HomeMy WebLinkAboutMINUTES - 10151996 - C11 TO: BOARD OF SUPERVISORS
FROM: Victor J.Westman,County Counsel
By:Dennis C.Graves,Deputy
DATE: October 8, 1996
SUBJECT: Joining in Motion before SBE to enforce assessment of Pacific Bell under 1992
Settlement Agreement
SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION
I. RECOMMENDATIONS
Authorize the County Counsel to file a notice with the State Board of Equalization (SBE)
that Contra Costa County joins in the motion filed by Los Angeles County and Santa Clara
County to enforce assessment of Pacific Bell pursuant to a Settlement Agreement signed by
the SBE,all Counties of California and all utilities in 1992.
Il. FISCAL IMPACT
None, if this Recommendation is adopted and the Counties are successful in sustaining
the values contemplated by the Settlement Agreement If Pacific Bell is successful in obtaining
a lower assessment, however, Contra Costa County(all agencies)will lose over a$1,000,000
a year for four years.
III.BACKGROUND/REASONS FOR RECOMMENDATIONS
In the 1980s several utilities filed Statewide lawsuits to challenge the State Board of
Equalization's unitary valuations of centrally assessed utility property. The lead case,
filed by AT+T, resulted in a superior court judgment in favor of the plaintiff. An appeal
was filed by the SBE. Because an adverse judgment on appeal could have set precedent
with draconian consequences, the SBE, utilities and counties established a group of
county and industry representatives to discuss the utilities' valuations. The goal was to
eliminate the existing disputes and avoid the potential loss of billions of tax dollars.
CONTINUED ON ATTACHMENT: X YES SIGNATURE 0�-----
RECOMMENDATION OF COUNTY ADMINISTRATOR _ RECOMMENDATION OF BOARD
COMMITTEE
APPROVE OTHER
SIGNATURE(S):
ACTION OF BOARD ON 10 15 96APPROVED AS RECOMMENDED X OTHER
VOTE OF SUPERVISORS:
I HEREBY CERTIFY THAT THIS IS A
X UNANIMOUS(ABSENT_� TRUE AND CORRECT COPY OF AN
AYES: NOES: ACTION TAKEN AND ENTERED ON THE
ABSENT: ABSTAIN: MINUTES OF THE BOARD OF
SUPERVISORS ON THE DATE SHOWN.
ATTESTED: October 15, 1996
PHIL BATCHELOR,CLERK
OF THE BOARD OF
SUPERVISORS AND
COUNTY ADMINISTRATOR
Contact:Dennis Graves(335-1833)
Deputy County Counsel
Background/Reasons continued:
As the group discussed the valuation of utilities, it became apparent that these
disputes were likely to continue indefinitely unless we could agree on "formula"valuations
that would apply both for existing disputes and future valuations. After extensive
negotiations,the SBE, counties and utilities reached a"global" settlement agreement in
1992. The Agreement established values for all utilities based on the formula:
V= HCLD - .25 DTR
Where HCLD is the historical cost less depreciation that the SBE had traditionally
calculated as an indicator of utility value and DTR is the deferred tax reserve of the
utility.
The formula values under the Agreement were understood to be at the low end of an
arguable range of market values,which provided sufficient incentive for the utilities to
dismiss their pending lawsuits and agree not to file other lawsuits during the term of the
Agreement. Thus, the Agreement resolved all prior years in dispute and established values
that would avoid further disputes to the year 2000. Because of constitutional concerns
about agreeing to future values,the Agreement was validated in a CCP 860 validating
action.
Until the current difficulties with Pacific Bell, next discussed,the Agreement was
implemented from 1992 to the present with no problems:the SBE staff annually calculated
the formula values under the Agreement and the SBE adopted those values.
Pacific Bell, one of the largest utilities and a publicly traded (New York Stock
Exchange) company, had long been closely regulated by the California Public Utilities
Commission (CPUC). Subsequent to the 1992 Agreement, Pacific became"deregulated",
ie., subject to competition in areas in which it traditionally had a governmentally approved
monopoly. To compete, Pacific Bell management determined that it would have to replace
plant more frequently. To comply with the accounting standards set by the Financial
Accounting Standards Board (FASB), as required by the Securities and Exchange
Commission (SEC)for reports filed by publicly traded companies, Pacific substantially
shortened depreciable asset lives to reflect the more frequent replacement of its plant and
took a large one time write-off as a result.
Because of this accounting change, Pacific argues that the depreciation element of
the HCLD formula values under the Agreement should be increased commensurately with
the greater depreciation that it now shows on its"external"financial reports to the SEC.
This would substantially lower Pacific's formula values, resulting in an annual tax reduction
of approximately $50,000,000 Statewide.
The Agreement calls for calculating the HCLD value indicator"in the same manner
and using the same approach as the SBE's Valuation Division employed for the fiscal year
1991-2 (as reflected in the SBE's 1991 Appraisal Data Report identified in the State
Assessee's Attachment and supporting SBE work papers)".
In describing the HCLD indicator, SBE Rule 3(d) has long contemplated the use of
CPUC depreciable lives, reflecting the close historical relationship between the SBE's
HCLD indicator and the "rate base" upon which the CPUC regulates utility earnings. The
Counties have taken the position that the Agreement continues to require the use of the
longer CPUC depreciable lives apparently used by the SBE Valuation Division in 1991-2 in
accordance with Rule 3(d). The SBE Staff agreed with the Counties, and the SBE adopted
1996-7 values using the longer depreciable lives. Pacific Bell filed an appeal with the SBE,
which is to be heard on November 21, 1996. The Counties will appear and argue against
Pacific's position. The subject"joinder"will demonstrate that Contra Costa County supports
the position of other counties that the 1996 value for Pacific Bell should be enforced in the
manner we believe the Agreement contemplates.
The resolution of the depreciation issue is important not just for the $50,000,000 at
risk with Pacific Bell. If Pacific ultimately is successful, we should expect that many other
companies that have been deregulated also will attempt to have their formula values
lowered. The risk conceivably could be many times the $50,000,000 in issue with Pacific.
cc:Phil Batchelor,County Administrator
c:VnsofficelwinworcNnfiles\RepodandRec.doc
1 VICTOR J. WESTMAN, SB 34044
County Counsel
2 Contra Costa County
651 Pine Street, 9th Floor
3 Martinez, California 94553
510 335-1818
4
5 Attorney for County of Contra Costa
6
7
8 BEFORE.THE STATE BOARD OF EQUALIZATION
9 OF THE STATE OF CALIFORNIA
10 In the matter of the Assessment of the )
Unitary Property of Pacific Bell, )
11 Valued as of January 1, 1996 ) NOTICE OF JOINDER IN
MOTION TO ENFORCE
12 COUNTIES OF LOS ANGELES and ) ASSESSMENT OF TAXPAYER
SANTA CLARA, ) NO. 279
13 )
Real Parties in Interest. )
14 )
15 NOTICE IS HEREBY GIVEN that the County of Contra Costa joins in the motion of the
16 Counties of Los Angeles and Santa Clara to confirm the assessment of Pacific Bell ("Pac Bell")
17 at$15.070 billion, to find that the assessment is consistent with the 1992 Master Settlement
18 Agreement, and for other relief to enforce the Settlement Agreement.
19 DATED: October 1996
20
Victor J. Westman
21 County Counsel
22
23
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25
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NOTICE OF JOINDER IN MOTION TO ENFORCE 1
ASSESSMENT OF TAXPAYER NO. 279