NEW MEXICO – Power purchase agreements between wholesale electricity generators and customers are intangible property not subject to property taxation

Lea Power Partners LLC, a wholesale electricity generator, operates an electric generating facility in Hobbs, Lea County, New Mexico. The facility delivers electricity into the Southwest Power Pool. The Pool is not a “capacity market,” which means that the Pool does not guarantee any payments to Lea Power Partners for its production of electricity at the facility. Wholesale generators like Lea Power Partners produce revenues by entering into private contracts with customers through power purchase agreements to secure compensation in exchange for having the capacity to produce or provide electricity.

In 2006, Lea Power Partners negotiated and entered into such an agreement with Southwest Public Service. Pursuant to the agreement, Lea Power Partners agreed to sell to Southwest Public Service all of the electric capacity and associated energy produced by its facility for twenty-five years, beginning September 2008. Under the agreement, Southwest Public Service was obligated to purchase all of the electric capacity and associated energy produced by the facility and supply Lea Power Partners with all the natural gas required to produce such electric capacity and associated energy. Significantly, the agreement guaranteed that Lea Power Partners receive annual revenue whether or not its facility produced any electricity.

Lea Power Partners submitted its 2012 property tax return and received a notice of valuation from the New Mexico Property Tax Division. Following receipt of the notice of valuation, Lea Power Partners timely filed a protest of the Division’s 2012 valuation. In the four years following, Lea Power Partners timely submitted property tax returns, the Division sent it notices of valuation in response, and Lea Power Partners timely filed protests to the notices of valuation. The protests asserted that the value of the Lea Power Partners property — and crucially, the facility—was significantly lower in each reported year than was reflected in the Division’s notices of valuation. The protests were consolidated and a hearing was held in June 2017. The Administrative Hearing Officer ultimately granted in part and denied in part Lea Power Partners’ protests, finding that the power purchase agreement was intangible property and was subject to neither taxation nor inclusion within calculation of tangible property cost under New Mexico law. On appeal, the Court of Appeals affirmed the Administrative Hearing Officer’s decision.

The Court relied on the plain meaning of the relevant section of the Administrative Code to hold that the Administrative Hearing Officer properly characterized power purchase agreements as “intangible long-term contracts” and thus properly considered them non-taxable, intangible property. The Court also agreed that they should not be characterized as an intangible cost of Lea Power Partners – rather than intangible property – and therefore not subject to property tax. The Court explained that certain costs, such as those associated with labor, engineering and geological analysis, utility bills, and equipment rental fees — met the definition of “intangible property cost” because they were “necessary expense[s]” and “necessary items[s] of expenditure”  but rejected the Division’s argument that intangible long term contracts like power purchase agreements  were likewise taxable “costs” simply because they are “used or useful for the generation, transmission or distribution of electric power or energy.”

 Lea Power Partners LLC v New Mexico Taxation and Revenue Department, 2021 WL 72203 (Ct App. N.M. January 6, 2021)

MISSOURI – Court of Appeals rejects appraisal utilizing all three approaches to value, and holds that assessors must use reproduction cost approach to value natural gas pipeline companies’ real and personal property

Laclede is a utility company that provides natural gas service throughout Missouri by means of gas service lines, mains, and other facilities, and is regulated by the Federal Energy Regulatory Commission and the Missouri Public Service Commission.  Laclede reports the cost of its assets to the Public Service Commission, which impacts the rate Laclede charges its customers for its service.

 In September 2013, Laclede purchased real and personal property from Missouri Gas Energy located in Clay County, Missouri. The real property consisted of underground pipes and gas mains and the personal property consisted of meters and regulators. The property also included new assets that were being constructed and assets provided by others to assist in construction and expansion of Laclede’s gas distribution system. A dispute arose between the assessor and Laclede as to the proper valuation of Laclede’s property in Clay County. Laclede appealed the assessor’s valuations to the Clay County Board of Equalization, but the Board adopted the assessor’s valuations. Laclede appealed the Board’s valuations to the State Tax Commission, which, after hearing testimony from experts for both the assessor and Laclede, reduced the valuations.

On appeal to the Court of Appeals, the assessor argued that the State Tax Commission erred in setting aside the Board’s valuations because Laclede failed to meet its burden of proof to present substantial and persuasive evidence to rebut the presumption of correct assessment by the Board in that the evidence produced by Laclede failed to properly apply accepted appraisal methodologies. Laclede responded by arguing that the General Assembly legislatively abolished the rebuttable presumption that the Board’s valuations were correct by amending Mo. Ann. Stat. § 138.431.4, and even if the presumption persists Laclede met its burden to rebut them.

The Court construed Mo. Ann. Stat. § 138.431.4, finding that the legislature abolished the rebuttable presumption in favor of the assessor’s valuations but left the rebuttable presumption in favor of valuations by boards of equalization and the State Tax Commission intact. Therefore, said the Court, the Commission was obligated to give the Board’s valuation a presumption of validity.

The Court also found that Laclede successfully rebutted the presumption that the Board’s valuations were correct. The assessor’s expert appraiser improperly used 1997 as the vintage year of all Laclede property installed before 1997 because the data provided by Laclede to the assessor did not include any vintage years for property installed before 1997.  While the initial information provided to the assessor by Laclede failed to provide the vintage years for certain personal property such as pipelines that were placed in service before 1997, Laclede later provided the assessor with an amended list of property with the correct vintage years when Laclede became aware that the assessor did not have the proper vintage years for all of its property. The assessor, and the assessor’s expert failed to amend the valuation based on this information prior to the Board’s hearing. The assessor also admitted that she did not properly apply the depreciation schedule, even though she had the necessary information to properly make those calculations, and this resulted in a higher assessed value. This admission rendered the assessor’s valuations unreasonable, and therefore the Board’s adoption of those valuations unreasonable. Accordingly, the Court found that the Board erred in sustaining the assessor’s valuation because the assessor unreasonably failed to consider and properly calculate depreciation based on the vintage years of the property.

However, the Court ordered the matter remanded back to the State Tax Commission, because it adopted Laclede’s valuations, and Laclede did not provide substantial and competent evidence to establish the valuation of its personal and real property. The Commission adopted Laclede’s expert appraiser’s valuation, which incorporated the cost approach, the comparable sales approach, and the income approach. In 2013, the Commission mandated that assessors use the reproduction cost approach to value natural gas pipeline companies’ real and personal property. The Commission failed to follow its own mandate. Therefore, the Court reversed and remanded for a determination of the value of the properly by applying the reproduction cost approach as mandated by Commission publications for the 2014 and 2015 tax years.

Rinehart v Laclede Gas Company, 607 S.W.3d (Miss. Ct. App., August 18, 2020)

LOUISIANA – Tax Commission properly relied on the purchase price of wells to establish their fair market value

In October 2012, D90 purchased two gas wells and one saltwater disposal well for $100,000.  The wells were subject to ad valorem property taxation in Jefferson Davis Parish. Relying on a Louisiana Tax Commission regulation applicable to oil and gas wells (LAC 61:V.907(A)(6)(e)), D90 argued that the purchase price in a valid sale is evidence of fair market value; therefore, the wells should be valued at $100,000 for the following three tax years.  For 2016, D90 provided the assessor with emails showing the wells were “shut in,” thus warranting a 90 percent reduction in value.  LAC 61:V.907(A)(6)(b). For that year, D90 submitted a fair market value of $10,000.00 for the wells. For each tax year, the assessor rejected D90’s documentation of the sale.  The assessor explained that his office never uses the sales price as fair market value for oil and gas wells, but rather, the valuation tables provided by the State Tax Commission, which take into account age, depth, type, and production of the wells. Using those tables, the assessor valued the wells at $3,347,240 for 2013; $3,347,240 for 2014; $3,140,372 for 2015; and $1,821,213 for 2016, and assessed them accordingly.

 D90 unsuccessfully protested the assessor’s determinations before the Jefferson Davis Parish Board of Review, and then appealed each assessment to the State Tax Commission, presenting documentary evidence and live testimony to establish the $100,000.00 purchase price for the wells and the arms-length nature of the sale. It also presented additional evidence to establish that the condition and value of the wells were virtually identical for each tax year. The Commission determined the fair market value of the wells for each of the years 2013, 2014, and 2015 was $235,000, reflecting the $100,000 sale price, plus the cost of plugging and abandoning the wells, which was quantified at $135,000. For 2016, the Commission valued the wells at $145,000.00, allowing the 90 percent reduction for shut-in wells ($10,000.00), plus plug and abandon costs of $135,000.00.

The assessor appealed the State Tax Commission’s valuation for each tax year to the District Court, which affirmed the Commission’s valuations for all four tax years. The assessor next appealed to the Court of Appeal, which reversed the District Court and reinstated the assessor’s valuation. 

The Louisiana Supreme Court reversed. D90 had submitted evidence before the State Tax Commission to support its claim that its wells were over-valued by the assessor, including substantiation that the sale price was $100,000.00, the sale was arms-length, the wells were “marginal” and “incapable of producing gas,” and the wells were “shut-in” in 2016. The State Tax Commission properly considered this evidence. The Court observed that the State Tax Commission’s regulations permit it to consider an arms-length sale in determining fair market value. Consequently, relying upon that express directive as a valuation standard cannot be arbitrary and capricious. As a reviewing court, the Court was required to afford considerable weight to an administrative agency’s construction and interpretation of its rules and regulations adopted under a statutory scheme the agency is entrusted to administer, and its construction and interpretation should control unless found to be arbitrary, capricious, or manifestly contrary to its rules and regulations. Having concluded that the Commission did not err in considering the sale, the Court found that a preponderance of the evidence showed that the sale was indeed valid and arms-length and that the Commission properly relied on it. The Court similarly credited the Commission’s finding of the shut-in status of the wells in 2016 and agreed that D90 was entitled to the 90 percent reduction for that tax year.

D90 Energy LLC v Jefferson Davis Parish Board of Review, 2020 WL 6145158 (Sup. Ct. La, October 20, 2020)

NEW YORK – Opt-out provision of NY Real Property Tax § 487 which exempts from taxation any increase in the value of real property by reason of the inclusion of a solar energy system for a period of 15 years must be filed with New York State Energy and Research Development Authority to become effective.

The Dryden Central School District adopted a resolution in 2014 to opt-out of a tax exemption for the value of solar energy systems subsequently installed on real property within the School District. The School District failed to file the 2014 resolution with the New York State Energy and Research Development Authority as required by NY Real Property Tax § 487[8][a]. Laertes Solar, LLC later built a solar energy system on real property within the School District. The assessor determined that Laertes owned the system, created a new tax parcel for it, and assigned it a school taxable value for the 2017 assessment rolls. Laertes applied for a tax exemption pursuant to NY Real Property Tax § 487 that was denied. 

Laertes paid the school tax bill under protest, then commenced this action for declaratory judgment arguing, among other things, that the system was tax exempt under NY Real Property Tax § 487 because the 2014 resolution was ineffective. The Supreme Court determined that the system was tax exempt under NY Real Property Tax § 487and that the complaint should be granted on that basis. The School District appealed from that judgment.

The Appellate Division held that the 2014 resolution was ineffective due to School District’s failure to comply with the statutory direction that the resolution be filed with the New York State Energy and Research Development Authority. The statute directs that an opt-out resolution “shall be filed” with the Authority, mandatory language that, according to the Court, “is ordinarily construed as peremptory in the absence of circumstances suggesting a contrary legislative intent.” Moreover, when the tax exemption afforded by NY Real Property Tax § 487 was last extended in 2014, the Legislature made clear that the tax exemption furthered the public policy of “spur[ring] the development of renewable energy across New York State” and that changes to the statutory language ensured “fair play for both the taxing jurisdiction and the developer” through proper and timely notice of an opt-out resolution’s adoption. The Court said those aims would both be undermined if the filing requirements, which enable the creation of a statewide “opt-out” registry that is consulted by renewable energy developers such as Laertes, were deemed to be permissive.

The Appellate Division also rejected the School District’s argument that it was entitled to demand that Laertes enter into a payment in lieu of taxes (PILOT) agreement. The Court agreed that the School District could require Laertes to enter into a PILOT agreement absent a valid opt-out resolution, but notice of intent to do so had to be given within 60 days of receiving a “written notification [from the owner or developer] of its intent to construct [a solar energy] system.”  The Court found that the School District was aware that the system existed given that it was assessed a taxable value and was notified in writing of that fact by Laertes no later than September 28, 2017, when a check for the taxes due on the system was sent with correspondence from Laertes reserving its right to contest the bill. However, the School District did not notify Laertes of its intent to require a PILOT agreement until December 19, 2017, over 60 days later. Thus, having failed to comply with the statutory requirements, the School District could not demand a PILOT agreement.

Laertes Solar, LLC v. Assessor of the Town of Harford, 182 A.D.3d 826, 122 N.Y.S.3d 427, 2020 N.Y. Slip Op. 02302 (April 16, 2020).

OHIO – Board of Revision considering assessment appeal lacks jurisdiction to determine ownership rights in real property

In 2011, Consolidation Coal Company, a subsidiary of CONSOL Energy Inc., conveyed to CNX, another subsidiary of CONSOL Energy Inc., the subsurface rights in 462 parcels in Belmont County, Ohio. The rights conveyed comprised “all Hydrocarbons within and underlying tracts or parcels of land . . . (the “Mineral Interests”) and “any units or pooling arrangements wherein the minerals are pooled or unitized . . . and] any wells owned by Grantor that are located on the property.” CNX requested that separate parcel numbers be assigned to the subsurface rights for tax purposes. According to CNX, the separate parcel numbers were requested and created to generate a savings event under the Dormant Mineral Act.

 Pursuant to Ohio Adm. Code 5703-25-10, the county auditor is required to code each parcel of taxable and exempt real property in accordance with subsection (C). The auditor coded all 462 of the parcels “260 OTHER MINERALS,” attributed a value of $1,500.00 per acre, and assessed real estate taxes on the parcels beginning in Tax Year 2012.

In 2012, CNX conveyed to Hess a 50% undivided interest in the subsurface rights in 313 of the parcels, and retained an undivided 50% interest. Pursuant to a joint venture agreement, Hess was responsible for the extraction of oil and gas from the property and CNX for the capital to fund the project. Five deeds conveying the subsurface rights from CNX to Hess are captioned “Mineral Interest Deed,” and convey an undivided 50% of “the oil and gas mineral fee interests . . . only insofar as such interests cover all depths within the Utica and Point Pleasant Formation (such 50% of Grantor’s interest in such mineral fee interests as so limited, the “Mineral Interests”), together with any and all rights, titles and interests of Grantor in and to any units or pooling arrangements whether the Mineral Interest are pooled or unitized.” The Real Property Conveyance Fee Statement of Value and Receipt for each of the 2012 deeds identifies the property conveyed only as “oil and gas interest.” In the auditor’s portion of the form, the auditor inserted, “Mineral Only* Multiple Parcels.” The Residential Review Property Record Cards reflect the “mineral only” designation by the auditor.

Under Ohio Adm. Code 5703-25-11, “Coal and minerals shall be valued in the same manner and on the same price level as other real property. Some of the factors that shall be considered in valuing coal and mineral deposits are the quality and extent of the deposit, the active working area which at current production will be mined in five years, active reserves that will not be worked in five to ten years, inactive reserves that will not be worked after ten years, and mined out or depleted areas.”  Unextracted oil and gas rights, however, are valued only with respect to a developed and producing well which has not been the subject of a recent arm’s length transaction.

Hess and CNX appealed the assessments of a substantial portion of the wells, claiming that they owned only oil and gas rights in the real property, rather than mineral rights in general. They further argued that there could be no taxable value attributed to the oil and gas parcels until the oil and gas was extracted. In the administrative proceedings, Hess and CNX argued that the proper code for each parcel was “270 OIL & GAS RIGHTS.” They predicated their improper coding argument on the nineteen deeds in the record. They asserted that the deeds conveyed only oil and gas rights, not the rights to other minerals. It was undisputed that they had not actively developed, extracted, or sold any gas or oil from the parcels. The Board of Revision agreed, finding that the only rights conveyed to Hess and CNX were oil and gas rights, and, since the deposits were unexploited, no tax was due. An appeal to the Board of Tax Appeals followed. Although the Board recognized the presumption that the auditor’s value was consistent with Ohio law where no evidence is offered to the contrary, it nonetheless rejected the auditor’s valuation because it was “based on the value of other mineral rights that were not a part of the subject parcels.” Because there was insufficient evidence in the record from which the Board could conduct an independent valuation, the Board of Tax Appeals remanded the matter to the Board of Revision for further findings.

On appeal to the Ohio Court of Appeals, the court agreed with the appellants that the Board of Tax Appeals erred in determining that the Board of Appeals had jurisdiction to make a legal determination as to what mineral interests were conveyed, and to re-code the subject parcels from other minerals to oil and gas parcels. Hess and CNX sought a determination of their ownership rights in the real property at issue on appeal, which was outside of the Board of Review’s limited statutory jurisdiction to value and assess real property. They offered no evidence to show that the other minerals were overvalued, and did not assert that the auditor’s valuation was contrary to the laws concerning the valuation of real property. As a consequence, the Court found that the complaints did not invoke the Board of Review’s statutory authority to correct an inaccurate calculation of the true value of the parcels.

The Court explained, “Because the subsurface owners predicate their complaints on the assertion that they do not own the other minerals, a quiet title action against the putative owner of the other minerals is required to conclusively determine the ownership of the mineral rights at issue in this appeal. Although the subsurface owners do not claim, but, rather, disclaim an interest in the other minerals, their payment of property taxes on the parcels creates an interest adverse to the putative owner of the other minerals. Because R.C. 5303.01 provides the statutory method for determining real property rights in Ohio, we find that the determination of ownership made by the BOR was beyond its jurisdiction to value and assess real property pursuant to R.C. 5715.19(A)(1)(d).”

Hess Ohio Developments LLC v Belmont County Board of Revision, 2020 WL 5834759 (Ct. App. Ohio, September 28, 2020)

NEW HAMPSHIRE – Transmission poles and conduits within land which becomes a public highway are subject to property tax whether or not they are subject to an agreement providing for payment of the tax, but guys and anchors are not taxable.

Northern New England Telephone Operations, LLC d/b/a FairPoint Communications-NNE (FairPoint) owns poles, conduits, and other related property located in municipalities throughout New Hampshire. The placement of these types of property in, under, or across municipal rights-of-way is governed by a statutory framework, and to erect, install, and maintain any such poles, structures, conduits, cables, or wires in, under, or across municipal rights-of-way, a municipal permit or license is required pursuant to a statutory procedure. As an exception to the procedural licensing requirements, previously approved poles, structures, conduits, cables, or wires existing in, under, or across land that subsequently becomes a public highway are “deemed legally permitted or licensed” provided that specified documentation is submitted to the municipality for recording purposes.

FairPoint challenged the property tax imposed on the value of its poles and conduits, and on the value of its use or occupation of municipal rights-of-way. Statutes govern each type of tax. With respect to the first, under Revised Statutes Annotated of the State of New Hampshire (RSA) 72:8-a (2012) (amended 2016), municipalities are permitted to tax “all structures, poles, towers, and conduits employed in the transmission of telecommunication … services … as real estate in the town in which such property or any part of it is situated.”  With respect to the second, municipalities may also impose property taxes on another’s use or occupation of municipal rights-of-way when the terms of the lease or other agreement authorizing such use or occupation “provide for the payment of properly assessed … property taxes” by the other party.  RSA 72:23, I (2012) (amended 2017, 2018, 2020).

 FairPoint sued a number of municipalities, seeking abatement of several years’ worth of tax assessments on its poles and conduits, and on its use or occupation of municipal rights-of-way. FairPoint claimed that the municipalities acted ultra vires in assessing taxes on its poles and conduits, and/or its use or occupation of municipal rights-of-way, because they had failed to comply with RSA 72:23, I(b) by having an express agreement with FairPoint which required payment of the tax.

The New Hampshire Supreme Court rejected FairPoint’s first argument, holding that licenses under RSA 231:160-a automatically include the statutorily required tax-shifting language.  The court said that the plain language of RSA 231:160-a resolves the issue, because it provides that poles, structures, conduits, and related property are to be deemed “legally … licensed without further proceedings under this subdivision.” RSA 72:23, I(b) mandates that any such license “provide for the payment of properly assessed real and personal property taxes by the party using or occupying such property.” Therefore, FairPoint’s claim that licenses arising under RSA 231:160-a “do not automatically include the statutorily required tax-shifting language” was incorrect, because if “deemed” licenses under RSA 231:160-a were not “deemed” to include the tax-shifting language, they would not be “legal.” Therefore, its poles and conduits were taxable.

The Court agreed, however, that FairPoint’s use or occupation of municipal rights-of-way was not, as a matter of law, pursuant to a perpetual lease that gave rise to an independently taxable property interest, but rather via a license (or a permit).

FairPoint also argued that it was taxed disproportionately by the Towns for the respective tax years in question. The Supreme Court affirmed the Superior Court’s decisions to credit various opinions of FairPoint’s appraiser, and to reject those of the municipalities’ appraiser, on the basis that they were reasonable based upon the evidence presented at trial. It also held that the Superior Court properly determined that guys and anchors attached to the transmission poles were not taxable as “structures” under RSA 72:8-a based upon the language in RSA 231:161, the licensing statute, to the effect that “necessary and proper guys, cross-arms, fixtures, transformers and other attachments and appurtenances” required in the reasonable and proper operation of a licensee’s business are “place[d] upon … poles and structures.” Guys and anchors said the court, are therefore not themselves “structures,” but rather, they are “place[d] upon” structures and poles, and so not taxable.

Northern New England Telephone Operations, LLC v. Town of Acworth, 2020 WL 6534452 (N.H. Sup. Ct., Nov. 6, 2020).