Consideration of an above-market power purchase agreement in valuing a power plant for property tax purposes.

Author:Blair, Benjamin A.
Position:Recent Court Decisions on Real Estate and Valuation

In 2009, Seneca Sustainable Energy began construction of a biomass cogeneration facility outside Eugene, Oregon. Seneca negotiated a long-term power purchase agreement (PPA) with the local water and electric board (Board), including rates that the Board would pay for electricity, capacity, and renewable energy credits. Because the facility was located in a designated enterprise zone, the facility was exempted from property taxes for its first three years of operations, but failure to meet certain economic development and employment goals would result in Seneca being required to pay a public benefit contribution based on the amount of tax that Seneca would have paid absent the exemption. That amount was dependent on the value determined by the Department of Revenue (Department).

The facility began operating in 2011, but because Seneca failed to meet its development goals for the 2012-2013 tax year, Seneca was charged a public benefit contribution determined using the facility's real market value per the Department. Seneca challenged the Department's determination of the property's real market value in the Oregon Tax Court.

For the 2012-2013 tax year, both parties presented the testimony of appraisers, each of whom agreed that the income approach was the most appropriate way to value the property. The Department's appraiser valued the property based on the terms of Seneca's actual PPA, which he considered to be reflective of market rates on the assessment date. Seneca's appraiser valued the property by relying on market electricity rates on the assessment date, not the rates the Board actually paid to Seneca under the PPA. The tax court generally agreed with Seneca's appraiser and set the market value of the facility accordingly. The Department appealed.

On appeal, the Oregon Supreme Court noted that Seneca presented evidence that the PPA resulted in revenues significantly above what a purchaser of the property could have obtained. Because natural gas prices plummeted after the PPA was signed, and because the biggest market for renewable energy credits (California) had become closed to Oregon generators after a change in law, the rates in the PPA were not available on the assessment date "and would not be available in the future." By relying on the above-market PPA, the...

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