San Diego County Super. Ct. No. 37-2008- 00097074-CU-MC-CTL Ct.App. 4 D056943
Original Appeal Original Proceeding, 195 Cal.App.4th 285 Superior San Diego, County Ronald L. Styn, Judge
Law Offices of Peter Michaels, Peter W. Michaels; Gibson, Dunn & Crutcher, Julian W. Poon, Blaine H. Evanson; Mooney, Wright & Moore and Paul J. Mooney for Plaintiff and Appellant.
Richard N. Wiley for Wirelessco, L.P., as Amicus Curiae on behalf of Plaintiff and Appellant.
Reed Smith, Mardiros H. Dakessian, Margaret M. Grignon, Mike Shaikh and John R. Messenger for Institute for Professionals in Taxation as Amicus Curiae on behalf of Plaintiff and Appellant.
Sutherland, Asbill & Brennan, Douglas Mo, Prentiss Willson, Jr., and Eric S. Tresh for Broadband Tax Institute as Amicus Curiae on behalf of Plaintiff and Appellant.
Wm. Gregory Turner for Council on Taxation as Amicus Curiae on behalf of Plaintiff and Appellant.
Cahill, Davis & O’Neall and Cris K. O’Neall for California Taxpayers Association, California Manufacturers & Technology Association and Silicon Valley Leadership Group as Amici Curiae on behalf of Plaintiff and Appellant.
Coblentz, Patch, Duffy & Bass, Richard R. Patch, Jeffrey Sinsheimer and Charmaine G. Yu for California Cable and Telecommunications Association as Amici Curiae on behalf of Plaintiff and Appellant.
Paul Hastings, Peter H. Weiner, Gordon E. Hart, Sean D. Unger, Jill E. C. Yung, Nancy Iredale and Jeffrey G. Varga for Independent Energy Producers Association as Amici Curiae on behalf of Plaintiff and Appellant.
Edmund G. Brown, Jr., and Kamala D. Harris, Attorneys General, David S. Chaney, Chief Assistant Attorney General, Paul D. Gifford, Assistant Attorney General, Felix E. Leatherwood, Dean Freeman, Leslie Branman Smith, Brian Wesley and Tim Nader, Deputy Attorneys General, for Defendant and Respondent Board of Equalization.
Theresa A. Goldner, County Counsel, and Jerri S. Bradley, Deputy County Counsel, for Defendant and Respondent County of Kern.
John F. Kratli, Acting County Counsel (Los Angeles) and Albert Ramseyer, Principal Deputy County Counsel, for John R. Noguez, Los Angeles County Assessor as Amicus Curiae on behalf of Defendants and Respondents.
Edward G. Summers for Middle Class Taxpayers as Amicus Curiae on behalf of Defendants and Respondents.
Michael Wall and Alex Jackson for Natural Resources Defense Council as Amicus Curiae on behalf of Defendants and Respondents.
Miguel Márguez, County Counsel (Santa Clara), Orry P. Korb, Assistant County Counsel, Robert M. Coelho, Lead Deputy County Counsel, and Steve Mitra, Deputy County Counsel, for California State Association of Counties and California Assessors’ Association as Amicus Curiae on behalf of Defendants and Respondents.
John Stump for Sierra Club as Amicus Curiae on behalf of Defendants and Respondents.
Ann Hancock for Climate Protection Campaign as Amicus Curiae on behalf of Defendants and Respondents.
Kurt R. Wise and Barbara Baird for South Coast Air Quality Management District as Amicus Curiae.
Counsel who argued in Supreme Court (not intended for publication with opinion): Paul J. Mooney, Mooney, Wright & Moore, Tim Nader, Deputy Attorney General
This case presents questions regarding how the State Board of Equalization (Board) may assess the value of an electric power plant for purposes of property taxation. The issue is complicated by the circumstance that, with exceptions not relevant here, assessors may not include the value of intangible assets and rights in the value of taxable property. (Cal. Const., art. XIII, § 2; Rev. & Tax. Code, §§ 110, 212; Roehm v. County of Orange (1948) 32 Cal.2d 280 (Roehm).) In this case, the power company purchased “emission reduction credits” (ERCs) — credits the company had to purchase to obtain authorization to construct the plant and to operate it at certain air-pollutant emission levels. All parties agree these ERCs constitute intangible rights for property taxation purposes. However, they dispute whether the Board improperly taxed the ERCs when it assessed the power plant. This dispute turns on our construction of Revenue and Taxation Code section 110, subdivisions (d) and (e), and section 212, subdivision (c) (hereinafter sometimes sections 110(d), 110(e), and 212(c)).
Sections 212(c) and 110(d) prohibit the direct taxation of certain intangible assets and rights, including the ERCs in this case. However, in assessing taxable property under section 110(e), the Board may “assum[e] the presence of intangible assets or rights necessary to put the taxable property to beneficial or productive use.” The key issue is whether section 110, subdivisions (d) and (e) are mutually exclusive provisions, as the Court of Appeal held, or whether they can be applied together. We conclude that subdivisions (d) and (e) can be applied together. Resolution of this issue determines the validity of the Board’s assessment of the power plant.
In this case, the Board used two methods of assessing the power plant, a replacement cost method and an income approach. With the replacement cost method, the Board estimated the cost of replacing the assets of the power plant. (Cal. Code Regs., tit. 18, § 6.) Because ERCs are necessary to put the power plant to beneficial use, the Board included the estimated cost of replacing the ERCs when it valued the plant. The issue is whether the Board may include the estimated cost of replacing the ERCs in using the replacement cost method. We conclude that the Board directly and improperly taxed the power company’s ERCs when it added their replacement cost to the power plant’s taxable value.
With the income approach, the Board estimated the amount of income the property is expected to yield over its life and determined the present value of that amount. (Cal. Code Regs., tit. 18, § 8.) The issue is whether the Board was required to attribute a portion of the plant’s income stream to the ERCs and deduct that value from the overall income estimate prior to taxation. We conclude that the Board was not required to deduct a value attributable to the ERCs under an income approach. There was no credible showing that there is a separate stream of income related to enterprise activity or even a separate stream of income at all that is attributable to the ERCs in this case.
I. FACTS AND PROCEDURAL HISTORY
Elk Hills Power, LLC (Elk Hills), is a Delaware limited liability company that owns and operates an independent electric power plant in Kern County. Elk Hills brought this action under section 5148, subdivision (a), to recover property taxes paid to the County of Kern (County) during the five-year period from 2004 and 2008. Elk Hills alleged that the County improperly added an increment of value to Elk Hills’s tax assessment that directly and impermissibly taxed its ERCs. Elk Hills had purchased these ERCs to gain authorization to construct the power plant and to operate it at specified emission levels.
In 1999, Elk Hills had applied for a permit to construct and operate a power plant in Tupman, California. Tupman is in the jurisdiction of the San Joaquin Valley Unified Air Pollution Control District (District), which ensures that proposed pollution sources comply with state air quality regulations. The California Clean Air Act of 1988 (Stats. 1988, ch. 1568, p. 5634) (California Clean Air Act) requires local air quality districts “to achieve and maintain the state and federal ambient air quality standards... and... enforce all applicable provisions of state and federal law.” (Health & Saf. Code, § 40001, subd. (a).) In the San Joaquin Valley, the District’s air quality rules forbid “net increases in emissions above specified ...