BEFORE THE LOUISIANA TAX COMMISSION CLYDE A. GISCLAIR, ST. CHARLES PARISH ASSESSOR, EX PARTE DOCKET NUMBER 05-PS-008

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1 BEFORE THE LOUISIANA TAX COMMISSION CLYDE A. GISCLAIR, ST. CHARLES PARISH ASSESSOR, EX PARTE DOCKET NUMBER 05-PS-008 In re: Challenge of Clyde A. Gisclair to the LTC s valuation and assessment of Entergy Louisiana, Inc. Ruling Issued on the 26 th day of April, I. OVERVIEW Clyde A. Gisclair, Assessor for St. Charles Parish filed an Exception to Assessment of Public Service Property of Entergy Louisiana, Inc. and Incorporated Protest and Appeal with the Louisiana Tax Commission (LTC) from the LTC s determination of the assessed value of Entergy Louisiana, Inc. (Entergy Louisiana) for the 2005 assessment year. 1 The matter was heard by the LTC on August 3, Appearing as counsel on behalf of Gisclair was William W. Edelman. Appearing as counsel on behalf of the LTC Public Service Division was Robert D. Hoffman, Jr. Following the hearing counsel also filed Post Hearing Memorandum with the LTC. 2 II. JURISDICTIONAL STATEMENT AND APPLICABLE LAW The Louisiana Constitution requires property subject to ad valorem taxation to be assessed at a percentage of fair market value that shall be uniform throughout the state on the same class of property. La. Const. art. VII, 18 (A). The state constitution itself further provides for various classifications of property and the assessment ratios to be applied to each classification. Public service properties (excluding land) are assessed at 25% of fair market value while [other] property is assessed at 15% of fair market value. La. Const. art. VII, 18(B). The Louisiana Tax Commission determines the fair market value of public service properties. La. Const. art. VII, 18(D). Local assessors determine the fair market value of other property subject to taxation within their respective parish or district according to the criteria established by law, which must be applied uniformly throughout the state. La. Const. art. VII, 18(D). La. R.S. 47:1851(M) defines public service properties as: [T]he immovable, major movable, and other movable property owned or used but not otherwise assessed in this state in the operations of each airline, electric membership corporation, electric power company, express company, gas company, pipelines company, railroad company, telegraph company, telephone company and water company. Public service properties and other property are both assessed to determine fair market value, but different methods are used for these assessments. La.R.S. 47:2321 defines fair market value as follows: Fair market value is the price for property which would be agreed upon between a willing and informed buyer and a willing and informed seller under usual and ordinary circumstances; it shall be the highest price estimated in terms of money which property will bring if exposed for sale in the open market with reasonable time allowed to find a purchaser who is buying with knowledge of all the uses and purposes to which the property is best adapted and for which it can be legally used. For purposes of appraising public service property, the LTC must use the unit method to determine fair market value. La. R.S. 47:1853 (B) provides in pertinent part that: 1 The Assessor also filed a First Amendment to Petition/Exception. The Exception to Assessment of Public Service property filed by Gisclair also requested relief with regard to railroad cars of Dow Chemical and/or Union Carbide. Those claims were withdrawn by the assessor and dismissed with prejudice by the LTC. (Transcript p. 217). 2 Counsel for the St. Charles Parish Assessor filed an Original Post Hearing Brief on September 22, Counsel for the Public Service Division of the Louisiana Tax Commission filed a Post Hearing Memorandum and Proposed Findings of Facts and Conclusions of Law on September 22, Thereafter, on November 27, 2006, Counsel for the St. Charles Parish Assessor filed a Supplemental Hearing Brief. Page 1 of 15

2 B. (1) In appraising public service properties, the Louisiana Tax Commission shall: (a) Employ all of the following nationally recognized techniques of appraisal, where applicable, to best determine fair market value: (i) The market approach. (ii) The cost approach. (iii) The income approach. (b) Assign such weight to each approach as is appropriate to best determine fair market value. (2) However, all public service properties of the same nature and kind shall be appraised in the same manner. The appraised value of all lands owned by the company in this state shall be deducted from the total appraised value of the public service properties and shall be assessed by the Louisiana Tax Commission and shown as a separate item on the tax roll. Additionally, La. R.S. 47:1853 provides that the Louisiana Tax Commission shall, on or before September first of each calendar year, appraise, for taxation, public service properties based upon each company's report, as defined in Section 1852(A) and such other information as may be available to the Louisiana Tax Commission. 3 Thus, the Louisiana Tax Commission, Public Service Division, serves as the Assessor for public service property. La. R.S. 47:1856 provides a right of protest to any public service taxpayer dissatisfied with the initial determination of the assessed valuation of its property as determined by the LTC Public Service Division. The statute provides in part as follows: A. (1) The Louisiana Tax Commission shall give notice of the initial determination of the assessed valuation in writing to the company. This notice shall be delivered by certified mail, return receipt requested addressed to, or by personal service upon, the officer or authorized agent of the company responsible for the filing of the annual report. Except as provided in R.S. 47:1856(G), in the event that the company objects to the initial determination by the Louisiana Tax Commission, it may, within thirty days after receipt of the notice of that initial determination, file a protest in writing to the Louisiana Tax Commission which protest shall fully disclose the reason for protesting the initial determination. (2) The initial determination by the Louisiana Tax Commission shall become final if no protest is filed with the Louisiana Tax Commission within thirty days after receipt by the company of the notice of the initial determination. (3) In the event that a protest is filed, the Louisiana Tax Commission shall grant a full and complete hearing to the company at a time and place to be determined by the Louisiana Tax Commission, but in no case shall the hearing be scheduled more than one hundred eighty days from the date the company filed its written protest in the case of public service property. Such hearing shall not be consolidated with any other hearing with respect to any other protest filed in a different tax year by the taxpayer or by any other taxpayer of an initial determination of assessed valuation by the Louisiana Tax Commission. LTC Rules and Regulations Chapter 29, 2907 provides that an assessor may file an exception to the assessed value of a public service company assessed by the LTC or to the allocation of the assessed value to one or more parishes. Chapter 29, 2907 reads as follows: On or before September 15 or within 15 days after the commission has certified the assessed value of a company to an assessor, whichever is later, an assessor may file 3 La R.S. 47:1853(A) reads as follows: A. In accordance with the provisions of this Section and Sections 1854 and 1855, the Louisiana Tax Commission shall, on or before September first of each calendar year, appraise, for taxation, public service properties based upon each company's report, as defined in Section 1852(A) and such other information as may be available to the Louisiana Tax Commission. In the absence of a report the Louisiana Tax Commission shall appraise the properties of any company failing to file such a report upon any information which the Louisiana Tax Commission, in its best judgment, deems sufficient. Page 2 of 15

3 an exception to the assessed value of the company, or to the allocation of the assessed value to one or more parishes, in writing, with the commission together with evidence in support of the exception. If, in the exception, a hearing is requested, it shall be held in accordance with the Administrative Procedure Act. III. PROCEDURAL BACKGROUND In accordance with La. R.S. 47:1853, the Public Service Division of the Louisiana Tax Commission (hereinafter referred to as LTC Public Service Division ) appraised the public service property of Entergy Louisiana. The LTC Public Service Division gave notice of the determination of the assessed valuation in writing to Entergy Louisiana in accordance with La. R.S. 47:1856. Entergy Louisiana did not protest the valuation of its property. The Assessor for St. Charles Parish, however, filed an Exception pursuant to the Louisiana Tax Commission Rules and Regulations, Chapter 29, 2907 to the assessment of the public service property of Entergy Louisiana. In his appeal, the St. Charles Parish Assessor (hereinafter sometimes referred to as Gisclair ) alleges that the LTC Public Service Division violated the Louisiana Constitution, statutes and the United States Constitution by failing to value the properties of Entergy Louisiana, Inc. in a uniform manner with respect to like properties located in parishes other than St. Charles Parish. The Assessor further alleges that this failure has resulted in or contributed to the undervaluation of the Entergy Properties for the tax years at issue. According to the Assessor, the alleged undervaluation has and/or will result in the payment by Entergy Louisiana of considerably less in ad valorem taxes to St. Charles Parish and its taxing districts than it would have paid if the properties at issue would have been properly valued by the Public Service Division. In addition to the above, the Assessor also alleges that the Public Service Division of the Louisiana Tax Commission failed to fully and/or properly allocate the assessed value of property owned by Entergy Louisiana, Inc. to St. Charles Parish. Finally, the St. Charles Parish Assessor alleges that the Public Service Division improperly applied industrial tax exemptions granted to Entergy Louisiana, Inc. by the Louisiana Board of Commerce and Industry (hereinafter referred to as LBCI ). At the hearing before the LTC, counsel for the LTC Public Service Division argued that Louisiana law does not provide Gisclair with the right to protest the LTC Public Service Section Division s valuation of Entergy Louisiana. The LTC will consider the objection made by counsel for the LTC Public Service Division as a Peremptory Exception of no right of action. The LTC Public Service Division contends that La. Const. art. VII, 18(D) and La.R.S. 47:1853 et seq. make clear that the LTC, not the local assessor, is to value public service properties. The LTC Public Service Division contends that while La. R.S. 47:1856 provides for a public service property taxpayer dissatisfied with the assessment of its property by the LTC to assert an objection and prosecute an appeal of the assessment, the statute contains no provision that would grant an assessor or person other than the taxpayer the right to protest the valuation of the property. The LTC Public Service Division argues that because Entergy Louisiana, the taxpayer, has not appealed or challenged the valuation and assessment of its property by the LTC, Gisclair is not permitted to challenge the assessment. The LTC Public Service Division contends that 2907 of the LTC Rules and Regulations providing an assessor with the right to appeal an assessment by the LTC of a public service property is invalid and contrary to law as it provides an assessor with a right of action not provided for by the Louisiana Constitution or by statute. The LTC Public Service Division argues that administrative rules and regulations that go beyond the scope of their statutory authority must be considered invalid citing State vs. B.P. Exploration & Oil, Inc., 686 So. 2d. 823 (La.1997) (to the extent that tax regulation is inconsistent with the statute the regulation is invalid); Pensacola Constr. Co. vs. McNamara, 558 So. 2d. 231(La.1990) (regulation that went beyond the statute is invalid); McNamara vs. Patterson, Serv., Inc., 382 So. 2d. 971 (La. App. 1 Cir. 1980). Gisclair argues that LTC Rules and Regulations 2907 provides the assessor with the right to appeal an assessment of a public service property by the LTC and that the rule has been in place for almost thirty years. Gisclair further argues that the LTC Public Service Division has no right or standing to challenge an LTC Rule since its appraisal work is performed subject to the same Rules and Regulations. Gisclair also argues that the objection raised by counsel for the Public Service Division is untimely and that the LTC Public Service Division is legally estopped from denying Gisclair the opportunity to challenge the valuations and assessment by the LTC after the Assessor fully followed the LTC s own rule. Page 3 of 15

4 Gisclair also cites ANR Pipeline Company vs. Louisiana Tax Commission, 851 So. 2d (La. 9/5/2003) for the proposition that the LTC is without authority or jurisdiction to consider or rule upon a challenge to the constitutionality of LTC Rule and Regulation In reviewing the Louisiana Tax Commission Rules and Regulations, Chapter 29, 2907, the authority notes cited in the Rules and Regulations state that the section was promulgated in accordance with La. R.S. 47:1853 and La. R.S. 47:1855. The historical notes reflect that the section was promulgated by the LTC in February, 1978 and amended in 1987, 1990 and However, the LTC notes that neither La. R.S. 47:1853 nor La. R.S. 47:1855 provides a right of action to an Assessor to file an appeal with the Louisiana Tax Commission to contest the valuation of public service property. 4 However, because 2907 of the LTC Rules and Regulations was promulgated by the LTC, the LTC is bound by the rule in these proceedings. Central Louisiana Electric Company, Inc. vs. Louisiana Public Service Commission, 377 So 2d (La. 1979) (The weight of opinion is to the effect that administrative agencies are bound by their own rules which are promulgated to affect the rights and liabilities of members of the public); Crescent Real Estate Equities /110 Poydras vs. Louisiana Tax Commission, 809 So. 2d. 394 (La. App. 1 Cir. 2001) (The Tax Commission is estopped from contesting the validity of its own rules and instructions made under apparent statutory authority, and promulgated to the public for their governance in commission matters). The Commission finds that Assessor Gisclair filed the exception/appeal to the assessed value of Entergy Louisiana for 2005 pursuant to Louisiana Tax Commission Rules and Regulations 2907 and that the exception/appeal was timely. Accordingly, the Exception of No Right of Action urged by the LTC Public Service Division is denied. The LTC will now address the merits of the exception filed by Gisclair. IV. Evidence on Fair Market Value, Exemptions and Allocation: A. Evidence Presented by Assessor 1. Testimony of Richard Murphy In support of the Exception to the assessed value of Entergy Louisiana, the Assessor called Richard Murphy, Director of the LTC Public Service Division. Mr. Murphy testified that he was responsible for the preparation of the appraisal of Entergy Louisiana for 2005 and prepared the report of the appraisal. He testified that Vergie Booty supervised him in the preparation of the appraisal. 5 (Transcript p. 19). Mr. Murphy testified that in determining the fair market value of a public service company the unit approach is used. (Transcript p. 60). Mr. Murphy explained that the unit approach values the whole entity and its income to arrive at value. Mr. Murphy testified that all three approaches to value were considered in the appraisal of Entergy Louisiana (Transcript p. 66). Mr. Murphy explained that the market approach, also known as the stock and debt approach to value, was not used by the LTC Public Service Division in the appraisal of Entergy Louisiana and would be inappropriate, as it would rely on information of stock and debt of Entergy Corporation which has three subsidiaries. He testified that there is no stock information for Entergy Louisiana. (Transcript p. 68). Mr. Murphy testified that the amounts used in the appraisal of Entergy Louisiana were obtained from the 2004 Property Tax Rendition Annual Report filed by Entergy Louisiana as well as the FERC Report filed by Entergy Louisiana with the Federal Energy Regulatory Commission (FERC). 6 Mr. Murphy testified that because the amounts reported by Entergy Louisiana on the FERC form are audited by the federal government, the amounts reported are accepted by the LTC. (Transcript p. 30). Mr. Murphy testified that in determining the fair market value of Entergy Louisiana using the cost approach to value, the LTC Public Service Division allowed a deduction of $576,897, for decommissioning costs. (Transcript pp ). Mr. Murphy testified that the decommissioning costs figure used was reported by Entergy Louisiana in the 2004 Property Tax Rendition Annual Report. (Transcript pp ; Assessor 4 La. R.S. 47:1853 sets forth the methodology that is mandated to be used by the Public Service Appraisal Division of the Louisiana Tax Commission. La. R.S. 47:1853 sets forth the manner of allocating the assessed valuation of each company among the local taxing units according to situs. 5 Ms. Booty is the Administrator of the LTC and previously worked as the Director of the Public Service Division. 6 The Entergy Louisiana, Inc Property Tax Rendition Annual Report was accepted into evidence as Assessor Exhibit 9. The FERC Report was accepted into evidence in connection with the report of Black Chaffe, Assessor Exhibit 19. Page 4 of 15

5 Exhibit 9). Mr. Murphy testified that the decommissioning cost is an amount required to be set aside by the federal government. (Transcript p. 31). 7 Mr. Murphy also testified that in determining fair market value of Entergy Louisiana using the cost approach to value, a deduction of $672,553, was made for income shortfall or obsolescence. (Transcript pp ). Mr. Murphy testified that the income shortfall is used to determine obsolescence and to reflect what a willing buyer is willing to pay. (Transcript pp ). Mr. Murphy testified that the income shortfall method was developed by Thomas Tegarden, an expert in the filed of valuation of public service companies. (Transcript pp ). Mr. Murphy specifically denied that the income shortfall method disregards the cost approach to value. (Transcript p. 69). He explained that the method is used to determine and demonstrate income obsolescence when using the cost approach. (Transcript p. 69). Mr. Murphy testified that obsolescence is determined by the appraiser and is not an amount reported by the public service property taxpayer. (Transcript p. 70). Mr. Murphy testified that in determining the fair market value of Entergy Louisiana using the income approach to value a capitalization rate of 11% was used. (Transcript pp ). Mr. Murphy testified that the capitalization rate is determined at the beginning of each year before beginning any appraisals. He testified that he consulted with Vergie Booty who determined the 11% capitalization rate. (Transcript pp ). Mr. Murphy testified that in developing the capitalization rate to be used, the study by the California Board of Equalization entitled Capitalization Rate Study dated March 2005 (the California Study) was consulted. 8 (Transcript p. 58). Mr. Murphy testified that while the California study sets forth a basic capitalization rate of 8.52% to 9.33% for electric companies, the companies in its study are not regulated. (Transcript p. 59). Mr. Murphy testified that Entergy Louisiana is a regulated company and, therefore, the amounts the company can earn are limited by regulation. (Transcript p. 59). Mr. Murphy testified that in determining the value of Entergy Louisiana under the income approach to value, the Net Operating Income of Entergy Louisiana is divided by the capitalization rate. (Transcript pp ). Mr. Murphy testified that the Net Operating Income is determined by amounts reported on the FERC form. (Transcript p. 65). Mr. Murphy testified that the capitalization rate and the weighted average cost of capital are not the same. (Transcript p. 64). Mr. Murphy acknowledged that if a lower capitalization rate is used, mathematically the income value will be higher. (Transcript p. 64). The LTC Public Service Division determined the Total System Value of Entergy Louisiana for 2005 to be $1,941,000, (Assessor Exhibit 5, LTC Utility Certification p. 13). As all the property of Entergy Louisiana is located in Louisiana a 100% allocation factor for Louisiana was used. (Transcript pp ). Mr. Murphy testified that in allocating the system value to the parishes, a ratio of cost of assets in each parish as compared total assessed value is determined. (Transcript p. 98). In the allocation to St. Charles Parish, the assessed value is reduced by the depreciated cost of the Waterford 3 nuclear plant. (Transcript pp ). The amount of the depreciated cost if Waterford 3 is provided by Entergy Louisiana (Transcript pp ). Mr. Murphy testified that the LTC Public Service Division deducted from the Total System Value all exemptions as follows: Total System Value-$1,941,000, Less Industrial tax exemption contracts-$282,814,495 Licensed vehicles-$1,337, Louisiana Taxable Value-$1,656,847, (Assessor Exhibit 5, LTC Utility Certification, p. 13). Mr. Murphy testified that licensed motor vehicles are exempt from taxation. (Transcript p. 74). Mr. Murphy testified that the industrial tax exemptions are exempt from taxation by virtue of contracts granted by the Louisiana Board of Commerce and Industry. (Transcript p. 75). 7 The United States Nuclear Regulatory Commission (NRC) is the federal agency which regulates, inter alia, the decommissioning of nuclear facilities. Licensees of a nuclear facility must provide financial assurance for decommissioning to the NRC. 8 The California Study was accepted into evidence as Assessor Exhibit 11. The California Board of Equalization is the property tax division for the state of California and like the LTC is charged with the responsibility of valuing public service properties. Page 5 of 15

6 Mr. Murphy testified that the industrial exemption amounts used by the LTC Public Service Division for the appraisal were obtained from the list of industrial tax exemption contracts provided by Entergy Louisiana. (Assessor Exhibit 9). (Transcript pp ). Mr. Murphy explained that the exemptions were deducted from the Total System Value. (Transcript p. 80). Mr. Murphy testified that the licensed vehicles were deducted from the system value at depreciated cost. (Transcript pp. 80; 85). Similarly, the industrial tax exemptions are deducted from the system value by taking the contract exemptions at cost and reducing them by book depreciation (Transcript p. 81). Mr. Murphy testified that LTC Public Service Division appraisers do not determine the fair market value of the assets subject to LBCI exemption contracts, as they are deducted from the system value at depreciated cost. (Transcript pp ). Mr. Murphy testified that the exemptions are deducted before allocation to the parishes and are not deducted twice. (Transcript p. 104). 2. David Blackshear Hamilton Chaffe Mr. David Blackshear Hamilton Chaffe, III (Mr. Chaffe) also testified on behalf of Gisclair. Mr. Chaffe is a principal in the investment firm of Chaffe & Associates. He testified that his work and background include the valuation of privately held as well as public companies. (Transcript pp ). Mr. Chaffe was accepted by the LTC as an expert in business valuation and specifically in determining the weighted average cost of capital. (Transcript pp ). Mr. Chaffe testified that the scope of his work was to determine the cost of equity, the cost of debt and the weighted average cost of capital for Entergy Louisiana, which would then become a capitalization rate to be used in determining the value of the company as of December 31, (Transcript p. 110). Mr. Chaffe s opinions are set forth in a report dated July 27, 2006 (Assessor Exhibit 19). (Transcript pp ). It is Mr. Chaffe s opinion that the current weighted average cost of capital for Entergy Louisiana is 8.6%. (Transcript p. 111 & Assessor Exhibit 19-A). Mr. Chaffe determined the cost of debt of Entergy Louisiana to be 6.32 % based upon a weighted average of the mortgage bonds that Entergy Louisiana has outstanding. (Transcript p. 114). Mr. Chaffe explained that he used the Gordon Growth Model to find the cost of equity. (Transcript pp ). He explained that the Gordon Growth Model is often used in valuing the cost of equity of utility companies because it is best applied to a stable growth dividend paying security. (Transcript p. 114). Mr. Chaffe testified that regulated companies such as utilities are obvious candidates for the Gordon Growth Model because their growth rates are constrained by regulation, geography, and population and they are fairly stable in their earnings. (Transcript p.117). Mr. Chaffe testified that the Gordon Growth Model states that the stock price of a company is the expected dividends one year from now, divided by the required rate of return that equity investors would want to have, minus the growth rate in dividends forever. The algebraic formula of the Gordon Growth Model is [Value of Stock = DPS 1 /(r-g)]. (Assessor Exhibit 19-A). The amounts used in determining the cost of equity for Entergy Louisiana was a closing stock price of Entergy Corp. on December 31, 2004 of $64.59 a share, and a rate of growth of 7.5% obtained from Zack s five-year earnings estimates for Entergy Corp. Mr. Chaffe testified that Zack s is a service that publishes financial analysts consensus of growth for various industries. (Transcript p. 127). The dividend growth rate one year from now was calculated by determining the growth rate of total dividends in 2004, which was $1.89. The Gordon Growth Model provides a cost of equity of % (rounded up from %). (Transcript pp ). Mr. Chaffe also used the Capital Asset Pricing model (CAPM) to calculate the return on equity for Entergy Louisiana. (Transcript p. 119). The CAPM formula states that the cost of capital of a company is equal to the risk-free rate plus beta times the expected equity premium. The algebraic formula of the CAPM is stated as [Cost of Capital = Rf + Beta (ERP)]. (Assessor Exhibit 19-A). Mr. Chaffe testified that the expected risk premium is obtained from Ibbotson Associates 2005 year book, a reference work used throughout the securities analysis industry and business valuation industry as a guideline for determining equity risk premium. (Transcript pp ). From this information, the equity risk premium was determined to be 7.17% (.0717). Beta was determined by comparing the price movements of Entergy Corp. to the Standard and Poor 500 Index. Mr. Chaffe testified that four years of daily prices of the Standard and Poor's 500 Index yielded a beta of The CAPM calculation resulted in a cost of capital of 8.02 % (rounded up from ). (Transcript pp ). Page 6 of 15

7 Mr. Chaffe testified that the weighted average cost of capital is what the company s capital that its employees cost it, weighted by the percentage of equity in the capitalization of the company and the percent of debt in the capitalization of the company. (Transcript p. 129). However, Mr. Chaffe explained that to compare his calculations directly to the method used by the LTC in its appraisal, he had to adjust for interest on the debt. Mr. Chaffe testified that the weighted average cost of capital takes the cost of debt, minus the tax rate, times the cost of debt to adjust the cost of debt for the tax rate. (Transcript p. 130). Mr. Chaffe calculated the weighted average cost of capital of Entergy Louisiana to be 8.6%, which was based upon the Gordon Growth Model. Mr. Chaffe testified that if the net operating income of a company is divided by the weighted average cost of capital, it would yield the enterprise value of the company which is the company s equity plus debt. (Transcript p. 133). Mr. Chaffe testified that he does not use the term unit value in his work. (Transcript p. 133). On cross examination, Mr. Chaffe testified that Entergy Louisiana, Inc is a wholly-owned subsidiary of Entergy Corp. (Transcript p. 136). He testified that he did not know what proportion Entergy Louisiana comprises of the parent company, Entergy Corp. (Transcript p. 136). Mr. Chaffe agreed that his computations of weighted average cost of capital of Entergy Louisiana using the Gordon Growth Model used expected dividends of Entergy Corp and that the CAPM model used stock prices of Entergy Corp. (Transcript pp ). He testified that there is no information available for dividend history or stock price of Entergy Louisiana. (Transcript p. 137). B. Evidence Presented by the Louisiana Tax Commission, Public Service Division 1. Testimony of Vergie Booty Ms. Vergie Booty also testified on behalf of the Louisiana Tax Commission s Public Service Division. Ms. Booty is the Administrator for the Louisiana Tax Commission. She has been employed at the LTC since 1980, and has worked as an appraiser, as Assistant Director of the Public Service Division, Director for the Public Service Division, and Administrator of the LTC. (Transcript p. 142). She served as Director of the Public Service Division for approximately five years. (Transcript p. 142). She testified that in the course and scope of her duties, she has performed thousands of appraisals, including appraisals of electric utilities. (Transcript pp ). Ms. Booty testified that she is very involved in the Appraisal for Ad Valorem Taxation of Communication, Energy, and Transportation Properties Conference held each year at Wichita State University and has been a speaker at the conference for many years. (Transcript p. 145). Ms. Booty also testified that she is involved in the International Association of Assessing Officers (IAAO). (Transcript p. 145). Ms. Booty testified that she has testified in court as an expert in the appraisal of public service properties. (Transcript p. 146). The LTC accepted Ms. Booty as an expert in appraisal of public service properties. (Transcript pp ). 9 Ms. Booty testified that she has participated in or supervised approximately fifteen appraisals of Entergy Louisiana, or its predecessor, Louisiana Power & Light. Ms. Booty further testified that the assessment of Entergy Louisiana and/or LP&L had never been appealed prior to the instant appeal by Gisclair. (Transcript pp ). Ms. Booty testified that following her promotion from Director of the Public Service Division to Administrator of the LTC in 2005, she continued to supervise the appraisal of all major utility companies. She participated in the assessment of Entergy Louisiana, including the determination of the capitalization rate used for all major utilities for (Transcript p. 144). Ms. Booty testified that the LTC has used the California Capitalization Rate Study for a number of years in determining the capitalization rate to be used for appraisal of public service properties. (Transcript pp ). Ms. Booty explained that the LTC uses the California Capitalization Rate Study because California also values utility properties for ad valorem taxation purposes and because the California Board of Equalization has a very large staff which is capable of compiling all of the statistical data necessary to determine a capitalization rate. (Transcript pp ). Ms. Booty testified that the California Study reflects a cap rate in the range of 11.52% to 12.90% for companies that generate electricity. She testified that the study reflects a lower capitalization rate for companies that are not generation companies but are engaged in the sale and distribution of electricity. 9 The LTC overruled the objection of counsel for the Assessor to accepting Ms. Booty as an expert witness. Page 7 of 15

8 (Transcript pp ; See also Assessor Exhibit 11-The California Capitalization Rate Study, p.1). In selecting the capitalization rate of 11% used by the LTC for all major electric utilities in Louisiana, including Entergy Louisiana, Ms. Booty used a blended rate of the two categories of the California Study. (Transcript p. 156). She explained that Louisiana is a regulated market and has distribution, transmission and generating facilities. (Transcript pp ). Ms. Booty testified that use of the California Study for determining a capitalization rate is consistent with the practices of other states. (Transcript p. 158). Ms. Booty testified that in determining the capitalization rate for a particular industry in Louisiana, she considers risk factors. For the electric companies in Louisiana, Ms. Booty considers the risk factor that storms may damage the system. (Transcript pp ). She testified that the issue of spent fuel in the nuclear facilities was also a risk factor she considered, as Louisiana has two nuclear power plants. (Transcript p. 160). Ms. Booty testified that the capitalization rate used by the LTC for purposes of appraisal for ad valorem taxation was applied industry-wide to all major electric utilities in Louisiana, including SWEPCO, CLECO, Entergy Louisiana and Entergy Gulf States. (Transcript pp ). She testified that the use of one capitalization rate for all major electric utilities in Louisiana has been the practice of the LTC for many years. (Transcript p. 158). She explained that this promotes uniformity in assessment mandated by the Louisiana Constitution. Ms. Booty testified that the LTC Public Service Division staff also calculated an equity-debt rate for Entergy Louisiana to compare and validate the capitalization rate of 11% used by the LTC Public Service Division. (Transcript pp ). Ms. Booty offered testimony on deductions made by the LTC Public Service Division in the cost approach to value for decommissioning costs. Ms. Booty testified that in calculating value under the cost approach the decommissioning liabilities are subtracted from the net plant value. (Transcript p. 173). On crossexamination, Ms. Booty agreed that the decommissioning liabilities of $347,255, on the 10-K form match the decommissioning liabilities of $347,255, on the FERC Report 10 (Transcript pp ). Ms. Booty also agreed that the 10-K form reflects decommissioning trust fund of $172,083,000 which matches the amount of "Other Special Funds on the FERC Report. (Transcript pp ). She believes that the LTC adds the decommission trust fund as an asset. (Transcript p. 173). Ms. Booty also offered testimony on the allocation of the value of Entergy Louisiana to the parishes. Ms. Booty testified that 46.69% of the total value of Entergy Louisiana was allocated to St. Charles Parish totaling $191,536, (Transcript p.164). Ms. Booty confirmed the testimony of Mr. Murphy that the allocation to parishes of the system value is by the cost in each parish compared as a ratio to the total system value. (Transcript pp ). Ms. Booty testified that the allocation of the system value of Entergy Louisiana, Inc was made in accordance with La. R.S. 47:1855(A). (Transcript p. 167). In her direct testimony, Ms. Booty explained that in developing a ratio between the assessment and the original cost for the allocation of the system value to the parishes, it is necessary to separate the nuclear plants and apply the decommissioning costs, AFUDC, and FASBY costs directly to those facilities, instead of applying those costs to the entire system value. (Transcript p. 205). This same procedure was used in connection with the assessment of Entergy Gulf States, Inc. and the nuclear power plant in W. Feliciana Parish. (Transcript pp ). She explained that the special allocations to the two nuclear plants are necessary to have an apples to apples comparison. (Transcript pp ). An excerpt from Public Utility Basic Appraisal Course prepared by Tegarden & Associates, Inc. for the Wyoming Department of Revenue, Division of Property Taxation, was accepted into evidence as LTC Exhibit 1. The treatise states that cost is the appropriate method of measuring allocation of system value to various states and taxing entities. (Transcript pp ). Ms. Booty testified that the LBCI grants tax exemptions in a specified amount based on the total final affidavit of cost for the assets. The LBCI not the LTC, sets the amount of the industrial exemption. (Transcript p. 152). Ms. Booty testified that for many years, Mr. Gisclair has complained about the tax exemptions in St. Charles Parish granted by LBCI. (Transcript pp ). On direct examination, Ms. Booty testified that the total system values of $1,941,000, for Entergy Louisiana as well as the industrial exemptions are a depreciated book value of the assets. (Transcript pp ). On cross-examination, Ms. Booty testified that $1,941,000, represents the fair market value of Entergy Louisiana, not net book value. (Transcript pp ). She explained that the industrial tax exemptions are depreciated so that the amount of depreciation on the industrial tax exemptions matches the 10 The 10-K Form is a report filed Entergy Louisiana with the U. S. Securities and Exchange Commission (SEC). Page 8 of 15

9 amount of depreciation taken in the cost approach analysis. (Transcript p. 151). She agreed that exemptions are subtracted based on cost, not on value, but denied that this is inappropriate from an appraisal standpoint or that it was an apples to oranges comparison. (Transcript p. 176). Ms. Booty confirmed the testimony of Richard Murphy that exemptions are deducted from the system value before allocation to the parishes, and that there are no additional deductions made for exemptions after allocation to the parishes. (Transcript pp ). Ms. Booty denied that deducting the depreciated book value of the assets covered by a LBCI exemption and deducting the depreciation in the cost method results in a double exemption. (Transcript p. 198). Ms. Booty explained that if the depreciation was not taken off of the exemption, it would result in an allowance of the total exemption plus the amount of depreciation associated with that asset. (Transcript p. 200). Ms. Booty testified that when the nuclear plants were still under LBCI exemptions, if the depreciated cost on the exemptions had not been used, there would have been a tax credit due by the parishes to the company. (Transcript p. 202). Ms. Booty explained that the LTC does not attempt to arrive at fair market value of the exemptions granted by the LBCI, but simply recognizes the exemption which has been granted. (Transcript pp ). Ms. Booty reiterated that the LBCI determines the amount of the exemption and, therefore, the LTC cannot change the amount of the exemption granted by LBCI by valuing the exemption. (Transcript p. 178). Ms. Booty denied that the method used by the LTC in applying the exemptions results in a distortion that creates excess exemptions. (Transcript pp ). Ms. Booty explained that taking a deduction for the cost of the exemption less depreciation is the same as exempting the property from taxation. (Transcript pp ). Ms. Booty testified that the LTC has accounted for tax exemptions in the same manner for many years. (Transcript p. 186). Ms. Booty also addressed the complaint in Gisclair s Exception that when certain industrial tax exemption contracts in St. Charles Parish expire, there no corresponding increase in the parish tax rolls. Ms. Booty explained that during the term of the contract, the assets depreciate. She testified that as an example if a ten year tax exemption contract was granted by LBCI on an asset that has only a ten-year economic life, at the end of the ten-year contract term, the asset with a ten-year economic life will have been depreciated to the depreciation floor and, therefore, only this residual value would be placed on the rolls for the asset. (Transcript pp ). VI. DISCUSSION: Proceedings before the Louisiana Tax Commission and review thereof in the state district court are governed by the Administrative Procedure Act. La.R.S. 49:961(A). The duty to assess public service property is placed upon the Public Service Division of the Louisiana Tax Commission. Accordingly, when the Public Service Division assesses public service property, their conclusions are presumed to be correct until the party complaining has shown a clear case of error. Lake Charles Ry., Light & Water Works Co. v. Reid, Sup.1922, 152 La. 476, 93 So Where officers charged with the duty to assess have made and completed an assessment of property subject to taxation and within their jurisdiction, an assessment is presumed to be valid unless and until, in a proceeding authorized by law and brought within the time and under the conditions thereby prescribed, it is shown to fall below or to exceed some legal limitation of valuation, in which event, though it is not open to attack in an action of nullity, it is open to correction by an increase or reduction in valuation. Soniat v. Board of State Affairs, Sup.1919, 146 La.450, 83 So Entergy Louisiana is a public service company within the meaning of La.R.S. 47:1851(M). As a public service company, the fair market value of the property of Entergy Louisiana is to be determined by the LTC. La. Const, art. VII, 18(D). The appraisal of Entergy Louisiana s public service property for ad valorem tax purposes is to be determined using the unit method to determine fair market value. La. R.S. 48:1853(B). The appraisal of the public service property of Entergy Louisiana for 2005 was prepared by Richard Murphy, Director of the LTC Public Service Division, with supervision by Vergie Booty, Administrator of the LTC and former Director of the LTC Public Service Division. Ms. Booty prepared previous appraisals of the public service property of Entergy Louisiana. On August 5, 2005, the LTC issued a notice of its initial determination of the appraisal and assessed valuation of Entergy Louisiana for 2005 ad valorem property tax assessment purposes, which set forth a total system value of Entergy Louisiana of $1,941, Entergy Louisiana did not protest the LTC s determination of the appraisal and assessed valuation of its public service property for Pursuant to LTC Rules and Regulations 2907, the assessor for St. Charles Parish filed an exception to the LTC s determination of the value of the public service property of Entergy Louisiana. Page 9 of 15

10 The appraisal of the public service property of Entergy Louisiana was based upon Entergy Louisiana s 2004 Property Tax Rendition Annual Report (Assessor Exhibit 9) and the FERC report (Assessor Exhibit 19) filed with the LTC by Entergy Louisiana. (Transcript p. 30). The FERC report is prepared and filed by Entergy Louisiana with the Federal Energy Regulatory Commission, which regulates the transmission and sale of natural gas, oil by pipelines and electricity for sale in interstate commerce. FERC also monitors and investigates energy markets and the conduct of regulated companies and administers accounting and financial reporting regulations. Pursuant to 18 C.F.R. Part 1, et seq., Entergy Louisiana is required to prepare and file with FERC reports showing all assets, costs, and depreciation for Entergy Louisiana. As the amounts reported by Entergy Louisiana on the FERC form for assets, costs, and depreciation are audited by FERC, those amounts reported by Entergy Louisiana to the LTC are accepted by the LTC for purposes of the appraisal. In connection with the appraisal of the public service property of Entergy Louisiana, the LTC Public Service Division employs the unitary valuation method, whereby the fair market value of the entire system is first determined, and then an allocation is made to each parish of that portion of the system that is located within the taxing jurisdiction of that parish. Thereafter, the allocated portion is given an assessed value which is a percentage of the property s fair market value. The Commission determines the fair market value of the system using the cost approach, income approach and market approach to value as provided for in La.R.S. 47:1853(B). A. The Market Approach to Value Under the market approach, also referred to as the debt and equity approach, the LTC Public Service Division considers all outstanding securities attributable to the public service company s operating system, as well as all obligations and liabilities. Mr. Murphy explained that the market approach, also known as the stock and debt approach to value, was not used by the LTC Public Service Division in the appraisal of Entergy Louisiana and would be inappropriate, as it would rely on information of stock and debt of Entergy Corporation, which has three subsidiaries. He testified that there is no stock information for Entergy Louisiana. (Transcript p. 68). The LTC also notes that in the Post Hearing Memorandum filed by Gisclair, counsel states that the LTC Public Service Division correctly declined to use the market approach to value due to the absence of reliable market data. (See also Transcript p. 13). B. The Cost Approach to Value Under the cost approach, the LTC Public Service Division determines the original cost of the company and deducts accrued physical depreciation to arrive at net book value. The LTC Public Service Division deducts economic or functional obsolescence in this calculation where there is evidence that such an adjustment is warranted. Under the cost approach to value, the LTC Public Service Division determined the fair market value of Entergy Louisiana to be $1,940,909, The Deduction for Decommissioning Costs Counsel for Gisclair contends that in the cost approach, the LTC appraisers deducted an incorrect amount for decommissioning costs. The LTC appraisers allowed a deduction of $576,897, for decommissioning costs. (Transcript pp ). This was the amount reported as decommissioning costs by Entergy Louisiana in its 2004 Property Tax Rendition Annual Report filed with the LTC. (Transcript pp ; Assessor Exhibit 9). The Entergy Louisiana FERC Report (Assessor Exhibit 10 p. 112, line 34) and the Entergy Louisiana Form 10-K (Assessor Exhibit 19-A, p. 20) show the decommissioning costs to be $347,255,104. The amount of $347,255,104 is also shown as a liability in both the FERC Report (Assessor Exhibit 10 p. 112, line 34) and the 10-K Form (Assessor Exhibit 19-A, p. 20). On cross examination, Ms. Booty acknowledged that the decommissioning liabilities of $347,255, on the 10-K Form match the decommissioning liabilities shown on the FERC report. (Transcript pp ). Ms. Booty also acknowledged that the Form 10-K reflects Decommissioning Trust Fund of $172,083.00, which matches the amount of Other Special Funds on the FERC Report. (Transcript pp ). While counsel for Gisclair elicited testimony from Ms. Booty that the decommissioning costs of $576,897, used by the LTC Public Service Division, did not match the $347,255,104 amount shown on the Form 10-K and the FERC Report, the Assessor offered no testimony or written evidence that the amount used by the LTC Public Service Division for decommissioning costs for Entergy Louisiana was improper. The LTC notes that the amount used by the LTC Public Service Division was the amount of decommissioning costs reported by Entergy Louisiana to the LTC in the 2004 Property Tax Rendition Page 10 of 15

11 Annual Report (Assessor Exhibit 9). 11 This amount is not set by FERC, and, therefore does not appear in the FERC Report. The LTC finds that the LTC Public Service Division did not err in its use of $576,897, as the decommissioning costs in the cost approach to value. Counsel for the Assessor also contends that decommissioning costs should be reduced by $172,082,543.00, which represents sums held in the Decommissioning Trust Fund, which is shown as an asset in the FERC Report (Assessor Exhibit 10, p. 110, line 28) and 10-K Form (Assessor Exhibit 19-A., p. 19). It was Ms. Booty s belief that the Decommissioning Trust Fund had been included as an asset by the LTC in the cost approach to value analysis, but she was not certain on this point. (Transcript p. 173). No written evidence or testimony was offered by the Assessor that the LTC appraisers had not accounted for and/or improperly accounted for the Decommissioning Trust Fund. The LTC finds that Gisclair failed to come forth with any evidence showing a clear case of error in the manner of accounting for the Decommissioning Trust Fund. 2. Adjustment for Income Shortfall /Obsolescence The LTC appraisals determined a Net Plant Value of $3,665,259, for Entergy Louisiana (Assessor Exhibit 5, p 6). From that total, the following amounts were deducted: Net Plant Value Cost Approach-$3,665,259,586 Less Decommissioning Cost-($576,897,065) Less FASBY-($41,959,038) Less Value-($432,941,764) An additional deduction of $672,553, was made for income shortfall for obsolescence. (Transcript pp ). Counsel for the Assessor contends that this deduction by the LTC appraisers was arbitrary and performed in order to have the cost approach value equal the income approach. Counsel for the Assessor contends that by making the income shortfall adjustment, the cost approach to value was ignored in the appraisal. Mr. Murphy testified that the income shortfall is used in the cost approach to determine and demonstrate economic obsolescence. (Transcript pp ; 69). Obsolescence is to be recognized when assets in place fail to meet the rate of return required or expected by investors due to external factors to the property such as supply and demand and government regulation that place limitations on the company s earning power. As a regulated utility, Entergy Louisiana can earn only on the allowed rate base, which does not include all costs. With a regulated utility, the only value a potential buyer would be concerned with is the return on investment to be achieved---not the cost of the asset. Mr. Murphy denied that the deduction for income shortfall disregards the cost approach to value. (Transcript p. 69). No evidence or testimony was offered by the Assessor that the determination of obsolescence under the income shortfall method is not proper appraisal methodology. No testimony or evidence was offered by the Assessor that the Public Service Division arbitrarily ignored the cost approach to value. To the contrary, Mr. Murphy testified that the income shortfall method of determining obsolescence is promoted by Thomas Tegarden, an expert in the valuation of public service properties. Mr. Murphy testified that obsolescence should be considered in the cost approach to value to arrive at fair market value, which is the amount that a willing buyer is willing to pay for a property. C. The Income Approach to Value Under the income approach, the LTC Public Service Division estimates the present worth of the income the property will produce during the remainder of its productive life. To accomplish this calculation, the LTC Public Service Division takes an average of the last five (5) years of net operating income and capitalizes it. Under the income approach to value, the LTC Public Service Division determined the fair market value of Entergy Louisiana to be $1,940,909, Use of an 11% Capitalization Rate Counsel for Gisclair contends that in the income approach to value, the LTC Public Service Division improperly used a capitalization rate of 11%. Counsel for Gisclair argues that the correct capitalization rate 11 The amount of decommission costs deducted is based on actual funds that must be available at the end of the life of the asset to decommission the plant. Page 11 of 15