1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 27, 2018 10 11 12 ITEM C 13 PUBLIC HEARINGS 14 C1 15 PROPERTY TAXES - STATE ASSESSEES' 16 PRESENTATIONS ON CAPITALIZATION RATES 17 AND OTHER FACTORS AFFECTING VALUES 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Jillian M. Sumner 28 CSR NO. 13619 1 1 P R E S E N T 2 3 For the Board Honorable George Runner Equalization: Chairman 4 Honorable Fiona Ma 5 CPA, Vice Chair 6 Honorable Jerome Horton Third District 7 Honorable Diane L. Harkey 8 Fourth District 9 Yvette Stowers Appearing for Betty T. 10 Yee, State Controller (per Government Code 11 Section 7.9) 12 Joann Richmond Chief 13 Board Proceedings Division 14 15 For Board of Equalization Staff: Dick Reisinger 16 Chief State-Assessed Properties 17 Division 18 Peter Michaels Attorney 19 20 21 ---oOo--- 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 FEBRUARY 27, 2018 4 ---oOo--- 5 MS. RICHMOND: We're going back to Item C, 6 Public Hearings; Item C1, Property Taxes - State 7 Assessees' Presentations on Capitalization Rates and 8 Other Factors Affecting Values. 9 And we do have a speaker. 10 MS. HARKEY: Thank you. 11 Welcome. Please introduce yourself for the 12 record. 13 MR. REISINGER: Dick Reisinger of the 14 State-Assessed Properties Division. 15 This is the first opportunity under Board 16 Rule for state assessees and other interested parties 17 to present comments to the Board in a public setting 18 regarding capitalization rates and other matters 19 affecting the state assessment for the fiscal year 20 '18-'19. 21 I'm here to address any comments and answer 22 any questions. 23 I did want to mention that a particular 24 interest this year is the evaluation of the potential 25 impacts of the new tax cut and job acts of 2017. The 26 significant reduction in the corporate tax rate and 27 the limitations on the deductibility of interest 28 expense may have impact on capitalization rates and 3 1 assess values for state assessees. 2 To what degree, it's uncertain at this 3 point. But we're reviewing a lot of information on 4 the changes in the capital markets, and we've met 5 with many of our larger state assessees, and with 6 other state central assessors, and -- to get their 7 input. And I'm confident we'll be able to address -- 8 adequately address this issue in our 2018 values. 9 MS. HARKEY: Thank you. 10 MR. MICHAELS: Hi, my name is Peter 11 Michaels. And I'm here today on behalf of 40 state 12 assessees including local exchange telephone 13 companies, inter exchange telephone companies, 14 wireless carriers, gas and electric utilities, 15 independent electric power producers, railroads, 16 petroleum pipelines and natural gas pipelines. 17 We have a similar agenda to the one 18 Mr. Reisinger described, and we have been in frequent 19 communication with Mr. Reisinger and his staff. 20 We've met with Mr. Reisinger and his staff. We'll 21 continue to meet with Mr. Reisinger and his staff. 22 They've reached out to us, to their great credit, for 23 our input on the impact of the Federal Tax 24 Legislation that was signed into law at the end of 25 last year. And it's been a collaborative exercise 26 with the Board staff, among the companies I 27 represent, to make the necessary adjustments based on 28 the new law. 4 1 We've also discussed with Mr. Reisinger and 2 his staff the impact of some of the highly publicized 3 natural disasters in this state in recent years. And 4 unfortunately there will be more natural disasters in 5 our likelihood, fires and floods. So we're 6 addressing valuation-related issues and risk-related 7 issues with Mr. Reisinger and his staff as well. 8 And, finally, marketplace dynamics, the 9 energy space, the energy segment, energy production, 10 whether it's solar wind or conventional, combined 11 cycle power production. There -- its dynamic 12 economically and technologically, likewise 13 transportation and telecommunication. 14 So we're looking with Mr. Reisinger and his 15 staff at the economic dynamics of the companies that 16 you will be adopting values for in May. But so far, 17 so good is -- is what I -- I want to say. 18 MS. HARKEY: Thank you. 19 Members, any questions? Any comment? 20 MR. HORTON: Mr. -- to both parties, 21 Madam Chair, what are your views on the current 22 method of determining economic obsolescence? 23 MR. MICHAELS: Well, it -- it varies from 24 industry to industry, and it varies within 25 industries. There are subsets within industries that 26 are losing market share, and, for example, local 27 exchange telephone companies is probably an example 28 where there would be no difference of opinion with 5 1 Mr. Reisinger. 2 There's economic obsolescence because the 3 property itself is not less valuable, but the 4 customer base and the economics of running a business 5 are way different than they were when that property 6 was purchased. 7 So the property is suffering -- is less 8 valuable to a prospective purchaser, even though its 9 actual inherent value is not lower. So local 10 exchange telephones is a good example of where 11 they've lost 75 or 80 percent of the customer base 12 they had 10 years ago. We all had local phone 13 service 15 years ago, and now very few of us do. 14 Certainly very few under the age of 40. So that 15 would be an example. 16 But if you look at wireless, you might have 17 a very different conversation where there's growth. 18 There's a lot of technological advancement, and that 19 could lead to functional obsolescence perhaps. 20 So it depends, in my view, on the actual 21 market segment of the industry that we're talking 22 about. In some instances, yes, it's appropriate to 23 make an adjustment for economic obsolescence where 24 the property through external forces, whether it's 25 court rulings, whether it's regulatory change, 26 whether it's technological advances, the property 27 actually is less valuable. And there are other 28 instances where that's not the case, even within 6 1 separate markets. 2 So Mr. Reisinger I'm sure can speak 3 authoritatively on the subject. 4 MR. REISINGER: Well, I think there -- 5 we've -- that it's well established on the 6 methodologies that are used to measure off less. We 7 have income shortfall methods, we have 8 underutilization methods. You know, we have RCN, 9 Replacement Cost New studies. 10 I think the critical thing in all these 11 methodologies is the data and the information that's 12 utilized in these methodologies. I think the 13 methodology are all solid and they're used around the 14 world. It really comes down to getting the 15 appropriate information to make those models of 16 methodologies lead you to a -- 17 MR. HORTON: I mean -- 18 MR. REISINGER: -- proper conclusion. 19 MR. HORTON: Part of what we've experienced 20 is the mixture of the two. 21 MR. REISINGER: Mm-hm. 22 MR. HORTON: And when you end up mixing 23 economics, and when you end up mixing the two 24 different computations, and why you do so and why you 25 don't, is where the dispute sort of comes into 26 play. 27 MR. MICHAELS: We -- we have not had that 28 problem. And certainly with the State-Assessed 7 1 Properties Division, I think we can delineate, at 2 least for our own purposes, functional obsolescence, 3 which has certain characteristics, and economic 4 obsolescence, which has different characteristics. 5 And they're not mutually exclusive. They -- they -- 6 they can both exist. But, personally, I don't 7 recall -- 8 MR. HORTON: You -- you're generally in 9 agreement. I'm actually speaking to the entities 10 that come in and are not -- 11 MR. REISINGER: Yeah, I think in -- I -- 12 you're probably alluding to we've had the oral 13 hearings last couple years relative to the power 14 plants. 15 MR. HORTON: Right. 16 MR. REISINGER: And really we've narrowed 17 it -- we have 40 -- this year we have 47, I think we 18 had 42 last year. And we really only had one appeal 19 of those 40 assessees. It got to the Board, because 20 we couldn't resolve it with the assessee. 21 But I think our methodologies are -- are 22 sound. I think we've -- we've narrowed the -- in 23 the -- in the past, we had a gap between like our 24 cost approach and our income approach. 25 MR. HORTON: Right. 26 MR. REISINGER: And we've worked really hard 27 in the last couple years at narrowing that gap so 28 that everybody's more comfortable that both -- both 8 1 value indicators are -- are in the -- 2 MS. HARKEY: In the range -- 3 MR. REISINGER: -- range of reasonable 4 value. Right. 5 MS. HARKEY: Yeah, I -- I want to commend 6 the Department. They really have stepped up and 7 stepped forward on -- based on this Board's 8 recommendation that they consider these items. It 9 was a very thorny issue. And I think they -- they 10 did a great -- they've done a really good job of 11 trying to be sure that those -- those assessments are 12 lining up. 13 MR. HORTON: I agree. 14 The disasters that occur, Mr. Michaels, tell 15 me how that affects your client. 16 MR. MICHAELS: Okay. 17 And just as a quick addendum to what 18 Mr. Reisinger said, many -- like a high number of the 19 similarly situated electric power producers, there's 20 one outliner. 21 MR. HORTON: Yeah. 22 MR. MICHAELS: I represent most of the other 23 ones -- yeah, most of the other ones. And we work 24 very closely. And there's a spirited give and take. 25 And we certainly establish, you know, our presence. 26 We -- we make our views well known to the staff. But 27 ultimately we find some common ground. But we're not 28 necessarily in sync from the first moment, first 9 1 step. 2 Natural disasters. So what has been highly 3 publicized with the recent fires, as recently as 4 yesterday with PG&E here in Northern California, the 5 Napa fire, with the floods down in Ventura, Santa 6 Barbara County, and -- and what is likely to happen, 7 this is also true of several other high profile 8 property units notably including the San Onofre 9 Nuclear Generating Station in San Diego County. 10 There's been an outcry for the investors of 11 these utility companies, rather than the rate payers 12 of these utility companies, to bear the cost of these 13 natural disasters. So the theory goes if PG&E is at 14 fault, or if Southern California Edison is at fault 15 for the fires or the floods, that a court would have 16 to decide that. Then the rate payers should not have 17 to pay the damages. Those damages should come out of 18 the pockets of investors. 19 Well, if that's the case, then an investor, 20 a prudent investor who is considering buying PG&E or 21 considering buying Edison or any of these properties, 22 is going to adjust the purchase price. Because 23 buyers can say, "Hey look, you know, I'm signing up, 24 potentially, for some heavy-duty damages here. So 25 I'm gonna put that in my calculus in how much I'm 26 going to offer." 27 And I -- I think that's absolutely true. 28 MR. HORTON: So it becomes a value 10 1 indicator. 2 MR. MICHAELS: Well, it -- it -- if we're 3 looking at the fair market value of property from the 4 perspective of a prudent investor, a prudent 5 purchaser and a prudent seller, the purchaser is 6 going to offer less than that purchaser might 7 previously have offered if that purchaser is assuming 8 liability for natural disaster damages. 9 MR. HORTON: Now, are you anticipating 10 legislation among those lines? 11 MR. MICHAELS: Well, the PUC is very active, 12 and the courts are very active. And there has been 13 talk about legislation. 14 But, you know, we're looking at property -- 15 the fair market value of property here. We're 16 looking at the assessed value of the property. So 17 regardless, I would say, of legislation, is the 18 property, in the eyes of a prudent investor, worth 19 less than maybe it would otherwise be if that 20 investor is on the hook for disaster liability? In 21 the past, those liabilities have been borne in part 22 or in whole by rate payers. 23 MR. HORTON: Great debate, by the way, over 24 the years. Yeah. 25 MS. STOWERS: No -- no comment. Yeah, I'll 26 go ahead -- very good conversation. But -- but I 27 understand what you're saying that, you know, there 28 may be some litigation that the -- the companies are 11 1 responsible or have to bear the cost. But wouldn't 2 it -- at the end of the day, the rates would increase 3 so the individuals, the rate payers, would still be 4 bearing that cost? 5 MR. MICHAELS: Well, who's paying the 6 damages? Damages are coming out of the pockets of 7 the investors. 8 MS. STOWERS: But eventually won't the -- 9 won't the rate payers rates go up because of it? 10 MR. MICHAELS: You know, the PUC governs 11 rates. The PUC has the final say. The PUC dictates 12 rates that PG&E is permitted to charge. PG&E doesn't 13 decide; PUC does. 14 MS. STOWERS: Okay. Go back to PUC and ask 15 to increase the rates. 16 MR. MICHAELS: Of course they can. They've 17 also asked for the costs for these natural disasters 18 to be borne by rate payers. That didn't go over so 19 well. 20 MS. STOWERS: No. 21 MR. MICHAELS: So ultimately the last word 22 on rate making is with the California Public 23 Utilities Commission. 24 MR. HORTON: Right. 25 MS. STOWERS: So from the BOE perspective, 26 are you guys considering that for this upcoming value 27 setting? 28 MS. HARKEY: Well, they'd have to -- 12 1 MS. STOWERS: Or do you have to have 2 actual -- 3 MR. REISINGER: We're -- we would -- we 4 pretty much rely on what the CPUC approves. 5 You have to remember for these large 6 companies, these rate-regulated companies, the value 7 is based on historical cost. And they're -- so 8 they're going to get a return based on what the CPUC 9 allows, and what their cost basis is. So that's why 10 when you look at our evaluations for those big 11 utilities, those rate-regulated utilities, that we 12 rely 75 percent on the -- on the historical cost to 13 determine the value. 14 Now, we -- we -- the -- we have spoken with 15 all the three -- the four major utilities 16 --rate-regulated utilities, and they've all expressed 17 the same concerns. So they'll -- hopefully they'll 18 provide us with some information. 19 I think it may be difficult to reflect it in 20 the current years' valuation, because, you know, 21 we -- I don't think we're in a position to set the 22 precedent on what the CPUC is going to allow and what 23 they're not going to allow. So I think maybe it will 24 be resolved in -- in the next fiscal year. 25 It's really difficult for us. We -- we 26 determine our rates based on what the CPUC's 27 approved, and what's in the marketplace. Now the 28 marketplace may have reflected some of this at the 13 1 end of the year, this increased risk. And that would 2 be reflected in our cap rate study. But probably not 3 to the full extent that the utilities would like to 4 see it. 5 MR. MICHAELS: You know, to Mr. Reisinger's 6 credit and his staff's credit, they have reached out 7 to us. We've discussed it collaboratively. And 8 it's -- we've jump-started a discussion about it. 9 And there's merit on both sides, and there's a middle 10 ground we'll find. 11 MS. STOWERS: That sounds -- that's good. 12 Nice to hear that you guys are working together. 13 MR. REISINGER: We try. 14 MR. HORTON: Just as an aside, Madam Chair, 15 I'm deviating a little bit. 16 Tell me how a federal tax law impacted 17 you. 18 MR. MICHAELS: Okay. Well, on the one hand, 19 the rate just dropped by 14 percent. 20 MR. HORTON: Right. 21 MR. MICHAELS: So in -- in theory, you're 22 going to -- you're -- you're going to earn more 23 money. 24 MR. HORTON: Right. 25 MR. MICHAELS: If you're a rate-regulated 26 company, such as the ones we were just talking 27 about -- and this is the case across the country 28 among many companies -- I'm not vouching for any of 14 1 the ones -- big ones here in California, because I'm 2 not -- actually don't know for sure. 3 The big utility companies that are 4 rate-regulated are actually taking the initiative and 5 going to the Public Utilities Commissions across the 6 country and saying, "Hey, you know, you've got to 7 lower our rate of return. You've got to reduce the 8 rates that you're setting, because we're going to be 9 making more money." 10 So we see the writing on the wall. 11 MR. HORTON: Okay. 12 MR. MICHAELS: So there -- there are utility 13 companies that are preemptively approaching state 14 Public Utilities Commissions and saying, you know, 15 "We -- we -- we -- we see that our earnings are going 16 to be going up, and, therefore, we think, you know, 17 we should talk about what kind of an adjustment to 18 make." It's a preemptive strike. 19 There are, under the new law, limits that 20 didn't previously exist on interest -- the deduction 21 of interest. So that is kind of the flip side of 22 earnings going up, because you can deduct less 23 interest now. This is true for many, but not all of 24 the companies that you assess. 25 There are views that the -- the cost of 26 capital and cost of debt will be affected by the tax 27 law change. And I -- I think -- if we're looking as 28 of January 1, there's no way of knowing what, in 15 1 fact, that impact is going to be. Because the bill 2 didn't get signed until December 27th. 3 MR. HORTON: Right. 4 MR. MICHAELS: But if we're asking ourselves 5 what would a prudent investor be thinking on 6 January 1, well, that prudent investor would say, 7 "Hey, the tax rate is going to go down." So we're 8 trying to balance that. 9 MR. HORTON: Any anticipation of offshore 10 income coming back into the states? 11 MR. MICHAELS: I don't -- Mr. Reisinger can 12 address that, too. That does not seem to be an issue 13 for these companies. They're really California 14 grounded. All the -- all the -- all the 15 infrastructure, all the assets, all the workers, 16 there's nothing outsourced by -- by the companies you 17 assess. 18 Now, many of these companies have 19 subsidiaries or affiliates that do business in other 20 places, other states. But the properties that you 21 assess are grounded here in California. 22 So Mr. Reisinger can maybe fine tune what 23 I'm saying. But I -- I don't think that's an issue 24 for state assessees. 25 MR. HORTON: I get it. 26 MR. REISINGER: Yeah, we're -- we're valuing 27 the property in California. 28 MR. HORTON: Yeah, I didn't think so. 16 1 MR. REISINGER: I would make the one comment 2 that the -- I mean, I don't think anybody expects 3 that the utilities -- the utilities themselves don't 4 expect it, we don't expect it, the PUC doesn't expect 5 it that they're going to get some windfall from the 6 reduced tax rate -- income tax rate. 7 All the main -- all the major utilities 8 we've talked to, they're already working on 9 projections and analysis expecting the PUC is going 10 to require them to reduce their rates to rate payers 11 to reflect the fact that they're paying, you know, 12 significantly less in income taxes. So -- 13 MR. MICHAELS: Right. 14 MS. STOWERS: That's interesting. 15 MR. HORTON: Thank you. I just thought we 16 should have a discussion. 17 MR. MICHAELS: Yeah, it's going to be a 18 balancing act. And there are certain elements where 19 there's going to be higher revenues, and there are 20 going to be certain elements where there are higher 21 costs. So we're working with Mr. Reisinger -- 22 MS. STOWERS: That's interesting. So -- so 23 will the PUC make announcements on their Web site 24 that we can track? 25 MR. REISINGER: Oh, I'm sure they'll -- 26 MR. MICHAELS: Oh, yeah. They'll make 27 decisions at a public hearing, and they'll be plenty 28 of press about it. 17 1 MR. REISINGER: We -- we follow the Web -- I 2 mean, we follow all of the rate cases. They're all 3 public records. 4 MS. STOWERS: Okay. 5 MR. HORTON: Well, let me -- 6 MS. STOWERS: I have so many things going 7 on -- 8 MR. REISINGER: I know. I know. 9 MS. STOWERS: -- I really -- if anyone would 10 like to shoot me an e-mail when an announcement is 11 made, I really would appreciate it. 12 MR. MICHAELS: There will be a series of 13 announcements, because PG&E is gonna have a rate 14 case, Edison is gonna have a rate case, Southern 15 California Gas and so forth. There's a whole 16 bunch. 17 MS. HARKEY: This could be fun, right? 18 MS. STOWERS: I would really like to -- 19 MR. MICHAELS: Depends how you define fun. 20 MS. STOWERS: If -- you don't have to, but 21 if any -- 22 MR. MICHAELS: Sure. 23 MS. STOWERS: Ystowers@ -- 24 MR. MICHAELS: Of course. Of course. 25 MS. STOWERS: I would love to see it. 26 MR. HORTON: Well, let me -- 27 MS. STOWERS: I'll probably see the press 28 anyway. 18 1 MR. MICHAELS: Well, you know, are we 2 allowed -- Mr. Reisinger better do that. Because 3 I'm -- it wouldn't be appropriate for me -- 4 MS. STOWERS: Yeah. 5 MR. MICHAELS: -- to do an ex parte 6 communication with you. 7 MR. HORTON: Oh, you can. But anyway, we 8 need to clear that up, because that's how people 9 actually think right now. Legally, we maybe need to 10 issue some kind of memo or something. 11 But let me just commend you, Mr. Michaels, 12 for the work that you continue to do on behalf of 13 your constituents. And particularly in this 14 particular case as it relates to federal tax law, 15 it's quite pleasing to know that folks are coming 16 forward in anticipation of the benefit and 17 anticipation of trying to equitably share that 18 benefit with the rate payers. I appreciate that. 19 Thank you, Madam Chair. 20 MS. HARKEY: Thank you. 21 All right. 22 Mr. Reisinger, you're off the hot seat I 23 think. 24 MR. REISINGER: Not yet. 25 MR. HORTON: Not yet. 26 MS. HARKEY: Not yet? 27 MR. MICHAELS: I'm off the hot seat. 28 MS. HARKEY: Uno mas. 19 1 Ms. Richmond. 2 MS. RICHMOND: And so our next part of the 3 Public Hearing is for the private railroad car 4 assessees' presentations on factors and procedures 5 affecting fiscal year 2018-'19. 6 MR. REISINGER: Again, I'm Dick Reisinger 7 from the State-Assessed Properties Division. 8 This is the first opportunity under Board 9 Rule for private rail car owners to present comments 10 to the Board in a public setting regarding factors 11 and procedures affecting taxable values of private 12 rail cars for fiscal year '18-'19. 13 I'm here to address any comments and answer 14 any questions. 15 MR. HORTON: Madam Chair. 16 MS. HARKEY: Yes. 17 MR. HORTON: With all the discussion on the 18 railroad issue, the assessment and so forth, and the 19 legislature, no one came forth to express any -- any 20 thoughts? 21 MR. REISINGER: No. Well, we -- we worked 22 with -- we've been working with the major railroads 23 in developing our cap rates. 24 MR. HORTON: Okay. 25 MR. REISINGER: We had discussions with them 26 about that. But they haven't -- we haven't had any 27 evaluation issues with them in the last few years. 28 And prior rail cars is pretty straightforward. It's 20 1 just calculations. And we haven't had any issues 2 with them for years. 3 MR. HORTON: Okay. 4 MS. HARKEY: Everybody's in agreement. 5 MR. HORTON: Thank you. 6 MS. HARKEY: Okay. Thank you very much. 7 MR. REISINGER: Thank you. 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 21 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Jillian Sumner, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on February 27, 2018 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 21 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: June 5, 2018 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 22