Boston Gas is a regulated utility whose property and profits are heavily controlled by the Department of Public Utilities (“DPU”). Boston Gas owns nearly 1000 miles of delivery pipe and a large liquid natural gas storage facility in Boston. When the City of Boston assessed tax on that property, Boston Gas appealed, arguing that the city overestimated its property’s value, given the heavy regulation. The Appellate Tax Board found that the city had in fact undervalued Boston Gas’s property. Boston Gas appealed, and the SJC granted direct appellate review.

DPU limits return on investment for physical property based on the property’s “net book value”: the original cost of the property minus depreciation. In practice that means that regulated property is usually worth no more than net book value. Assessed value may exceed net book value in certain circumstances, however, which the Board found applied in this case.

1. Recovery of acquisition costs. Since the last appellate valuation cases, DPU has announced a policy that allows acquiring companies to recover acquisition costs, if they are justified by an overall increase in efficiency due to merger. The Board found that the ability to recover acquisition costs would justify a sales price higher than net book value. Boston Gas argues that such a conclusion is not borne out by actual practice, where acquiring companies typically have not been permitted to charge rates higher than those prior to merger.
2. Comparison to prior acquisition prices. The Board considered prices for previously acquired utilities in setting a value for Boston Gas’s property. The method, which is apparently novel, consists essentially of setting a price on the previous utilities’ real property by subtracting the value of all other assets from the sales price, and then comparing the earnings of Boston Gas to the earnings of those previous companies to estimate the value of Boston Gas’s property. Boston Gas argues that this method is inaccurate—and unlawful—because it does not consider other elements of the sales price, such as newly created economies of scale, and therefore imposes tax on the value of non-tangible assets.

Evaluation of the lengthy record underlying this argument is well beyond the ambit of Mass. Appellate Briefs. The ongoing, delicate negotiation between regulated utilities and their regulators, standing in for free markets in an area of natural monopoly, is of crucial importance, but also of baffling complexity. It will be interesting to see how the Court handles this latest evolution.