Court Decision in Power Plant Valuation Trial Impacts Energy Landscape as Private Development Ramps Up in New York

Property tax issues of statewide concern are brought to the forefront. Decision comes at a crucial time in New York State’s efforts to rapidly decrease greenhouse emissions and scale up renewable energy capacity.

On April 12, 2024, the Nassau County Supreme Court rendered a critical property tax appeal decision impacting energy industry participants and taxpayers throughout New York State, following the Power Plant valuation trial of J-Power USA Development Co., Ltd., v. the Assessor and the Board of Assessment Review of the Village of Freeport, Index No. 400993-2018 (DeStefano, J.).

The J-Power USA v. Village of Freeport trial involved the valuation and assessment for property tax purposes of a privately owned and operated Peaker Power Plant located in the Village of Freeport, Nassau County, New York. In a 64-page Decision after Trial, Justice Vito M. DeStefano determined that the Village had been significantly overvaluing the Plant and that the real property tax assessments imposed by the Village exceeded by approximately 200% the actual value of the Plant.

The decision comes at a crucial time in New York State’s efforts to rapidly decrease greenhouse emissions and scale up renewable energy capacity in meeting the public policy goals of the 2019 Climate Leadership and Community Protection Act (CLCPA). The CLCPA mandates that 70% of statewide electric generation be supplied by renewable energy by 2030 and that 100% be supplied by zero-emission sources by 2050.

One essential component of the CLCPA goals is the State’s initiative to foster a rapid buildout of alternative energy sources, specifically wind and solar. An impediment encountered by developers and investors is the property tax risk and uncertainty associated with a project, caused by the variation in methods of assessment for energy generating facilities that are utilized by local municipalities and, in some cases, overzealous assessors. Moreover, as renewable resources are implemented there will be a need for peaker plants, such as J-Power’s, to support the integration of offshore wind and other renewable generation.

At issue in this case was the proper valuation of J-Power’s Freeport Generating Station Unit 1, based on its condition and use as of the Village taxable status dates of October 1, 2017 and October 1, 2018. Freeport Unit 1 is a natural gas-fired simple cycle combustion power plant with an average rated net capacity of 47 MW, originally designed and used to meet peak loads subject to a Power Purchase Agreement (PPA) with the Long Island Power Authority (LIPA) and a Payments-in-Lieu of Taxes (PILOT) Agreement with Nassau County and the Village of Freeport. In 2017, both agreements expired.

Freeport Unit 1 has since operated as a merchant peaker plant that sells in the open energy market within New York Independent System Operator (NYISO) Zone K, running in times of high demand. Revenues became subject to the demands of the market without reliance on guarantees by LIPA and all expenses previously reimbursed by LIPA under the expired PPA became the sole responsibility of J-Power. Despite this dramatic change in how revenues were generated and expenses were paid, the Village looked to and relied on historical and outdated information in restoring the Plant to the tax roll with assessed market values of $98,098,000 for the 2018/19 tax year, and $102,660,698 for the 2019/20 tax year. As a result of the exorbitant assessments, the Plant was now subject to a $1.1 million annual Village tax bill.

J-Power offered a detailed and competent expert appraisal report (prepared by Kevin S. Reilly of evcValuation, LLC), which incorporated analyses contained in three expert component reports, each performed by eminently qualified experts in their respective fields. A Cost Estimate Report (prepared by Michael Borgstadt of Burns & McDonnell) calculated reproduction and replacement cost estimates for a brand new, identical or comparable replacement power facility prior to any adjustment for depreciation or obsolescence. A Power Market Report (authored by Roger Schiffman) analyzed supply and demand in the market, the potential revenue and related expenses for the Plant operating as a merchant facility for the first time following the PPA expiration. A Land Appraisal Report (prepared by Stephen Deutsch of Goodman-Marks Associates, Inc.) determined the value of the land to support a part of the Cost Approach.

The Village offered an appraisal report prepared by a single expert with general real estate appraisal experience who had never appraised a power plant. This expert concluded that the Plant was significantly over assessed having determined appraised market values of $64,000,000 and $65,000,000 as of October 1, 2017 and October 1, 2018, respectively.

Initially, the Court held that the presumption of validity afforded by law to the Village tax assessments was overcome by the evidence of both parties’ appraisers which determined market values of the Plant well below the contested assessed values.

As it regards the Income Approach analyses for valuing Freeport Unit 1 as of the taxable status dates, with the PPA having just expired, there was a lack of actual financial data to rely upon as a foundation to accurately forecast revenues for the Plant, which now operated as a merchant plant. All prior financial data related to the period the Plant operated under the terms of the expired PPA which dictated revenue and reimbursements to J-Power. As such, the Court found it could afford little weight to that portion of J-Power’s Appraisal Report. The Court rejected the Village Income Approach altogether finding it problematic since it was, in fact, predicated on the Plant’s 2016 financial data and performance as a Peaker that was still subject to the PPA and PILOT Agreements.

The Court observed that the Plant is uniquely adapted to the business conducted upon it and the use made of it cannot easily be converted to other uses without the expenditure of substantial sums of money. As such, the Plant has no easily ascertainable market value because of its use and uniqueness. The Court held, as a matter of law, that Freeport Unit 1 is a “specialty property” warranting valuation under the Cost Approach.

The Cost Approach is based on the principle of substitution with the underlying premise that a prospective buyer would not pay more for a property than what it would cost to construct or acquire a new, similar property with equal utility less deductions for all forms of depreciation. An appraiser estimates the market’s perception of the difference between the facility being appraised and a newly constructed facility with optimal utility. Generally, the Cost Approach supports two methods for estimating cost (reproduction cost or replacement cost) and three methods of estimating depreciation (physical, functional and external). Reproduction cost is the cost to engineer, procure, and construct an exact duplicate of the subject plant, whereas replacement cost is the cost to construct a plant with the same utility as a comparable plant using current materials and standards, all reflective of the taxable status dates.

The Court adopted the base costs developed in J-Power’s Cost Estimate Report to reproduce a new facility or a substitute facility with the same utility as Freeport Unit 1. Thereafter, the Court applied deductions for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence to account for all attributes of the Plant that make it less valuable from a market prospective, when compared to a new facility. The resulting reproduction cost new less depreciation was then added to the land value to determine a total value for the Plant.  Here, the Court adopted the land value presented in J-Power’s Land Appraisal.

Weighing the entire record, the Court determined the preponderance of the evidence adduced at trial established that Freeport Unit 1 had been significantly overvalued by the Village. The Court’s final conclusions of value are:

Village Tax Year	Village Tax Status Date	Village Assessed Market Value	The Court’s Final Market Value
2018/19	October 1, 2018	$98,098,000	$33,381,261
2019/20	October 1, 2019	$102,660,698	$33,449,834

The Village must fix the assessments based on the Court’s findings and refund to J-Power almost $1.5 million of overpaid taxes based upon the onerous tax assessments, plus interest.

The trial team is comprised of Farrell Fritz, P.C. partners Michael P. Guerriero and Arthur K. Feldman (Emeritus), members of the firm’s Real Property Tax Certiorari Litigation Practice Group, together with co-counsel Peter J. Crossett of Crossett Consulting & Legal Services, a nationally renowned property tax litigation attorney and consultant in the energy industry. Kevin S. Reilly, ASA, a professional appraiser and Managing Director of evcValuation, LLC, prepared the principal Appraisal Report for J-Power. Michael Borgstadt, PE, an engineer and managing director at Burns & McDonnell, prepared the Cost Estimate Report. Energy industry market consultant Roger Schiffman prepared the Power Market Report. Stephen Deutsch, a local commercial real estate appraiser and Chairman of Goodman-Marks Associates, Inc., prepared the Land Appraisal.