Mesquite v. Ador

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
MESQUITE POWER, LLC, Plaintiff/Appellee,
v.
ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellant.
No. 1 CA-TX 22-0002
FILED 12-20-2022
Appeal from the Arizona Tax Court
No. TX2018-000928
The Honorable Danielle J. Viola, Judge
VACATED AND REMANDED WITH INSTRUCTIONS
COUNSEL
Mooney, Wright, Moore & Wilhoit, PLLC, Mesa
By Paul J. Mooney (argued) and Bart S. Wilhoit
Counsel for Appellee
Arizona Attorney General’s Office, Phoenix
By Lisa Neuville (argued) and Kimberly Cygan
Counsel for Appellant
OPINION
Judge Paul J. McMurdie delivered the Court’s opinion, in which Presiding
Judge Brian Y. Furuya and Judge Jennifer B. Campbell joined.
MESQUITE v. ADOR
Opinion of the Court
M c M U R D I E, Judge:
¶1 The Arizona Department of Revenue (“Department”) appeals
from the tax court’s judgment reducing the full cash value of property held
by Mesquite Power, LLC (“Mesquite”) for the 2019 tax year. The
Department argues the tax court erred by (1) discounting the impact of an
established power purchase agreement on the property’s value and
(2) considering incompetent expert testimony.
¶2 We hold that where intangible assets enhance the real and
tangible property’s value, a competent appraisal must consider the effect
such intangible assets have on the taxable property’s value. Thus, we vacate
the judgment, vacate the award of attorney’s fees, costs, and expenses, and
remand for the court to affirm the statutory value found by the Department.
FACTS AND PROCEDURAL BACKGROUND
¶3 The heart of this dispute is Mesquite’s power plant’s full cash
value assessment for the 2019 tax year. At issue is whether the existence of
an intangible agreement enhances the value of the real and tangible
personal property subject to the tax assessment.
1. Mesquite’s Power Plant.
¶4 Mesquite’s power plant is one-half of a two-block,
combined-cycle, natural gas-fired electric generation facility in western
Maricopa County. It operates as a “base load plant,” meaning it runs
continuously. The plant sells the electricity it generates on the open market
as a “merchant plant.”
¶5 A power plant’s capacity is measured in megawatts. The plant
has a nameplate capacity of 691.6 megawatts and a net operating capacity
of 625 megawatts. Another metric, called “heat rate,” confirms how
efficiently a plant converts fuel into energy. The plant’s historical heat rates
are superior to the average for comparable facilities in the region and across
the United States.
2. Transaction History.
¶6 Sempra U.S. Gas & Power (“Sempra”) built the plant in 2003.
Sempra structured the plant and its accompanying business as Mesquite. In
2015, Sempra sold Mesquite to ArcLight Capital Partners, LLC (“ArcLight”)
for nearly $357 million.
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Opinion of the Court
¶7 ArcLight spent over $27 million in capital improvements for
the plant. In December 2017, less than a month before the January 1
valuation date1 for the 2019 tax year, ArcLight solicited offers for the sale of
Mesquite. Southwest Generation Operating Company (“Southwest”) first
offered $518 million, and the deal closed in July 2018 for around $556
million. Southwest currently owns Mesquite.
3. The Purchase Agreement.
¶8 Southwest’s purchase of Mesquite from ArcLight included
transferring a contract for power generation (“Purchase Agreement”).
Under the Purchase Agreement, Mesquite guaranteed the Southwest Public
Power Resources Group (“SPPR”) access to 271 megawatts of electrical
capacity until May 2021, when the capacity increased to 475 megawatts. In
return, SPPR promised to pay Mesquite $34 million per year, rising to $48
million per year in 2022, as well as certain operation and maintenance costs
for the plant. SPPR’s payments are fixed whether SPPR draws upon any
guaranteed electrical capacity. The terms of the Purchase Agreement run
through 2046. Both before and after the purchase by Southwest, Mesquite
remains bound by the Purchase Agreement.
¶9 The Purchase Agreement does not require that Mesquite
provide electricity to SPPR from the Mesquite plant. If it chooses, Mesquite
may purchase power on the open market to cover the capacity guarantee to
SPPR. Although technically the Purchase Agreement and the plant are
severable, any such severance would require approval by SPPR. According
to Southwest’s vice president, the presence of the Purchase Agreement was
a deciding factor in purchasing the property.
4. Litigation History.
¶10 This is not the first time Mesquite has appeared before the tax
court. While still under the ownership of ArcLight, Mesquite challenged the
Department’s valuation of the property for the 2016 and 2017 tax years. The
tax court issued a consolidated judgment in Mesquite’s favor, establishing
reduced property values for those years and finding that the Purchase
Agreement was a “non-taxable, intangible asset.” The Department did not
appeal that judgment.
1 A.R.S. § 42-14153(C) provides that a property’s value is the value
“determined as of” the valuation date. Siete Solar, LLC v. Ariz. Dep’t of
Revenue, 246 Ariz. 146, 150, ¶ 17 (App. 2019).
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Opinion of the Court
¶11 In this case, the Department valued the property for the 2019
tax year at $196 million (“statutory value”). Mesquite appealed that
assessment to the tax court, claiming that the statutory value exceeded the
property’s market value in violation of A.R.S. § 42-11001(6). Mesquite
argued that the property’s full cash value should be reduced to $105
million.
¶12 Before the tax court, Mesquite moved for partial summary
judgment on whether the Purchase Agreement could be considered in the
property’s valuation. Mesquite asserted that the 2016–17 rulings estopped
the Department from considering the Purchase Agreement. The
Department, in turn, argued that while the Purchase Agreement was not
taxable, its existence enhanced the value of the taxable property and should
be considered in determining value. The tax court entered partial summary
judgment for Mesquite, ruling that the Purchase Agreement is a
“non-taxable, intangible asset that is separate and severable from the
tangible property.” The court partially denied the motion about “whether
cash flows attributable to the Purchase Agreement can be considered as part
of the valuation of Mesquite’s property.” The court did not address the cash
flow issue in its final judgment.
¶13 At trial, Mesquite offered expert testimony supporting its
$105 million evaluation claim. The Department offered expert testimony
valuing the property at $432 million. Each expert considered the three
standard appraisal methods (market,2 income, and cost), although
Mesquite’s expert gave no weight to the cost or market approaches. Only
the Department’s evaluation included the “cash flows attributable” to the
Purchase Agreement. Mesquite’s expert, instead, constructed a
hypothetical income model that excluded the Purchase Agreement income.
¶14 After a five-day bench trial, the tax court ruled for Mesquite,
valuing the property at $105 million for the 2019 tax year. The Department
appealed, and we have jurisdiction under A.R.S. §§ 12-2101(A)(1)
and 42-1254(D)(4).
2 In the tax court, the parties called the market approach the “sales
comparison” approach, we apply the terminology found in A.R.S.
§ 42-16051(B)(1)–(3). See Maricopa County v. Sperry Rand Corp., 112 Ariz. 579,
581 (1976).
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DISCUSSION
¶15 “We view the facts in the light most favorable to sustaining
the trial court’s judgment.” Cimarron Foothills Cmty. Ass’n v. Kippen, 206
Ariz. 455, 457, ¶ 2 (App. 2003) (quoting Sw. Soil Remediation, Inc. v. City of
Tucson, 201 Ariz. 438, 440, ¶ 2 (App. 2001)). We will “defer to the trial court’s
factual findings as long as the record supports them.” In re the Gen.
Adjudication of All Rts. to Use Water in the Gila River Sys. & Source, 198 Ariz.
330, 337, ¶ 15 (2000). We review pure questions of law and mixed questions
of law and fact de novo. See Robson Ranch Mountains, LLC v. Pinal County, 203
Ariz. 120, 125, ¶ 13 (App. 2002).
¶16 When challenging the statutory value, the taxpayer must
rebut the statutory presumption and show that a lower valuation is correct.
See Graham County v. Graham County Elec. Coop., Inc., 109 Ariz. 468, 469–70
(1973).
¶17 Arizona values property at its “full cash value” for tax
purposes. Bus. Realty of Ariz., Inc. v. Maricopa County, 181 Ariz. 551, 553
(1995). “Full cash value” generally means “fair market value,” defined as
“that amount at which property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of the relevant facts.” Id. Fair
market value can be derived by using “standard appraisal methods and
techniques.” A.R.S. § 42-11001(6).
¶18 “Current usage shall be included in the formula for reaching
a determination of full cash value.” A.R.S. § 42-11054(C)(1). “The valuation
of electric generation facilities,” like the property here, is determined by
looking at, among other things, “[t]he value of land, . . . . [t]he valuation of
real property improvements used in operating the facility, . . . . [and the]
valuation of personal property used in operating the facility.” A.R.S.
§ 42-14156(A)(1)–(3). “‘Personal property’ means all tangible property
except for land and real property improvements.” A.R.S. § 42-14156(B)(2).
A. Mesquite Misattributes Value to the Purchase Agreement.
¶19 The parties agree that Southwest bought
Mesquite—including real and personal property and the Purchase
Agreement—for about $556 million. Mesquite’s expert appraised the
tangible property at $105 million. Though there was no appraisal for
Mesquite’s intangible property, it follows from the sale price that, as of the
time of Southwest’s purchase, Southwest valued Mesquite’s intangible
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Opinion of the Court
property (which includes the Purchase Agreement) at more than $400
million.
¶20 Although Mesquite did not separately appraise the value of
the Purchase Agreement, the Department argues that the Purchase
Agreement has little to no independent value. The Department also
contends, however, that the Purchase Agreement’s presence enhances the
value of the real and tangible property of the plant.
¶21 The Purchase Agreement is a contract to provide electricity to
SPPR in exchange for SPPR paying Mesquite a fixed annual rate and
operational costs. But the Purchase Agreement itself does not represent or
evidence the value of these transactions. If the Purchase Agreement no
longer existed, it would change nothing about the plant or its ability to
produce the same electrical capacity. So long as the plant can produce
electricity, a new sale agreement could be negotiated with SPPR or any
other willing purchaser. The plant’s electricity production generates value
no matter how the sale of that electricity is made or who is purchasing the
electricity.
¶22 Still, Mesquite argues that the Purchase Agreement has
independent value because, under the agreement, Mesquite will be paid no
matter if SPPR chooses to take any electrical power. This argument is not
persuasive. SPPR’s choice to obtain power under the Purchase Agreement
is irrelevant because Mesquite’s obligation to guarantee power under that
agreement persists. Any income Mesquite receives under the Purchase
Agreement is earned by ensuring SPPR has access to the specified capacity.
That Mesquite may or may not need to use the plant to satisfy its obligations
under the Purchase Agreement does not alter the reality that electricity can
be produced and sold by the plant, much less the circumstances of actual
use relevant during the valuation period. And if the income must yet be
achieved through performance under the contract, the value of the income
is not inherent to the contract.
¶23 This is not to say that a contract can never hold value. For
instance, a contract may have inherent value if its terms are favorable such
that the bargained-for return is worth more than the consideration would
secure on the open market. But the tax court did not make such a finding.
If anything, the Purchase Agreement provides the best evidence for the fair
market value of Mesquite’s obligation, as the agreement was entered at
arm’s length.
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Opinion of the Court
¶24 Finally, even if the Purchase Agreement holds some value,
Mesquite has failed to show that the inherent value of the Purchase
Agreement explains the $400 million gap between the purchase price and
the claimed property value. We thus conclude that Mesquite misattributes
the value of the taxable property to the Purchase Agreement.
B. The Purchase Agreement Enhances the Value of the Taxable
Property.
¶25 Mesquite maintains that because the Purchase Agreement is
a “non-taxable, intangible asset that is separate and severable from the
tangible property,” it cannot be considered in determining the property’s
tax valuation. In its appraisal, Mesquite’s expert excluded the income
generated under the Purchase Agreement and declined to factor the
Purchase Agreement into Mesquite’s risk assessment. As a result,
Mesquite’s appraisal for $105 million hinged on hypothetical cash flows
and risk as if the Purchase Agreement did not exist.
¶26 Among other criticisms, the Department argues that
Mesquite’s appraisal is flawed because the Purchase Agreement
contributes to the cash flow of the taxable tangible property. It also claims
that the Purchase Agreement’s income guarantee reduces the risk of
operating the plant. The Department asserts that the Purchase Agreement’s
inherent value may be non-taxable, but to appraise the property as if the
Purchase Agreement did not exist would artificially reduce the value of the
taxable property and be error.
¶27 As a matter of mixed fact and law, we review de novo whether
an appraisal technique is proper under standard appraisal methods. See
Eurofresh, Inc. v. Graham County, 218 Ariz. 382, 387, ¶ 23 (App. 2007). As
applied here, we address whether a tax valuation of real and personal
property should consider intangible assets.
¶28 Maricopa County v. Viola, a case involving apartments
participating in the low-income housing tax credits (“LIHTC”) program, is
instructive. 251 Ariz. 276 (App. 2021). Under the LIHTC program, property
owners received federal tax credits for agreeing to thirty-year restrictions
on the rent they can charge tenants. Id. at 278, ¶ 2. The tax court found this
agreement intangible and untaxable. Cottonwood Affordable Hous. v. Yavapai
County, 205 Ariz. 427, 429 (Ariz. Tax Ct. 2003).
¶29 We affirmed the tax court’s ruling through special action and
held that the LIHTC program must be considered when valuing property
subject to the restrictions. Viola, 251 Ariz. at 281, ¶ 19. We explained that
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“[a]n LIHTC property cannot be valued as if it were a conventional
apartment complex because it is not and cannot be used as such.” Id. at 280,
¶ 15. This holding reflects the statutory requirement that “[c]urrent usage”
be considered in reaching the formula for full cash value. A.R.S.
§ 42-11054(C)(1). We agreed with the tax court’s conclusion:
A willing buyer, knowing that there is a restriction as to the
amount of rent that can be charged, would pay less for a low
income housing project than for a regular commercial
apartment complex. This property should not be valued as
though a buyer would not consider the restrictions. A
valuation for an LIHTC project, determined under any of the
standard appraisal methods, that does not take the deed
restrictions into account will not result in a determination of
fair market value for that property.
Id. at 279–80, ¶ 13 (quoting Cottonwood Affordable Hous., 205 Ariz. at 430).
Thus, while the LIHTC restrictions were not taxable property, it would be
error to evaluate the apartments without considering their effect on the
property.
¶30 Parallel reasoning applies here to the Purchase Agreement
and the Mesquite plant. True, the Purchase Agreement raises rather than
lowers the value of the business. That said, a willing buyer would still
consider the Purchase Agreement’s impact on the plant. Southwest’s vice
president affirmed this by testifying that Southwest would have never
bought Mesquite’s business without the Purchase Agreement. Because the
Purchase Agreement influences the purchase price a willing buyer would
pay for the property (and, more basically, whether to buy the property), the
proper valuation of the property should reflect the effect of the Purchase
Agreement. See Viola, 251 Ariz. at 279–80, ¶ 13.
¶31 Mesquite argues that it would be improper to consider the
Purchase Agreement’s enhancement of the value of the taxable property
because the Purchase Agreement is “separate and severable from the
tangible property.” Mesquite maintains that because the tax court granted
partial summary judgment on the issue and it was not appealed, the
Department cannot contest the Purchase Agreement’s separate and
severable status.
¶32 But the Purchase Agreement’s severability does not resolve
whether it enhances the value of real and tangible property. The Purchase
Agreement is severable, but it has not been severed. An asset that may be
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removed from the property does not exempt it from taxation. A contrary
view would defeat the purpose of including “personal property” in the
valuation statute. See A.R.S. § 42-14156(A)(3). And more importantly, A.R.S.
§ 42-11054(C)(1) directs that tax evaluations be based on the property’s
“[c]urrent usage,” not hypothetical usage.
¶33 Severable as it may be, the Purchase Agreement is not easily
disentangled from the plant. The two were transferred together in the sale
from ArcLight to Southwest. The terms of the Purchase Agreement require
a supermajority buyer’s approval to sell or transfer the Purchase
Agreement independently, and Mesquite presented no examples of
contracts like the Purchase Agreement being sold on the market separately
from power plants. The Purchase Agreement provides operation and
maintenance payments for Mesquite. We reject any suggestion that an
agreement that offers, among other things, payment of operation and
maintenance costs is not directed toward the operation or maintenance of
the facility and can be ignored in an income-approach valuation.
¶34 Finally, the Purchase Agreement is not a unique or exclusive
method for selling electrical power. Both parties presented evidence that
most power plants not owned by a utility company operate and receive
income through long-term contracts. Yet Mesquite’s expert eliminated the
revenue generated under the Purchase Agreement in his appraisal because
the contract produced it. Taken to its extreme, such an approach would
conclude that fully-subscribed power plants hold no value. Such a view
defies reason and economic reality. Mesquite may not avoid taxes by
sequestering its value into an untaxable contract just because such a
contract is hypothetically severable and independent of the property on
which it depends for its relevance. To hold otherwise also would run
contrary to A.R.S. § 42-14156.
¶35 We conclude that the Purchase Agreement enhances the value
of Mesquite’s taxable property because it contributes to the plant’s cash
flows and current usage. Thus, it must be considered in determining the
property’s value.
C. Because Mesquite’s Appraisal Failed to Evaluate the Property as It
Exists, It Is Incompetent to Rebut the Statutory Presumption.
¶36 Generally, the tax valuation “as approved by the appropriate
state or county authority is presumed to be correct and lawful.” A.R.S.
§ 42-16212(B). The taxpayer may overcome this presumption by presenting
competent evidence that the taxing authority’s valuation is excessive.
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Inspiration Consol. Copper Co. v. Ariz. Dep’t of Revenue, 147 Ariz. 216, 219
(App. 1985). “Evidence is competent for the purposes of rebutting the
statutory presumption and of showing that the Department’s valuation was
excessive when it is derived by standard appraisal methods and techniques
which are shown to be appropriate under the particular circumstances
involved.” Id. at 223.
¶37 If the taxpayer uses a different valuation method than the
taxing authority, it must establish that its approach was appropriate under
the circumstances. Inspiration Consol. Copper Co., 147 Ariz. at 219. Yet if the
taxpayer and taxing authority use the same appraisal method “but differ as
to the correct treatment of factors utilized in such method, the taxpayer’s
evidence is nevertheless competent and sufficient to overcome the statutory
presumption.” Id.
¶38 The experts for the Department and Mesquite considered the
three standard appraisal approaches, though they “differ[ed] as to the
correct treatment of factors” and the relative weights given each method.
See Inspiration Consol. Copper Co., 147 Ariz. at 219. The Department’s expert
gave some weight to each of the three approaches. By contrast, Mesquite’s
appraisal relied on the income-based approach, claiming it is the most
relied on by buyers and sellers in the industry. This approach uses the
projected future cash flows of the property to determine its present value.
¶39 But Mesquite did not calculate cash flows for the plant in its
current usage. Instead, Mesquite only included income from what it
considers the taxable property, constructing a hypothetical income model
for the property as if the Purchase Agreement did not exist. Mesquite’s
model is improper because it envisions the plant operating in a way that is
not its “[c]urrent usage.” See A.R.S. § 42-11054(C)(1). Mesquite cannot,
consistent with reality, be valued as a plant without an in-place agreement
providing a fixed income. See Viola, 251 Ariz. at 280, ¶ 15. This error alone
would render Mesquite’s appraisal “[in]appropriate under the particular
circumstances involved.” Inspiration Consol. Copper Co., 147 Ariz. at 223.
¶40 But we have more concerns with Mesquite’s appraisal. For
example, in calculating the weighted average cost of capital (“WACC”) for
its model, Mesquite’s expert included a “small company size premium”
and a “company-specific” risk factor. Mesquite added these two values
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together under the label “additional risk factor” (“Ru”).3 The Department
did not use either of these risk factors. The Department challenges the
application of Ru, arguing that it is unjustified and that its two components
are duplicative.
¶41 We agree with the Department. The record offers no
indication that the small company premium and the company-specific risk
are not improperly duplicative. Mesquite’s expert explained the small
company premium at trial, testifying that small companies are “inherently
more risky because of . . . size, lack of diversification, and the liquidity in
general.” But Mesquite’s expert report justifies the company-specific risk in
a single sentence, claiming that it “account[s] for the electrical generation
industry, lack of diversification and illiquidity.” When asked on direct
examination whether applying the company-specific risk beyond the small
company premium would be double counting, Mesquite’s expert replied:
It’s not double counting because, again, we’ve got the risk
associated with there being a company and diversification,
right? We still have the unsystematic risk that’s associated
with—again, the fact that we don’t have that diversification.
We have a single asset, and more specifically, just the real and
personal property of that asset.
¶42 Despite the expert’s nominal denial, the testimony fails to
disprove the Department’s accusation of double counting. The whole of
Mesquite’s evidence encompasses both the small company premium and
the company-specific risk based on diversification and liquidity grounds.
The use of two factors to account for the same risk is duplicative. Without
contrary justification, the Ru factor appears to be little more than an attempt
to pad the numbers such that they arrive at Mesquite’s preferred value. See
Del. Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 339 (Del. Ch.
2006) (“[T]he company specific risk premium often seems like the device
experts employ to bring their final results into line with their clients’
objectives, when other valuation inputs fail to do the trick.”).
¶43 Moreover, the effect of Ru on the overall valuation is immense.
For instance, Ru adds 10.37% to the rate of return on equity capital, more
3 Mesquite applies the label “additional risk factor” to both the sum,
Ru, and to the 5% company-specific risk factor which is a subcomponent of
Ru. For clarity, we call the subcomponent the “company-specific risk” and
the total 10.37% amount Ru.
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than doubling the number it would otherwise be (and, incidentally, roughly
doubling the number Southwest projected as a rate of return on equity
when purchasing Mesquite). Removing Ru and relying only on Mesquite’s
expert’s numbers for every other step in the analysis would lead to a total
valuation of over $230 million—a number greater than the statutory value.
The wild disparity in these values is especially alarming given Mesquite’s
sparse justifications for incorporating both risk factors.
¶44 The Department also argues that the small company premium
and company-specific risk factors cannot be competently applied without
evidence to justify their use. The Department supports this position by
citing an unpublished decision, Transwestern Pipeline Company v. Arizona
Department of Revenue, No. 1 CA-TX 19-0006, 2020 WL 4529622 (Aug. 6,
2020) (mem. decision). In Transwestern, the Department appealed a tax
court’s judgment that adopted a taxpayer’s WACC calculation for the 2016
and 2017 tax years. Id. at *2, ¶ 6. The taxpayer’s expert appraisal included
small company premiums and company-specific risk factors that, in total,
did not exceed five percent. Id. at *3, ¶ 14.
¶45 The Department challenged the validity of the risk factors,
arguing that “company-specific risks duplicate the risks already accounted
for in the small-company risk premium and the industry beta.”
Transwestern Pipeline Co., No. 1 CA-TX 19-0006, at *3, ¶ 15. The Department
also argued that the risk factors were unjustified because
there is no evidence in the record that Transwestern uniquely
suffered from the identified company-specific risks . . . while
other companies in the pipeline industry do not. . . .
[Transwestern] failed to provide sufficient factual basis for
the premium; either specific financial analysis to determine
whether a company-specific risk premium is appropriate or
the amount of such a premium.
Id. While the taxpayer argued that applying company-specific risks
followed “standard appraisal method[s],” the Department countered that
“the evidence must still show risks specific to the company, above general
risks to the entire industry.” Id. at *4, ¶ 16.
¶46 We agreed with the Department that there was insufficient
evidence identifying risks specific to Transwestern above the general risk
to the industry or risks common to all business ventures. Transwestern
Pipeline Co., No. 1 CA-TX 19-0006, at *5, ¶ 19. We vacated the part of the
judgment adopting the taxpayer’s WACC calculation, holding that “we
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need not defer to the tax court’s conclusion based on [Transwestern’s]
testimony when we cannot find competent record evidence that
Transwestern specifically suffered from the specific risk factors accepted by
the court.” Id. at *4, ¶ 16; see also Pima County v. Cyprus-Pima Mining Co., 119
Ariz. 111, 119 (1978) (The expert’s capitalization method was not competent
evidence when he departed from projected copper prices and failed to
adjust for inflation.).
¶47 Transwestern follows holdings from other jurisdictions. See
Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1158 (Del. Ch. 2006)
(Company-specific premiums should not be applied without justifying
evidence.); see also Minn. Energy Res. Corp. v. Comm’r of Revenue, 886 N.W.2d
786, 793–94 (Minn. 2016) (Lack of evidentiary support for company-specific
risk justifies a tax court’s decision to exclude this factor.); cf. Horn v.
McQueen, 353 F. Supp. 2d 785, 839 (W.D. Ky. 2004) (Appraisals must be
“careful not to ‘double-count’” by applying a company-specific risk,
“especially as modified . . . for smaller companies.”). While a
company-specific risk may apply in some cases, the choice to use and the
value of such a factor must be supported by the evidence.
¶48 Here, the Ru factor is more than double what it was in
Transwestern. But there is no evidence in the record suggesting that
Mesquite is inferior to similar plants. On the contrary, its heat rates are
superior to nationwide and regional averages. There is also no evidence
that Mesquite is riskier than similar plants. Over half of Mesquite’s capacity
is contracted through 2046, and Mesquite’s expert testified that plants
under a contract are less risky than those without an agreement. We
conclude that Mesquite has failed to provide evidence to justify its use of
the 10.37% Ru factor. As a result, its inclusion was unreasonable and
“[in]appropriate under the particular circumstances involved.” Inspiration
Consol. Copper Co., 147 Ariz. at 223.
¶49 Lastly, we respond to the Department’s suggestion that
Mesquite must apply the unit principle. An appraisal using the unit
valuation method would calculate the plant’s total value as an operating
unit and remove any untaxable assets’ fair market value from the full value.
The Department cites several cases from other jurisdictions that apply the
unit principle. See Elk Hills Power, LLC v. Bd. of Equalization, 304 P.3d 1052(Cal. 2013) (power plant); RT Commc’ns, Inc. v. State Bd. of Equalization, 11
P.3d 915 (Wyo. 2000) (telephone company); In re Appeal of ANR Pipeline Co.,
79 P.3d 751 (Kan. 2003) (natural gas pipeline).
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¶50 The advantage of the unit principle is that it captures the
value generated by the cooperation of mutually beneficial assets. In so
doing, it considers the “[c]urrent usage” of the property. See A.R.S.
§ 42-11054(C)(1). Given the shortcomings in Mesquite’s appraisal, we need
not decide whether the unit valuation principle is appropriate here.
¶51 We hold that any valuation approach must appraise the
operating unit by its current usage to be competent. Property appraisal
evidence is only competent “when it is derived by standard appraisal
methods and techniques which are shown to be appropriate under the
particular circumstances involved.” Inspiration Consol. Copper Co., 147 Ariz.
at 223. Though derived by nominally standard methods, Mesquite’s
appraisal is inappropriate under the circumstances because, by assuming
the Purchase Agreement does not exist, it does not reflect the property as it
is. Thus, Mesquite’s expert testimony is incompetent to rebut the statutory
presumption.
CONCLUSION
¶52 We vacate the tax court’s judgment and remand for the tax
court to impose the statutory value. We vacate the tax court’s award of
attorney’s fees, expert witness fees, and costs. We deny Mesquite’s request
for appellate attorney’s fees, costs, and other expenses under A.R.S.
§ 12-348(B) because Mesquite did not prevail on the merits.
AMY M. WOOD • Clerk of the Court
FILED: AA
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