1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 APRIL 13, 2010 9 PUBLIC HEARINGS 10 F1 PROPERTY TAXES - STATE ASSESSEES PRESENTATIONS 11 ON THE VALUATION OF STATE-ASSESSED PROPERTIES 12 13 14 15 16 17 18 19 20 21 22 23 Reported by: Juli Price Jackson 24 No. CSR 5214 25 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 Barbara Alby Acting 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 John K. Thompson Chief 20 State-Assessed Properties Division 21 22 ---o0o--- 23 24 25 26 27 28 2 1 INDEX OF SPEAKERS 2 ---o0o--- 3 NAME PAGE 4 Peter Michaels 5 5 Richard Wiley 8 6 7 ---o0o--- 8 9 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 APRIL 13, 2010 4 ---oOo--- 5 MS. YEE: Let us resume the Board of 6 Equalization meeting. 7 What's the our next item, Ms. Olson? 8 MS. OLSON: Our next item is F1, Property Taxes 9 - State Assessees Presentations on the Valuation of 10 State-Assessed Properties. 11 MS. YEE: Okay. 12 MS. OLSON: Please come forward. 13 MS. YEE: We have -- let's -- let's hear from 14 Mr. Thompson first to introduce this matter and let me 15 call the two speakers to come up, Mr. Michaels and 16 Mr. Wiley. 17 MR. THOMPSON: Good afternoon. 18 In the end of May, the Board will entertain the 19 valuation of over 400 State assessees, the unitary 20 property. 21 You will be getting the appraisal data reports 22 around May 15th to the Board Members for their review 23 before that value setting. 24 The Rules of Practice allow this time in April 25 for a public presentation of any assessees that wish to 26 present their issues and valuations to the Board. 27 And staff is available to respond to any 28 questions. 4 1 MS. YEE: Thank you very much, Mr. Thompson. 2 Let us hear from the speakers. If you'll 3 introduce yourselves for the record, then we'll give you 4 3 minutes each. 5 PETER MICHAELS 6 ---o0o--- 7 MR. MICHAELS: Okay, thank you. 8 For the record, my name is Peter Michaels. And 9 I am here today on behalf of seven different 10 categories -- or at least five categories of State 11 assessees, including telephone companies, which is a 12 very dynamic area, as we well know, local, traditional, 13 legacy phone companies, long loaning distance phone 14 companies, wireless phone companies -- all unregulated 15 and all fiercely competing amidst emerging technology. 16 It's very dynamic. I'm also here today on behalf of 17 traditional rate regulated electric and gas companies, 18 which is not nearly as dynamic. Likewise with 19 railroads, on whose behalf I am here today and 20 intercounty pipeline companies there is less to talk 21 about. 22 We will, of course, be meeting for each of 23 those companies and industries with Mr. Thompson and his 24 staff over the next days before their numbers or 25 recommendations are finalized. 26 But the principal focus of these brief remarks 27 here will be on the most dynamic of the areas, which is 28 the telecom sector where the obsolescence and the 5 1 competition and the technology -- pace of technological 2 changes is pretty obvious to all of us and what we do 3 with it is a question. 4 I'm glad that this year the staff published a 5 capitalization rate study. Last year it didn't, so, 6 we're grateful for that, as well as the percent good 7 factors and replacement cost new factors that have been 8 published. And we have guidelines now, formal 9 guidelines, for measuring obsolescence of State 10 assessees and particularly these phone companies that -- 11 on whose behalf I'm here and on whose behalf Mr Wiley is 12 here. 13 We made major strides last year, in 2009, after 14 Mr. Thompson assumed his position. And we were very 15 pleased with the strides we made last year. And I think 16 there was a common sense that there were more strides to 17 be made. 18 And we are meeting with the State Assessed 19 Properties Division staff to look at those additional 20 strides. We're very focused on excess operating costs, 21 redundant networks, duplicative networks and will -- if 22 we don't make the progress that we're looking to make, 23 seek you out before the values are set. 24 But I'm optimistic working with Mr. Thompson's 25 staff that they will be receptive to the points we make 26 and that we'll have constructive dialogue. 27 I would like to observe, particularly since we 28 have two Board Members here who have not bee part of the 6 1 State assessment process before, just for the record, 2 it's -- we're looking at the value of these State 3 assessees, you're the assessor. You're not a revenue 4 agent, you're exactly the same as Ken Steiger here is in 5 this county, for the moment at least, Steiger -- not a 6 revenue agent. 7 You're looking at the fair market value, what 8 would a buyer pay? And that's what I'd like to 9 emphasize here just very briefly. What would a buyer 10 pay? Not what would a seller accept, what would a buyer 11 pay for a legacy phone company, for a traditional phone 12 company that is forced to operate two networks to serve 13 the customers as a provider of last resort? What would 14 a buyer look to as replacement cost? What would a buyer 15 look to as a capacity requirement? 16 Much of the dialogue we've had over the years 17 has been about the perspective of a seller and if you're 18 selling property, you want the recover what you 19 invested. But what a buyer would pay is, for these 20 dynamic -- for companies that are in the long distance 21 market, for companies that are in the local exchange 22 market, traditional, old-fashioned, plain old telephone 23 service markets? We really need to look closely at the 24 perspective of a buyer and how much that buyer would 25 replace and with what and how much that would cost. 26 So, I -- 27 MS. OLSON: Time has expired. 28 MR. MICHAELS: -- as the conversation 7 1 continues, would urge a balanced perspective. 2 What would a buyer pay in an open market, arm's 3 length transaction, a knowledgeable buyer? 4 And I submit it's not more than replacement 5 cost. And I submit that the placement costs -- and the 6 technologies are advancing so fast that the values are 7 going down. 8 MS. YEE: Okay, thank you very much, 9 Mr. Michaels. 10 Mr. Wiley? 11 ---o0o--- 12 RICHARD WILEY 13 ---o0o--- 14 MR. WILEY: Thank you. 15 I'm Rich Wiley. I'm an attorney in private 16 practice. I am here today representing Sprint Telephone 17 PCS, LP, also known as Sprint PCS. 18 On behalf of Sprint, I'd like to thank the 19 Board's valuation staff for already giving its active 20 and thoughtful consideration to a presentation about 21 Sprint's value that was prepared by the national 22 consulting firm of Duff & Phelps. 23 Duff & Phelps recently responded to a number of 24 questions posed by the staff. And I understand there 25 will be further discussions later this week. We're very 26 appreciative of the staff's engagement on reviewing 27 this -- this study. 28 I don't know where the discussions are going to 8 1 lead, but the staff typically begins its replacement 2 cost valuations of Sprint by looking backwards, if you 3 will, back to the historical investment costs and then 4 computing adjustments that are designed to bring those 5 historical costs up to consider inflation, depreciation, 6 and then, finally, to be reduced by any economic 7 obsolescence. 8 And those of you who were here for last year's 9 hearings may recall that measuring economic obsolescence 10 has been a particularly important issue for Sprint as a 11 result of its well-publicized subscriber losses and its 12 operation of two redundant networks, the CDMA network 13 and the former Nextel IDEN networks. 14 So, what the Duff & Phelps study does is rather 15 than beginning its replacement cost analysis by looking 16 backwards at historical investment, it looks at the 17 present, focuses on the present. What would it take -- 18 what would it cost to entirely replace the two networks 19 with a new state of the art network capable of yielding 20 the same services and amenities as the old networks? 21 If there is one thought I'd like to leave you 22 with today, it's that Duff & Phelps has determined that, 23 for example, a replacement network would require half as 24 many cell sites as Sprint is currently operating, it 25 would require roughly 4,000 cell sites rather than the 26 current 8,000. 27 Now, this trend in -- this replacement cost -- 28 I am sorry -- is corroborated, to a large extent, by the 9 1 trend in Sprint's actual operations where they've 2 retired almost 700 million in CDMA assets during 2009 3 and have added 400 million in newest technology CDMA 4 assets during 2009. So, you already see a trend to a 5 smaller, more efficient, less redundant network, which 6 we feel corroborates the results of Duff & Phelps' study 7 and is very helpful as well. 8 So, with that overview, I'd like to thank the 9 staff again for its thoughtful review of the details of 10 the Duff & Phelps study. We look forward to further 11 work with the staff throughout the 2010 valuation 12 season. 13 And I thank you for your time. 14 MS. YEE: Thank you very much, Mr. Wiley. 15 Thank you, Mr. Michaels. 16 Questions, Members? Comments? 17 Okay, thank you. We will take your points in 18 consideration and I appreciate the collaboration with 19 Mr. Thompson and his staff. 20 Thank you. 21 MR. MICHAELS: Thank you. 22 MR. WILEY: Thank you. 23 ---o0o--- 24 25 26 27 28 10 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 APRIL 13, 2010 I recorded verbatim, in shorthand, to the 10 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 10 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: June 8, 2010 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 11