USGen New England, Inc. v. Town of Rockingham
Annotate this Case
USGen New England, Inc. v. Town of Rockingham (2003-072); 177 Vt. 193;
862 A.2d 269
2004 VT 90
[Filed 17-Sep-2004]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
2004 VT 90
No. 2003-072
USGen New England, Inc. Supreme Court
On Appeal from
v. Windham Superior Court
Town of Rockingham January Term, 2004
John P. Wesley, J.
Robert E. Woolmington of Witten, Woolmington, Campbell, Boepple & Welford,
P.C., Manchester Center, for Plaintiff-Appellant.
Richard H. Saudek and David L. Grayck (On the Brief) of Cheney, Brock &
Saudek, P.C., Montpelier, for Defendant-Appellee.
PRESENT: Amestoy, C.J. (FN1), Dooley, Johnson, Skoglund and Reiber, JJ.
¶ 1. DOOLEY, J. USGen New England, Inc. (USGen) appeals from a
Windham County Superior Court order setting the value of its Bellows Falls
hydroelectric facility in the Town of Rockingham (Town) at $90,377,100 for
property tax purposes. The facility spans the Connecticut River and is
partly in Vermont and partly in New Hampshire. In reaching its decision,
the superior court heard testimony from three valuation experts, two
presented by the Town - Dr. Richard Silkman and Bruce Biewald - and one
presented by USGen - Todd Filsinger. The experts' estimates varied
greatly, ranging from Dr. Silkman's estimate of $100,419,000 to Biewald's
of $76,505,700 to Filsinger's of $32,706,401. Prior to Dr. Silkman's
appearance, USGen moved to exclude his testimony arguing that he was
unqualified to offer an opinion as to value and that his valuation
methodology did not pass muster under Daubert v. Merrill Dow Pharm., Inc.,
509 U.S. 579 (1993). The trial court denied this motion, heard from all
three experts, and in its order relied principally on Dr. Silkman's
testimony. The trial court's order also accepted the Town's recommendation
and allocated 90% of the value of USGen's facility to the Town of
Rockingham. USGen now appeals, arguing that the trial court erred when it:
(1) admitted Dr. Silkman's testimony; (2) relied on Dr. Silkman's
testimony; and (3) accepted the Town's allocation. We affirm.
¶ 2. As the trial court observed, "[t]his is the second installment
of a saga of litigation spawned by the partial deregulation of the markets
for electrical power." The first installment began in 1998 when the
Vermont General Assembly temporarily froze the grand list valuation of
hydroelectric generating facilities for property tax purposes. As a result
of this freeze, the value of USGen's facility for 1998, 1999, and 2000
remained unchanged from its 1997 value. USGen subsequently challenged the
freeze's constitutionality in the Windham Superior Court. In that case,
the court ruled that the freeze was constitutional, and we affirmed in
USGen New England, Inc. v. Town of Rockingham, 2003 VT 102, ¶ 1, 14 Vt. L.
Wk. 299, 838 A.2d 927 (USGen I).
¶ 3. Once the freeze expired, USGen challenged the frozen value
for tax year 2001. Accordingly, the Town and then the court had to
determine the value of the plant as of April 1, 2001. In USGen I,
foreshadowing this case, we discussed the substantial difficulties
associated with valuing a hydroelectric plant in a deregulated electrical
power market. Id. ¶ ¶ 21-23. As we stated in that opinion, "the
income-production of [the] hydroelectric facility will be extremely
relevant, if not determinative, to its value." Id. ¶ 21. Consistent
with that observation, the parties agreed that the income capitalization
method was the preferred method of valuing the facility. See generally
Beach Props., Inc. v. Town of Ferrisburg, 161 Vt. 368, 372, 640 A.2d 50, 52
(1994) (discussing the accuracy of the income capitalization method). As
this litigation proceeds into its second installment, the battle between
the experts in the proceedings below and the arguments USGen now advances
in this Court proves the accuracy of our previous observation.
¶ 4. Before delving into the specifics of the experts' testimony, it
is helpful to present some background information both about the Bellows
Falls facility and the electrical power market. The Bellows Falls
hydroelectric facility is located on the Connecticut River and was first
placed into service in 1928. In 1999, USGen purchased the plant from New
England Power Company (NEPCO). By the Town's estimate, USGen acquired 87%
of the property formerly owned by NEPCO. The property consists of the
Bellows Falls station, a dam (located almost entirely in Walpole, NH), and
a reservoir.
¶ 5. Although the issue in this litigation is the valuation of these
capital assets, the value of this unique property must be reached through a
determination of the income that these assets will generate. When the
price of wholesale power was regulated, that income was stable and
predictable. Deregulation of wholesale power prices introduced uncertainty
and volatility into power markets, resulting in the difficulty of valuing
the assets that produce that power.
¶ 6. According to the evidence in this case, the price of
electrical energy is set through bilateral contracts and sales on the spot
market. If a plant sells its electrical energy through bilateral
contracts, it enters into agreements with buyers in advance of the
delivery, specifying the time of delivery, the quantity, and the price.
Many of these contracts are arrived at through brokers, who operate a
market in energy futures contracts. One of the brokers, Natsource, is
frequently consulted for determining the price of energy because it makes
its trading information public. The trial court in this case found that
"the forward prices being reported by Natsource compared very closely to
futures reported by two other trading sources, TFS and Platt's MW Daily, as
well as Energy Argus, a source of energy price projections relied upon by
[USGen's expert]."
¶ 7. On the spot market, each power generator submits bids stating
the price at which it would sell a certain amount of electricity for each
hour in the next day. After the bids have been submitted, the regional
administrator considers all the bids submitted by various regional power
plants and then accepts the bids, starting with the least expensive, to
meet the area's power demands. Once the demand for power is satisfied, the
regional administrator looks at the cost of the last kilowatt hour needed
to meet the demand. The cost of this kilowatt hour sets the "market
clearing price" for that hour. The market clearing price then becomes the
price that is paid to all suppliers selected to provide power for that
hour.
¶ 8. As we explained in Beach Properties, the income capitalization
approach to valuation converts the future benefits of property ownership -
that is, the income the property will generate - into an expression of
present worth. Id. For a business property like the one before us, income
to the owner is the reason to hold the property. Valuing the property
based on its anticipated income is done as follows:
The income approach is based on the proposition that a rational
investor would pay the fair market value for a piece of property,
which is the price (P) that, when multiplied by the rate of return
available from alternative investments of comparable risk (the
capitalization rate or R), is equal to the property's expected net
income (I). In other words, if the known factors are
capitalization rate and net income, the price of the property may
be calculated by dividing the net income by the capitalization
rate: P = I/R.
Id.
¶ 9. In this case, the experts agreed on the use of the above
methodology, the period over which the expected income should be measured,
twenty years, and the capitalization rate. Although not central to this
appeal, they disagreed over the costs to be incurred in generating the
income. The real disagreement that explains the wide variation in
valuations reached by the experts was over the expected income from the
plant. This income, in turn, has a number of components, including
electrical energy and generating capacity. Almost all of the variations in
the experts' valuations can be explained by disagreements over expected
income from the sale of electrical energy.
¶ 10. The dispute started when the Town listers relied upon Dr.
Silkman's valuation of $102,608,000 for the entire property. The Town then
allocated 90% of that value to Rockingham, on the basis that 90% of the
asset value was located in the Town. After the allocation, the Town listed
USGen's facility at $90,992,200. (FN2) Pursuant to 32 V.S.A. § 4467, USGen
appealed this assessment to the superior court challenging both the stated
value of the facility and the allocation calculation.
¶ 11. During the superior court appeal, both the Town and USGen
presented the testimony of the three experts who valued the Bellows Falls
plant. The Town presented the testimony of two experts, Silkman and
Biewald, although their conclusions conflicted on a number of points. The
Town presented additional testimony from Laurie A. Rowell, a lister for the
Town, who described its allocation process. USGen presented the testimony
of Filsinger.
¶ 12. The admission of Dr. Richard Silkman's testimony is the
central point of contention in this appeal. He has a Ph.D. in economics
and his primary occupation is as president of a company that brokers energy
supply contracts in the New England power market. His qualifications to
testify in this case are described in more detail infra. The other expert
witnesses have more traditional backgrounds for valuing properties.
USGen's expert, Todd Filsinger, is a professional engineer and certified
appraiser. He has appraised numerous power plants and has consulted on the
financing of power plants in the deregulated market.
¶ 13. In his report, Dr. Silkman exlpained his method of determining
expected income from the sale of electrical energy:
I used market-based prices for two components of "electricity" -
energy and capacity - in developing the estimate of revenues in
the valuation model. The prices of energy were derived from
forward prices for energy (per MWh) as these existed on or about
April 1, 2001, as reported by Natsource, an electricity broker
that publishes its forward prices for energy and capacity each
trading day. The forward energy prices are reported by Natsource
for each month for the on-peak and off-peak hours during that
month. Since the forward prices are for April 2001, the prices
reported for January through March are for calendar 2002.
The forward prices for energy are then weighted by the estimated
MWhs of generation during the on-peak and off-peak hours each
month to create an "effective" or average energy price for that
month. The monthly forward prices and the effective prices for
each month are shown Exhibit B, along with the estimated MWh of
generation during the on-peak and off-peak hours each month.
On April 2, 2001, the work day closest to April 1, 2001, Natsource reported
bid and ask prices for contracts for NEPOOL (FN3) power for delivery in
months in the following year. For some of those months, there are bid and
ask prices for that month. Others are aggregated into two-month blocks.
Thus, Dr. Silkman used seven data elements to derive the prices for the
twelve months following the valuation date. He assumed sales at the
midpoint between bid and ask prices. From this, he derived the "annual
average price per Mwh" for April 1, 2001 through March 31, 2002 as $54.41.
In estimating electric energy costs for the nineteen years thereafter, he
held the 2001-2002 average price constant for three years and then
increased it by an average rate of inflation of 2.5% for the remaining
sixteen years.
¶ 14. Following Dr. Silkman's deposition, USGen moved to exclude
his testimony as insufficiently reliable under the Daubert standard. The
main basis of the admissibility challenge, as it has evolved in the
superior court and this Court, is that the seven Natsource data elements
are insufficient to determine a twenty-year projection of energy sales
income. The trial judge rejected this argument before trial and in more
detail in his decision. Before we address USGen's arguments, we must
decide three preliminary questions about the applicability and application
of Daubert to this case.
¶ 15. The narrow question in Daubert was whether the adoption of
Federal Rule of Evidence 702 had altered the prevailing test for admission
of novel scientific evidence first articulated in Frye v. United States,
293 F. 1013, 1014 (D.C. Cir. 1923). Under the Frye test, scientific
evidence was admissible only upon a showing that the scientific principles
supporting the evidence had gained general acceptance in the relevant
scientific community. 293 F. at 1014. The Daubert Court held that the
Frye test did not survive and had been replaced by flexible standards of
relevance and reliability. Daubert, 509 U.S. at 587-89; see also State v.
Streich, 163 Vt. 331, 342-43, 658 A.2d 38, 46-47 (1995) (adopting and
explaining Daubert standard). Although it was no longer necessary under
Daubert to show that the proffered evidence had gained general acceptance
in the relevant scientific community, the Court stated that "the trial
judge must ensure that any and all scientific testimony or evidence
admitted is not only relevant, but reliable." 509 U.S. at 589. The
necessity that scientific evidence be both relevant and reliable is derived
from Fed. R. Evid. 702, which read as follows when Daubert was decided:
(FN4) "If scientific, technical, or other specialized knowledge will
assist the trier of fact to understand the evidence or to determine a fact
in issue, a witness qualified as an expert by knowledge, skill, experience,
training, or education, may testify thereto in the form of an opinion or
otherwise."
¶ 16. The Court addressed both components - reliability and
relevance - stating that reliability is assured if the evidence is
supported by "scientific knowledge." Id. at 589-90. The Court further
explained that, "in order to qualify as 'scientific knowledge,' an
inference or assertion must be derived by the scientific method. Proposed
testimony must be supported by appropriate validation - i.e., 'good
grounds,' based on what is known." Id. at 590. Perhaps recognizing that
the "scientific knowledge" and "good grounds" were somewhat amorphous
concepts, the Court went on to provide some "general observations," 509 U.S. at 593, in the form of non-exclusive factors. The following factors
are intended to assist trial judges in determining whether expert testimony
is sufficiently supported by "scientific knowledge" so as to be admissible:
(1) whether the scientific technique or methodology involved can be tested,
id. at 593; (2) whether the technique or methodology has been subjected to
peer review and publication, id.; (3) the known or potential rate of error
particular to the technique or methodology, id. at 594; and (4) whether the
technique or methodology has been generally accepted in the scientific
community, id. The Court stressed that these factors were not exhaustive
and that the admissibility standard under Daubert is a flexible one. Id.
at 593-94. Relevancy, under the Court's decision, is essentially
determined by considering if the expert's testimony "will assist the trier
of fact to understand or determine a fact in issue." Id. at 592.
¶ 17. Because the Daubert opinion was explicitly limited to
scientific evidence, it was unclear whether the Daubert framework was also
applicable to non-scientific evidence. See id. at 590 n.8 ("Rule 702 also
applies to 'technical or other specialized knowledge.' Our discussion is
limited to the scientific context because that is the nature of the
expertise offered here."). Six years after Daubert was decided, the
Supreme Court addressed this issue in Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147 (1999). Grounding its analysis in Rule 702's language, the
Court explained,
This language makes no relevant distinction between "scientific"
knowledge and "technical" or "other specialized" knowledge. It
makes clear that any such knowledge might become the subject of
expert testimony. In Daubert, the Court specified that it is the
Rule's word "knowledge," not the words (like "scientific") that
modify that word, that "establishes a standard of evidentiary
reliability." Hence, as a matter of language, the Rule applies
its reliability standard to all "scientific," "technical," or
"other specialized" matters within its scope.
Id. (quoting Daubert, 509 U.S. at 589-90). Accordingly, after Kumho Tire,
Daubert is applicable to all types of expert testimony and certainly to the
expert testimony presented in this litigation.
¶ 18. In Vermont, we adopted the Daubert analysis, concluding that
because our rules of evidence are "essentially identical to the federal
ones on admissibility of scientific evidence" it makes sense to adopt
admissibility principles similar to those used in the federal courts.
State v. Brooks, 162 Vt. 26, 30, 643 A.2d 226, 229 (1994). This decision
was typical of the at least thirty states that have done the same, based on
similar reasoning. See Christian v. Gray, 2003 OK 10, ¶ 2 n.2, 95 P.3d 591
(collecting cases). Following the Brooks decision, in Streich, 163 Vt. at
342, 658 A.2d at 46, we reiterated our decision to follow Daubert and
reject Frye. In 2000, although not explicitly, we followed Kumho Tire,
when we applied the Daubert standard in State v. Kinney, 171 Vt. 239,
248-49, 762 A.2d 833, 841-42 (2000), where an expert testified about rape
trauma syndrome. Recently, we made our adoption of Kumho Tire explicit by
amending V.R.E. 702 to include its holding. See 2004 Amendment to V.R.E.
702 (effective July 1, 2004) (making V.R.E. 702 identical to Fed. R. Evid.
702, note 4, supra).
¶ 19. Following Daubert and Kumho Tire, trial judges must now act
as gatekeepers who screen expert testimony ensuring that it is reliable and
helpful to the issue at hand before the jury hears it. Amorgianos v. Nat'l
R.R. Passenger Corp., 303 F.3d 256, 265-66 (2nd Cir. 2002). If the judge
finds that the evidence meets both Daubert prongs, the proponent may then
present its expert. Conversely, if the judge finds the evidence
insufficient to satisfy either prong, the proffered testimony is excluded
and never presented to the jury. We emphasize, however, that Daubert
presents an admissibility standard only. The admitted evidence does not
alone have to meet the proponent's burden of proof on a particular issue,
and, of course, the expert witness remains subject to cross-examination.
Reichert v. Phipps, 2004 WY 7, ¶ 9, 84 P.3d 353.
¶ 20. This brings us to three preliminary issues we must address
before we consider USGen's claim of error: (1) the standard of review for a
decision of a trial judge admitting or excluding evidence under Daubert and
V.R.E. 702; (2) whether Daubert applies in a bench trial; and (3) whether
Daubert applies to data inputs as well as the methodology employed by the
expert. We begin with the standard of review.
¶ 21. Although we have not specifically articulated a standard of
review for Daubert rulings, we have held that admissibility of decisions
under V.R.E. 702 are reviewed only for abuse of discretion. See Trotier v.
Bassett, 174 Vt. 520, 523, 811 A.2d 166, 170 (2002) (mem.); State v.
Griswold, 172 Vt. 443, 447-48, 782 A.2d 1144, 1147-48 (2001); State v.
Gomes, 162 Vt. 319, 329-30, 648 A.2d 396, 403-04 (1994). We revisit these
rulings only because a number of courts have held that a less deferential
standard of review applies to Daubert challenges. See, e.g., Jennings v.
Baxter Healthcare Corp., 14 P.3d 596, 603 (Or. 2000) (holding that the "the
question whether scientific evidence is admissible is reviewed for errors
of law"); Gentry v. Mangum, 466 S.E.2d 171, 177 (W.Va. 1995) ("The trial
court's determination regarding whether the scientific evidence is properly
the subject of 'scientific, technical, or other specialized knowledge' is a
question of law that we review de novo."); C. Mueller, Daubert Asks the
Right Questions: Now Appellate Courts Should Help Find the Right Answers,
22 Seton Hall L. Rev. 987, 1019 (2003) (arguing that appellate courts
should use a more "exacting standard of review" than abuse of discretion
when reviewing trial court's decision to admit evidence under Daubert).
Nevertheless, we conclude that a special standard of review for Daubert
challenges is inappropriate.
¶ 22. We note at the outset that the U.S. Supreme Court has held
that abuse of discretion is the appropriate standard of review for Daubert
rulings in the federal courts. General Elec. Co. v. Joiner, 522 U.S. 136,
142-43 (1997). We are also persuaded by those state courts that have
analyzed the issue and applied abuse of discretion review. The Alaska
Supreme Court observed in State v. Coon, 974 P.2d 386, 399 (Alaska 1999)
that there are at least three reasons to apply an abuse of discretion
standard to Daubert challenges. Each of these reasons applies here.
First, the general standard for review of evidentiary rulings is abuse of
discretion, and there is no persuasive reason to deviate for Daubert
rulings. See id. at 399. We similarly use abuse of discretion review for
evidentiary rulings generally. E.g., State v. Gemler, 2004 VT 3, ¶ 11, 844 A.2d 757 ("We will reverse a trial court's decision to admit evidence only
if the court withheld or abused its discretion."); Bazzano v. Killington
Country Vill., Inc., 2003 VT 46, ¶ 5, 175 Vt. 534, 830 A.2d 24 (mem.)
(holding that the reliability and relevance of witness's testimony was for
trial court to assess, and, absent an abuse of discretion, we will not
overturn trial court's decision to admit testimony). Second, although
appellate courts are occasionally presented with broad, categorical
admissibility decisions, see Kinney, 171 Vt. at 250, 762 A.2d at 842, the
far more common Daubert issue depends heavily on the record made in the
trial court and the credibility of the expert witness presenting the
disputed evidence. Coon, 974 P.2d at 399; State v. Alberico, 861 P.2d 192, 205 (N.M. 1993). The trial court is in the best position to assess
the expert's credibility, as this case demonstrates.
¶ 23. Finally, on this point, abuse of discretion review comports
with the flexible standard developed in Daubert. Coon, 974 P.2d at 399.
We emphasized this flexibility in adopting the Daubert standard. Streich,
163 Vt. at 342-43, 658 A.2d at 46-47. It would be incongruous for us to
recognize the trial court's discretion in applying the Daubert factors, but
be unwilling to defer to that discretion on review.
¶ 24. Thus, we apply an abuse of discretion standard of review to
the trial court's decision to admit Dr. Silkman's testimony. When
reviewing a trial court's decision to either admit or exclude expert
testimony we consider whether the judge's decision was either made for
reasons clearly untenable or was unreasonable. Quenneville v. Buttolph,
2003 VT 82, ¶ 24, 175 Vt. 457, 833 A.2d 1263. Absent a clear showing of
judicial error, we will affirm the trial court's decision to admit or
exclude the proffered testimony. This does not mean, however, that we will
not engage in a substantial and thorough analysis of the trial court's
decision and order "to ensure that the trial judge's decision was in
accordance" with Daubert and our applicable precedents. Alberico, 861 P.2d
at 206.
¶ 25. The second preliminary question flows from the Town's
argument that Daubert is inapplicable to a bench trial. The Town contends
that during a bench trial the judge is not obligated to perform Daubert's
gatekeeping function because the need for this function is to avoid jury
confusion and exposure to unreliable or irrelevant testimony. In support
of this argument, the Town cites a number of cases that describe the role
of Daubert in a bench trial. Although the cases conclude that the court's
gatekeeping role is less critical when the court sits as the fact-finder,
none fully abandons the requirement that the judge find the expert's
testimony relevant and reliable. Gibbs v. Gibbs, 210 F.3d 491, 500 (5th
Cir. 2000); Berry v. School Dist. of Benton Harbor, 195 F. Supp. 2d 971,
977 n.3 (W.D. Mich. 2002); Magistrini v. One Hour Martinizing Dry Cleaning,
180 F. Supp. 2d 584, 596 n.10, 597 (D.N.J. 2002); Volk v. United States, 57 F. Supp. 2d 888, 896 n.5 (N.D. Cal. 1999); Ekotek Site PRP Comm. v. Self, 1 F. Supp. 2d 1282, 1296 n.5 (D. Utah 1998).
¶ 26. As we explained above, the Daubert standards have essentially
been codified in V.R.E. 702, as recently amended. The Vermont Rules of
Evidence are applicable in bench trials. V.R.E. 101, 1101. We have
applied Rule 702 to the admissibility of expert testimony in bench trials.
E.g., Soutiere v. Soutiere, 163 Vt. 265, 269, 657 A.2d 206, 208 (1995);
Brown v. Whitcomb, 150 Vt. 106, 111, 550 A.2d 1, 4 (1988). Nevertheless,
we agree that in the absence of a jury, the screening function of the judge
is diminished. Thus, we conclude that Daubert must still be followed,
albeit in a somewhat more relaxed manner. See Seaboard Lumber Co. v.
United States, 308 F.3d 1283, 1302 (Fed. Cir. 2002) (acknowledging lesser
import of gatekeeping function in bench trials, while stressing that
Daubert relevance and reliability standards must still be met). As Judge
Richard A. Posner, sitting specially assigned, explained in Smithkline
Beecham Corp. v. Apotex Corp., 247 F. Supp. 2d 1011, 1042 (N.D. Ill. 2003),
the Daubert standard must be applied in bench trials, but because Daubert
"requires a binary choice - admit or exclude - . . . a judge in a bench
trial should have discretion to admit questionable technical evidence,
though, of course he must not give it more weight than it deserves."
¶ 27. The final preliminary question regards the Town's argument
that the Daubert analysis is used exclusively to review an expert's
methodology, and not his or her data inputs, and therefore Daubert is
inapplicable because USGen contests data inputs. This argument is not
consistent with Kumho Tire and its codification in V.R.E. 702. In Kumho
Tire, the Court explained that Daubert requires a reliability determination
with respect to the expert testimony's "factual basis, data, principles,
methods, or their application." 526 U.S. at 149. In fact, the decision to
exclude the evidence in Kumho Tire was based in part on concerns about the
expert's visual inspection of the allegedly defective tire - that is, the
data inputs for the expert's analysis. Id. at 154-56. As amended, V.R.E.
702 requires the court to determine whether the expert testimony "is based
upon sufficient facts or data."
¶ 28. This case is somewhat similar to In re Aluminum Phosphide
Antitrust Litig., 893 F. Supp. 1497 (D. Kan. 1995), a class action suit
where plaintiffs alleged that defendants conspired to fix the price of
aluminum phosphide. Id. at 1498. In that case plaintiffs offered
testimony from Dr. Richard C. Hoyt, an economist who has frequently
testified in cases of all kinds. Id. at 1499-1500. All parties agreed
that to determine whether defendants had fixed prices the best methodology
was the "before and after" model. Id. at 1500. This model compares prices
during two distinct time periods - one incorporating the alleged price
fixing and the other, a normative period, with an estimated price
reflecting no price fixing. Id. In conducting his analysis, Dr. Hoyt used
the "before and after model" which required him to compare the actual price
of aluminum phosphide with an estimated price - the price aluminum
phosphide would have been selling at but for the price fixing. Id. at
1501. The court accepted Dr. Hoyt's methodology, but questioned his data
inputs - the estimated price predictions. Id. at 1501-02. Because the
court determined that the price predictions were unreliable, the court
excluded Dr. Hoyt's testimony under Daubert. Id. at 1507.
¶ 29. Like the Aluminum Phosphide court, we conclude that data
inputs are appropriately within the purview of Daubert and V.R.E. 702.
See Cayuga Indian Nation of N.Y. v. Pataki, 83 F. Supp. 2d 318, 326
(N.D.N.Y. 2000). An opposite holding would require admission of unreliable
expert opinion testimony because the unreliability is caused by the data
used rather than the methodology used to apply the data. We reject the
Town's argument that we should dismiss USGen's Daubert challenge to Dr.
Silkman's testimony because it is based on data inputs.
¶ 30. As neither of the Town's arguments prevents us from reaching
the merits of this case, we now consider USGen's claims of error under the
abuse of discretion standard. We note at the outset of this discussion
that the Daubert challenge goes solely to the reliability of Dr. Silkman's
testimony. The testimony was undoubtedly relevant under Daubert. The
precise issue in the case was the value of the Bellows Falls facility, and
that is exactly what Dr. Silkman testified to.
¶ 31. Although USGen raised seventeen reasons why Dr. Silkman's
testimony should be excluded, it has emphasized here its primary reason:
that the data inputs are an unreliable basis on which to project twenty
years worth of income. This objection actually involves three related
arguments: (1) Natsource's forward bid and ask data are an insufficient
basis on which to project future revenues from the sale of energy; (2) even
if Natsource data are sufficient generally, the use of one day of such data
is not; and (3) even if Natsource data are sufficient to project one year
of revenue, they are insufficient to project twenty years of revenue. (FN5)
We review each argument in turn.
¶ 32. As to the first argument, the trial court squarely rejected
it:
In reaching their estimates as to future prices for electrical
power, both Dr. Silkman and Mr. Biewald placed substantial
reliance on information published by Natsource. Natsource is a
brokerage firm specializing in bilateral contracts for the
purchase and sale of power to be delivered in the future.
Bilateral agreements are distinguished from transactions brokered
through a spot market, such as NEPOOL. However, since the
deregulation of power markets, bilateral agreements have become
increasingly useful as hedges to better insure predictability of
revenues. Although an institutional futures market for sale of
power is not as well-developed as for other commodities, power
futures are now traded through Natsource, and a number of other
private brokerage firms. An important aspect of Natsource's
operations is the public availability of its trading data, a
significant advantage recognized by active participants in the
market, as well as others who require reliable information
regarding the development and functioning of the electricity
market, such as public utility commissions. Although USGen
challenged both the reliability of Natsource trading information,
as well as the extent to which it is relied upon by others, the
Court is persuaded by the testimony of the Town's experts that it
is a commonly recognized source of data regarding electricity
pricing.
. . . .
. . . As noted in the testimony of the Town's experts, the forward
prices being reported by Natsource compared very closely to
futures reported by two other trading sources, TFS and Platt's MW
Daily, as well as to Energy Argus, a source of energy price
projections relied upon by Mr. Filsinger.
¶ 33. USGen attacks this decision because the Natsource data do not
show trading volumes and the liquidity of the market is unknown. The
expert witnesses agreed on the income capitalization approach to determine
the plant's value. That approach required each expert to forecast future
income. Dr. Silkman relied first upon market data for sales of energy over
the following year. In Daubert terms, as the trial court found, that data
source was validated by public agency use in making electricity price
forecasts and its similarity to other sources of market data. The trial
court could conclude that this external validation overcame any concerns
about trading volumes and the opaqueness of the market. The trial court
acted well within its discretion in rejecting the argument.
¶ 34. Although USGen's second argument raises different
considerations, we believe that the court appropriately rejected it. The
main difference between the experts is represented by their predictions of
future energy prices. They agreed that electrical energy prices would
follow the course of natural gas prices, because new plants would generate
electricity from natural gas and set the market prices, but disagreed about
the future price of natural gas. At the time of valuation, April 1, 2001,
natural gas prices had recently increased substantially, and, as a result,
prices for electricity futures contracts had also increased markedly. Dr.
Silkman believed that the higher natural gas and electricity prices
represented a new floor that would continue indefinitely. By contrast,
USGen's expert testified that prices prevailing on April 1 represented a
price spike, and prices would fall to historic levels.
¶ 35. We emphasize the legal requirment that the asset to be taxed
be valued on one date, April 1 of the year of taxation. 32 V.S.A. § 3482.
Consistent with Dr. Silkman's view, the prices prevailing on that day, and
not those in the days and weeks before April 1, represented the base.
Although the prices were taken from one trading day, they reflected
delivery dates up to a year in the future. We recognize that we have been
critical of testimony valuing property by the income capitalization method
if it is based on income data from only one point in time. Beach Props.,
161 Vt. at 374, 640 A.2d at 53. That criticism came, however, in the
context of a stable business where the expert witness failed to consider
the property's potential for earning income in the future. Id. Here, the
testimony is based on the expert's view of future earning potential in a
new and volatile market, an opinion validated by actual market prices for
future delivery. We conclude that the court acted well within its
discretion in admitting the testimony under V.R.E. 702.
¶ 36. In reaching this conclusion on the second argument, we reject
USGen's position that we should look at the actual path of gas prices
following April 1, 2001. As USGen showed, they dropped after April 1, a
development not predicted by Dr. Silkman. We do not believe that the
actual movement of gas prices is a valid ground to reject Dr. Silkman's
testimony or to prevent reliance upon it. The court was required to
determine "the price which the property will bring in the market when
offered for sale and purchased by another" as of April 1, 2001. 32 V.S.A.
§ 3481(1). A buyer of the facility on April 1 could not have known the
price for gas or electricity after that date. Thus, actual future gas
prices have no impact on valuation as of April 1.
¶ 37. USGen's third argument challenges the use of one year of
income data to project a twenty-year revenue stream. We agree that the
reliability of the income capitalization method of valuation can be
questioned where the market in which future income is to be earned is new
and volatile. Nevertheless, USGen does not challenge the use of the income
capitalization approach, and each of the expert witnesses was required to
predict future income in spite of the uncertainty. Dr. Silkman's method
for doing so was transparent, and he explained his rationale for using it.
(FN6) He explained that while Natsource data existed for deliveries
beyond a year, too few sales existed to make the data reliable. Thus, he
relied upon his conclusion that electrical energy prices prevailing on
April 1, 2001 would continue for three years. He relied, in part, on
anticipated changes in energy regulatory policy from the Federal Energy
Regulatory Commission (FERC). (FN7) We conclude that to the extent USGen's
argument shows weaknesses in Dr. Silkman's testimony, it goes to weight,
not admissibility; accordingly, we reject the argument.
¶ 38. In addition to the above arguments, (FN8) USGen attacked Dr.
Silkman's qualifications to render the opinion he offered asserting: (1) he
has no training in appraisals or appraisal methodology; (2) he has no
familiarity with the Uniform Standards of Professional Appraisal Practice;
(3) he has never testified in a court proceeding as an expert; (4) he has
never inspected or even visited the Bellows Falls Station; and (5) he is
not an expert in predicting future prices in the New England Electrical
market. We stress that the trial court has wide discretion to determine
the qualifications of an expert witness. State v. Hicks, 148 Vt. 459, 461,
535 A.2d 776,777 (1987). If an expert's limitations are clear, both on
direct testimony and cross-examination, "the court may not be said to have
abused its discretion in allowing the testimony." Cappiallo v. Northrup,
150 Vt. 317, 319, 552 A.2d 415, 417 (1988). "A professional certification"
is unnecessary to qualify as an expert. Reporter's Notes, V.R.E. 702.
¶ 39. The evidence indicated that Dr. Silkman holds both a Masters
and a Ph.D. in Ecomonics from Yale University. He has consulted for many
years in the energy field and he is president of Competitive Energy
Services in Maine, a company that arranges electricity supply contracts in
the New England Power market. He has testified before numerous public
utility commissions and other public bodies. He has taught economics at
the university level, and his course included the methodology for valuing
assets by the income capitalization approach. He is not a licensed
appraiser and therefore unfamiliar with the Uniform Standards of
Professional Appraisal practice; he has never inspected the Bellows Falls
facility; and he regularly provides advice to clients regarding the future
price of electricity. Based on the above, the trial court ruled:
Dr. Silkman is amply qualified by education and experience to
undertake the type of economic analysis that undergirds each
expert's opinion in this case, and to offer opinion testimony
regarding the workings of the market for electricity. Indeed, as
noted by the Town, each expert was well-qualified, and worked
diligently to synthesize a bewildering amount of information. Yet
the Court also agrees with the Town's proffer:
"Dr. Silkman showed himself to have the broadest experience of any
of the witnesses in various disciplines that bear on New England
power markets: as an economics teacher at the college level; as an
entrepreneur in the market, as a consultant and advisor to public
utilities commissions and legislatures throughout Northern New
England; as an advocate at the Federal Energy Regulatory
Commission ('FERC') and even as an individual member of the New
England Power Pool."
This decision was well within the trial court's discretion, and we affirm
it.
¶ 40. For the above reasons, we conclude that the trial court did
not err in admitting Dr. Silkman's testimony with respect to the value of
the Bellows Falls hydroelectric facility on April 1, 2001. We additionally
consider whether the court erroneously relied upon that testimony.
¶ 41. Throughout its claims of error, USGen asserts that the
superior court decision is inconsistent with our decision in Beach
Properties, Inc. v. Town of Ferrisburg. The exact point of comparison has
been somewhat unclear because the Beach Properties decision does not
involve the admissibility of expert evidence, the explicit claim of error
made by USGen, but instead it involves the sufficiency of evidence to
support a valuation based on the income capitalization methodology.
Nevertheless, we exercise our discretion to examine USGen's Beach
Properties arguments because, as we have held above, USGen's claims go much
more to weight and sufficiency than to admissibility. For this reason, we
address whether the court erred in relying upon Dr. Silkman's evidence.
¶ 42. In Beach Properties, the Town of Ferrisburg appealed a State
Board of Appraisers decision valuing by the income capitalization method a
summer resort and convention center on the shores of Lake Champlain. 161
Vt. at 370, 640 A.2d at 51. The property was owned by a family corporation
that was owned in turn by two stockholders as a result of an intra-family
stock transfer. Following the stock transfer, which was based on "a
theoretical sale price for the entire property," the taxpayer's appraiser
arrived at the property's value using an income capitalization method that
relied on the net income produced in a single year and the intra-family
stock transfer. Id.
¶ 43. The taxpayer's appraisal was almost a million dollars lower
than that of the Town and was the taxpayer's main evidence before the
Board. The Board accepted the taxpayer's appraisal, and the Town then
appealed claiming that "the Board of Appraisers erred by making findings
that were so devoid of evidentiary support as to be clearly erroneous."
Id. We agreed with the Town's argument and reversed the Board's decision.
Id. at 372, 640 A.2d at 52. For the same reasons, USGen argues that we
should reverse the superior court decision here. We cannot agree.
¶ 44. There is one superficial similarity between this case and
Beach Properties and many significant differences. First, we stress the
differences. We reversed the Board's decision in Beach Properties mainly
because the Board "made virtually no findings of its own, but rather
described and summarized the dispute between the parties." Id. at 371, 640 A.2d at 52. Here, in sharp contrast, the trial judge rigorously reviewed
all three experts' testimony, made detailed and extensive findings based on
that review, and explained why he credited particular testimony above other
testimony.
¶ 45. Second, we concluded that the capitalization rate used by
taxpayer's appraiser was unreliable because it was based on the rate of
return for one year of the business being valued, rather than the rate
available from comparable investments. Id. at 373-74, 640 A.2d at 53-54.
Additionally, we rejected the rate because it was based on a fictitious
designation of value. Id. We concluded that the appraiser had "derived a
capitalization rate from a postulated fair market value for the property
under appraisal, rather than deriving fair market value from a postulated
capitalization rate based on investments with similar risk." Id. at 374,
640 A.2d at 53. Here, by comparison, the capitalization rate was
externally derived and agreed to by all of the expert witnesses.
¶ 46. Third, the expenses necessary to produce the income were
based on "internal, unaudited financial statements" and were not
sufficiently itemized to determine whether they were reasonable, especially
with respect to the salaries of family members. Id. In contrast, the
expense figures used by the experts here were very detailed and were the
subject of disagreements and cross-examination. The trial judge made
findings specifically resolving the disagreements.
¶ 47. This leads us to the similarity. The income and expense
figures for the resort in Beach Properties were based on one year's
experience, the calendar year before the valuation date. We noted that for
an on-going resort business income is affected by "a wide variety of
factors, ranging from the competence of management to the economic climate
experienced by the establishment's customer base to the weather," 161 Vt.
at 373, 640 A.2d at 53, and that "it is generally expected that a
'stabilized annual net income' reflecting more than one year's set of
figures will be used as the basis for income capitalization," id. at 374,
640 A.2d at 53. USGen argues that Silkman's analysis has the same defect
because it is based on one day of market data from which twenty years of
income is projected.
¶ 48. We need not decide whether this weakness in the expert's
analysis alone would make the valuation unsustainable. Again, we stress
that the similarity of approach on which USGen relies is superficial. As
we stated in our analysis of the admissibility of Dr. Silkman's testimony,
there are vast differences between income generation from a stable resort
business and a hydroelectric plant. As the trial court fully explained,
the historical track record of energy prices was of limited value in light
of deregulation, and energy prices, the key component of revenues, were
steadily rising up to April 1, 2001, the date of valuation. The court was
faced with a dispute among the experts on the relation of this price rise
to long term energy prices. USGen's expert testified that he believed it
was a short-term price spike which would fall back to historic averages.
The Town's experts, particularly Dr. Silkman, testified that it was a new
baseline for future prices so that historical prices were of limited
significance in determining long-term future prices. The trial court
resolved the disagreement in favor of the Town, concluding that a purchaser
on April 1, 2001 would have believed that prices would move around the
April 2001 level, and would not drop back as USGen's expert predicted.
¶ 49. Our review of the trial court's valuation decision is quite
deferential. See Waller v. American Int'l Distrib. Corp., 167 Vt. 388,
394, 706 A.2d 460, 464 (1997) ("The weight to be given to a particular
method of valuation . . . is within the sound discretion of the court.").
In addition to the testimony of the Town's expert witnesses, particularly
Dr. Silkman, the trial court had one other major reason for its conclusion,
its strong disagreement with the conclusion of USGen's expert. The trial
court adopted the Town's finding that:
It is, of course, understandable that USGen would seek to reduce
its tax burden. But here, it has presented an expert who would
cut the taxable valuation from $90,990,200 to approximately
$37,000,000 . . . For six years prior to the sale of this plant to
USGen, the agreed value for the USGen property [with the previous
owner] was $81,000,000. Now, as of April 1, 2001, after the
wholesale market had undergone a very substantial increase, USGen
claims the value of the Station plummeted to less than half that
level.
We also note the great differences between the trial court opinion in this
case and that in New England Power Co. v. Town of Barnet, 134 Vt. 498, 367 A.2d 1363 (1976), our one earlier case overturning the property tax
valuation of a hydroelectric plant. In that case, we reversed the trial
court's valuation decision because "the findings below, while both
painstaking and extensive, are largely mere recitals of the testimony
given," id. at 502, 367 A.2d 1366, and the court failed to explain
specifically why it rejected the opinions of the experts and found a
valuation between their opinions, id. at 503, 367 A.2d at 1366-67. Here,
the court carefully explained its decision-making process and how it was
influenced by the experts' testimony. If the trial court considered the
various approaches offered, assigned weight to each approach, and provided
a thorough explanation for its findings and conclusions we will not
overturn the court if its order "appears to be fair, just and equitable
according to the evidence presented." 134 Vt. at 506, 367 A.2d at 1368.
We conclude that the trial court's reliance on Dr. Silkman's analysis,
including the decision to base long term income predictions on bilateral
contract prices as of April 1, 2001, and its rejection of the conclusion of
USGen's valuation expert, was within its discretion.
¶ 50. Finally, USGen argues that the trial court erred by accepting
the lister's allocation and assigning 90% of the value of the Bellows Falls
facility to the Town. The trial court had before it three opinions of the
percentage of the facility's value that lies within the Town: Laurie
Rowell, Town lister, 90%; Biewald, 83.7% and Filsinger, 86.24%. Each
briefly explained his or her method for reaching the conclusion indicated,
but very little of the testimony was on this allocation issue. The court
accepted Ms. Rowell's allocation. It explained that it could not credit
the opinion of USGen's expert because it was based on cost information, the
source of which was undisclosed and unexplained. Thus, it accepted the
"reasoned judgment" of the lister.
¶ 51. In addition to being a Town lister, Rowell is a lawyer. She
has attended a number of courses on property valuation and specifically
courses on valuing electrical generation assets. She gave her reasons for
the 90% allocation and was cross-examined on those reasons. While there
was no discussion of her qualifications as an expert witness under Rule
702, her valuation opinion was based on her training, and there was no
objection to this opinion.
¶ 52. The lister's allocation enjoys a presumption of validity under
our precedents. Id. at 507, 367 A.2d at 1369 ("This court has recognized
that a presumption of validity and legality attaches to the actions of the
listers."); accord Vermont Elec. Power Co. v. Town of Vernon, 174 Vt. 471,
472, 807 A.2d 430, 433 (2002) (mem.). Although we presume the lister's
allocation is correct, the presumption is locative only and any admissible
evidence can rebut this presumption. Woolen Mill Assocs. v. City of
Winooski, 162 Vt. 461, 463, 648 A.2d 860, 862 (1994).
¶ 53. Here, the Town argues that USGen failed to overcome the
presumption behind the lister's decision. We reiterate, however, that any
admissible evidence, including that offered by the Town, can overcome the
presumption. Id. The testimony of Biewald and Filsinger overcame the
presumption.
¶ 54. We emphasize, however, that USGen has the burden of persuasion
on all issues in a property tax appeal. See Beach Props., 161 Vt. at 375,
640 A.2d at 54. The court was not persuaded by its evidence. USGen
responds that, even so, the court could not rely upon the Rowell's
testimony because it lacked "any foundation or explanation." We disagree.
The Town showed her qualifications to offer an opinion on utility property
valuation, and she stated her opinion on the allocation of the facility's
value and the basis for the opinion. USGen did not challenge her
qualifications, relying instead on cross-examination as its basis. The
trial court was the proper judge of the weight to be accorded her
testimony.
Affirmed.
FOR THE COURT:
___________________________
Associate Justice
------------------------------------------------------------------------------
Footnotes
FN1. Chief Justice Amestoy sat for oral argument but did not participate in
this decision.
FN2. Dr. Silkman acknowledged he made a computational error. The corrected
value of Dr. Silkman's estimate, after the allocation, would be
$90,377,100.
FN3. NEPOOL is an acronym for the New England Power Pool, which administers
the New England transmission system and wholesale power market. NEPOOL
power means power generated in New England.
FN4. Federal Rule of Evidence 702 was amended in 2000 to codify the Court's
decision in Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999). Rule 702
now reads:
If scientific, technical, or other specialized knowledge will
assist the trier of fact to understand the evidence or to
determine a fact in issue, a witness qualified as an expert by
knowledge, skill, experience, training, or education, may testify
thereto in the form of an opinion or otherwise, if (1) the
testimony is based upon sufficient facts or data, (2) the
testimony is the product of reliable principles and methods, and
(3) the witness has applied the principles and methods reliably to
the facts of the case.
FN5. It is not clear that USGen actually made the same arguments against
admissibility in the trail court as here. The court ruled on a preliminary
motion to exclude Dr. Silkman's valuation testimony, based primarily on
excerpts from Dr. Silkman's deposition. Although the motion complained
generally about the data inputs without specificity, its rationale for
exclusion was that Dr. Silkman knew nothing about appraisal methodology,
was not an expert in forecasting the future price of energy in New England,
relied upon predicted future changes in energy regulatory policy and
acknowledged in the past that his work could not be used to render a
valuation conclusion. USGen focused more on its current primary arguments
in cross-examination of Dr. Silkman at trial. Given that the arguments
were eventually made, and the trial court relied heavily on Dr. Silkman's
testimony, we exercise our discretion to rule on the admissibility
arguments presented to us.
FN6. USGen argued that Dr. Silkman admitted that he did not know how a
purchaser would value the plant, apparently to set up the testimony of its
expert that no buyer would use Silkman's analysis. Dr. Silkman responded
that although he did not know how any particular purchaser would value the
plant, and did not know whether they would employ Natsource data, they
would follow the discounted cash flow methodology he used.
FN7. USGen challenged Dr. Silkman's reliance on anticipated changes in FERC
policy as improper. We note that the testimony went to the cost of
capacity, and not energy, a relatively minor part of the value testified to
by Dr. Silkman. Dr. Silkman gave a detailed analysis of FERC's actions in
this area, emphasizing that its policy was in flux after deregulation. We
conclude that an objection to this analysis went to the weight to be
accorded his testimony.
FN8. USGen also argued that Dr. Silkman's testimony should be excluded
because he was a registered lobbyist for the Town. Dr. Silkman responded
that he had registered as a lobbyist because the Town had hired him to help
in their plan to establish a municipal electric utility and he had
testified in the Vermont Legislature in that capacity. We fail to see how
Dr. Silkman's registration as a lobbyist goes to his qualifications to
testify under V.R.E. 702.
USGen also challenged Dr. Silkman's valuation, in part, because he
took USGen expense and capital expenditure data partially from that
estimated by a valuation consultant for USGen who did not testify in this
case. It argues, in essence, that Dr. Silkman was merely a conduit for the
opinion of another expert in violation of our decision in Dupona v. Benny,
130 Vt. 281, 287, 291 A.2d 404, 408 (1972). The error, if any, is
harmless. In its decision, the court concluded that the expense testimony
of Biewald was the most credible, but failed to include that data in its
valuation, instead relying wholly on the Silkman valuation. This mistake
inured to the benefit of USGen because Silkman recognized greater expenses
leading to a lower net income figure for the income capitalization. Thus,
the valuation consultant data helped USGen.
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