Centerior Fuel Corp. v. Zaino

[This decision has been published in Ohio Official Reports at 90 Ohio St.3d 540.]

CENTERIOR FUEL CORPORATION, APPELLEE, v. ZAINO, TAX COMMR., ET AL.,

APPELLANTS.

OES FUEL, INC., APPELLEE, v. ZAINO, TAX COMMR., APPELLANT.

[Cite as Centerior Fuel Corp. v. Zaino, 2001-Ohio-13.]

Taxation—Personal property valuation—Fuel companies’ lease of nuclear fuel

rods to public utilities—Fuel companies for personal property tax valuation

purposes can exclude the amounts they have capitalized on their books for

the cost of funds borrowed to construct fuel rods.

(Nos. 99-1987 and 99-1988—Submitted October 17, 2000—Decided

January 17, 2001.)

APPEALS from the Board of Tax Appeals, Nos. 96-M-1468 and 96-M-1469.

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ALICE ROBIE RESNICK, J.

{¶ 1} These two cases have been consolidated for review. The appellees,

Centerior Fuel Corporation (“CFC”) and OES Fuel, Inc. (“OES Fuel”) (“fuel

companies”), are nonutilities that lease nuclear fuel rods to public utilities that are

part owners of either the Perry nuclear power plant in Lake County or the Davis-

Besse nuclear power plant in Ottawa County. The tax years at issue are 1990-1995.

{¶ 2} CFC leases fuel rods to the Cleveland Electric Illuminating Company

and the Toledo Edison Company. OES Fuel leases fuel rods to Ohio Edison

Company and Pennsylvania Power Company.

{¶ 3} In order to raise the millions of dollars needed to pay for construction

of new fuel rods, the fuel companies have entered into multiple borrowing

arrangements with various banks and brokerage firms. While the materials for the

fuel rods are being refined and fabricated, the fuel companies capitalize the interest

costs they incur on the funds they have borrowed to finance the construction. The

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interest costs the fuel companies incur after the fuel rods are placed in service are

expensed.

{¶ 4} When the fuel companies filed their original or amended personal

property tax returns for tax years 1990-1995, they excluded the capitalized

construction interest cost from the book value of the fuel rods. However, after

auditing the fuel companies, the Department of Taxation increased the valuation by

adding back the capitalized construction interest cost. On review of petitions for

reassessment, the Tax Commissioner affirmed the assessments. The fuel

companies appealed to the Board of Tax Appeals (“BTA”), where the

commissioner’s assessments were reversed. The Tax Commissioner has appealed

the BTA’s decision in both cases.

{¶ 5} In addition to the Tax Commissioner’s appeals, separate appeals have

been filed in case No. 99-1987 by the auditors of Lake and Ottawa Counties.

{¶ 6} These causes are now before the court upon appeals as of right.

{¶ 7} The sole question in these cases is whether for personal property tax

valuation purposes the fuel companies can exclude the amounts they have

capitalized on their books for the cost of funds borrowed to construct fuel rods.

{¶ 8} R.C. 5711.21(C) provides that the true value of personal property

leased to a public utility and used by it directly in the rendition of a public utility

service “shall be determined in the same manner that the true value of such property

is determined under section 5727.11 of the Revised Code if owned by the public

utility.”

{¶ 9} Former R.C. 5727.11(B) (now [A]) provides that the true value of the

taxable personal property of an electric public utility “shall be determined by a

method of valuation using cost as capitalized on the public utility’s books and

records.”

{¶ 10} However, former R.C. 5727.11(G) (now [E]) provides that the true

value “shall not include the allowance for funds used during construction or interest

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during construction which has been capitalized on the public utility’s books and

records as part of the total cost of the taxable property.”

{¶ 11} Combining these statutory provisions results in a method of

valuation for the lessor fuel companies that is based on capitalized cost, but

excludes from the capitalized cost the allowance for funds used during construction

or the interest during construction that has been capitalized on the books as part of

the total cost. Because the fuel rods are leased to the electric utilities they are to be

valued as if they were owned by the electric utilities. Therefore, we must consider

how the fuel rods would be valued if they were owned by the electric utilities.

{¶ 12} The Public Utilities Commission of Ohio requires electric utilities

operating in Ohio to follow accounting procedures established by the Federal

Energy Regulatory Commission (“FERC”). Ohio Adm.Code 4901:1-9-05. The

phrase “allowance for funds used during construction” (“AFUDC”) used in R.C.

5727.11(G) is an accounting term used by FERC in its regulations covering electric

utilities. Title 18, C.F.R., Subchapter C, Part 101, Electric Plant Instructions,

Section 3A(17). This court has described AFUDC as “an accounting mechanism

which recognizes capital costs associated with financing construction. Generally,

the capital costs recognized by AFUDC include interest charges on borrowed funds

and the cost of equity funds used by a utility for purposes of construction.”

Consumers’ Counsel v. Pub. Util. Comm. (1983), 6 Ohio St.3d 377, 378, 6 OBR

428, 429, 453 N.E.2d 673, 674. In their book Principles of Public Utility Rates (2

Ed.1988) 248, Bonbright, Danielson, and Kamerschen state, “The primary purpose

of AFUDC is to capitalize the costs of financing construction, separate the effects

of the construction program from current operations, and to allocate current capital

costs to future periods when these capital facilities are producing revenue.” The

Federal Power Commission, the predecessor to FERC, stated the following

reasoning for capitalizing construction interest costs: “Interest costs are actually

incurred and can be viewed in the same manner as labor, materials, equipment and

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other costs which are incurred and properly capitalized during construction.” 40

F.R. 23322.

{¶ 13} The construction of nuclear fuel rods is the type of construction cost

eligible for AFUDC. Title 18, C.F.R., Subchapter C, Part 101, Electric Plant

Instructions, Section 3A(17) states that AFUDC applies to “construction work in

progress plus nuclear fuel in process of refinement, conversion, enrichment, and

fabrication.”

{¶ 14} The Tax Commissioner states that the lessor fuel companies failed

to prove the extent to which their construction interest cost would have been

excludable as AFUDC if the fuel rods had been owned by the utilities. The

commissioner also states that no calculation of AFUDC under the FERC formulas

was made by either the fuel companies or the BTA. The commissioner misconstrues

the purpose of R.C. 5727.11(G). The purpose of R.C. 5727.11(G) is to arrive at a

valuation for utility property that is based on a capitalized cost that excludes all

capitalized construction interest cost.

{¶ 15} The maximum amount of construction interest cost that an electric

utility can capitalize as AFUDC is determined by mathematical formulas developed

by FERC. Title 18, C.F.R., Subchapter C, Part 101, Electric Plant Instructions,

Section 3A(17). Any construction interest cost incurred in excess of the AFUDC

maximum, or in excess of any amount less than the AFUDC maximum that an

electric utility actually capitalizes as AFUDC, is expensed. Thus, for the purpose

of valuing an electric utility’s own personal property, the exclusion of AFUDC

from the total capitalized cost results in a valuation that is based on a capitalized

cost that excludes all capitalized construction interest cost.

{¶ 16} Therefore to have its personal property valued in the same manner

as the electric utility, the nonutility need not use the FERC formulas to calculate an

AFUDC amount. When a nonutility lessor deducts all of its capitalized

construction interest cost from the total capitalized cost of the property, it is

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achieving the same result as that achieved by an electric utility that excludes

AFUDC from a valuation that originally included only those interest costs allowed

by AFUDC. As required by R.C. 5727.11(G), the resulting valuation for both the

electric utility and the nonutility lessor is based on the capitalized cost that excludes

the allowance for funds used during construction, whether denominated as AFUDC

or capitalized construction interest cost.

{¶ 17} In the alternative, the commissioner states that the fuel rods should

have been valued using a valuation method other than the statutory method based

on capitalized cost. To support his position, the commissioner cites former R.C.

5727.11(B) (now [A]), which provides, “If the commissioner finds that application

of this [statutory] method will not result in the determination of true value of the

public utility’s taxable property, he may use another method of valuation.” In Texas

E. Transm. Corp. v. Tracy (1997), 78 Ohio St.3d 83, 86, 676 N.E.2d 523, 525, we

affirmed an alternate valuation, stating that “where rigid application of the statute

would be inappropriate, the presumption of value must yield to other competent

evidence reflecting true value.” However, in this case the Tax Commissioner

presented no evidence to show that the application of the statutory measure of value

was inappropriate.

{¶ 18} Appellants Edward Zupancic, the Auditor of Lake County, and

James Snider, the Auditor of Ottawa County, filed similar notices of appeal. In

their appeals they contend that CFC should not have been able to exclude the

construction interest costs because these costs were reimbursable.

{¶ 19} The auditors’ contention is contrary to R.C. 5727.11(G) (now [E]).

The relevant point is that these construction interest costs were capitalized by CFC.

If CFC is to be treated the same as an electric utility, then the capitalized

construction interest cost cannot be included in the capitalized cost for valuation

purposes.

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{¶ 20} Accordingly for the reasons set forth above, we find the decisions of

the BTA to be reasonable and lawful, and they are hereby affirmed.

Decisions affirmed.

MOYER, C.J., DOUGLAS, F.E. SWEENEY, PFEIFER and LUNDBERG STRATTON,

JJ., concur.

MCMONAGLE, J., concurs in judgment.

TIMOTHY E. MCMONAGLE, J., of the Eighth Appellate District, sitting for

COOK, J.

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Squire, Sanders & Dempsey, L.L.P., Bebe A. Fairchild, Abby R. Levine and

David J. Young, for appellees.

Betty D. Montgomery, Attorney General, and James C. Sauer, Assistant

Attorney General, for appellant Thomas M. Zaino, Tax Commissioner of Ohio.

Charles E. Coulson, Lake County Prosecuting Attorney, Michael P. Brown

and James R. Dugan, Assistant Prosecuting Attorneys, for appellant Edward H.

Zupancic, Lake County Auditor.

Mark E. Mulligan, Ottawa County Prosecuting Attorney; Baumgartner &

O’Toole, Kenneth S. Stumphauzer and Daniel D. Mason, for appellant James

Snider, Ottawa County Auditor.

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