Souza’s shot in the dark on PG&E

At Tuesday’s City Council Meeting, Councilmember Stephen Souza got up before council to talk about the recent SMUD-PG&E election. Souza was a strong supporter of the SMUD annexation attempt in Yolo County.

One of the key parts of the election was the dispute between SMUD and PG&E over how much it would cost for SMUD to purchase PG&Es infrastructure. SMUD believed it was worth between $86 and $133 million while PG&E focused on the number $520 million.

Souza never really understood this point, he got burned by it at a Measure H & I debate by the PG&E spokes man. Here’s my best understanding of the rule. For electricity infrastructure, fair market value is not determined by current worth. Rather it is determined by replacement value. Hence PG&E is claiming that the fair market value for their infrastructure is $520 million. SMUD was disputing that figure and placed it much lower at between $86 million and $133 million. I do not know enough to know which figure was accurate.

However, regardless of PG&E claims, they are not being assessed at replacement value but rather at actual value. The Board of Equalization is the one that assesses their value and the amount that they are paying taxes. The Board of Equalization is certainly going to be far better aware of the assessment laws than Councilmember Stephen Souza and it is unlikely that they have been assessing PG&E’s current taxable value incorrectly.

Of course, Souza could have discovered most of this if he had asked questions in private about how taxes are assessed versus fair market value issues that arose during the campaign. Instead he has suggested that council agendize this. We see no purpose for this and believe it a waste of staff time and resources and that council should put its energies into other areas.

—Doug Paul Davis reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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20 Comments

  1. Anonymous

    There seems to be confusion over terms. There are really four different values being discussed.

    Net Book Value – that is the value of the assets on the PG&E books. The definition is the orginal cost of the assets less book depreciation. The assets are depreciated over some aribitrary life influenced by generally accepted accounting principles. Most likely the useful life used for accounting purposes is shorter that the expected realistic life of the assets. Therefore the net book value may be very low.

    The Tax Value (or tax basis) starts with the original cost but generally the life of the asset is longer than the life used by the company. The Tax Value is probably higher than the PG&E book value.

    The Net Book Value and the Tax Value are both usually far below Fair Market Value. Look at a house for example, excluding the land. The original cost of the structure is far below the worth of the structure today (assuming it was built a while ago – say 15 to 25 years ago. With regard to Fair Market Value, both the Net Book Value and Tax Value are not relevant unless you are talking about relatively new assets.

    Replacement value (ore Replacement Cost) is the cost of rebuilding all of the assets. Assume Shasta dam broke and the flood wiped out all of the PG&E assets is Yolo County. The replacement cost assumes you start with nothing and you rebuild the entire power infrastructure.

    The Fair Market Value is less than Replacement Value because the assets have been sitting out there exposed to the elements for a number of years. You would start with Replacement Value and subtract some reasonable amount to compensate for the deterioration of the assets since the assets were put in service.

    The entire issue boils down to what is a reasonble Replacement Value and what is a reasonable amount to assign to the value of deterioration. The net of the two is almost certainly less than the PG&E claim and more than the SMUD claim.

  2. Anonymous

    There seems to be confusion over terms. There are really four different values being discussed.

    Net Book Value – that is the value of the assets on the PG&E books. The definition is the orginal cost of the assets less book depreciation. The assets are depreciated over some aribitrary life influenced by generally accepted accounting principles. Most likely the useful life used for accounting purposes is shorter that the expected realistic life of the assets. Therefore the net book value may be very low.

    The Tax Value (or tax basis) starts with the original cost but generally the life of the asset is longer than the life used by the company. The Tax Value is probably higher than the PG&E book value.

    The Net Book Value and the Tax Value are both usually far below Fair Market Value. Look at a house for example, excluding the land. The original cost of the structure is far below the worth of the structure today (assuming it was built a while ago – say 15 to 25 years ago. With regard to Fair Market Value, both the Net Book Value and Tax Value are not relevant unless you are talking about relatively new assets.

    Replacement value (ore Replacement Cost) is the cost of rebuilding all of the assets. Assume Shasta dam broke and the flood wiped out all of the PG&E assets is Yolo County. The replacement cost assumes you start with nothing and you rebuild the entire power infrastructure.

    The Fair Market Value is less than Replacement Value because the assets have been sitting out there exposed to the elements for a number of years. You would start with Replacement Value and subtract some reasonable amount to compensate for the deterioration of the assets since the assets were put in service.

    The entire issue boils down to what is a reasonble Replacement Value and what is a reasonable amount to assign to the value of deterioration. The net of the two is almost certainly less than the PG&E claim and more than the SMUD claim.

  3. Anonymous

    There seems to be confusion over terms. There are really four different values being discussed.

    Net Book Value – that is the value of the assets on the PG&E books. The definition is the orginal cost of the assets less book depreciation. The assets are depreciated over some aribitrary life influenced by generally accepted accounting principles. Most likely the useful life used for accounting purposes is shorter that the expected realistic life of the assets. Therefore the net book value may be very low.

    The Tax Value (or tax basis) starts with the original cost but generally the life of the asset is longer than the life used by the company. The Tax Value is probably higher than the PG&E book value.

    The Net Book Value and the Tax Value are both usually far below Fair Market Value. Look at a house for example, excluding the land. The original cost of the structure is far below the worth of the structure today (assuming it was built a while ago – say 15 to 25 years ago. With regard to Fair Market Value, both the Net Book Value and Tax Value are not relevant unless you are talking about relatively new assets.

    Replacement value (ore Replacement Cost) is the cost of rebuilding all of the assets. Assume Shasta dam broke and the flood wiped out all of the PG&E assets is Yolo County. The replacement cost assumes you start with nothing and you rebuild the entire power infrastructure.

    The Fair Market Value is less than Replacement Value because the assets have been sitting out there exposed to the elements for a number of years. You would start with Replacement Value and subtract some reasonable amount to compensate for the deterioration of the assets since the assets were put in service.

    The entire issue boils down to what is a reasonble Replacement Value and what is a reasonable amount to assign to the value of deterioration. The net of the two is almost certainly less than the PG&E claim and more than the SMUD claim.

  4. Anonymous

    There seems to be confusion over terms. There are really four different values being discussed.

    Net Book Value – that is the value of the assets on the PG&E books. The definition is the orginal cost of the assets less book depreciation. The assets are depreciated over some aribitrary life influenced by generally accepted accounting principles. Most likely the useful life used for accounting purposes is shorter that the expected realistic life of the assets. Therefore the net book value may be very low.

    The Tax Value (or tax basis) starts with the original cost but generally the life of the asset is longer than the life used by the company. The Tax Value is probably higher than the PG&E book value.

    The Net Book Value and the Tax Value are both usually far below Fair Market Value. Look at a house for example, excluding the land. The original cost of the structure is far below the worth of the structure today (assuming it was built a while ago – say 15 to 25 years ago. With regard to Fair Market Value, both the Net Book Value and Tax Value are not relevant unless you are talking about relatively new assets.

    Replacement value (ore Replacement Cost) is the cost of rebuilding all of the assets. Assume Shasta dam broke and the flood wiped out all of the PG&E assets is Yolo County. The replacement cost assumes you start with nothing and you rebuild the entire power infrastructure.

    The Fair Market Value is less than Replacement Value because the assets have been sitting out there exposed to the elements for a number of years. You would start with Replacement Value and subtract some reasonable amount to compensate for the deterioration of the assets since the assets were put in service.

    The entire issue boils down to what is a reasonble Replacement Value and what is a reasonable amount to assign to the value of deterioration. The net of the two is almost certainly less than the PG&E claim and more than the SMUD claim.

  5. Anonymous

    In the second paragraph you say fair market value “is determined by replacement value,” but in the third paragraph you say “they are not being assessed at replacement value but rather at actual value.” I was confused by this and not sure which one you meant is the right one.

  6. Anonymous

    In the second paragraph you say fair market value “is determined by replacement value,” but in the third paragraph you say “they are not being assessed at replacement value but rather at actual value.” I was confused by this and not sure which one you meant is the right one.

  7. Anonymous

    In the second paragraph you say fair market value “is determined by replacement value,” but in the third paragraph you say “they are not being assessed at replacement value but rather at actual value.” I was confused by this and not sure which one you meant is the right one.

  8. Anonymous

    In the second paragraph you say fair market value “is determined by replacement value,” but in the third paragraph you say “they are not being assessed at replacement value but rather at actual value.” I was confused by this and not sure which one you meant is the right one.

  9. Doug Paul Davis

    Fair market value is not assessed at the current value but rather at the cost it would take to replace the infrastructure. That is not however the rate at which the property is assessed for tax purposes. For tax purposes, the property is assessed at current value–the current worth of the property.

    If I wrecked your car, I would pay current market value not replacement value. If I destroyed your electrical utility equipment, I would pay replacement value. However, the owner is assessed at current value.

    Hope that makes sense.

  10. Doug Paul Davis

    Fair market value is not assessed at the current value but rather at the cost it would take to replace the infrastructure. That is not however the rate at which the property is assessed for tax purposes. For tax purposes, the property is assessed at current value–the current worth of the property.

    If I wrecked your car, I would pay current market value not replacement value. If I destroyed your electrical utility equipment, I would pay replacement value. However, the owner is assessed at current value.

    Hope that makes sense.

  11. Doug Paul Davis

    Fair market value is not assessed at the current value but rather at the cost it would take to replace the infrastructure. That is not however the rate at which the property is assessed for tax purposes. For tax purposes, the property is assessed at current value–the current worth of the property.

    If I wrecked your car, I would pay current market value not replacement value. If I destroyed your electrical utility equipment, I would pay replacement value. However, the owner is assessed at current value.

    Hope that makes sense.

  12. Doug Paul Davis

    Fair market value is not assessed at the current value but rather at the cost it would take to replace the infrastructure. That is not however the rate at which the property is assessed for tax purposes. For tax purposes, the property is assessed at current value–the current worth of the property.

    If I wrecked your car, I would pay current market value not replacement value. If I destroyed your electrical utility equipment, I would pay replacement value. However, the owner is assessed at current value.

    Hope that makes sense.

  13. Anonymous

    With what you’ve both said above, it seems there’s still plenty of room to interpret what “replacement value” should really mean. For example, do you assume the infrastructure is replaced with the same technology with the same amount of wear, with the same technology but new, with the latest technology, or with technology that is the same level of “latest” today relative to what it was when originally installed, and so on.

    To illustrate the fourth case, say the equipment was installed in 1980 with technology that had been around for five years. For calculating the replacement value today in 2006, would you assume replacing it with technology from 1975 or 2001?

  14. Anonymous

    With what you’ve both said above, it seems there’s still plenty of room to interpret what “replacement value” should really mean. For example, do you assume the infrastructure is replaced with the same technology with the same amount of wear, with the same technology but new, with the latest technology, or with technology that is the same level of “latest” today relative to what it was when originally installed, and so on.

    To illustrate the fourth case, say the equipment was installed in 1980 with technology that had been around for five years. For calculating the replacement value today in 2006, would you assume replacing it with technology from 1975 or 2001?

  15. Anonymous

    With what you’ve both said above, it seems there’s still plenty of room to interpret what “replacement value” should really mean. For example, do you assume the infrastructure is replaced with the same technology with the same amount of wear, with the same technology but new, with the latest technology, or with technology that is the same level of “latest” today relative to what it was when originally installed, and so on.

    To illustrate the fourth case, say the equipment was installed in 1980 with technology that had been around for five years. For calculating the replacement value today in 2006, would you assume replacing it with technology from 1975 or 2001?

  16. Anonymous

    With what you’ve both said above, it seems there’s still plenty of room to interpret what “replacement value” should really mean. For example, do you assume the infrastructure is replaced with the same technology with the same amount of wear, with the same technology but new, with the latest technology, or with technology that is the same level of “latest” today relative to what it was when originally installed, and so on.

    To illustrate the fourth case, say the equipment was installed in 1980 with technology that had been around for five years. For calculating the replacement value today in 2006, would you assume replacing it with technology from 1975 or 2001?

  17. Anonymous

    http://www.boe.ca.gov/annual/pdf/2005/3-property05.pdf
    Electric Generation
    Facilities
    Article XIII, section 19, of the California Constitution grants the Board of Equalization assessment jurisdiction over public utilities, regardless of whether or not such entities are regulated by the California Public Utilities Commission. Public utilities, which include all independent electric generation facilities that have dedicated their property to public use, are subject to unit valuation under article XIII, section 19 in that such property is valued annually by the Board at its fair market value, and is not valued based upon the limitations imposed on the assessment of real property by Proposition 13. Revenue and Taxation Code section 721.5 and California Code of Regulations, title 18, section 905, which shifted the assessment of certain independent electric generation facilities from local assessment to the Board, therefore do not violate the terms of the California Constitution.
    Independent Energy Producers Assn., Inc. v. State Bd. of Equalization (2004) 125 Cal.App.4th 425

  18. Anonymous

    http://www.boe.ca.gov/annual/pdf/2005/3-property05.pdf
    Electric Generation
    Facilities
    Article XIII, section 19, of the California Constitution grants the Board of Equalization assessment jurisdiction over public utilities, regardless of whether or not such entities are regulated by the California Public Utilities Commission. Public utilities, which include all independent electric generation facilities that have dedicated their property to public use, are subject to unit valuation under article XIII, section 19 in that such property is valued annually by the Board at its fair market value, and is not valued based upon the limitations imposed on the assessment of real property by Proposition 13. Revenue and Taxation Code section 721.5 and California Code of Regulations, title 18, section 905, which shifted the assessment of certain independent electric generation facilities from local assessment to the Board, therefore do not violate the terms of the California Constitution.
    Independent Energy Producers Assn., Inc. v. State Bd. of Equalization (2004) 125 Cal.App.4th 425

  19. Anonymous

    http://www.boe.ca.gov/annual/pdf/2005/3-property05.pdf
    Electric Generation
    Facilities
    Article XIII, section 19, of the California Constitution grants the Board of Equalization assessment jurisdiction over public utilities, regardless of whether or not such entities are regulated by the California Public Utilities Commission. Public utilities, which include all independent electric generation facilities that have dedicated their property to public use, are subject to unit valuation under article XIII, section 19 in that such property is valued annually by the Board at its fair market value, and is not valued based upon the limitations imposed on the assessment of real property by Proposition 13. Revenue and Taxation Code section 721.5 and California Code of Regulations, title 18, section 905, which shifted the assessment of certain independent electric generation facilities from local assessment to the Board, therefore do not violate the terms of the California Constitution.
    Independent Energy Producers Assn., Inc. v. State Bd. of Equalization (2004) 125 Cal.App.4th 425

  20. Anonymous

    http://www.boe.ca.gov/annual/pdf/2005/3-property05.pdf
    Electric Generation
    Facilities
    Article XIII, section 19, of the California Constitution grants the Board of Equalization assessment jurisdiction over public utilities, regardless of whether or not such entities are regulated by the California Public Utilities Commission. Public utilities, which include all independent electric generation facilities that have dedicated their property to public use, are subject to unit valuation under article XIII, section 19 in that such property is valued annually by the Board at its fair market value, and is not valued based upon the limitations imposed on the assessment of real property by Proposition 13. Revenue and Taxation Code section 721.5 and California Code of Regulations, title 18, section 905, which shifted the assessment of certain independent electric generation facilities from local assessment to the Board, therefore do not violate the terms of the California Constitution.
    Independent Energy Producers Assn., Inc. v. State Bd. of Equalization (2004) 125 Cal.App.4th 425

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