OAH Docket No. 8-2700-15631-1
Governor’s Tracking No. AR 071
STATE OF
OFFICE OF
ADMINISTRATIVE HEARINGS
FOR THE DEPARTMENT
OF REVENUE
|
In the Matter of the Proposed Amendments
to Rules Relating to Valuation and Assessment of the Property of Utility
Companies, |
REPORT OF THE ADMINISTRATIVE LAW JUDGE |
Administrative Law Judge Eric L.
Lipman conducted a hearing concerning the above rules beginning at 9:30 a.m. on
December 20, 2006, in Conference Room 2000, Department of Revenue,
The hearing and this Report are part of a
rulemaking process governed by the Minnesota Administrative Procedure Act.[1] The legislature has designed the rulemaking
process to ensure that state agencies have met all of the requirements that
The rulemaking process includes a hearing when a sufficient number of persons request that a hearing be held. The hearing is intended to allow the agency and the Administrative Law Judge reviewing the proposed rules to hear public comment regarding the impact of the proposed rules and what changes might be appropriate. The Administrative Law Judge is employed by the Office of Administrative Hearings (OAH), an agency independent of the Department of Revenue (the Department, or, the agency).
The members of the Department’s hearing panel were Alan G. Whipple, Manager of the Property Tax Division; Harriet J. Sims, Supervising Attorney of Appeals and Legal Services; and Brent Eyre, Appraiser and Consultant hired by the Department. Thirty-seven members of the public signed the hearing register and no members of the public spoke at the hearing.
The
Department received a number of written comments on the proposed rules before
the hearing. After the hearing, the
record remained open for twenty days, until January 9, 2007, to allow interested
persons and the Department an opportunity to submit written comments. Following the initial comment period, the
record remained open for an additional five days to allow interested persons
and the Department the opportunity to file a written response to the comments
submitted. The OAH hearing record closed
on January 17, 2007. All of the comments
received were closely read and thoroughly considered.
The Department has established that it has the statutory authority to adopt the proposed rules and that the rules are necessary and reasonable.
Based upon all the testimony, exhibits and written comments, the Administrative Law Judge makes the following:
Regulatory Framework
1.
This
rulemaking proceeding involves revisions to the rules governing the valuation
and assessment of the property of utility companies for property tax
purposes. Minnesota Statutes mandate
that assessors “give due weight to every element and factor affecting the
market value” when estimating the value of real property for the purpose of
taxation,[2]
and the Department of Revenue has proposed new rules to meet this statutory
mandate.
2.
There
are three generally accepted approaches to determining market value: (1) the
cost approach; (2) the income approach; and (3) the market approach.[3]
3.
Prior
to 1973, the Commissioner of Taxation valued utility property using the
original cost less depreciation (“OCLD”) formula with a cap on depreciation. As the Minnesota Supreme Court would later
remark, the OCLD formula has it limits; as it “makes market value synonymous
with original cost, taking into account limited depreciation, and gives no
weight to other factors affecting market value.”[4]
4.
In
1973, the Minnesota Supreme Court decided the case of Independent School District No. 99 v.
Commissioner of Taxation, 211 N.W.2d 886 (
5.
The
valuation rules that are currently in place were promulgated in 1975, so as to
meet the requirements set forth in statute and the Court’s holding in I.S.D. No. 99 v. Commissioner.[6]
6.
In the
years since 1975, the state courts have continued to follow the rule announced
in I.S.D. No. 99; instructing that
any approximation of market value used by the Department must include
consideration of all relevant factors.[7]
7.
The
Department has undertaken this revision of its rules because, in its view, the
current rules exclude some relevant data from the valuation calculation.[8] As characterized by the Department, the
current rules are overly “rigid,” “formula driven,”[9] and “strictly prohibit
the application of the market approach” in the valuation of utility property.[10]
Nature of the Proposed Rules
8.
Beginning
in 2001, the Department held periodic open forum meetings regarding possible
rulemaking in the area of utility valuation.
In July 2004, the Department hired Brent Eyre as a consultant to prepare
a report which reviewed the existing rules and made recommendations for changes. That report was completed in January
2005. The Department held public forums
to discuss the report and solicit additional public comments in March and July,
2005. In addition, the Department
created a 14-member Utility Rules Advisory Committee with representatives from
the utility industry and host communities.
The last advisory committee meeting in March, 2006, included a review
and discussion of a draft of the proposed rules. The Department held another public forum in
May, 2006, to solicit additional informal public comment regarding the draft of
the rules prior to publication in the State
Register. A final public forum was
held on December 15, 2006, after publication of the proposed rules in the State Register and before the public
hearing.
9.
The
Department maintains that the proposed rules are necessary to: ensure that
estimates of market value are derived from the consideration of all appropriate
data; permit the application of sound appraisal judgment within the context of
an established and predictable set of procedures; reflect current economic
conditions; and ensure that the utility valuation process is transparent and
manageable.[11]
Procedural Issues
10.
In its post-hearing comments,
11.
The Department responded to each of
12.
As detailed further in the accompanying
Memorandum, below, none of the procedural objections raised by
13. By letter dated November 7, 2003, and received by OAH on November 13, 2003, the Department requested that the Office of Administrative Hearings approve the Department’s additional notice plan. Administrative Law Judge George A. Beck approved the additional notice plan, with some recommended additions, by letter dated November 19, 2003.[14]
14. On December 8, 2003, the Department published a Request for Comments on Possible Amendments to Rules Governing Valuation and Assessment of the Property of Utility Companies. The Request indicated that the Department was considering amending the rules to update the existing rule in light of current economic conditions and properly reflect the market values of the subject properties. The Request for Comments was published at 28 State Register 758.[15]
15. By letter dated October 3, 2006, and received by OAH on October 5, 2006, the Department requested that OAH schedule a hearing and assign an Administrative Law Judge. The Department also filed a proposed Notice of Hearing, a copy of the proposed rules, and a draft of the Statement of Need and Reasonableness (SONAR). In a letter dated October 12, 2006, Administrative Law Judge Eric L. Lipman approved the Department’s Notice of Hearing.
16. On November 9, 2006, the Department mailed the Notice of Hearing to all persons and associations who had registered their names with the agency for the purpose of receiving such notice and to all persons identified in the additional notice plan. The Department also sent a series of notices via electronic mail on November 8 and 10, 2006.[16] The Notice of Hearing stated that a copy of the proposed rules was attached to the notice.[17]
17. On November 9, 2006, the Department sent a copy of the Notice of Hearing and Statement of Need and Reasonableness to the legislators specified in Minn. Stat. § 14.116.[18]
18. On November 9, 2006, the Department mailed a copy of the Statement of Need and Reasonableness to the Legislative Reference Library.[19]
19. On November 13, 2006, the proposed rule and the Notice of Hearing were published at 31 State Register 637.[20]
20. On the day of the hearing the following documents were placed in the record:
·
The
Request for Comments published December 8, 2003, at 28 SR 758 (Ex. 1);
·
A copy
of the proposed rule with Revisor’s approval dated September 26, 2006 (Ex. 2),
and the Department’s proposed corrections to the rule (Ex. 2a);
·
A copy
of the Statement of Need and Reasonableness (SONAR) (Ex. 3); the Department’s
correction to page 15 (Ex. 3a); Brent Eyre’s report (Ex. 3b); and valuation
projections (Ex. 3c);
·
A copy
of the transmittal letter showing the agency sent a copy of the SONAR to the Legislative
Reference Library (Ex. 4);
·
The
Notice of Hearing as mailed and as published in the State Register at 31 SR 637
(Exs. 5a and 5b);
·
Certificate
of Mailing the Notice of Hearing to the Department’s rulemaking mailing list
dated November 9, 2006, and Certificate of Accuracy of the Mailing List (Ex. 6);
·
Certificates
of Additional Notice given, with transmittal letters (Ex. 7);
·
Written
comments on the proposed rules received by the agency following publication of
the Notice of Hearing (Ex. 8);
·
A copy
of the transmittal letter showing the agency sent a copy of the Notice and
SONAR to the legislators required by Minn. Stat. § 14.116 (Ex. 9);
·
Copy of
approval letter from Commissioner of Finance and copy of agency letter to
Finance requesting approval under Minn. Stat. § 14.131 (Ex. 10);
·
Copy of
letter from OAH approving Additional Notice Plan (Ex. 11);
·
Certificate
of Mailing the Request for Comments (Ex. 12);
·
Copy of
links to posting on Department’s website, showing Notice, proposed rule, SONAR,
exhibits in support of SONAR, and other background information, as part of the
Additional Notice Plan (Ex. 13);
·
The
Department’s written statement as presented at the hearing (Ex. 14);
·
David
Beaudet’s motion to disqualify Administrative Law Judge Lipman from presiding
over the rulemaking proceeding (Ex. 15);
·
Chief
Administrative Law Judge Raymond Krause’s Order denying the motion to
disqualify Judge Lipman (Ex. 16);
·
Brent
Eyre’s slide presentation from the rulemaking hearing (Ex. 17); and
·
Post-Hearing
Comments from the Department and the public (Exs. 18-25).
21. Minnesota Statutes §§ 14.131 and 14.23, require that the SONAR contain a description of the Department’s efforts to provide additional notice to persons who may be affected by the proposed rules. The Department submitted an additional notice plan to the Office of Administrative Hearings. This plan was reviewed and approved with certain additions, by letter dated November 19, 2003. In addition to notifying those persons who earlier-requested notice of rulemaking proceedings under Minn. Stat. § 14.14, the Department represented that it would also provide notice to the following groups and individuals:
·
by
mail, all utility companies permitted to operate in the State of Minnesota, the
President of the Real Estate Section of the Minnesota State Bar Association, all individuals who have indicated to the
Department that they are interested in utility valuation, the Public Utilities
Commission, the Energy Division of the Department of Commerce, the Residential
Utilities Division of the Minnesota Attorney General’s Office, the Minnesota
Municipal Utility Association (MMUA), Minnesota Rural Electric Association
(MREA), Energy CENTS Coalition, Legal Services Advocacy Project (LSAP),
Minnesota Chamber of Commerce, and the Suburban Rate Authority; and
·
by
email, all county assessors and auditors.
Further, the Department also posted the
Request for Comments, the Notice of Hearing, the proposed rules, the SONAR, and
supplemental information regarding the proposed rules, on its internet website.
22. The Administrative Law Judge finds that the Department did give notice to those individuals contained in its Additional Notice Plan on November 9, 2006.
23. The Department is authorized to adopt these rules pursuant to Minn. Stat. § 207C.06, which allows the Commissioner to “make, publish, and distribute rules for the administration and enforcement of state revenue laws.” In addition, Minn. Stat. §§ 273.33, subd. 2; 273.37, subd. 2; and 273.38 require the Commissioner to assess personal property of electric, gas distribution, and pipeline companies, as well as electric cooperatives.
24. The Administrative Law Judge finds that the Department has the statutory authority to adopt the proposed rules.
Regulatory Analysis in the Statement
of Need and Reasonableness (SONAR)
25. The Administrative Procedure Act requires an agency adopting rules to consider seven factors in its Statement of Need and Reasonableness. The first factor requires:
(1) A description of the classes of persons who
probably will be affected by the proposed rule, including classes that will
bear the costs of the proposed rule and classes that will benefit from the
proposed rule.
The
Department states that the class of affected parties will include electric, gas
distribution, pipeline, and integrated companies with operating property in
(2) The probable costs to the agency and to any
other agency of the implementation and enforcement of the proposed rule and any
anticipated effect on state revenues.
The Department states that it could incur costs during the phase-in period that are associated with additional assessment procedures, training, and increases in the number of inquiries from utilities and local governments. The Department asserts that there will be no effect on state revenues as a result of the proposed rule change, because most revenue from utility property taxes is paid to local units of government. The Department notes, however, that there could be some shifting of tax burdens at the county level.[22]
(3) The determination of whether there are less costly methods or less intrusive methods for achieving the purpose of the proposed rule.
The Department states that there are no less costly or intrusive methods for achieving the purposes of the proposed rule changes.[23]
(4) A description of any alternative methods for achieving the purpose of the proposed rule that were seriously considered by the agency and the reasons why they were rejected in favor of the proposed rule.
The Department states that there are no reasonable alternative methods for achieving the purposes of the proposed rule changes.[24]
(5) The probable costs of complying with the proposed rules.
The Department asserts that the compliance costs to all parties will be negligible; citing only initial training costs for assessors and company tax preparers on the new valuation and assessment methods. The Department states that the most significant change in practice under the new rules will be that assessors will be permitted to use appraisal judgment in weighing the indicators of value.[25]
During the comment period following publication of the Request for Comments, several people noted that counties could bear financial costs if a new rule resulted in lower valuations. The Department acknowledged that this was a possible consequence of the proposed rules, but argued that this was not a cost of compliance with the rules.[26]
(6) the probable costs or consequences of not adopting the proposed rule, including those costs borne by individual categories of affected parties, such as separate classes of governmental units, businesses, or individuals.
The Department has not identified any specific costs
that are certain to arise if the proposed rule is not adopted. Yet, the Department asserts that, if the rule
is not adopted, it is likely that it will continue to incur large litigation
costs in utility valuation disputes. The Department states that over the past
three years, litigation costs from three utility valuation cases under the
current rules have resulted in approximately $6.5 million worth of litigation
costs.[27] The
Department predicts that this rate of expense will continue if the proposed
rules are not adopted.[28] Such costs are borne by the state, host
communities and any parties contesting the valuation.[29]
(7) An assessment of any differences between the proposed rules and existing federal regulation and a specific analysis of the need for and reasonableness of each difference.
The Department argues that there are no existing federal regulations related to this rule, and that the federal government is constitutionally prohibited from administering property taxes.[30]
26. The Administrative Procedure Act[31] also requires an agency to describe how it has considered and implemented the legislative policy supporting performance based regulatory systems. A performance based rule is one that emphasizes superior achievement in meeting the agency’s regulatory objectives and maximum flexibility for the regulated party and the agency in meeting those goals.[32]
27. The Department states that its primary objectives in pursuing these rule changes are to: (1) accurately and predictably estimate market value; and (2) ensure that the process for utility valuations is transparent and manageable.[33]
Consultation with the Commissioner of Finance
28. Under Minn. Stat. § 14.131, the agency is required to “consult with the commissioner of finance to help evaluate the fiscal impact and fiscal benefits of the proposed rule on units of local government.”
29. The Department consulted with its Department of Finance representative, Alexandra Broat, by letter dated August 29, 2006.[34] In a memorandum dated September 20, 2006, Ms. Broat wrote:
Based on this information, I believe the Department of Revenue’s proposed rule amendments will have a noticeable fiscal impact on local units of government. Revenue has adequately considered these possible effects through an advisory committee, a consultant’s report, and public forums. In response, the Department of Revenue has developed a plan to mitigate the fiscal impact on local units of government by implementing the proposed rule changes over three years.[35]
30. The Administrative Law Judge finds that the Department has met the requirements set forth in Minn. Stat. § 14.131 for assessing the impact of the proposed rules, including consideration and implementation of the legislative policy supporting performance-based regulatory systems.
Analysis Under
31. Effective July 1, 2005, under Minn. Stat. § 14.127, the Department must “determine if the cost of complying with a proposed rule in the first year after the rule takes effect will exceed $25,000 for: (1) any one business that has less than 50 full-time employees; or (2) any one statutory or home rule charter city that has less than ten full-time employees.”[36] The Department must make this determination before the close of the hearing record, and the Administrative Law Judge must review the determination and approve or disapprove it.[37]
32. The Department has determined that the cost of complying with the proposed rules in the first year after they take effect will not exceed $25,000 for any one small business or small city.[38] According to the Department, the cost of complying with these rules for a small business is negligible because the information required under the proposed rules will be virtually the same as under the current rules. The Department states that there will be no change in the cost to comply for small cities because the counties handle all administrative work on property tax assessment and collection for local governments.[39]
33. In reaching its determination, the Department consulted with its advisory committee, which included a representative from a small business and a small city. None of the advisory committee representatives of cooperative associations indicated that costs would exceed $25,000. The Department assumed that costs of compliance are costs other than taxes, because costs of complying are distinct from potential tax impacts.[40]
34. The Administrative Law Judge finds that the agency has made the determination required by Minn. Stat. § 14.127 and approves that determination.
35. Under Minn. Stat. § 14.14, subd. 2, and Minn. Rule 1400.2100, a determination must be made in a rulemaking proceeding as to whether the agency has established the need for and reasonableness of the proposed rule by an affirmative presentation of facts. In support of a rule, an agency may rely on legislative facts, namely general facts concerning questions of law, policy and discretion, or it may simply rely on interpretation of a statute, or stated policy preferences.[41] The Department prepared a Statement of Need and Reasonableness (SONAR) in support of the proposed rules. At the hearing, the Department primarily relied upon the SONAR as its affirmative presentation of need and reasonableness for the proposed amendments. The SONAR was supplemented by comments made by Department representatives at the public hearing and in written post-hearing submissions.
36. In addition to need and reasonableness, the Administrative Law Judge must also assess other factors; namely: whether the agency has complied with rule adoption procedures; whether the rule grants undue discretion; whether the Department has statutory authority to adopt the rule; whether the rule is unconstitutional or illegal; whether the rule constitutes an undue delegation of authority to another entity; or whether the proposed language does not meet the statutory requirements for a rule.[42]
37. In this proceeding, the Department has proposed changes to its utility valuation rules after publication in the State Register. Accordingly, the Administrative Law Judge must also determine if the new language is substantially different from that which was originally proposed.[43]
38. The standards to determine if new language is substantially different are found in Minn. Stat. § 14.05, subd. 2. The statute specifies that a modification does not make a proposed rule substantially different if “the differences are within the scope of the matter announced … in the notice of hearing and are in character with the issues raised in that notice,” the differences “are a logical outgrowth of the contents of the … notice of hearing and the comments submitted in response to the notice,” and the notice of hearing “provided fair warning that the outcome of that rulemaking proceeding could be the rule in question.”
39. In determining whether modifications make the rules substantially different, the Administrative Law Judge is to consider whether “persons who will be affected by the rule should have understood that the rulemaking proceeding … could affect their interests,” whether “the subject matter of the rule or issues determined by the rule are different from the subject matter or issues contained in the … notice of hearing,” and whether “the effects of the rule differ from the effects of the proposed rule contained in the … notice of hearing.”[44]
40. Any substantive language that differs from the rule as published in the State Register has been assessed to determine whether the language is substantially different. Because some of these changes are not weighty or controversial, they are not separately set forth below. Any change that is not separately referenced below is found to be not substantially different from the rule as published in the State Register.
General
41. This report focuses upon the portions of the proposed rules that received significant comment or otherwise require a detailed examination. When rules are adequately supported by the SONAR or the Department’s oral or written comments, a detailed discussion of the proposed rules is unnecessary. The agency has demonstrated the need for and reasonableness of all rule provisions not specifically discussed in this report by an affirmative presentation of facts. All provisions not specifically referenced below are authorized by statute and there are no other deficiencies that would prevent the adoption of the rules.
8100.0100 – Definitions
42. Subpart 11. Operating Property: The Department is proposing to amend the definition of “operating property” as follows:
“Operating property” means any tangible
property, that is owned or leased, except land that,
which is directly associated with the generation, transmission, or
distribution of electricity, natural gas, gasoline, petroleum products, or
crude oil. Examples of operating
property include, but are not limited to, substations, transmission and
distribution lines, generating plants, and pipelines. Property that is located on the same or
contiguous parcels of land as operating property is presumed to also be
operating property. Land,
garages, warehouses, office buildings, pole yards, radio communication towers,
and parking lots are examples of is always nonoperating property.
43. The Department decided to amend this definition to more accurately describe operating property and to make clear that the definition does not include land. Under the revised text, property located on the same or contiguous parcels of land as operating property is presumed to be operating property.[45] Questions as to the proper valuations of items in close proximity to operating property often arise in this context. Having this presumption will no doubt aid both the Department and regulated parties in resolving such issues in the valuation process. The Department proposes to delete many of the examples of nonoperating property because the valuation determination is case specific and examples would not lend clarity to the rule.[46]
44. Enbridge Energy Company, Inc. (“Enbridge”) urged the agency to amend the definition of “operating property,” arguing that language proposed by the Department does not address, or reduce, the kind of valuation disputes that Enbridge has encountered during the course of its business.[47] As a remedy, Enbridge proposes the following modifications to the proposed rule:
Examples of
operating property include, but are not limited to, substations, transmission
and distribution lines, generating plants, and pipelines, and
machinery or equipment which is a component of, or operated in conjunction
with, any of the foregoing.
Enbridge argues that the inclusion of additional examples will clarify the rule and help to minimize the conflict as to what constitutes operating property.[48]
45. The Department defends its amended definition by arguing that most equipment which operates “in conjunction with” a utility operation is likely covered by its proposed text – namely, “tangible property … which is directly associated with the generation, transmission, or distribution of electricity, natural gas, gasoline, petroleum products, or crude oil.”[49] Further, the Department asserts that Enbridge’s proposed language does not, in fact, lend clarity to the definition of operating property; particularly because the Commissioner would, in each instance, still need to determine whether the specific item was a component of, or operating in conjunction with, operating property. Finally, the Department asserts that Enbridge cannot demonstrate that it is unreasonable for the agency to decline to adopt the additional text.
46. Enbridge responds that the natural “inference” claimed by the Department is not sufficient when, in its experience, local assessors do not make this same inference. Enbridge asserts that it has been drawn into litigation as to the valuation of related equipment; a circumstance that it believes could be avoided in the future if machinery and equipment were specifically referenced in the definition of operating property.[50]
47. While the Administrative Law Judge agrees that litigation as to the valuation of equipment that is used in generation, transmission or distribution activities is regrettable, the Department has demonstrated that its proposed language is needed and reasonable. The Department has established a rational basis for the proposed language defining operating property.
8100.0800
– Phase-In
48. Subpart 1. Phase-in of valuation changes. The proposed rule provides that the changes in valuation practice that result from the new rules are to be phased in over a period of three years; with the changes being fully effective in the third year. For assessment year 2007, the first year that the proposed changes would take effect, twenty percent of the difference in value between the value derived under the current rule, and the proposed changes, would be added to the assessed value for 2007. The addition would be made regardless of whether the addition is a positive or a negative sum. In assessment year 2008, fifty percent of the difference in value would be added to the assessed value for 2008; again regardless of whether the sum is a positive or negative number. Finally, in assessment year 2009, and all subsequent years, the full value derived under the proposed changes would be the assessed value.[51]
49.
The Department proposes a phase-in period for
the new valuation rules because the reduction in valuations that will occur under
the new rules will be both large in the aggregate and disparate across host
communities in
50. Xcel Energy, the MREA, and the Sherburne County Board of Commissioners all support the Department’s proposal to phase-in the rule changes.[53] Specifically, Sherburne County and the City of Becker assert that the proposed changes in valuation practice will result in lower revenues for their communities; and they appreciate the opportunity to adjust “assessment procedures, properly administer the changes, and develop an accurate and complete baseline of relevant information from which to make all future central assessments of utility property” during the proposed phase-in period. [54]
51. The Western Minnesota Municipal Power Agency (WMMPA)[55] supports the proposed rule generally, but offers one proposed change regarding the length of the phase-in period.[56] WMMPA asserts that the phase-in time should be four years for all entities, including those valued under the cost less depreciation method. In its submission, WMMPA argues that companies that are valued under “the unit value method” would achieve “the net book value for property tax purposes” in a relatively short time – four years – whereas companies that are valued under “the cost less depreciation method” would need a far longer period – fourteen years – to reach “the net book value for property tax purposes.”[57]
52. The Department denied that proposed differences in phase-in periods was discriminatory – or especially disfavored smaller companies – on the grounds that any utility would be free to select the valuation method that is used. As the department argues, if one or another valuation method better meets the utility’s needs, it may elect to use that method.[58]
53.
54. The Department responds to this critique that the proposed rule affects valuation, not tax rates; and that counties and local governments remain responsible for setting tax rates under the proposed rules. The Department goes on to reply that there is nothing in statute or rule that prohibits the agency from phasing in the proposed rule and that the agency has adequately established the need for and reasonableness of the proposed rule.[60]
55. The Coalition of Utility Cities (CUC)[61] objects to the impact of the proposed rule changes in their entirety and argues that the phase-in period will only delay the inevitable large decrease in tax revenues that the host communities will experience following adoption of the proposed rule.[62] The Department’s response is that CUC has not shown that the proposed rule is unreasonable.[63]
56. As detailed further in the accompanying Memorandum, below, the Administrative Law Judge finds that the proposed phase-in language is a lawful exercise of authority, needed and reasonable.
Characterization of the Commissioner’s Valuations
57. Enbridge submitted written comments throughout the rulemaking process regarding the characterization of the Commissioner’s valuations as orders or recommendations. Enbridge stated that the Department has frequently characterized valuations of Enbridge’s formula-based property, such as machinery and equipment, as “recommended;” thereby signaling to local tax officials the Department’s acquiescence to modifications in those valuations.[64] Enbridge further argues that chapter 8100 implies that valuations should be ordered for property that is not land, nonoperating property or a right-of-way. Accordingly, Enbridge suggests that the following language be added to Minn. R. 8100.0600, subp. 1, to eliminate by rule the Commissioner’s practice of characterizing valuations of machinery and equipment as “recommended:”
“In communicating its apportionment to the taxing districts, the commissioner may characterize as recommended only those valuations dealing with non-formula-assessed property.”[65]
58. The Department’s response to Enbridge’s proposal is that the language is not necessary and is unreasonable. According to the Department, Enbridge has blurred the distinctions between operating and non-operating property, on the one hand, with the very different concepts of recommended values and ordered values, on the other.[66] Further, the Department asserts the proposed language is unduly restrictive; as it would oblige it to issue valuation orders for formula assessed property in every instance.
59. Minn. Stat. § 273.33, subds. 1 and 2 list the types of property that must be listed and assessed by the county and that which must be listed and assessed by the Commissioner. It is the Department’s position that all values not required to be listed and assessed by the Commissioner are recommended values and that county officials may change the recommended values. The Department acknowledges that this principle is not stated explicitly in statute, but notes that it plans to introduce legislation to clarify this issue during the 2007 legislative session.[67] Lastly, while acknowledging that there are good policy arguments in favor of requiring the Commissioner to order all values for formula assessed property, the Department states that a change of this scope and effect should be made by the Minnesota Legislature, and not by rulemaking.
60. In its response to the Department’s comments, Enbridge asserts that the agency’s deference to legislative prerogatives is pretextual and overstated – arguing that other measures in the proposed rules are of far broader scope and policy impact than the clarifications it has suggested.[68]
61. It is the determination of the Administrative Law Judge that while Enbridge has identified issues that are worthy of the Department’s continued attention, Enbridge has not demonstrated that the absence of its suggested text renders the proposed rule unreasonable or unnecessary.
62. Finally, to the extent that either the Conclusions or Memorandum that follow below contain matters that are more appropriately described as Findings, the Administrative Law Judge incorporates those matters into these Findings.
Based upon the foregoing Findings of Fact, the Administrative Law Judge makes the following:
1.
The Department
of Revenue gave proper notice of the hearing in this matter.
2.
The
Department has fulfilled the procedural requirements of Minn. Stat. § 14.14 and
all other procedural requirements of law or rule.
3.
Newly
promulgated rules are reasonable if they are: (1) within the delegated authority
of the agency;[69]
(2) rationally related to the end sought to be achieved by the governing
statute;[70]
and (3) adequately grounded in the facts and circumstances set forth in the
rulemaking record.[71]
4.
The
Minnesota Supreme Court has further defined an agency’s burden in adopting
rules by requiring it to “explain on what evidence it is relying and how the
evidence connects rationally with the agency’s choice of action to be taken.”[72]
An agency is entitled to make choices between
possible approaches so long as the alternative selected is one that a rational
person could have made.
5.
It is
not the role of the Administrative Law Judge to make an independent assessment
as to which of several possible policy alternatives represents the “best
approach” in a given case. The duty and
opportunity to make these choices are among the powers conferred by the
Legislature, to the agency, with the grant of rulemaking authority.
6.
The Department
has demonstrated its statutory authority to adopt the proposed rules and has
fulfilled all other substantive requirements of law or rule within the meaning
of Minn. Stat. §§ 14.05, subd. 1, 14.15, subd. 3, and 14.50 (i) and (ii).
7.
The Department
has documented the need for and reasonableness of its proposed rules with an
affirmative presentation of facts in the record within the meaning of Minn.
Stat. §§ 14.14, subd. 2, and 14.50 (iii).
8.
The
modifications to the proposed rules that were offered by the Department after
publication in the State Register do not make the rules substantially different
from the proposed rule within the meaning of Minn. Stat. §§ 14.05, subd. 2, and
14.15, subd. 3.
9.
To the extent that the Memorandum that follows
below contains matters that are more appropriately described as Conclusions,
the Administrative Law Judge incorporates those matters into these Conclusions.
10.
A
finding or conclusion of need and reasonableness with respect to any particular
rule, or part thereof, does not preclude (nor should it discourage) the Department
from further modification of the proposed rules based upon an examination of
the public comments; provided that the final rule adopted by the agency is
based upon facts appearing in this rule hearing record.
Based upon the foregoing Conclusions, the Administrative Law Judge makes the following:
IT IS HEREBY RECOMMENDED that the proposed rules be adopted.
Dated this 16th day of February
2007.
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/s/ Eric L. Lipman |
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ERIC L. LIPMAN |
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Administrative Law Judge |
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NOTICE
The Department must make
this Report available for review by anyone who wishes to review it for at least
five working days before the Department takes any further action to adopt final
rules or to modify or withdraw the proposed rules. If the Department makes changes in the rules
other than those recommended in this report, it must submit the rules, along
with the complete hearing record, to the Chief Administrative Law Judge for a
review of those changes before it may adopt the rules in final form.
After adopting the final version of the rules, the Department must submit them to the Revisor of Statutes for a review of their form. If the Revisor of Statutes approves the form of the rules, she will submit certified copies to the Administrative Law Judge, who will then review them and file them with the Secretary of State. When they are filed with the Secretary of State, the Administrative Law Judge will notify the Department, and the Department will notify those persons who requested to be informed of their filing.
MEMORANDUM
Because
many of the interested parties raised substantive legal arguments in their
comments on the proposed rules, a short peroration on these claims is
warranted. For the reasons set forth
below, however, none of the claims made gives the Administrative Law Judge
reason to doubt that the Department lacks the statutory
authority to adopt the proposed rules or that the chosen rules are not necessary
or reasonable.
As
noted above, representatives of Goodhue County asserted that: (1) the
Department did not have copies of its exhibits available for attendees of the
public hearing; (2) the meetings of the Department’s Utility Rules Advisory
Committee were not conducted in accordance with Minnesota’s Open Meeting Law;
and (3) the Department failed to adequately address the impact of the rules on
local governments, following consultation with the Department of Finance.
First,
with respect to the availability of the exhibits offered by the agency at the
public hearing, the Department is correct when it observes that its obligation
to make copies for distribution at the public hearing is limited by rule. Under Minnesota Rule 1400.2220, subpart 2,
the Department was obliged only to have copies of the proposed rules and the
accompanying statement of need and reasonableness available at the hearing; an
obligation that it satisfied. With that
said, however, under Minn. Stat. § 14.365 (2), the hearing exhibits submitted
by the agency were available for public inspection throughout the 20-calendar
day post-hearing comment period. There
is no suggestion that
Second,
with respect to the openness and availability of seating for observers at the
Utility Rules Advisory Committee meetings, the Department is likewise correct
that agency advisory committees are not subject to the Open Meeting Law because
these informal advisors are not “governing bodies” with the power to transact
public business.[74] Moreover, as these advisors had no authority
to promulgate the valuation rules, or insist upon particular features in the
proposed rules, it is not at all clear how inadequate seating at the Utility
Rules Advisory Committee meetings, even if true,[75]
would result in a defective proposal.
Third,
pointing to claims by a Department employee that the fiscal impact of the
proposed rules is “not very much,” and that detailed financials as to the
impacts on local governments of the proposed rules were not included in the
agency’s rulemaking submissions, Goodhue County questions whether the agency consulted
with the Minnesota Department of Finance regarding the local impact of the proposed
rules. As noted in the findings above,
the claim is without merit. The record
establishes that the agency consulted with the Department of Finance and that
the Finance Department concluded that the agency “adequately considered” the
fiscal impact of the new rules on local units of government and developed a
plan to mitigate those effects.[76]
A claim of more substance
is
Still, the question recurs as to the authority of the Department to segment, over time, the application of rules which better meet the statutory requirement to “give due weight to every element and factor affecting the market value” when estimating the value of real property.[78] In this regard, the cases of Public Citizen, Inc. v. Mineta, 340 F.3d 39 (2d Cir. 2003) and Natural Resources Defense Council, Inc. v. EPA, 194 F.3d. 130 (D.C. Cir. 1999) are instructive. In both of those cases, notwithstanding a clear Congressional mandate to achieve a specific outcome – in Mineta it was the installation in automobiles of warning devices that indicate “when a tire is significantly under inflated,” and in NRDC it was application of monitoring methods to assure compliance with federal clean air standards – the federal courts approved agency rules that applied new methods of achieving these mandated results, in phases. Central to the holding in each of these cases was the reasonableness of the agency’s assessment as to whether a full application of the new standards could be, in all practicality, achieved at an earlier time. Guided by those standards in this case, it is without doubt that the Department’s proposal to phase in the application of the new valuation rules over the course of a three year period is reasonable.
Lastly, the argument of the Western Minnesota Municipal Power Agency to the effect that different phase-in periods, for different valuation methods, is discriminatory, is not well taken. To the contrary, the fact that the Department has provided alternative means of valuation, which may be freely chosen by the utility, contributes to the overall reasonableness of the proposed rules.[79] As WMMPA members may select the valuation method that is used, as each may deem fit, the proposed rules are not arbitrary or unreasonable.
For all of the reasons, the proposed valuation rules are a lawful exercise of authority, needed and reasonable.
[1]
[2]
[3] SONAR at 5.
[4]
Indep. Sch. Dist. No. 99 v. Comm’r of
Taxation, 211 N.W.2d 886, 891 (
[5]
[6] SONAR at 4.
[7]
See, e.g., Contos v. Herbst, 278
N.W.2d 732, 738 (
[8] See, e.g., SONAR at 11.
[9] SONAR at 5.
[10]
[11]
[12] Ex. 19.
[13] Ex. 25.
[14] Ex. 11.
[15]
Ex. 1;
[16] Ex. 7.
[17] Ex. 6.
[18] Ex. 9.
[19] Ex. 4.
[20] Ex. 5b.
[21] SONAR at 7.
[22] SONAR at 8.
[23]
[24] SONAR at 5.
[25] SONAR at 8.
[26]
[27] SONAR at 9.
[28] Id; compare also, Ex. 24 (Xcel Energy asserts that for “a long period,” utility operating property has been “valued substantially higher than market value due to application of the current rule …”).
[29] SONAR at 9.
[30]
[31]
[32]
[33] SONAR at 9.
[34] Ex. 10.
[35] Id; see also SONAR at 9-10.
[36]
[37]
[38] SONAR at 10.
[39]
[40]
[41]
Mammenga v. Department of Human Services,
442 N.W.2d 786 (
[42]
[43] Minn. Stat. § 14.15, subd. 3 (2006).
[44] Minn. Stat. § 14.05, subd. 2 (2006).
[45] SONAR at 13.
[46]
[47] Ex. 8.
[48]
[49] Ex. 18.
[50] Ex. 23.
[51] SONAR at 22.
[52]
[53] Exs. 8, 20, and 24.
[54] Ex. 20.
[55]
WMMPA is a joint action agency with 23 municipal utility members owning
approximately 180 miles of transmission lines in
[56] Ex. 21.
[57]
[58] Ex. 25.
[59] Ex. 19.
[60] Ex. 25.
[61]
The Coalition consists of seven
[62] Ex. 22.
[63] Ex. 25.
[64] Ex. 8.
[65]
[66] Ex. 18.
[67] See, generally, House File 496 and Senate File 610 (2007).
[68] Ex. 23.
[69]
In re Hanson, 275 N.W.2d 790 (
[70] Mammenga, 442 N.W.2d at 789-90; Broen Memorial Home v. Department of Human Services, 364 N.W.2d 436, 444 (Minn. Ct. App. 1985).
[71]
See, generally, Federal Security
Administrator v. Quaker Oats Co., 318
[72] Manufactured Housing Institute, 347 N.W.2d at 244.
[73] Public Hearing Transcript, at 6-7, 16-17 and 53-54.
[74]
Compare, e.g., The Minnesota Daily v.
[75] See, Ex. 19.
[76] Id; see also SONAR at 9-10.
[77] Ex. 19.
[78]
[79] Compare, Kennecott Greens Creek Mining Co. v. MSHA, Case No. 01-1046, slip op. at 20-21 (D.C. Cir. Feb. 9, 2007).