1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 FEBRUARY 22, 2011 9 ITEM F1 10 PUBLIC HEARING 11 PROPERTY TAXES 12 STATE ASSESSEES' PRESENTATIONS ON 13 CAPITALIZATION RATES AND OTHER FACTORS 14 AFFECTING VAUES 15 16 17 18 19 20 21 22 23 Reported by: Juli Price Jackson 24 No. CSR 5214 25 26 27 28 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per 13 Government Code Section 7.9) 14 15 Diane G. Olson Chief, Board 16 Proceedings Division 17 18 For the Board: Grant Thompson 19 Supervising Tax Counsel III 20 21 22 ---oOo--- 23 24 25 26 27 28 2 1 INDEX OF SPEAKERS 2 ---o0o--- 3 NAME PAGE 4 Peter Michaels 4 Law Offices of Peter Michaels 5 6 Lenny Goldberg 7 Executive Director 7 CalTax Reform Association 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 FEBRUARY 22, 2011 4 ---oOo--- 5 MR. HORTON: Ms. Olson, what is our next 6 scheduled item? 7 MS. OLSON: Our next item is F1, Property Tax - 8 State Assessees Presentation on Capitalization Rates and 9 Other Factors Affecting Values. 10 We do have two speakers for this item. 11 MR. HORTON: Members, let me call the speakers 12 to the -- to the desk here, Mr. Peter Michaels, 13 Attorney, for Peter Michaels firm, Mr. Lenny Goldberg, I 14 believe is here, Executive Director for CalTax Reform 15 Association. 16 Thank you. As they come, please commence with 17 your presentation. 18 ---o0o--- 19 PETER MICHAELS 20 ---o0o--- 21 MR. MICHAELS: Mr. Chair, for the record, my 22 name is Peter Michaels and I am here today on behalf of 23 19 State-assessed utilities, including a number of local 24 exchange telephone companies, some long distance phone 25 companies, some wireless phone companies, inter-county 26 pipeline companies and railroad companies -- each of the 27 industries that are subject to Board's equalization 28 under the constitution. 4 1 And, as always, our cap rate hearing is early 2 in the season before returns have been filed, before 3 data for the preceding year has been fully compiled and 4 assembled. 5 So, we haven't filed anything. We haven't 6 begun substantive discussions with the staff yet. 7 However, based on how those discussions went last year, 8 not having appeared at a hearing myself on behalf of any 9 of these companies, it's safe to say that Mr. Thompson 10 and the State-Assessed Properties Division have been 11 very good to work with. They've been receptive to our 12 input. And we expect to continue working with the staff 13 and avoid Board hearings, if possible, again this year. 14 And, Mr. Horton, I was mildly disappointed, 15 even though I knew when you became Chair you were 16 unlikely to attend, but, as last year was the case, I 17 went to an asset valuation conference recently and, 18 fortunately -- fortunately, the Board of Equalization 19 sent a member of the S. A. P. D. to that conference, 20 asset valuation conference also. 21 And I think it was fantastic that the Board was 22 represented there and hope sometime other -- a Board 23 Member can see for him or herself what experts that the 24 State itself, California, relies on are saying about 25 marketplace conditions, marketplace dynamics, 26 obsolescence, new technology, emerging trends in the 27 telecom industry, in the gas and electric industry. 28 So, fortunately, a member of Mr. Thompson's 5 1 staff was in attendance and participated actively, so, 2 was able to bring back to Sacramento a lot of, I think, 3 current and helpful information for the values that are 4 going to get set later this season. 5 The only substantive comment -- we will talk, 6 as in past years, during April and May with the staff 7 and we have the pre value setting session in April. So, 8 that will be around the time we have some serious 9 meetings with staff about the values. 10 But the one topic or the one observation I 11 wanted to make at this moment here, since it's a cap 12 rate hearing, it is substantive, is that we, on behalf 13 of two gas and electric utilities here in the state, 14 San Diego Gas & Electric and Southern California Gas 15 Company, are looking at the inputs to the Board's cap 16 rates. 17 And based on last year's cap rate study, this 18 is the cap rate hearing, we have preliminarily engaged 19 Mr. Thompson and Mr. Kerrigan and the staff to maybe do 20 a double-check for currency. And, so, as this relates 21 specifically to cap rate setting and specifically in 22 relation to these two companies where there is some 23 weight put on the income indicator, the phone companies, 24 of course, are valued on cost and, so, the cap rate is 25 less meaningful. But there are two companies with -- as 26 to which we will be working with Mr. Thompson and his 27 staff to examine the accuracy and currency of the inputs 28 for their cap rate. 6 1 MR. HORTON: Thank you very much. 2 Mr. Goldberg? 3 ---o0o--- 4 LENNY GOLDBERG 5 ---o0o--- 6 MR. GOLDBERG: Yes, thank you for having me 7 here, Mr. Horton. 8 I'm speaking to one issue of policy with regard 9 to State assessment, which is in the hands of the Board 10 of Equalization. And normally for outsiders like 11 myself, the -- the assessment process is kind of a black 12 box, you don't really see -- because of various 13 concerns, you don't really see what goes into it. 14 But there are some policy decisions that can 15 get made and this is the State assessees hearing. The 16 particular issue is that the addition of accelerated 17 depreciation, bonus depreciation and the stimulus tax 18 cuts at the federal level, which were 2008 to 2010 or 19 it's through 2012, are 50 percent bonus depreciation, 20 but then in the year 2010 to -- through 2011, it ends up 21 being 100 percent, which is effectively expensing on 22 behalf of the utilities ends up with a significant -- 23 because of the accounting methodology, ends up as a 24 significant property tax loss for local government. And 25 that is because the accumulated deferred income taxes 26 are -- which, in this case, there is a substantial 27 growth because of the bonus depreciation and the federal 28 stimulus cuts that the accumulated A. D. I. T., the 7 1 accumulated deferred income tax account, is actually, as 2 I understand it, deducted from the cost basis of the 3 utilities, so that the federal stimulus -- I only am 4 suggesting this, I don't expect to resolve this 5 complicated issue here, but only suggesting that the 6 accounting method which allows for bonus depreciation 7 and -- of 50 and 100 percent in this period 2008 to 8 2012 -- should be a policy decision as to -- with regard 9 to whether or not that should be subtracted from the 10 cost basis. 11 We're looking at tens of millions of dollars in 12 losses of property tax. We're looking at hundreds of 13 millions dollars over the period of a number of years. 14 And I would suggest -- or let me just say one 15 thing that I don't know about this is the extent to 16 which this affects telecommunications. The estimate of 17 50 million in a year and 480 million over five years is 18 based on our utilities consultant is just for the gas 19 and electric utilities. 20 I cannot speak to how this issue -- whether the 21 stimulus tax cuts and the valuation speak to the 22 unregulated telecommunications companies. But it 23 definitely speaks to the regulated utilities. 24 And we want to put -- I guess put on notice 25 that the Board has a policy decision to make as to 26 whether or not to allow these accumulated deferred 27 income taxes to be subtracted on a cost basis. 28 We would recommend that they not be, given the 8 1 loss of revenue in the immediate term, and that there 2 be -- ultimately, this accounting washes out over the 3 many years, but in terms of the immediate term, the use 4 of the stimulus tax cuts in depreciating -- in lowering 5 cost basis should be a policy decision and we would 6 recommend that it not be used to lower cost basis. 7 MR. HORTON: All right, thank you very much, 8 gentlemen. 9 MR. GOLDBERG: Thank you. 10 MR. HORTON: Mr. Thompson, please commence with 11 your presentation. 12 And then, Members, we'll open it up for 13 discussion. To the extent you can incorporate the 14 discussions shared by those who have testified here 15 today? 16 MR. THOMPSON: Yes, we're looking forward to 17 the input that not only Mr. Michaels, but other 18 representatives have been in touch with us are providing 19 input for the capitalization rate study. 20 We determine cost of capital for use in the 21 income approach for the valuation of the -- mostly gas 22 and electric companies and railroads that use the income 23 approach as a large part of their -- of the value 24 indicators that we use. 25 That will -- we're just about done with the 26 study. We have collected all data and it will be final 27 probably around March the 5th and we are looking forward 28 to posting that the website by about the 15th of March. 9 1 So, we're getting close to -- to the final. 2 Of course, the cost of capital reflects the 3 economic position of -- that the country is now going 4 through and, in general, the cost of capital has been 5 reflecting the fact that we are in recessionary times. 6 Relating to the stimulus and its effect on the 7 historical cost less depreciation of indicator, which is 8 the indicator where we provide most of the weight for 9 our gas and electric companies, we are aware of this 10 issue. The CPUC is taking a look at adjusting rates for 11 the fact that the -- that the rate base will reflect 12 additional deferred income taxes above and beyond what 13 was expected in the rate cases. 14 And following current practice for the staff 15 and the Board that has been in the effect since 2000, we 16 would expect that we would follow the PUC. 17 If the PUC would -- would reduce the rates and 18 the rate base for the fact that the stimulus is causing 19 more deferred income taxes, we would follow through and 20 again reduce our historical cost less depreciation 21 indicator to reflect that fact. 22 MR. HORTON: Thank you. 23 Discussion, Members? 24 Hearing none, thank you very much, 25 Mr. Thompson. Those who have testified here today, 26 thank you as well for your input in this process. 27 Please know that, as Mr. Thompson indicated, 28 the Board has repeatedly indicated that they are very 10 1 much interested in hearing from the industry and all 2 interested parties if we began to formulate this process 3 for this, the results of this process. 4 So, thank you very much. 5 ---o0o--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 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 FEBRUARY 22, 2011 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 11 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: MARCH 18, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 12