL BRUCE TAPPER PURE THE
RECORD SHOULD REFLECT ANDERSON
IS RECUSED FROM THE COMMISSIONER
OF REVENUE CASE WHICH WE WILL
TAKE FIRST.
CANCEL WILL GIVE YOU 3 MINUTES
OF TIME AND ARE ATTEMPTED AT THE
BEGINNING OF YOUR ARGUMENT.
THE THREE MINUTE MARK I WILL SEE
IF THE COURT HAS QUESTIONS.
AND YOU HAVE RESERVED 10 MINUTES
EVERY BOTTLE AND YOU CAN
CONTINUE WHEN YOU ARE READY.
>> Ms. Kitchak: HOW IS THE
MICROPHONE, CAN EVERYONE HEAR
ME?
GREAT, THANK YOU.
MAY IT PLEASE THE COURT MY NAME
IS JENNIFER KITCHAK AND I
REPRESENT
COMMISSIONER OF REVENUE.
THE TAX COURT MADE THREE ERRORS
IN THIS CASE.
FIRST, IT SHIFTED THE BURDEN OF
PROOF OF THE COMMISSIONER, WHICH
IS INCORRECT.
SECOND, IT DISREGARDED THE
PRINCIPLE THAT WHEN A TAXPAYER
DECIDES TO APPEAL FROM ONE OF
THE ASSESSED VALUE IT ASSUMES
THE RISK THAT THAT PROPERTY
VALUE MAY INCREASE, DECREASE OR
STAY THE SAME.
THEY ASSUME THAT RISK.
I WANT TO CONCENTRATE ON THE
TEXTTEXT COURTS THIRD ERA.
BY DEDUCTING HUNDREDS OF
MILLIONS OF DOLLARS OF VALUE
FROM THE COST APPROACH TO
ACCOUNT FOR OBSOLESCENCE
SUPPOSEDLY CAUSED BY STANDARD
REGULATORY TREATMENT OF THE
UTILITIES DEFERRED INCOME TAXES.
THIS ERROR ACCOUNTS FOR 75% OF
THE TAX REFUND IN THIS CASE.
NOW, IT IS A FACT THAT
REGULATORS DON'T ALLOW A UTILITY
TO EARN A RETURN ON ASSETS
PURCHASED WITH CUSTOMER SUPPLIED
PREPAID TAXES.
REGULATORS IMPOSE THE LIMITS OF
THE CUSTOMERS ARE NOT DOING
TWICE, ONCE WHEN THEY PAY THE
TAXES IN THE UTILITY RATES AND
AGAIN IF FORCED TO PAY THE RATE
OF RETURN FOR THE BENEFIT OF
USING THOSE.
BUT WHERE THE TAX COURT ERRED
WHEN IT MADE THE LEAP FROM
REGULATORY FACT TO THIS
CONCLUSION THAT PURCHASERS AND
THE MARKET WILL NOT PAVE BOOK
VALUE FOR ASSETS AS A RESULT.
WHILE THE TAXPAYER EXPERTS
STATED THIS AS A CONCLUSION IN
THEIR REPORTS, THEY DIDN'T COME
FORWARD WITH SINGLE MARKET
TRANSACTION TO BACK THIS UP.
AS THIS COURT KNOWS, HAVING
MARKET EVIDENCE TO SUPPORT
EVALUATION CONCLUSIONS IS A
VITAL PART OF DETERMINING MARKET
VALUE.
NOW COME IN THIS CASE THE RECORD
CONTAINS OVERWHELMING EVIDENCE
THAT REGULATORY ASSETS DO NOT
SELL FOR LESS THAN BOOK VALUE.
THEY REALLY SELL FOR MORE ALL
THE TIME.
FOR EXAMPLE THE COMMISSIONER'S
EXPERTS ANALYZED MORE THAN A
DOZEN MARKET TRANSACTIONS TO
SHOW BUYERS PAY MORE THAN BOOK
VALUE, EVEN WHERE EVERY SINGLE
COMPANY IN THAT LIST OF
TRANSACTIONS HAD DEFERRED TAX
BALANCES.
THE RECORD INCLUDES ANOTHER
EXAMPLE THAT IS CLOSER TO HOME.
CENTERPOINT'S DIRECTOR OF
REGULATORY PORTFOLIO MANAGEMENT
TESTIFIED AT TRIAL THAT
MINNEGASCO PURCHASED UTILITY
ASSET FOR MORE THAN THE BOOK
VALUE ON THE SELLER'S BOOKS EVEN
THOUGH THE OVERAGE COULD BE
INCLUDED IN MINNEGASCO'S RATE
INCREASE.
THE TAX COURT NEVER EXPLAINED
HOW IT GOT AROUND THE LOGICAL
FALLACY IN THIS CASE APPEAR THAT
IF DEFERRED TAXES BECAUSE
OBSOLESCENCE.
IF DEFERRED TAX BALANCES RELIEF
BECAUSE OBSOLESCENCE, THEN WHY
IS THOSE TAX BALANCES WENT DOWN
FROM ASSESSMENT DATE TO IT
ASSESSMENT DATE?
THE OBSOLESCENCE MORE THAN
DOUBLED.
THE TAX COURT FAILED TO EXPLAIN
HOW THIS COULD BE THE CASE.
THE EVIDENCE DOES NOT SUPPORT
ANY ADJUSTMENTS FOR
OBSOLESCENCE.
THE COURT SHOULD REVERSE.
I WANT TO TAKE YOU, COUNSEL, TO
THE ISSUE OF THE COMMISSIONER'S
CHANGE POSITION.
AND I WILL WORK TO RAISE THE
COMMISSIONERS CHANGE IN
POSITION.
YOU CRITICIZE THE TAX COURT FOR
LOOKING AT THE CAP RATE STUDIES
AND ASSESSMENT.
THE CAP RATE STUDIES USED WHEN
THE COMMISSIONER ASSESS THE
PROPERTY VALUE.
AND THE COMMISSIONER HAS A
DIFFERENT APPROACH.
THE EXPERTS APPROACH AND
FOLLOWED A DIFFERENT APPROACH AT
TRIAL.
AND FOR TAX COURT RELIED ON THAT
DIFFERENCE.
YOU ARE CRITICIZING THE TAX
COURT FOR THAT.
IF THE TAX COURT REVIEW IS
DE NOVO AND ASSESSING THE
RELIABILITY OF EXPERT TESTIMONY,
WHY WAS IT THE ERROR TO LOOK AT
THE COMMISSIONERS CHANGE IN
POSITION?
>> Ms. Kitchak: WELCOME AS AN
INITIAL MATTER, THIS COURT HAS
SAID THE ASSESSED VALUE IS NOT
RELEVANT TO DETERMINING THE
VALUE AND EVALUATION.
AND EVALUATION IS AN ART, NOT A
SCIENCE AND THE CAP RATE IS ONE
OF THE MOST STRONGLY DEBATED IN
THE HIGHLY CONTENTIOUS ISSUES IN
ANY EVALUATION CASE.
IN THIS CASE, MINNEGASCO ASKED
NOT TO HAVE THE STUDY APPLIED TO
A NEW EVALUATION YOU WOULD FOR
THE COURT TO TAKE THE POSITION
THAT IT WAS IMPROPER FOR THE
COMMISSIONER TO PUT FORWARD AN
INDEPENDENT EXPERT'S OPINION
SEEMS THE TAX COURT IS MORE
CONCERNED WITH THE COMMISSIONERS
TRIAL STRATEGY THAN THE
EVIDENCE.
>> BUT WHERE DID THE TAX COURT
SAY THAT?
IT DIDN'T SAY IT WAS IMPROPER
FOR THE COMMISSIONER TO OFFER
EXPERT TESTIMONY.
THE TAX REPORT WAS EVALUATING
THE RELIABILITY OF THE
COMMISSIONERS EXPERT TESTIMONY.
>> Ms. Kitchak: AT A.D.D. 29,
THE TAX COURT STATED, "IT IS NOT
CLEAR, HOWEVER, HOW IT COULD BE
PROPER FOR THE COMMISSIONER AND
HIS BRIEFING TO THIS COURT TO
RELY ON GD HEATS OPINION TO
REPUDIATE THE RESULTS OF THE
STUDIES."
THE COURT GOES ON TO SAY THIS IS
PUNISHING THE TAXPAYER FOR
APPEALING.
BUT THERE IS NO EVIDENCE
COMMISSIONER ASKED INDEPENDENT
EXPERTS TO MAKE ANY PARTICULAR
CONCLUSION ABOUT CAP RATE AT
ALL.
IN FACT, THE EXPERT TESTIFIED AT
TRIAL HE DID NOT REVIEW THE CAP
RATE STUDY.
THE ANALYSIS WOULD BE PURELY
INDEPENDENT.
>> IS THERE ANY CONCERN FROM THE
COMMISSIONER OF UNEQUAL
TREATMENT OF TAXPAYERS?
THE COMMISSIONERS TREATING
TAXPAYERS IN THE ASSESSMENT
PROCESS THE SAME FOR PURPOSES OF
LET'S SAY CAP RATE, SO THEY ARE
ALL BEING TREATED THE SAME.
THEN BECAUSE MINNEGASCO APPEALS,
MINNEGASCO WILL BE TREATED
DIFFERENTLY IF YOU FOLLOW YOUR
EXPERTS APPROACH.
IT IS THE COMMISSIONER AT ALL
CONCERNED ABOUT THAT UNEQUAL
TREATMENT OF TAXPAYERS?
>> Ms. Kitchak: THE
COMMISSIONER DOESN'T THINK
MINNEGASCO REMAINS IN SIMILARLY
SITUATED TO THE OTHER TAXPAYERS.
MINNEGASCO IS --
>> BECAUSE THEY CHOSE TO APPEAL
>> Ms. Kitchak: THEY CHOSE TO
APPEAL >> THEY ARE BEING TREATED
DIFFERENT BY APPEAL.
>> Ms. Kitchak:.
>> Ms. Kitchak: THE
INDEPENDENT FACT FINDER THEN
THEY THEMSELVES BUT IN EVIDENCE
QUITE DIFFERENT FROM THE
COMMISSIONERS CAP RATE STUDY.
IT SEEMS LIKE IF THERE IS A
RULE, IT ONLY GOES ONE WAY AND
IT DOESN'T GO THE OTHER
DIRECTION TO THE TAXPAYER HERE
THAT WOULDN'T BE APPROPRIATE IN
THE COMMISSIONERS FIELD.
>> IS THAT THE COMMISSIONERS
RATE STUDY IN ANY GIVEN YEAR IS
ENTIRELY IRRELEVANT?
>> Ms. Kitchak: WELL, UNDER
THE ANALYSIS --
>> WOULD YOU RELY ON IT?
YOU KNOW, THEY ARE CHALLENGING
IT BUT COULD YOU COME IN AND SAY
WE WILL RELY ON IT?
>> THAT WOULD BE A TRIAL STUDY
BUT THERE IS NO RULE THAT
SAYS THE COMMISSIONER IS
LIMITED.
>> I'M NOT ASKING THAT.
IN PARTS OF YOUR BRIEF YOU SEEM
TO SUGGEST HAS TO BE TOTALLY SET
ASIDE AND IGNORED BY THE TAX
CODE.
BUT I JUST WANT TO BE CLEAR THAT
IS NOT ACTUALLY WHAT YOU ARE
ARGUING.
YOU COULD RELY ON IT.
IF SOMETHING THE TAX COURT COULD
CONSIDER?
>> Ms. Kitchak: WE WOULD STATE
THAT UNDER THIS COURT'S
JURISPRUDENCE, THE ASSESSMENT
ITSELF IS NOT TO BE RELEVANT TO
THE MARKET.
>> BUT IS THAT THE ASSESSMENT?
>> Ms. Kitchak: WELL, IT IS
CERTAINLY THE LARGEST COMPONENT
OF THE ASSESSMENT ITSELF.
IT IS A PART OF THE EVALUATION
DONE INITIALLY.
>> DOES THAT MEAN YOU HAVE TO
HAVE INDEPENDENT EXPERT COME IN
AND SAY I WILL RELY ON THE CAP
RATE STUDY?
YOU DID SAY YOU COULD RELY ON
THE CAP RATE STUDY.
>> Ms. Kitchak: WELL, THAT
WOULD ASSUME INDEPENDENT EXPERT
WOULD BE WILLING TO DO THAT.
>> I JUST WANT -- I GUESS --
>> Ms. Kitchak: THOUGHT
COMMISSIONER COULD INDEED RELY
ON ITS OWN ASSESSMENT, YES, THAT
WOULD BE A TRIAL STUDY OPTION
FOR THE COMMISSIONER.
>> SO IT'S NOT THE TAX COURT
COULD SIMPLY AS A MATTER OF LAW
NOT RELY ON THE CAP RATE STUDY?
>> Ms. Kitchak: WELCOME I
THINK THE ARGUMENT WE ARE MAKING
IS A FINER POINT THAT TAX COURT
SHOULDN'T REMIND THERE RELY ON
THE CAP RATE STUDY TO PUT A CAP
ON THE VALUE OF THE WEIGHTED
AVERAGE COST OF CAPITAL THAT THE
COMMISSIONER MADE AN ADVOCATE OF
HER AT THE TRIAL.
IT IS NOT AS IF THE TAX COURT
DID NOT ASK THE CORRECT VALUE.
AS TO WHAT IS THE CORRECT VALUE
IF I LIMIT THE COMMISSIONER TO
HIS CAP RATE STUDY.
>> WHAT ABOUT THE FACT THAT TAX
COMMISSIONER ACCEPTED SOME OF
THE HEDONISTS AND POSITIONS
RELATED TO THE CAP RATE STUDY?
NOT TO THE CAP RATE BUT THAT HE
ACTUALLY IGNORED -- HE ACTUALLY
ACCEPTED THE POSITION WITH
REGARD TO THE INCOME APPROACH?
I MEAN, THAT SEEMS TO SUGGEST
HE'S NOT IGNORING THE EXPERT
REPORT.
>> Ms. Kitchak: THE COURT
CLEARLY SAID IN HIS OPINION IT
WAS NOT PROPER FOR THE
COMMISSIONER TO RELY ON THAT
ASPECT OF J.B. HEATON ANALYSIS.
SO THEY PUT AN IMPROPER LIMIT
THAT THE COMMISSIONER WAS
ALLOWED TO MAKE WITH RESPECT TO
ASPECTS OF THE CAP RATE STUDY.
>> CAN WE FIND FROM THE RECORD
THAT THE TAX CREDIT MADE SOME
CREDIBILITY FINDINGS ABOUT YOUR
EXPERT MR. J.B. HEATON?
HE WAS VERY PROUD OF NOT BEING
AN APPRAISER AND THAT KIND OF
LANGUAGE.
IT SEEMED TO ME HE WAS MAKING
CREDIBILITY FINDINGS.
>> Ms. Kitchak: THE TAX COURT
MADE SOME CREDIBILITY FINDINGS
ABOUT THE EXPERT, BUT I THINK
THE TAX COURT STATEMENT ABOUT
WHETHER IT IS PROPER FOR THE
COMMISSIONER TO RELY ON AN
ASPECT OF THAT EXPERTS
EVALUATION IS SEPARATE FROM A
CREDIBILITY ANALYSIS.
I MEAN, THE CAP RATE ITSELF, THE
CAP RATE STUDY THAT THEY DO
EVERY YEAR, THERE ARE MANY, MANY
CONSIDERATIONS THAT GO INTO IT.
THERE ARE POLICY CONSIDERATIONS
WHERE YOU DEVELOP A RATE FOR
EVERY UTILITY IN THE STATE.
THERE IS INTERNAL VETTING
PROCESS AT THE DEPARTMENT OF
REVENUE.
STAKEHOLDERS, MEETINGS, REVIEW
AND FRANKLY, THE LITIGATION RISK
AS WELL.
>> ONE MORE QUESTION ON THAT IS
AND I HAVEN'T READ ALL OF HIS
TESTIMONY BUT UNFORTUNATELY AT
THIS POINT, BUT IS THERE
SOMETHING THAT HE SAID
ABOUT THE PGM EXCLUSION AND
DATA, THE WAY HE HANDLED THOSE
THAT WAS SPECIFIC TO MINNEGASCO?
LIKE WE SHOULDN'T CONSIDER THESE
THINGS BECAUSE MINNEGASCO IS
DIFFERENT?
OR IS IT I JUST DON'T AGREE WITH
THIS METHODOLOGY GENERALLY?
>> Ms. Kitchak: WELL, WITH THE
RESPECT TO GDM, J.B. HEATON SAYS
ESSENTIALLY A ZERO GROWTH KIND
OF COMPANY AND A STEADY GROWTH
COMPANY WITH RULE 8100 THAT THE
DTM IS NOT RELIABLE ANALYSIS
BECAUSE OF ONE PERFORMED
TECHNICALLY, TYPICALLY CONSUMES
CONTINUOUS RATE OF GROWTH
OVER TIME.
IT IS NOT AN APPROPRIATE
ANALYSIS FOR SIMILARLY RELATED
COMPANY TO MINNEGASCO.
>> SO THAT WAS SPECIFIC TO
MINNEGASCO BUT NOT MINNEGASCO
BUT VERSUS OTHER COMPANIES.
>> Ms. Kitchak: TO THE STUDY
INVESTMENT OF REGULATED
UTILITIES.
THAT IS THE SAME WITH THE DATA
THAT THERE IS VERY LOW
VOLATILITY AND RISK WITH A RATE
REGULATED INVESTMENT LIKE A
UTILITY.
>> IS A DID THE COMMISSIONER USE
THOSE THINGS IN HIS ASSESSMENT?
>> Ms. Kitchak: WELL, THE
COMMISSIONERS EVALUATION CAP
RATE STUDY HAS A LOT OF
CONSIDERATIONS THAT GO INTO IT
AND A LOT OF STAKEHOLDER INPUT.
THERE IS ACADEMIC THEORIES ON
EVERY SINGLE METHOD OF
CONDUCTING A CAP RATE ANALYSIS
IN TEXTBOOKS IN COLLEGE CLASSES,
GRADUATE SCHOOLS ALL OVER THE
COUNTRY.
THERE WAS A LOT OF ROOM FOR
DEBATE ABOUT WHAT IS THE RIGHT
WAY TO DO CAP RATE.
IT IS THE MOST CONTENTIOUS ISSUE
IN RATE.
SO TO HIRE AND ECONOMICS,
INTEREST AS THE INDEPENDENT
REVIEW OF WHAT WAS THE RIGHT WAY
TO DO CAP RATE FOR THIS
PARTICULAR UTILITY ON THESE TWO
ASSESSMENT DATES.
>> IF IT IS DEBATABLE AS YOU
SAY, WHY WOULDN'T IT BE FRESH
FOR THE TAX COURT TO THROW ALL
OF THAT DEBATE INTO THE BLENDER,
SO TO SPEAK, AND MAKE A
DETERMINATION ABOUT RELIABILITY?
>> Ms. Kitchak: I DON'T THINK
IT WOULD BE A MISTAKE FOR THE
TAX COURT TO LOOK AT ALL OF THE
EVIDENCE, BUT I THINK WITH THE
TAX COURT DID IS PUT ARTIFICIAL
LIMITS ON WHAT IS PROPER FOR THE
COMMISSIONER TO ARGUE HERE.
THAT IS THE POINT HERE ARE THE
COMMISSIONER WOULD LIKE TO BE
REAFFIRMED IS THAT AN ASSESSMENT
CAN GO UP OR DOWN, HIGHER OR
LOWER HERE THAT IS A RISK THAT
LITIGANTS TAKE WHEN THEY BRING A
CASE LIKE THIS.
>> IN THE CAP RATE STUDY IS THE
POINT PART OF THE POINT THAT THE
CAP RATE STUDY WITH REGARD TO
GDM IS LOOKING AT BOTH ZERO
GROWTH COMPANIES AND AT
COMPANIES THAT HAVE GROWTH?
I MEAN, IT WILL COVER -- THAT IS
SUPPOSED TO COVER A WIDE VARIETY
OF COMPANIES, SIMILAR WITH THE
DATA.
OUR UTILITY COMPANIES REGULATED?
I DON'T KNOW IF ENBRIDGE ENERGY
IS A UTILITY COMPANY.
>> Ms. Kitchak: ENBRIDGE
ENERGY IS A SEPARATE COMPANY
THEN MINNEGASCO IS A GAS
COMPANY.
WHAT THE CAP RATE STUDY DOES IS
LOOK AT SIMILARLY SITUATED
COMPANIES WHETHER REGULATED
COMPANIES --
AND ADVISE COMPANIES TO LOOK AT
WHAT IS APPROPRIATE FOR THE
INDUSTRY.
>> ARE THERE ANY UTILITIES NOT
INCLUDED IN THE CAP RATE COMPANY
DECIDES MINNEGASCO?
>> Ms. Kitchak: MY
UNDERSTANDING IS CAP RATE SOLELY
RELIES ON SIMILAR SITUATED
UTILITY COMPANIES.
>> SO MINNEGASCO WITH THE REGARD
TO THE DATA TO THE CAP RATE
STUDY THE FACT IT IS A UTILITY
SO REGULATED RISK.
>> Ms. Kitchak: 8100
ESSENTIALLY ASSUME ZERO GROWTH.
BECAUSE WE ARE VALUING THE
ASSESSMENT AND SNAPSHOT ONE DATE
AND TIME ASSESSMENT FOR EACH
PROPERTY.
SO AT [BOOS]
THINK ABOUT FUTURE GROWTH IN THE
EVALUATION.
20 SNAPSHOT OF THEM.
WITH A PAUSE IN THE QUESTIONS, I
WOULD LIKE TO GO BACK TO THE
CLEAR ERROR ISSUE IN THIS CASE,
WHICH IS VERY SIGNIFICANT.
IT ACCOUNTS FOR 75% OF THE
REDUCTION VALUE IN THIS CASE.
IN OUR VIEW, IT IS AN ISSUE THAT
IF LEFT UNTOUCHED ON APPEAL HAS
POTENTIAL TO AFFECT 14 OTHER GAS
UTILITIES REGULATED BY THE STATE
OF MINNESOTA IN ANY FIVE OF
MINNESOTA'S 87 COUNTIES.
IF THE MERE FACT OF RATE
REGULATION THAT ADDRESSES THE
TREATMENT OF DIFFERENT TAXES
CAUSES HUNDREDS OF MILLIONS OF
DOLLARS OF LOSSES IN VALUE WERE
TO STAND WITHOUT EVIDENCE TO
SUPPORT IT, THIS WOULD HAVE
WIDE-RANGING IMPLICATIONS FOR
THE COUNTIES TAX OFFERS.
BUT WHAT WE HAVE HERE IN THIS
CASE IS AN EXPERT WHO HAS NEVER
DONE ANY RATE REGULATION WORK
AND TESTIFIED IT'S BEEN MORE
THAN 30 YEARS SINCE HE'S BEEN
INVOLVED IN UTILITY MERGER
TRANSACTION.
HE SIMPLY STATES, "PARTIES WON'T
PAY FOR ASSETS THAT YOU CAN'T
RUN A RATE OF RETURN ON."
HE DOESN'T COME FORWARD WITH
EXAMPLES FROM THE MARKET OR
SALES THAT SHOW THAT TO BE TRUE.
HE JUST SAYS, "TRUST ME."
WHEN YOU LOOK AT ALL THE
EVIDENCE IN THE RECORD, WE HAVE
EXPERTS 50 PLUS YEARS IN RATE
REGULATION AND HELP UTILITIES
VALUE THEIR PROPERTIES FOR
ACQUISITIONS ON A REGULAR BASIS.
THEY SAY THE EXISTENCE OF ADIT
IS NOT AN ELEMENT OF REVIEW IN
THE EVALUATION OF DUE DILIGENCE
PROCESS FOR EQUITY OR FOR
MERGERS OR TRANSACTIONS LIKE
UTILITIES.
AT THE ANALYSIS THAT THEY HAVE
SHOWN IF YOU LOOK AT THAT
EXHIBIT J4 AND NUMBER 3 ALL OF
THESE RECENT TRANSACTIONS.
IT ACCOUNTS FOR GOODWILL AND
OVERAGES OVER BOOK VALUE.
IT SHOWS THEY ALL CARRY ADIT.
THESE COMPANIES, THEY DO PRICE
ALLOCATIONS AND THEY SAY THIS IS
THE FAIR VALUE OF THE ASSETS OR
PURCHASES, THE BOOK VALUE OF THE
ASSETS WE PURCHASE.
WHAT THEY SHOW THEIR ANALYSIS IS
THAT COMPANIES DO COME IN FACT
PAY MORE THAN BOOK VALUE FOR THE
ASSETS, WHICH TOTALLY NEGATES
MR. TO GARDENS STATEMENT THAT WE
WON'T PAY FOR IT, JUST TRUST ME.
THIS IS ONE CASE WHERE THE
EVIDENCE JUST REALLY DOESN'T
SUPPORT THAT FINDING.
AND THAT IS WHY WE ARE ASKING
THE COURT TO REVERSE THAT
FINDING OF OBSOLESCENCE.
>> I WANT TO MAKE SURE THAT I'M
RELYING -- THAT I HAVE THE
PROPER CITATION TO THE TAX
COURT'S OPINION HERE WHERE YOU
ARE GROUNDING YOUR CONCLUSION
ABOUT THE PROPERNESS.
IS THAT THE SENTENCE ON PAGE 29
OF THE TAX COURT'S DECISION
WHERE THE TAX COURT IS
ESSENTIALLY ASKING A QUESTION?
IT IS NOT ALL CLEAR, HOWEVER,
HOW IT COULD BE PROPER FOR THE
COMMISSIONER IN ITS BRIEFING TO
THE COURT?
IS THAT THE SENTENCE YOU ARE
RELYING ON?
>> Ms. Kitchak: THAT IS THE
SENTENCE AND CONTINUES ON THE
FOLLOWING PAGE WHERE IT TALKS
ABOUT IT BEING IMPROPER.
TAKE THAT POSITION BECAUSE IT
PUNISHES A COMPANY FOR ASKING.
>> TAKING AN APPEAL, OKAY.
>> CAN I JUST ASK, SO WE ARE
TALKING ABOUT -- AND THE POINT
YOU WERE LAST MAKING FOR THE
CHIEFS QUESTION, WE ARE LOOKING
AT A COST APPROACH, WHICH IS THE
COST TO REPLACE IT?
THAT IS GENERALLY SPEAKING.
>> Ms. Kitchak: NOT EXACTLY.
IN RULE 8100 AND ORIGINAL COST
LIST DEPRECIATION WHICH IS THE
COST USED ALSO IN REGULATORY
RATE SETTING.
SO, WHAT DO THEY CARRY ON THEIR
BOOKS FOR?
THE ORIGINAL COST LESS
DEPRECIATION.
>> SO THE COST IS WHAT THEY ARE
CARING BECAUSE YOU WOULDN'T, YOU
WOULDN'T, YOU WOULDN'T PAY THAT
IF BUILT IT FOR LESS IS THE IDEA
OF PEER THAT IS THE MAXIMUM THAT
SOMEONE -- IS THAT THE THEORY
ESSENTIALLY?
>> Ms. Kitchak: OUTSIDE RULE
8100, THE REPLACEMENT COST
APPROACH BUT THE HISTORICAL COST
APPROACH IS WHAT IS USED IN
RELATING 8100 BECAUSE THAT IS
ESSENTIALLY RATE REGULATION.
BUT THE IDEA THAT SOMEONE WOULD
PAY A COMPANY WHAT THEIR ASSETS
ARE WORTH ON THEIR OWN BOOKS
ORIGINAL COST LESS DEPRECIATIONS
DISPROVEN BY ANALYSIS OF THE
EXPERTS BEFORE.
AND IF THE COMPANY REALLY
BELIEVED ITS ASSETS WERE WORTH
LESS THAN CARRIED ON THE BOOKS,
YOU WOULD THINK THAT WOULD SHOW
UP SOMEWHERE IN THE 10K
ADVISORIES TO THE INVESTORS.
IT DOES NOT.
>> SO WHAT ABOUT -- SOME
LANGUAGE AND I THINK IT IS RULE
8100 ABOUT HAVING A MATCH OF
WHAT THE MPUC REGULATORS ARE
DOING IN TERMS OF EVALUATION?
IS THAT SOME LANGUAGE AND HOW
DOES THAT APPLY?
>> Ms. Kitchak: REGULATION AND
EVALUATION ARE TWO DIFFERENT
PROCESSES AND THEY ARE NOT THE
SAME.
>> DO YOU KNOW WHAT LANGUAGE I'M
TALKING ABOUT?
>> Ms. Kitchak: BUT YES,
ORIGINAL COST IS PRESUMED, YES.
THAT IS THE DIFFERENCE BETWEEN
REPLACEMENT COST WHICH IS 30
YEARS OLD IT WOULD COST MORE
THAN IT WOULD BUILD TODAY SO
THEY USE THE ORIGINAL COST.
>> THAT IS ALL THAT REFERENCE
PEER THAT IS THE STARTING POINT.
>> Ms. Kitchak: CORRECT.
>> OKAY.
>> IN THE TAX COURT'S ORDER WHEN
IT SUMS UP THIS OBSOLESCENCE
ISSUE, IT SAYS THE COMMISSIONER
PRESENTED NO EVIDENCE
DISCREDITING OR EVEN DIRECTLY
ADDRESSING MR. TO GARDENS
CONCLUSION THAT THE REGULATORY
TREATMENT ADIT PRESENTS UTILITYG
MARKET REQUIRED RATE OF RETURN
AND THEN EMPHASIZES ITS ENTIRE
NET BOOK VALUE.
SO THEREFORE CAUSES ECONOMIC
OBSOLESCENCE.
SO WHAT IS WRONG WITH THAT
CONCLUSION?
>> Ms. Kitchak: WELL, ECONOMIC
OBSOLESCENCE IS A LOSS IN THE
VALUE OF MARKET.
SO WHAT SOMEBODY WOULD BE
WILLING TO PAY FOR IT.
BUT HEAR WHAT THE REGULATORS ARE
DOING IS THEY ARE ALLOWING
UTILITY TO EARN REASONABLE RATE
OF RETURN CONSTITUTIONALLY
REQUIRED AND ALLOWED TO EARN
RATE OF RETURN ON THEIR
INVESTMENT.
THE IDEA THAT THEY CAN'T BURN
RATE OF RETURN ON MONEY THAT
THEY DIDN'T HAVE TO PAY TO
BORROW OR RAISE FROM INVESTORS
AND PAY RATE OF RETURN ON, TO
EARN ON THOSE ASSETS IS REALLY
PRETTY MUCH REVENUE NEUTRAL FOR
THEM.
THE LEAP THAT THE TAX COURT MADE
AND THAT MR. TEGARDEN MADE THAT
REGULATORY REALITY APPLIES TO
ANY UTILITY THAT WOULD BUY THAT
PROPERTY PEER THAT REGULATORY
FACT DOES NOT IMPACT TRANSLATE
TO A LOSS OF VALUE IN THE MARKET
AS THE MARKET TRANSACTIONS IN
THE OVERLAND REPORT SHOWS.
IT IS NOT SO MUCH, "OH, WE CAN'T
EARN ON THOSE EARNINGS SO IT
SHOWS OBSOLESCENCE."
YOU HAVE TO SHOW A LOSS OF VALUE
IN THE PURCHASING MARKET.
THAT IS THE LEAP THAT THE COURT
MADE AND MR. TEGARDEN MADE THAT
THEY DIDN'T SUPPORT THE MARKET
EVIDENCE.
IT'S NOT SO MUCH THE REGULATORY
EFFECT THAT CAUSES IT.
YOU CAN SAY THAT BUT THOSE ARE
WORDS ON A PIECE OF PAPER.
YOU HAVE TO PROVE IT THROUGH
ACTUAL MARKET EVIDENCE TO SHOW
IT CAUSES A LOSS OF VALUE TO
PROSPECTIVE PURCHASERS.
>> SO WHAT IS IT IN YOUR VIEW OF
THE TAXPAYER HAD TO OFFER TO
PROVE EXTERNAL OBSOLESCENCE?
>> Ms. Kitchak: ON THE THEATER
THEY PROVIDED ON THE REGULATORY
TREATMENT, THE STANDARD
REGULATORY TREATMENT CAUSES
OBSOLESCENCE SINCE, THEY NEED TO
SHOW FROM THE MARKET A
TRANSACTION THAT SHOWED A BUYER
WAS NOT WILLING TO PAY FULL
ORIGINAL COST LESS APPRECIATION
FOR THE ASSET.
THEY WOULD NEED TO COME FORWARD
WITH EVIDENCE FROM THE MARKET
AND THEY DIDN'T COME FORWARD
WITH THINNING.
>> WHAT IS YOUR POSITION THE TAX
COURT WILL GET INVESTMENT VALUE?
>> Ms. Kitchak: WELL, THAT IS
AN ASSUMPTION THE TAX COURT MADE
NOT BASED ON EXPERT TESTIMONY OR
ANY EXPERT TESTIMONY IN THE
CASE.
IN FACT, WE BRIEFED, IN OUR
BRIEF ACCORDING TO THE APPRAISAL
OF REAL ESTATE, THE INVESTMENT
VALUE AND MARKET VALUE CAN VERY
MUCH BE THE SAME VALUE.
INVESTMENT VALUE IS SOMETHING
THE COURT CAME UP WITH WITHOUT
ANY WITNESS TESTIMONY.
IN FACT, WHAT ARE EXPERT
TESTIFIED WAS THAT THESE
TRANSACTIONS WERE COMMON FACT
BETWEEN WILLING BUYERS AND
WILLING SELLERS WITH REASONABLE
MOTIVATIONS.
HE TESTIFIED ABOUT THAT
TRANSCRIPT PAGE 3:30 SIX.
THE VALUE IS A RED HERRING THAT
IS UNSUPPORTED BY ANY EXPERT
TESTIMONY OR ANY EVIDENCE ON THE
RECORD.
>> WHAT DO YOU SAY ABOUT ANOTHER
PROBLEM THAT THE TAX COURT FOUND
WITH MR. HOWARD LUBOW TESTIMONY
THAT HE COULDN'T SPECIFY WHICH
COMPANY ASSETS WERE SOLD?
>> Ms. Kitchak: I THINK HOWARD
LUBOW REPORT DEMONSTRATES THEY
DID A THOROUGH ANALYSIS OF THE
TRANSACTION SPIRIT THEY RESEARCH
THEM IN THE MARKET AND LOOKED UP
THE PURCHASE PRICE ALLOCATIONS.
I THINK IF YOU LOOK AT THAT
CHART IN EXHIBIT J4 AN INTERNAL
EXHIBIT 3 FACIAL VERY MUCH AN
INQUIRY ASSET-BACKED OF THE
ANALYSIS.
>> COUNCIL GOING BACK TO THE
OBSOLESCENCE ISSUE IN YOUR ISSUE
TO THE CHIEF IN TERMS OF WHAT
THEY WOULD OF NEEDED TO SHOW.
YOU POINTED US TO EXHIBIT
TRANSACTIONS ON THE OTHER SIDE
OF THAT.
WHAT KIND OF TRANSACTION WHERE
THEY HAVE NEEDED TO SHOW?
IT IS ALMOST LIKE IT SEEMS TO ME
YOU ARE ASKING THEM TO PROVE A
NEGATIVE THAT A BUYER WOULD NOT
HAVE PAID A CERTAIN AMOUNT?
SO WHAT EXACTLY THEIR OPINION
IS, THEY HAVE STAYED THERE
STATED THAT INVESTORS WILL NOT
PAY FOR THE ASSETS BECAUSE THE
REGULATORS DO NOT ALLOW THEM
WITH A CUSTOMER'S RETURN
INVESTMENT.
WHAT WOULD SATISFY THE
COMMISSIONER IS WHAT I'M ASKING?
MAYBE THAT IS A BETTER QUESTION
FOR YOUR OPPONENT BUT WHAT WOULD
SATISFY THE COMMISSIONER?
EVIDENCE OF MARKET TRANSACTIONS
THAT SHOWS THAT TO BE TRUE.
AND THEY COULDN'T POINT OUT A
SINGLE TRANSACTION THAT THEY
WERE AWARE OF.
ARE THESE ASSETS SOLD FOR LESS
THAN VALUE BECAUSE OF THE
STANDARD RATE REGULATORY
PRACTICE REGARDING DEFERRED
TAXES.
THEY JUST SAID IT IS TRUE.
BUT THAT DOESN'T MEAN THE MARKET
EVIDENCE SUPPORTS THEY COULDN'T
SHOW A SINGLE TRANSACTION WHERE
THAT WAS THE CASE.
>> IT WOULD BE PROVING A
NEGATIVE THOUGH AS HE POINTS
OUT.
>> Ms. Kitchak: NO COME I
THINK IT WOULD PROVE THE PRICE
THEY WERE WILLING TO PAY WAS
LESS THAN BOOK VALUE.
THAT'S NOT A NEGATIVE PEER THAT
IS A POSITIVE.
THEY PAID A PRICE LESS THAN BOOK
VALUE.
THERE IS NO EVIDENT SUPPORT THAT
IS WHAT INVESTORS IN THE MARKET
DO AS A RESULT OF THIS STANDARD
RATE REGULATORY TREATMENT OF
DEFERRED TAXES.
>> THANK YOU, COUNSEL, YOU HAVE
2 MINUTES FOR REBUTTAL.
MR. KILMORE.
>> Mr. Kilgore: MAY IT PLEASE
THE COURT, COUNSEL, THIS
CONSOLIDATED APPEAL ASSESSMENT
YEAR 2018-2019 WAS TRIED IN THE
TAX COURT IN SEPTEMBER 2021.
THE TRIAL LASTED THREE DAYS.
MINNEGASCO PRESENTED FIVE FACT
WITNESSES AND TWO EXPERT
WITNESSES, THE COMMISSIONER
PROVIDED THREE EXPERT WITNESSES.
47 EXHIBITS WERE RECEIVED BY THE
COURT, INCLUDING ONE OR MORE
REPORTS FROM EACH EXPERT
WITNESS.
MANY OF THESE EXHIBITS WERE
VOLUMINOUS, FINANCIAL, AND
REGULATORY DOCUMENTS.
THE TRIAL TRANSCRIPT EXCEEDED
600 PAGES.
AFTER EVIDENCE, THE COURT ASKED
THE PARTIES FOR BRIEFS.
BRIEFS WERE SUBMITTED AND THE
TAX COURT ISSUED 49 PAGE OPINION
ANCHORED BY ALMOST 200
FOOTNOTES.
VIRTUALLY EVERYONE CITING TO A
TRIAL EXHIBIT OR TRIAL
TESTIMONY.
THE TWO EVALUATION SUBJECTS THAT
ARE NOW BEING CHALLENGED BY THE
COMMISSIONER, THE COST OF EQUITY
AND EXTERNAL OBSOLESCENCE, WE
RECEIVED A ESPECIALLY CLOSE
ANALYSIS.
THE COURT DEVOTED 13 PAGES TO
ITS DISCUSSION OF THE COST OF
EQUITY AND 12 PAGES TO EXTERNAL
OBSOLESCENCE.
AND IN EACH OF THESE AREAS, THE
COURT QUOTED EXTENSIVELY FROM
TESTIMONY OF THE PARTIES EXPERT
WITNESSES.
FOR BOTH YEARS, THE TAX COURT
LOWERED THE COMMISSIONER'S
ASSESSMENT.
THE TAX COURT EVALUATIONS WERE
NOT, HOWEVER, AS LOW AS THOSE
ADVOCATED BY THOMAS TEGARDEN,
MINNEGASCO'S EXPERT APPRAISER.
SO THE COURTS EVALUATION LANDED
BETWEEN THOSE OF THE TWO
EVALUATION EXPERTS.
THIS WAS TRUE IN EACH OF THE TWO
YEARS HERE IN AND I RECITE THESE
FACTS IN PART BECAUSE OF A
CURIOUS STATEMENT AT THE BOTTOM
OF PAGE 2 OF THE COMMISSIONERS
REPLIED BRIEF.
"MINNEGASCO ARC IS CLEARLY
ERRONEOUS STANDARD APPLIES
BECAUSE THE TAX COURT'S COST OF
EQUITY NUMBERS LIKE IT'S UNIT
VALUES WAS IDA BETWEEN THE
NUMBERS ADVOCATED BY THE PARTIES
EXPERTS."
THIS IS NOT MINNEGASCO'S
POSITION.
BUT CLEARLY ERRONEOUS STANDARD
APPLIES INDEPENDENT OF THE VALUE
ESTIMATES OF THE WITNESSES.
WHAT OUR BRIEF ACTUALLY POINTED
OUT IS THIS COURT'S OBSERVATION
IN THE EDEN PRAIRIE MALL CASE
THAT A TAX COURT EVALUATION WILL
BE GENERALLY REASONABLE IF AS
HERE IT FALLS WITHIN THE LIMITS
OF THE EXPERTS ESTIMATES.
THE TAX COURT'S ANALYSIS AND ITS
CONCLUSIONS MAKE IT MANIFESTLY
CLEAR THAT NO READER WILL BE
LEFT WITH A DEFINITE AND FIRM
CONVICTION THAT A MISTAKE HAS
BEEN COMMITTED TO PULL FROM THIS
COURT'S DECISION IN EQUITABLE
LIFE IN 1985 CASE.
INDEED, THIS WAS NOT A CLOSE
CASE.
IT IS DIFFICULT TO IMAGINE ANY
COURT ADOPTING THE VIEWS OF THE
COMMISSIONERS EVALUATION EXPERT
GIVEN HIS STRIDENT, EVEN
OUTLANDISH REJECTION OF THE
NORMS EMPLOYED BY MINNESOTA
COURTS IN VALUATION.
>> COUNSEL COME I WANT TO STOP
YOU BECAUSE YOU'RE 3 MINUTES ARE
UP.
CAN WE TURN TO THE ACCUMULATED
DEFERRED INCOME TAX ISSUE THE
OBSOLESCENCE ISSUE THAT THE
COMMISSIONER STARTED WITH
SPIRITS OF THE COMMISSIONER
ARGUES MINNEGASCO DID NOT
SUPPORT THE CLAIM HERE THAT THE
REGULATORY TREATMENT OF THE
CUMULATIVE DEFERRED INCOME WITH
THE PRICE OF PURCHASER WOULD BE
WILLING TO PAY FOR MINNEGASCO'S
PROPERTY.
HOW DO YOU RESPOND TO THAT
ARGUMENT AND WHAT EVIDENCE TO
SUPPORT YOUR POSITION ON THAT
POINT?
>> Mr. Kilgore: THE STANDARD
REVIEW BY THE COURT FROM ITS USE
MAKES THE BURDEN OF PROOF ON
MINNEGASCO HAD TO SATISFY WAS TO
PREVAIL BY PREPONDERANCE OF THE
EVIDENCE.
SO, THE COURT HEARD THE
TESTIMONY OF MR. TEEGARDEN WITH
APPRAISALS AND TESTIFYING FOR
ALMOST 50 YEARS.
IT HEARD THE TESTIMONY OF
MINNEGASCO'S REBUTTAL EXPERT A
PROFESSOR, DR. RACHEL HEATON,
PROFESSOR OF FINANCE FOR ENTIRE
CAREER LOOKING AT UTILITY
EVALUATION, UTILITY COMPANY
SALES, AND IT WAS THAT OPINION
THOSE TWO OPINIONS THAT THE COUT
RELIED ON AND THE REPORTS OF THE
EXPERTS.
AND THIS WAS IN CONTRAST TO THE
TESTIMONY THAT THE COURT HEARD
FROM THE COMMISSIONERS EXPERTS.
NOW, J.B. HEATON, THE
COMMISSIONERS EXPERTS SAID, "I
DON'T KNOW, I DON'T HAVE ANY
EXPERIENCE IN THE SALES OF
UTILITIES."
SO, HE DIDN'T HAVE ANYTHING TO
OFFER THERE PEER OF THE REBUTTAL
WITNESS FOR THE COMMISSIONER DID
TRY TO ADDRESS THAT POINT, AND
THEY DID IT WITH A REPORT THAT
WAS FULL OF ERRORS STARTING WITH
THE VERY TITLE OF THE REPORT.
IT WAS VERY SLOPPILY DONE, AND
THE ANALYSIS THAT WAS RELYING ON
WAS THE COURT POINTED OUT,
LOOKING AT THE INVESTMENT VALUE
OF COMPANIES, NOT THE MARKET
VALUE.
AND LOOKING AT COMPANIES WITH
RELATED COMPANIES OR COMPANIES
THAT MADE STRATEGIC SENSE TO BE
REQUIRED.
WHICH WILL SKEW MARKET VALUE.
ON TOP OF THAT, IT INCLUDED
INTANGIBLES WHICH ARE NOT TAXED
TO MINNESOTA.
THAT SKEWS THE ANALYSIS.
WHEN THIS WAS POINTED OUT IN
CROSS-EXAMINATION, MR. HOWARD LW
SAYS IT DOESN'T AMOUNT TO MUCH
BEER OF THE TESTIMONY JUDGING
THE CREDIBILITY SAID THAT
TESTIMONY WAS GIVEN WITHOUT MUCH
CREDIBILITY.
THOSE ARE THE THINGS THAT TAX
COURT RELIED ON.
>> SO THE COMMISSIONER SAYS YOU
NEED SPECIFIC -- MINNEGASCO
WOULD NEED EVIDENCE OF A
SPECIFIC TRANSACTION SHOWING A
WILLING BUYER DID COME IN FACT,
PAY LESS OR WOULD HAVE PAID
MORE.
YOU NEED SPECIFIC EVIDENCE OF
SPECIFIC TRANSACTIONS TO PROVE
THIS POINT.
HOW DO YOU RESPOND TO THAT?
>> Mr. Kilgore: NO, I THINK
THE TESTIMONY OF THE EXPERTS
DULY QUALIFIED EXPERTS WITH
EXPERIENCE WILL BE SUFFICIENT.
>> I DON'T UNDERSTAND THAT
ANSWER.
SO, ARE YOU SAYING YOU DON'T
NEED TO SHOW THAT?
I DON'T HEAR YOU GIVING US A
TRANSACTION OF THE TYPE THAT
YOUR OPPONENT DESCRIBED PEER
THAT IS WHAT I HEAR IN THE
CHIEFS QUESTION.
YOU DON'T HAVE TO SHOW THAT?
IS THAT WHAT YOU ARE TELLING US?
>> Mr. Kilgore: I DON'T THINK
IT IS NECESSARY TO PROVIDE TO
THE TAX COURT A SPECIFIC
TRANSACTION AND SAY, THIS IS ONE
TRANSACTION IN WHICH YOU HAVE A
DIFFERENCE IN MARKET VALUE.
THERE WAS ENOUGH FOR THE COURT
AS THE COURT POINTED OUT AN
ACCEPTED AND EVERYONE ACCEPTED,
WHEN YOU HAVE A DEDUCTION IN THE
REGULATORY PROCESS FOR
ACCUMULATED DEFERRED INCOME
TAXES, YOU HAVE A SITUATION
WHERE UTILITY THAT IS REGULATED
IS BEING TREATED DIFFERENTLY
THAN A COMPANY THAT IS NOT
REGULATED.
SO, YOU REALLY HAVE A SITUATION
IN WHICH YOU MAY HAVE EXTERNAL
OBSOLESCENCE.
THE EXPERTS WERE ASKED TO
TESTIFY ABOUT THAT AND THE COURT
RELIED UPON THAT TESTIMONY.
>> WHAT ABOUT -- GO AHEAD.
>> I THINK I KNOW WHAT YOUR
ANSWER TO THIS IS, BUT WHAT IS
YOUR REACTION TO THE COUNCIL
STATEMENT THAT IF WE WERE TO
AGREE WITH YOU AND WITH THE TAX
COURT HERE, IT IS KIND OF KAYDEN
BY THE DOORS IN TERMS OF THE
NUMBER OF UTILITIES THAT WILL BE
ABLE TO TAKE ADVANTAGE OF THIS
INTERPRETATION OF?
>> I SEE NOTHING IN THE TAX
COURT'S OPINION THAT SAYS GOING
FORTH, THIS IS GOING TO BE A
RULE THAT IS GOING TO BE BINDING
ON THE COMMISSIONER IN ALL
UTILITIES APPEAR THE COURT WAS
DECIDING THIS CASE BASED ON
THESE EXPERTS, THESE EXHIBITS.
HE WASN'T DECIDING ANY
PERSPECTIVE CASE IN THE FUTURE.
>> BUT WHAT I'M HEARING YOU SAY
THOUGH IS THAT YOU DIDN'T NEED
AND THEREFORE OTHER UTILITIES
WOULD NOT NEED TO SHOW THAT
BUYERS PAID A PRICE THAT WAS
LESS THAN BOOK VALUE.
THAT SEEMS TO BE THE
COMMISSIONER'S POSITION THAT
THAT IS KEY, YOU HAVE TO BE ABLE
TO SHOW THAT.
>> Mr. Kilgore: I THINK EVERY
CASE RISES AND FALLS ON THE
TESTIMONY OF THE EXPERTS IN THE
EXHIBITS.
I THINK IN A FUTURE CASE, THE
COMMISSIONER BRINGS AND AN
EXPERT WITNESS THAT SAYS, "THIS
IS NOT THE CASE."
WE CAN POINT TO TRANSACTIONS
THAT SHOW THAT PEER THEN YOU CAN
HAVE A DIFFERENT RESULT.
BUT THAT DIDN'T HAPPEN IN THIS
CASE.
THE COMMISSIONER DID NOT BRING
FORTH EVIDENCE OF THAT TYPE.
>> CAN YOU COMMENT ON THE
COMMISSIONER MENTIONED THAT IF
DEFERRED TAXES DID BECOME
EXTERNAL OBSOLESCENCE, THEN WHY
DID THE OBSOLESCENCE DOUBLE WHEN
THE TAXES WENT THERE?
>> Mr. Kilgore: THIS WAS A
SUBJECT AT TRIAL.
I THINK IT IS A FACTUAL
DETERMINATION FOR THE COURT.
AND I THINK WHAT THE COURT
GRASPED IS THAT THE EVIDENCE
SHOWED THAT, IN FACT, THERE WAS
A CORRELATION OTHER THAN ONE
YEAR.
AND THAT WAS ADEQUATELY
EXPLAINED BY A WITNESS FOR
MINNEGASCO.
THEY SAID, THAT WAS THE YEAR IN
WHICH THE TAX CUT AT THE END OF
2017 CAME INTO PLAY HERE THAT IS
WHY YOU HAVE THE DIFFERENCE FROM
THAT ONE YEAR.
YOU HAVE A DRAMATIC DROP IN THE
TAX RATE FROM 35% TO 21%.
THE GENERAL TREND THOUGH WAS NOT
AFFECTED BY THAT.
>> WHAT ABOUT THE COMMISSIONERS
POINT THAT ADIT IS REVENUE
NEUTRAL AS A UTILITY?
EVEN THOUGH THIS HAPPENS, IT IS
JUST KIND OF, IT IS KIND OF A
SHIFTING IN TIME AS OPPOSED TO
REDUCTION IN VALUE.
>> Mr. Kilgore: WRITES, IT IS
A REDUCTION IN VALUE BECAUSE,
AGAIN, THERE IS A SUBSTANTIAL
PART OF THE ASSETS OF THE
COMPANY THAT IT CAN'T TURN ON,
WHICH IS SOMETHING THAT WOULD
NOT APPLY TO UNREGULATED
COMPANY.
>> BUT THOSE ARE ASSETS THAT ARE
NOT REALLY ASSETS BECAUSE THEY
ARE OWED TO THE GOVERNMENT.
THAT IS THE THEORY, RIGHT?
SO, THAT IS LIKE EVERY OTHER
COMPANY.
I MEAN MY SUPPOSE IF A COMPANY
IS DEFERRING THEIR TAXES, THEY
CAN INVEST TO MAKE MONEY ON IT.
THAT IS YOUR POINT THAT YOU'RE
NOT IN INTENT TO MIKE UTILITY
COMPANY?
>> Mr. Kilgore: HAS THE TAX
COURT POINTED OUT THERE WAS NOT
A DISAGREEMENT BY ANY EXPERT
HERE THAT THE DEFERRED TAXES DID
REPRESENT A PORTION OF PROPERTY
THAT THE COMPANY COULDN'T TURN
ON.
AND I THINK THAT WAS THE
STARTING POINT FOR THE EXPERTS
DISCUSSIONS AND TESTIMONY.
>> BUT THE COMMISSIONER IS
SAYING THEY AGREE WITH THAT
POINT, BUT IT IS REVENUE NEUTRAL
TO THE UTILITY SO IT SHOULD NOT
AFFECT ITS VALUE.
WHY SHOULD IT ACTUALLY AFFECT
ITS VALUE?
I MEAN, SETTING ASIDE THE MARKET
COMPARISONS AND ALL OF THAT
STUFF, WHY DOES IT AFFECT ITS
VALUE?
>> Mr. Kilgore: I GUESS I CAN
ONLY RESPOND THAT REGARDLESS OF
HOW WE CHARACTERIZE THAT
SEGMENT, IT IS A SEGMENT THAT
THEY CAN'T GROW INCOME ON.
>> [INDISTINCT]
>> Mr. Kilgore: WELL, HIS
THEORY WAS INVESTORS AND
PURCHASERS BUY PROPERTY FOR THE
INCOME THEY PRODUCE.
ANY LIMITATION ON THE INCOME
THEY CAN PRODUCE IS GOING TO
LOWER MARKET VALUE.
>> BUT I THOUGHT YOU SAID WE
SHOULDN'T LOOK TO INVESTORS
BECAUSE WE SHOULDN'T LOOK TO
WHAT INVESTORS SHOULD PAY
BECAUSE THEY HAVE DIFFERENT
MOTIVES.
WHICH IS THE OTHER THING I DON'T
QUITE GET, HOW DO YOU DETERMINE
MARKET VALUE IF YOU DON'T LOOK
TO THE PEOPLE BUYING IT ON THE
MARKET?
THAT DOESN'T MAKE SENSE TO ME
THERE.
>> Mr. Kilgore: NO, YOU SHOULD
CERTAINLY LOOK TO INVESTORS.
I DIDN'T MEAN TO SAY YOU
SHOULDN'T LOOK TO INVESTORS.
>> IT SEEMS LIKE THE TAX COURT
DID.
>> Mr. Kilgore: THE TAX COURT
DID OR DIDN'T?
WELL, I THINK YOU SHOULD LOOK TO
INVESTORS.
THIS IS WHAT THE EXPERTS WERE
TESTIFYING ABOUT.
IF THE I WAS WHAT THE INVESTORS
WOULD DO IN THIS SITUATION, HOW
MUCH WOULD THEY DETERMINE
MARKET VALUE?
>> I KNOW BUT THE TAX COURT SAID
THAT YOU SHOULDN'T DO THAT
BECAUSE INVESTORS HAVE
MOTIVATIONS THAT ARE DIFFERENT
THAN THE MARKET AND IT IS
IRRELEVANT.
>> Mr. Kilgore: WHAT THE COURT
WAS TALKING ABOUT IN THAT
PORTION OF THE OPINION WAS
TESTIMONY FROM MR. LUBLOW AND
SAYING THAT THE COURT FOUND THAT
MR. LUBLOW WAS LOOKING AT
TRANSACTIONS THAT WERE NOT
ARM'S-LENGTH TRANSACTIONS.
AND BECAUSE YOU DON'T HAVE ARMS
LINKS TRANSACTION, YOU DON'T FIT
THE DEFINITION OF MARKET VALUE
IN THE STATUTE.
I WANT TO TALK A BIT, IF I MAY.
ABOUT THE COMMISSIONER'S
ALLEGATIONS OF TAX COURT CREATED
A NEW RULE.
IN THIS NEW RULE SEEMS TO BE
THAT THE COMMISSIONERS EXPERT
CANNOT ARRIVE AT VALUES HIGHER
THAN THE COMMISSIONERS.
THAT IS SUCH A RULE THAT
INTERFERES WITH THE COURT'S
TRIAL STRATEGY HAS THE
COMMISSIONER SAYS.
I THINK IT IS TELLING.
THE TAX COURT OPINION NEVER SAYS
THAT THE COMMISSIONERS EXPERT
CANNOT ARRIVE AT VALUES HIGHER
THAN THE COMMISSIONERS.
TO THE CONTRARY, THE TAX COURT
OPINION EXPRESSLY SAYS THAT THE
COMMISSIONERS EXPERT IS
CERTAINLY ENTITLED TO DISAGREE
WITH THE COMMISSIONER.
THE TAX COURT'S COMPARISON OF
THE COMMISSIONERS CAP RATE STUDY
WITH DR. HEATON'S METHODOLOGIES
AND NOT CONCLUSIONS ON PAGES 30
AND 31 OF THE OPINION,
JUDGE DELAPENA SAID THE FACT
THAT DR. HEATON DERIVED CAP
RATES IN A DIFFERENT MANNER IN
THE TAX COURT SOUGHT FITTING TO
PUT THOSE WORDS IN ITALICS THAT
THE COURT FOUND OBJECTIONABLE.
THE TAX COURT'S ANALYSIS NEVER
MENTIONS THE COMMISSIONERS UNIT
VALUES.
AND THIS DEFEATS THE
COMMISSIONER'S APPARENT ARGUMENT
THAT THE COURT IS USING THOSE
UNIT VALUES AS A CLOSED ON WHAT
DR. HEATON COULD PROPOSE.
NOW, OBJECTING TO THE TAX
COURT'S NEW RULE, THE
COMMISSIONER DEFENDS HIS
PRACTICE OF USING DIFFERENT
METHODOLOGIES PRODUCING
SIGNIFICANTLY HIGHER VALUES
DEPENDING ON WHETHER THE
TAXPAYER CHALLENGE THE
COMMISSIONERS ASSESSMENT OR NOT.
AND MINNEGASCO FLATLY REJECTS
THE COMMISSIONERS ARGUMENT ON
PAGE 5 OF HIS REPLIED BRIEF THAT
ONCE MINNEGASCO APPEALED TO THE
TAX COURT, IT WAS NO LONGER
SIMILARLY SITUATED TO ALL OF THE
OTHER UTILITIES BECAUSE IT
SOUGHT TO BE TREATED DIFFERENTLY
THROUGH ITS APPEAL.
THIS IS WRONG BECAUSE THE
OPPORTUNITY TO CHALLENGE A TAX
STATES TAXATION POWER IS A RIGHT
GRANTED ALL TAXPAYERS BY THE
LEGISLATIVE.
IN RULE 8100, WHICH THE
COMMISSIONER IS CLEAR THAT THE
POWER OF THE STATE MUST BE
EXERCISED IN A MANNER THAT IS
PREDICTABLE AND STABLE.
IN THIS CORE, THEY HAVE SAID IN
A DIFFERENT CONTEXT THE
COMMISSIONERS TAXATION PRACTICES
MUST BE CONSISTENT AND
EQUITABLE.
>> BUT RULE 8100 GIVES THE
COMMISSIONER DISCRETION.
>> Mr. Kilgore: CERTAINLY.
>> IF THE COMMISSIONER HAS
DISCRETION UNDER THE RULE, WHY
CAN'T IT CHANGE ITS
METHODOLOGIES?
>> Mr. Kilgore: BECAUSE THE
RULE SAYS THE COMMISSIONER HAS
DISCRETION IN ORDER TO REACH
CERTAIN GOALS.
ONE OF THOSE GOALS IS THE
ASSESSMENTS BE PREDICTABLE AND
STABLE.
SO, IF THE COMMISSIONER EXERCISE
THE DISCRETION TO MOVE AWAY TO A
SITUATION THAT IS LESS
PREDICTABLE AND LESS STABLE,
THAT IS NOT SOMETHING THAT RULE
8100 WOULD JUSTIFY.
I THINK IT IS IMPORTANT --
>> ON THE PROTECTION OF EQUAL
TREATMENT KIND OF ARGUMENT, I
MEAN, THERE IS SOMETHING KIND OF
LOGICALLY APPEALING ABOUT THE
ARGUMENT THAT WHEN YOU APPEAL
AND A TAXPAYER APPEALS FROM THE
GENERAL ASSESSMENT METHODOLOGY
AND IF YOU ARE CHALLENGING THE
METHODOLOGY, YOU ARE ASKING TO
BE TREATED DIFFERENTLY.
IN FACT, THAT IS WHAT YOU ARE
DOING.
AND SO, WHY ISN'T THE ARGUMENT
WELL, THEN, THIS IS KIND OF THE
POINT THAT WE HAVE TO TREAT THIS
PARTICULAR TAXPAYER THE SAME AS
EVERYBODY ELSE AND THEY ARE
CHALLENGING THAT.
OR IT SEEMS LIKE THE IMPLICATION
OF YOUR ARGUMENT IS THE TAX
COMMISSIONER CAN ONLY RELY ON
ITS RATE SETTING METHODOLOGY AND
ASSESSMENT AND HAVE TO DEFEND
THAT.
THAT IS THE LOGICAL IMPLICATION
OF THE ARGUMENT THAT A PERSON
WHO IS APPEALING CAN'T BE
TREATED DIFFERENTLY IN ANY WAY.
>> Mr. Kilgore: I THINK SOME
DISTINCTIONS HAVE TO BE MADE
HERE.
SO EVALUATION INVOLVES A NUMBER
OF APPROACHES.
AND IN THE INCOME APPROACH, THE
CAPITALIZATION RATE STUDY IS A
STUDY THAT IT DOES NOT FOCUS ON
ANY INDIVIDUAL TAXPAYER.
IT DOESN'T ESTIMATE SEPARATE
COST OF CAPITAL FOR EACH
UTILITY.
IT ESTIMATES ONE COST OF CAPITAL
FOR AN ENTIRE CLASS LOOKING AT
MACRO, ECONOMY WIDE STANDARDS.
FROM THAT PERSPECTIVE, IT
DOESN'T MAKE ANY SENSE FOR THE
METHODOLOGY TO CHANGE JUST
BECAUSE A TAXPAYER HAS ELECTED
TO APPEAL.
BECAUSE THE TAXPAYER HASN'T
CHANGED AT ALL.
IT IS SIMILARLY SITUATED TO ALL
OF THE OTHER GAS DISTRIBUTION.
>> THIS RAISES THE QUESTION
THOUGH IF THAT IS THE CASE, WHY
CAN'T THE COMMISSIONER BRING IN
AN ARGUMENT STATING, WELL, YOU
APPEALED IN THIS COMPANY IS
DIFFERENT.
WE AGREE WITH YOU SO WE THINK
THIS DIFFERENT METHODOLOGY
SHOULD APPLY IN THIS PARTICULAR
CASE.
DOESN'T WHAT YOU ARGUE PROVE A
POINT THAT THEY CAN DO THAT?
>> THERE ARE MANY MEANS BY WHICH
ON APPEAL THE COMMISSIONER CAN
ARRIVE AT NUMBERS AND A COURT
CAN ARRIVE AT NUMBERS DIFFERENT
THAN THE COMMISSIONER DID IN THE
ASSESSMENT.
IN THE RECONCILIATION OF A COST
INCOME APPROACH THE WAITING
COULD BE DIFFERENT AND CAN
RESULT IN A HIGHER ASSESSMENT.
IN ESTIMATING THE OPERATING
EARNINGS OF COMPANY INCOME
APPROACH, THAT COULD BE
DIFFERENT.
THAT IS COMPANY SPECIFIC.
AND THE COST APPROACH, THE COURT
COULD TREAT OBSOLESCENCE
DIFFERENTLY.
THAT COULD RESULT IN A DIFFERENT
VALUE.
BUT AGAIN, WHEN YOU GET TO THE
COST OF CAPITAL AND YOU ARE
LOOKING AT THE ECONOMY AS A
WHOLE AND YOU SUDDENLY ARE
RELYING ON AN EXPERT WHO WANTS
TO USE JUST ONE APPROACH AND IT
IS AN APPROACH --
>> SO THE COMMISSIONER COME I
THINK THE COMMISSIONER'S
ARGUMENT IS THAT EXACTLY WHAT
THEY ARE EXPERT WAS DOING IS
WHAT YOU SAID IS THAT FOR
PURPOSES OF GIVING BGM AND FOR
THE BETA THAT MINNEGASCO
ACTUALLY IS DIFFERENT BECAUSE IT
IS NO GROWTH COMPANY AND BGM
DOESN'T MAKE SENSE.
AND IT IS THE BETA PART, I
DIDN'T QUITE UNDERSTAND BECAUSE
THEY SAID IT WAS UTILITY BUT MY
UNDERSTANDING IS THE RATE
UTILITIES EXCLUSIVELY ANYWAY.
BUT IS THERE SOMETHING SPECIFIC
THAT THE ARGUMENT FOR MINNEGASCO
THAT MAKES IT DIFFERENT FROM THE
EXPERTS POSITION, HEATON'S
POSITION AND THE METHODOLOGY AND
RATE SHOULD NOT APPLY AND BGM
SHOULD HAVE --
WHY IT IS THAT WRONG?
THAT WAS A LONG QUESTION BUT MY
LAST SENTENCE IS THE QUESTION.
>> Mr. Kilgore: THAT WAS NOT
DR. HEATON'S TESTIMONY THAT THIS
DGM IS NOT APPROPRIATE FOR THIS
TAXPAYER.
IT WAS THAT THE D GM IS NOT A
RELIABLE MODEL.
ONLY THE CAPITAL AND PRICING
MODEL IS.
AND I WOULD POINT OUT, TOO, THE
COURT, THE COURT'S DECISION ON
THE COST OF CAPITAL WASN'T BASED
ENTIRELY, ALTHOUGH THE COURT
CERTAINLY FOUND IT RELEVANT BUT
NOT BASED ENTIRELY ON THE FACT
THAT DR. HEATON WAS DIFFERING
FROM WHAT THE COMMISSIONER HAD
DONE.
THE COURT SAID DR. HEATON IS
ENTITLED TO DO WHATEVER HE
WANTS.
BUT THE COURT WAS RELYING
HEAVILY ON TESTIMONY OF
MINNEGASCO'S EXPERTS.
AND IN PARTICULAR, MR. HEATON
SAID, YOU HAVE AN UNRELIABLE
COST OF CAPITAL IF YOU DON'T
HAVE HER THAN ONE METHOD SO THEY
CAN ACT AS CHECKS AGAINST ONE
ANOTHER.
AND SO, THAT TESTIMONY SUPPORTED
RELYING MORE ON MR. TOAD GUARD
AND MR. HEATON.
IT WAS NOT NEARLY THE FACT THAT
HE HAD DIFFERED FROM THE
METHODOLOGY USED BY THE
COMMISSIONER.
>> COUNCIL FOR YOU TO PREVAIL,
DO WE HAVE TO RULE AS A MATTER
OF LAW THAT THE TAX COURT ERRED
HERE AND SAYING THAT THERE WAS A
DIFFERENCE IN APPROACH?
IN OTHER WORDS, DO WE HAVE TO
SAY THAT THE COMMISSIONER CAN
NEVER USE A DIFFERENT APPROACH
ON CAP RATES IN ORDER FOR YOU TO
PREVAIL?
NO, NO.
EVEN IF THE COMMISSIONER IS
RIGHT THAT MINNEGASCO BY
APPEALING LOST THE RIGHT TO BE
TREATED THE SAME AS ALL THE
OTHER COMPANIES, WHICH WE THINK
IS INCONSISTENT WITH EXISTING
LAW BECAUSE OF RULE 18100.
BUT EVEN IF THE COMMISSIONER IS
RIGHT THAT WOULD NOT RESULT IN A
REVERSAL.
THE TAX COURT DIDN'T DECIDE THIS
CASE ON THE BASIS OF WHAT THE
COMMISSIONER CALLS A NEW RULE.
AS THE COMMISSIONER'S OPINION
REPEATEDLY NOTES AND FORTRESSES
WITH CITATIONS, ITS CONCLUSIONS
ARE BASED ON ALL OF THE EVIDENCE
WHICH BRINGS ME BACK TO
THE 200-FOOT NOTES THE RECORD
SUPPORTS EVERYTHING THAT THE
COURT DID.
THANK YOU.
BECAUSE THANK YOU, COUNSEL.
MS. KITCHAK, YOU HAVE 10 MINUTES
FOR REBUTTAL.
>> Ms. Kitchak: UNLESS THERE
IS IMMEDIATE YOU HEARD THE COURT
OF OPPOSING COUNSEL'S POINT ME
TO MARKET EVIDENCE THAT SUPPORTS
OBSOLESCENCE THEORY.
AND WHAT HE IS SAID, THE
COMMISSIONER DIDN'T BRING FORTH
ANY.
>> NO, WHAT HE SAID IS THE
EXPERT TESTIFIED ABOUT HIS
QUALIFICATIONS AND HIS
EXPERIENCE.
AND THE EXPERT'S OPINION AND
THIS IS SORT OF STANDARD EXPERT
WITNESS STUFF HERE THE EXPERT
GIVES AN OPINION BASED ON HIS
TRAINING AND EXPERIENCE, THAT X
SPIRITS OF THE COMMISSIONER CAN
COME FORWARD WITH NOT X BUT THE
COMMISSIONER DIDN'T.
SO THE EXPERT, AND THAT IS
SUFFICIENT.
>> Ms. Kitchak: I THINK HE
SAID BOTH, YOUR HONOR.
HE SAID YOU CAN LOOK AT MY
EXPERT'S TESTIMONY IN HIS
REPORT.
BUT THOSE REPORTS WERE PREPARED
BY AN EXPERT WHO TESTIFIED
TRANSCRIPT PAGE 240 HE WAS NOT
INVOLVED WITH ANY MARKET
TRANSACTIONS INVOLVING UTILITIES
AND THE LAST 30 YEARS HERE AND
HE ALSO TESTIFIED TRANSCRIPT 582
THAT HE IS NEVER WORKED IN A
SETTING DOING RATE REGULATION.
SO COME IF THAT IS HIS VAST
EXPERIENCE UPON WHICH HE BASES
HIS CONCLUSION THAT PURCHASERS
WILL NOT BUY THESE ASSETS OR
ANYTHING CLOSE TO BOOK VALUE,
THAT IS NOT SUFFICIENT TO
SUPPORT THAT OPINION PAIR THAT
IS WHAT I'M SAYING HERE.
>> YOU WOULD SAY THE TAX COURT'S
RELIANCE ON THE EXPERT OPINION
WAS AN ABUSE OF DISCRETION OR
OTHERWISE ERRONEOUS?
>> Ms. Kitchak: I WOULD SAY IT
IS CLEARLY ERRONEOUS BECAUSE
THERE WAS NO EVIDENCE TO SUPPORT
THE LOGICAL LEAP FROM REGULATION
TO LOSS IN VALUE IN THE MARKET.
THAT IS WHAT THE COURT DOES WHEN
IT LOOKS AT THE TOTALITY OF THE
EVIDENCE, IT CAN CONCLUDE IT
DIDN'T REASONABLY SUPPORT THE
EXTERNAL OBSOLESCENCE CONCLUSION
CONCLUSION.
AND AS TO THE LOGICAL FALLACY,
WHILE COUNSEL RECITATIVE AN
EXPLANATION OF ABOUT WHY,
COUNSEL THINKS THE COURT DIDN'T
STRUGGLE WITH THE LOGICAL
FALLACY OF ADIT BALANCE IS GOING
DOWN WHILE OBSOLESCENCE DOUBLED.
THAT IS NOT SOMETHING THE COURT
NEVER EXPLAINED IN ITS OWN
OPINION.
THAT IS ALSO ONE OF THE POINTS
THAT CLEARLY ERRONEOUS WHERE THE
TEXT CODE FAILS TO EXPLAIN ITS
REASONING.
>> WE DO UNDER THE LAW GIVE
DEFERENCE TO THE TAX COURT.
THE TAX COURT IS RECOGNIZED AS
HAVING EXPERTISE IN THE
EVALUATION HERE.
THIS FEELS LIKE TAX COURT STUFF
TO ME.
>> Ms. Kitchak: IT IS
DEFINITELY TAX COURT STUFF, BUT
THE COURT STANDARD IS WHILE IT
DOES DEFER GENERALLY TO
EVALUATION DECISIONS, IT WILL
NOT DIFFER IF THE EVIDENCE AS A
WHOLE DOES NOT SUPPORT THE
CONCLUSION OR TAX COURT FAILS TO
EXPLAIN REASONING PEER THAT IS
WHERE YOU COULD HAVE SHOWN THAT
EVALUATION IS CLEARLY ERRONEOUS.
>> COUNSEL, HOW ABOUT THE POINT
THAT YOUR OPPONENTS MAKE THAT
THIS IS ACTUALLY CASE-BY-CASE
LITIGATION STRATEGY OF THE TAX
COURT NOTES THAT THE 2017 CASE
INVOLVING THEM AT THE SAME
ISSUES, SAME EVALUATIONS WAS NOT
APPEAL OF THE PIER OF THE
COMMISSIONER TOOK A DIFFERENT
LITIGATION STRATEGY AND DID NOT
APPEAL 2017 AND DECIDED TO
PRESENT EVIDENCE WITH MR.
TEGARDEN IN THIS CASE.
BACK TO THE CHIEFS POINT, ISN'T
THIS JUST CASE-BY-CASE
LITIGATION?
IS THERE REALLY A CONCERN THERE
IS SOME BROAD RULE THAT IS GOING
TO HAVE THE TYPE OF EFFECT THAT
YOU INDICATED?
>> Ms. Kitchak: WELL, TAX
COURT ESPECIALLY IN THIS COURT
AND THE 2017 CASE, THE
COMMISSIONER ELECTED NOT TO
APPEAL BECAUSE IT WASN'T THE
RIGHT RECORD TO APPEAL THIS
ISSUE.
HERE ON THIS RECORD, THERE IS
STILL NO MARKET EVIDENCE FROM
THE TAXPAYER THAT STANDARD RATE
REGULATION TREATMENT CAUSES
LOSSES IN THE MARKET FOR
PARTICULAR PURCHASERS.
THE COMMISSIONER CAME FORWARD
WITH A WHOLE BUNCH OF EVIDENCE
SHOWING THE OPPOSITE.
IF THE COURT WERE TO AFFIRM ON
THIS RECORD AN EXPERT COULD COME
IN AND RECITE THEM IN MY
OPINION, BUYERS WILL PAY FOR
THESE ASSETS FROM EVEN THOUGH
THERE IS A BUNCH OF EVIDENCE
SHOW THEY DO COME IN FACT PAY
FOR THEM HERE THAT IS SOMETHING
THAT WILL BE VERY HARD TO
OVERCOME IN THE FUTURE.
IF THIS COURT SAYS IT IS ENOUGH
TO APPROVE CAUSES HUNDREDS OF
MILLIONS OF LOSSES, THAT IT WILL
HAVE A PRACTICAL EFFECT FOR
EVERY OTHER SIMILARLY REGULATED
UTILITY IN THE 85 COUNTIES IN
WHICH GAS UTILITIES ARE VALUED
BY THE COMMISSIONER.
>> CAN YOU JUST RUN THROUGH WHY
YOU THINK THE RATE TREATMENT OF
ADIT DOESN'T AFFECT VALUE?
WHAT IS THE ARGUMENT?
>> Ms. Kitchak: WELL, THE
REGULATORS TREATED THIS WAY FOR
A REASON.
IS THAT UTILITIES BY VIRTUE OF
THE TAX CODE CAN DEFER PAYING
INCOME TAXES BY USING
ACCELERATED DEPRECIATION OF
THEIR ASSETS.
ABOUT PART OF THE RATE
REQUIREMENT IN REGULATION IS THE
REGULATORS ALLOW THE COMPANY TO
COLLECT AMOUNTS FOR THEIR TEXANS
FROM THEIR CUSTOMERS AND THOSE
RATES.
SO THEY COLLECT THESE TEXANS
FROM THE CUSTOMERS, BUT THEY
DON'T HAVE TO PAY THEM.
THEY HAVE THE BENEFIT OF USING
THOSE FUNDS FOR ANYTHING THEY
WANT.
THEY CAN INVEST IN THE OUTSIDE
MARKET OR BY A PLANT FOR THIS
UTILITY.
BUT THEY ARE NOT HAVING TO GO
OUT AND PAY IN A COST FOR THAT
CAPITAL.
ZERO COST CAPITAL FUNDED BY THE
RATEPAYERS.
SO, THE IDEA THAT YOU ARE LOSING
OUT ON NOT BEING ABLE TO EARN ON
SOMETHING THAT YOU INVESTED IN
THE FIRST PLACE IS A MISNOMER.
IT IS TO PROTECT THE RATEPAYER
FROM GETTING DEEMED TWICE WHICH
THE FLIP SIDE IS THE WHEN FULL
TO THE UTILITY.
>> THEY CAN USE THAT MONEY TO
INVEST IN SOMETHING THAT WILL
BRING A RETURN.
>> Ms. Kitchak: I DON'T THINK
THERE IS A LIMITATION BY THE
REGULATORS HOW THEY CAN USE THE
FUNDS.
IT IS JUST IF THEY PURCHASE
REGULATIVE ASSETS OF THOSE
FUNDS, THEY CAN'T CHARGE THE
RATEPAYERS FOR THE BENEFITS OF
USING THOSE FUNDS IN ADDITION TO
HAVING COLLECTED THE FUNDS.
>> THAT MIGHT BE WHY BUYERS
DON'T UNDERVALUE THEM.
BECAUSE THEY ARE STILL ASSETS
THEY CAN INVEST OVER TIME
ACTUALLY.
>> Ms. Kitchak: WELCOME
EVENTUALLY DEFERRED TAXES BECOME
PAYABLE.
THE ADIT BALANCES ACTUALLY GO
DOWN.
IT IS NOT AN INCURABLE
CONDITION.
IT IS A TEMPORARY CONDITION.
>> COUNSEL, CAN YOU EXPLAIN ONE
MORE TIME HOW IS IT THE
RATEPAYERS GETTING TWICE?
I GET HOW THEY GET DINGED ONCE
BECAUSE REVENUE IS BEING
COLLECTED BUT HOW DO THEY
GETTING TWICE?
>> Ms. Kitchak: THE SECOND
TIME WOULD BE IF THE COMPANY
TAKES THOSE TAXES THAT THEY
COLLECTED FROM THE REPAIRS AND
USES THEM TO BUY ASSETS THAT THE
COMPANY DIDN'T INVEST IN, THEY
CHARGE THEM FOR RATE OF RETURN
ON THOSE ASSETS IN THEIR RATES
THEMSELVES.
SO, THAT IS THE SECOND TIME WHEN
THEY WILL GET DINGED.
THAT IS WHY THE REGULATORS
DISALLOW LEARNING OF RATE OF
RETURN ON ESSENTIALLY CUSTOMER
FUNDED, CUSTOMER FINANCED
ASSETS.
BECAUSE THE INVESTORS IN THE
COMPANY AREN'T RESPECTING RATE
OF RETURN ON THE ASSETS BECAUSE
THEY DIDN'T INVEST IN THEM, THE
RATEPAYERS DIDN'T.
>> COUNSEL, USE OF THE
COMMISSIONER INTRODUCED "A BUNCH
OF EVIDENCE THAT ADIT DOES NOT
IMPACT WHAT BUYERS PAY."
WHAT WOULD YOU REFER ME TO?
DIG UP WITH THOSE CITATIONS IN
YOUR BRIEF TO THAT BUNCH OF
EVIDENCE?
>> Ms. Kitchak: THEY ARE IN
THE BRIEF BUT SPECIFICALLY
OVERLONG CONSULTING REPORT
J4 EXHIBIT 3 IS THE TABLE OF
TRANSACTIONS OVER THE LAST FEW
YEARS OF RATE REGULATED UTILITY
ASSETS THAT DEMONSTRATE THAT THE
PRICE PAID FOR ASSETS IS ABOUT
THE BOOK VALUE.
THAT IS SOME OF THE EVIDENCE.
THERE WAS ALSO EVIDENCE FROM
PEGGY'S WARM, THE DIRECTOR OF
REGULATORY MANAGEMENT THAT
TESTIFIED.
SHE TESTIFIED ABOUT RECENT
TRANSCRIPT 83 WHERE MINNEGASCO
BUT ASSETS FOR MORE THAN THE
SELLERS HAD THEM ON THEIR BOOKS.
AND THEN I THINK HIM AGAIN, WE
COME TO LOVE FALLACY POINT WHERE
IF ADIT IS THE CAUSE, WHY IS THE
CAUSE DECREASING?
IS THE NEGATIVE PURPORTED EFFECT
DOUBLING?
THAT LEAVES YOU WITH UNANSWERED
QUESTIONS ABOUT HOW THAT CAN
REALLY BE CAUSING A LOSS IN
VALUE AS IT DEPLETES A LOSS IN
VALUE MORE THAN DOUBLES.
>> I THOUGHT A HEARD OPPOSING
COUNSEL SAY THAT WAS BECAUSE OF
THE YEAR SELECTED TO LOOK AT
THAT WAS SOMEHOW ADMIRATION
BECAUSE OF THE TAX CUT?
>> Ms. Kitchak: THE ADIT IS
LIKE 2%, I THINK.
THE ADIT IS ALMOST FLAT.
IT GOES DOWN A LITTLE BIT.
YET, THE OBSOLESCENCE SOMEHOW
DOUBLES.
I DON'T THINK YOU CAN EXPLAIN
THAT AWAY WITHOUT A TREND.
IF SOMETHING DOESN'T CHANGE AND
ONE LEAPS UP, THAT DEFIES THE
LOGICAL REASONING IF ADIT CAUSES
THAT RESULT.
>> WHAT ABOUT THIS NOTIONAL
THOSE COMPARABLES IN THE J4 ARE
STRATEGIC INVESTMENTS?
I DON'T KNOW WHAT THE DIFFERENCE
IS OF STRATEGIC VERSUS ARM'S
LENGTH TRANSACTION.
>> Ms. Kitchak: ARM'S LENGTH
TRANSACTION IS WILLING BUYER
TYPICALLY MOTIVATED.
>> WHICH IS, GO AHEAD HOW WAS
THAT DIFFERENT?
>> Ms. Kitchak: ESSENTIALLY
YOU CAN SEE THAT MOST UTILITY
TRANSACTIONS WILL INVOLVE SOME
SORT OF SYNERGY PEER THAT IS HOW
THEY HAPPEN.
AND IN OUR ARGUMENT, THAT IS
WHAT IS TYPICAL OF THE MARKET OF
BUYERS FOR UTILITIES THAT THEY
ARE SEEKING SYNERGY.
SO, TO SAY THEY ARE UNLIKELY
MOTIVATED OR DIFFERENTLY
MOTIVATED ISN'T REALLY FAIR IF
YOU ARE LOOKING AT PEOPLE WHO
BUY UTILITIES APPEAR THEY HAVE
SIMILAR MOTIVATIONS AND THAT IS
TYPICAL OF THE MARKET.
WILLING BUYER, WILLING SELLER,
TYPICALLY MOTIVATED.
>> OKAY, YOUR TIME IS EXPIRED,
THANK YOU VERY MUCH, COUNSEL.
THANKS FOR THE HELP YOU PROVIDED
TO THE COURT IN THIS MATTER.
THIS CASE IS SUBMITTED AND WE