1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 JANUARY 26, 2010 9 ITEM F2 10 PROPERTY TAXES - STATE ASSESSEES' 11 PRESENTATIONS ON CAPITALIZATION RATES 12 AND OTHER FACTORS AFFECTING VALUES 13 14 15 16 17 18 19 20 21 22 23 24 Reported by: Juli Price Jackson 25 No. CSR 5214 26 27 28 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per 12 Government Code Section 7.9) 13 Diane G. Olson 14 Chief, Board Proceedings Division 15 16 17 ---oOo--- 18 19 For Staff: Grant Thompson 20 21 ---o0o--- 22 23 24 25 26 27 28 2 1 INDEX OF SPEAKERS 2 ---o0o--- 3 4 Name Page 5 Peter Hladek 5 6 Peter Michaels 8 7 8 9 ---o0o--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 26, 2010 4 ---oOo--- 5 MS. YEE: Next item. 6 MS. OLSON: Our next item is F2, Property 7 Taxes -- State Assessees' Presentations on 8 Capitalization Rates and Other Factors Affecting Values. 9 And we do have speakers. 10 MS. YEE: Yes, let me -- Mr. Thompson, while 11 you're getting settled, let me call the speakers up on 12 this particular item. 13 Mr. Peter Hladek is here on this item. 14 MS. OLSON: Mr. Michaels was supposed to 15 appear, but I don't see him in the audience. 16 MS. YEE: Okay, that's okay. 17 MR. THOMPSON: Good morning. 18 MS. YEE: Good morning, Mr. Thompson. 19 MR. THOMPSON: The Rules of Practice 5322 20 allows two opportunities for assessee input to the Board 21 for the issue of setting unitary values of the public 22 utility property. 23 The first of the two meetings the focus is 24 primarily on the capitalization rates, but other issues 25 are also able to be brought up at this time. 26 Staff is currently collecting data for the 27 publishing of the capitalization rate study, which 28 should be coming in early March. 4 1 And an additional opportunity will be afforded 2 the State assessees at the April meeting for other 3 items. 4 And staff is present, available to answer any 5 questions. 6 MS. YEE: Thank you very much, Mr. Thompson. 7 Good morning, Mr. Hladek. 8 ---o0o--- 9 PETER HLADEK 10 ---o0o--- 11 MR. HLADEK: Good morning, Madam Chair and 12 Members of the Board. 13 Thanks for giving me a little bit of time this 14 morning. I am Peter Hladek. I am Managing Director of 15 Thomson Reuters Property Tax Services out of Scottsdale, 16 Arizona. 17 And, as such, I get to see quite a few cost of 18 capital studies around the country. Our practice spans 19 the entire United States. We get to see what other 20 states are doing in terms of their weighted average cost 21 of capital studies. 22 And having a background in finance myself, I'd 23 have to say that California is probably the leader when 24 it comes to putting together cost of capital studies 25 that span all of the types of businesses that we see in 26 this country. 27 It's not to say that we can't make adjustments 28 from time to time. And what I'd like to address today 5 1 is the fact that last year staff did make an adjustment 2 that I absolutely applaud, which was to move to a market 3 derived capital structure for rate-based water 4 companies. 5 For the last five years I think we've discussed 6 this with staff and with the Board that we thought that 7 the market capital structure was more appropriate rather 8 than a capital structure that's used for rate making 9 purposes, particularly when these companies are bought 10 and sold based on market capital structures. And the 11 structure we're supposed to use is that that might be 12 used by a prospective purchaser. 13 So, having said that, I want to applaud the 14 staff for that change. I look forward to working with 15 the staff on cap rates this year and stuff. 16 I think we have a little bit of input and we'll 17 be working with the staff. 18 So, thank you very much. 19 The second thing I'd like to bring up, and just 20 make a brief comment, has to do with the telecom 21 obsolescence guidelines paper that was adopted in the 22 last year or so. I know we worked quite a bit with 23 that. I know Mr. Young and I had the phone lines going 24 for days on end trying to resolve some of the language. 25 I think we ended up with a really good paper. 26 And, of course, that paper was supposed to be used to 27 identify and quantify the different types of 28 obsolescence, particularly in technology in the 6 1 telecommunications field. 2 And, of course, this year everything you are 3 seeing on TV and the maps and things like that, the 4 wireless companies are moving from the 3G platforms to 5 4G platforms, necessitating quite a swap out of 6 property. 7 The other thing is that on the wire line 8 companies, the Federal Communications Commission this 9 last year has been taking input and looking at a 10 nationwide move from the copper lines, land lines, that 11 we've had throughout the United States and now going 12 into the packet switching VOIP-type based 13 telecommunications systems. 14 What that shows me is that there is this move 15 that we've been looking at and that we've seen over the 16 last couple of years to these new technologies is going 17 to be front and foremost with a lot of our taxpayers. 18 And with that regard, I know I'll be working 19 with some of the staff to share some of our input that 20 we have from the FCC and from some of the companies and, 21 hopefully, resolve things and have some very appropriate 22 values this year. 23 Thank you. 24 MS. YEE: Thank you very much, Mr. Hladek. 25 Questions, Members? Comments? 26 Mr. Thompson? 27 MR. THOMPSON: Yes, I'd like to say that 28 generally this meeting has been scheduled for the 7 1 February Board meeting. And, in light of that, staff 2 will gladly -- gratefully accept any written comments 3 regarding this up until February 23rd. 4 We need it by that time in order to incorporate 5 it in our study. So -- and, so, many assessees probably 6 didn't have a chance to submit anything to the Board 7 because of the early date of this meeting, but we will 8 accept up until February 23rd. 9 MS. YEE: Okay, the assessees are aware of the 10 February 23rd deadline? 11 MR. THOMPSON: Yes, they are. 12 MS. YEE: Okay, very well. 13 Thank you. 14 Other questions? 15 Thank you very much, gentlemen. 16 MR. HLADEK: Thank you. 17 (Whereupon other proceedings were had.) 18 ---o0o--- 19 MS. YEE: Members, we have one public speaker 20 on item F2 who has signed in late. 21 I'd like to have Mr. Michaels come up and 22 address the Board before we recess for lunch. 23 ---o0o--- 24 PETER MICHAELS 25 ---o0o--- 26 MR. MICHAELS: Thank you very, very much. 27 For the record, my name is Peter Michaels. And 28 I'm grateful that you are squeezing me in here. I was 8 1 late. 2 And I was going to mention that it's now my 3 fourth decade of cap rate hearings and this is the 4 earliest in the year, I believe, ever in history that 5 there's been a cap rate hearing for State assessees and 6 also the earliest in the day, I believe in history -- 7 within the first hour. 8 MR. LEONARD: You still made it. 9 MR. MICHAELS: Well, I'm late, but thank you 10 for accommodating me. 11 And I will limit it -- I did not hear what 12 Mr. Thompson said, but he and I have worked closely 13 together and I want to commend Mr. Thompson and the 14 staff, his staff, because you'll recall last year there 15 were no hearings -- at least, I did not appear on behalf 16 of any State assessees at hearings -- and that is like a 17 tribute to the receptivity on the part of the staff to 18 arguments that -- and facts that were presented by 19 industry. 20 It's also my understanding that since the cap 21 rate hearing was initially set for Culver City in 22 mid-February, that if we do have comments, any of the 23 State assessees, that if we get those comments on cap 24 rates to Board for February 23rd, that that will -- 25 they'll be accepted. 26 The only substantive comment at this point, 27 it's way early in the year so we don't have year-end 28 stats, we don't have numbers, we don't know what the 9 1 plant additions were. We've got ideas, but nothing 2 specific. So, we'll -- it's too early for us to weigh 3 in there or offer any suggestions. 4 One observation that I would like to squeeze in 5 here, two weeks ago I attended a conference that in past 6 years staff has also had representation at. And it's a 7 valuation conference -- asset valuation conference 8 during which there were panel discussions on 9 Obsolescence in Local Exchange Networks, Obsolescence in 10 Long Distance Networks -- I'm reading the captions of 11 these panels -- Impacts of Technology Change on Wireless 12 Assets, Asset Valuation in the Converged Communications 13 Industry, Technology Obsolescence in Asset Valuation 14 Current Issues. 15 So, this was a two day long event focusing 16 specifically on the telecom industry, the telephone 17 companies, the voice over internet cable companies, the 18 traditional local phone companies, the wireless 19 carriers. 20 And if there was anything emphasized -- I sent 21 an advance copy of this to Mr. Thompson, but would like 22 very much to share with the Board in due course, is a 23 filing already made with the Federal Communications 24 Commission, FCC, by AT & T on behalf of its local land 25 line system. 26 Verizon, on whose behalf I am here today, has 27 not yet filed its comments, but will do so, I think, in 28 the next week. 10 1 The proceeding -- these are comments on the 2 transition from legacy circuit switch networks to 3 broadband. And in this filing by AT & T, the terms -- 4 the operative term and what came up repeatedly at this 5 conference I alluded to and in those panels is the 6 reference that AT & T makes to its own land line 7 business as being in a death spiral. And if you do a 8 word search in this FCC filing here, is a self 9 declaration of impairment, a self declaration that the 10 assets, the land line, traditional legacy phone assets, 11 are in a, quote, unquote, "death spiral." 12 So, as we continue working during the year, and 13 just very, very briefly, the incumbent phone companies 14 are required to have redundant networks, they're 15 required to be the provider of last resort. They're 16 trapped by regulatory traditions that go back. They're 17 also in the bulls-eye for all of the industries I 18 mentioned -- wireless, cable and voice over internet. 19 So, we'll look forward to working with your 20 staff. And then at the pre value setting, I guess in 21 April, we can follow through. 22 Thank you. 23 MS. YEE: Thank you very much, Mr. Michaels. 24 Mr. Horton? 25 MR. HORTON: Mr. Michaels, was it your 26 testimony that the decisionmakers were not at this 27 conference -- I mean, the BOE? 28 MR. MICHAELS: Oh, in past years the State 11 1 Assessed Properties Division was represented there and 2 I'm sure they would have loved to be in attendance, if 3 they could. 4 It's a shame they weren't. There were folks 5 from other jurisdictions, other states. 6 MS. MANDEL: Peter, was this -- 7 MR. MICHAELS: But we know the resources -- 8 MS. MANDEL: -- the Wichita? 9 MR. MICHAELS: No. This was in Austin, Texas. 10 And, in fact, interestingly, I think -- 11 MS. MANDEL: Which conference? 12 MS. YEE: Which conference? 13 MR. MICHAELS: I'm sorry? 14 MS. MANDEL: Which conference was it? 15 MR. MICHAELS: It's called -- and, oh, there's 16 a binder here that I'm going to PDF to the staff. 17 MS. MANDEL: We'll get the materials, because 18 you're -- 19 MR. MICHAELS: Technology Futures Asset 20 Valuation Concert (verbatim). 21 And the principal speakers were Mr. Stegeman, 22 who does the cost model that the staff uses; Mr. Hemke, 23 who does a lot of the obsolescence work the staff uses. 24 So, most of the speakers -- again, I'll share 25 this with the staff and with everybody. 26 MS. YEE: That would be great, thank you. 27 MR. HORTON: Madam Chair, I'd like to just 28 share that if there is such a -- I mean, when there is 12 1 such a conference where there's discussion about asset 2 valuations, we should be included in that somehow. 3 And I would encourage the -- those who present 4 the conference to make sure that they include the 5 individuals who will ultimately be debating whether or 6 not they're correct. 7 MR. MICHAELS: Well, as a matter of fact, if I 8 just inject, it's my impression that the people who 9 sponsored this, who are regular participants in the 10 State Board of Equalization activities, did, in fact, 11 invite the staff. 12 And I am sure it was budget related and head 13 count related. I mean, I'm sure, I don't really know. 14 I can't speak to that. 15 But it's my impression that people from the 16 Board of Equalization were encouraged and invited to go 17 and it was just not possible under the conditions. 18 But Mr. Thompson can speak to that much better than 19 I can. But the public -- the government's assessors are 20 encouraged and welcome. 21 And I was delighted to see other people soaking 22 it in and sorry someone from California couldn't hear 23 this. 24 MR. HORTON: Thank you. 25 MR. MICHAELS: Especially you five. 26 MS. YEE: Thank you. And thank you for sharing 27 that information with us. 28 MR. MICHAELS: Thank you. 13 1 MS. YEE: Mr. Leonard? 2 MR. LEONARD: Yeah, Mr. Michaels, I'm not doing 3 out of state trips on the taxpayers' dime while people 4 are being furloughed and layoff lists are being 5 prepared. And I think that's the decision our 6 management made. 7 And I appreciate your courtesy in making the 8 written copy available to our staff because I know 9 they'll take advantage of that. 10 MR. MICHAELS: Thank you. 11 MS. YEE: Thank you. 12 MR. HORTON: I mean, I would -- I mean I would 13 share with staff, though, the law does provide that if 14 we're on the panel and we are participating in the 15 process that the presenters have a methodology in which 16 to sponsor the agency to participate. 17 And if that can occur legally, there is no cost 18 to the organization. And the value of having a workshop 19 environment where these items are being discussed and 20 debated can only serve to increase compliance, 21 understanding, goodwill -- a number of issues in which, 22 you know, I personally believe the organization is 23 constitutionally required to do. 24 So, I would only encourage us that we sort of 25 look at and see if it's possible, even to the extent of, 26 if possible, I wouldn't mind attending on my own dime. 27 MS. YEE: Thank you, Mr. Horton. 28 Thank you Members. We will recess until 1:30 14 1 this afternoon. 2 Thank you. 3 ---o0o--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 JANUARY 26, 2010 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 15 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: October 5, 2010 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 16