STATE OF CALIFORNIA
                    BOARD OF EQUALIZATION
          Unitary Valuation Methods
                    PROPERTY AND SPECIAL TAXES DEPARTMENT
                          VALUATION DIVISION
                        HAROLD M. HALE, JR., CHIEF
                          REVISED MARCH 2003
                                                                     Preface
                     The California Constitution requires the Board of Equalization to annually assess property, except
                     franchises, owned or used by regulated railway, telegraph, or telephone companies, car companies
                     operating on railways in the state, and companies transmitting or selling gas or electricity.  It also
                     requires the Board to annually assess pipelines, flumes, canals, ditches, and aqueducts lying within
                     two or more counties.  The taxes are levied and collected in the same manner as for county-assessed
                     properties. The Valuation Division of the Property Taxes Department provides the elected members
                     with reasonable and timely estimates of the market value of property subject to the Board’s state
                     assessment jurisdiction.  State-assessed property, except rail transportation property, is assessed at its
                     fair market value or full value as of 12:01 a.m. January 1.  In conformity with federal law, the
                     assessed value for railroad operating property and nonunitary rail transportation property is limited to
                     a percentage of the market value set by the Board.
                     This Unitary Valuati                                           the Valuation Division to document the
                                          on Methods book has been prepared by
                     valuation models currently used by the Board’s staff in the preparation of indicators of value. As part
                     of the process of producing the original (November 1998) manual, and subsequent revisions (March
                     2000 and March 2003), meetings were held with interested parties.  Conflicts regarding the content of
                     the manual were identified and most were resolved. Those issues not resolved were voted on by
                     Members of the Board of Equalization after hearing testimony from interested parties and Board
                     Staff.  The results of the Board's action are reflected in this manual. 
                                                                               Harold M. Hale Jr., Chief
                                                                               Valuation Division 
                     Unitary Valuation Methods                          i                                        March 2003
                                                                                                 Table of Contents
                                 Cost Models  .….............................................................................................................................                     1
                                      Historical Cost Less Depreciation (HCLD) Model  ..................................................................                                          1
                                      Reproduction Cost Less Depreciation (ReproCLD) Model .......................................................                                              11
                                      Replacement Cost Less Depreciation  (ReplCLD) Model  .......................................................                                              23
                                 Capitalized Earning Ability Models  .....................................….................................................                                    35
                                      Perpetual Life Model .............................………………………….................................................                                             37
                                                                                                   .............................…......................................................         38
                                      Straight Line Capital Recovery Model 
                                      Level Annuity Capital Recovery  Model..........................….......................................................                                   39
                                      Net Liqui
                                                    dation Model .............................................................................................................                  67
                                 Other Valuation Models ...........................................................…................................................                            71
                                      Sales Model ..............................................................................…..............................................                 71
                                      Pipeline Rate Base Model ........................................................................................................                         84
                                 Appendices
                                                      ...............................................................................................................................…          91
                                                         
                                      Appendix   I:  Exempt Intangibles  ......................…………………………………………...........                                                                      91
                                      Appendix II: Property Tax Rules                                                                                                                           92
                                                                                           (as of March 2003) ……..…………………………….....
                                 Glossary  ........…….....................................................................................................................…                   105
                                 Unitary Valuation Methods                                                      ii                                                              March 2003
                                       Historical Cost Less Depreciation (HCLD) Model
                   Overview
                   The Historical Cost Less Depreciation (HCLD) value indicator derivation includes the historical or
                   original acquisition cost of all property less nontaxable items and property assessed elsewhere.  This
                   results in the taxable historical cost.  The taxable historical cost is then reduced for the assessee’s
                   regulatory accounting depreciation of the taxable property.  This results in the assessable HCLD.  The
                   value of any possessory interest and/or noncapitalized leased properties are added to arrive at the final
                   HCLD value indicator.
                   HCLD is one of the more important indicators of value for closely regulated public utilities. The
                   general practice of the California Public Utilities Commission (CPUC) and most other regulatory
                   agencies is to use historical or original cost less depreciation (with various adjustments) as the rate
                   base.  The regulatory agencies establish a rate base and a rate of return; utilities are permitted to earn
                   at this established rate on the rate base. Hence, it is logical that prospective buyers and sellers would
                   see the rate base as a significant factor in formulating investment decisions. HCLD is much less
                   important for valuing public utility properties that are not closely rate base regulated.
                   One of the major components in the development of 
                                                                   the HCLD indicator is accounting depreciation.
                   For most rate base regulated utilities, there may be several sets of accounting records that record
                   depreciation.  The set of records reflecting the depreciation (normally straight-line) allowed by the
                   rate setting regulatory agency for rate or tariff-setting purposes is the proper depreciation figure to use
                                 1
                   for the HCLD. 
                   Many utilities that are subject to central assessment are not closely regulated for economic results and
                   therefore, do not maintain a depreciation reserve based on regulatory accounting rules.  In such cases,
                   an HCLD value indicator based on the assessee’s book depreciation may be useful as a point of
                   reference for establishing a relationship between net book value and market value.  This indicator is
                   generally not given any weight in the value reconciliation process, however as the use of HCLD is
                   limited primarily to rate base regulated utilities.
                   Appraisal depreciation in the form of obsolescence may be present in utility property and deducted
                   from HCLD.  Such deductions may be proper when the utility’s economic income has been impaired
                   and the rate or tariff-setting regulators have recognized such impairment.
                   Since it is the practice of ratemaking agencies to 
                                                                deduct deferred income tax liabilities from the rate
                   base, an adjustment for deferred income taxes is appropriate.  Although a prospective purchaser
                   would not necessarily expect to earn a return on the portion of the property represented by the
                   deferred income tax liability, the prospective purchaser would expect to recover the cost of the
                   investment through the depreciation allowances included in the rates.  Therefore, the adjustment
                                                                                                 2
                   should measure the impairment on the utility's revenue, using the time value of money.
                                                                             
                   1
                      California Code of Regulations, Public Revenue, Title 18, Property Tax Rule 3(d)
                   2
                      California State Board of Equalization, Assessor’s Handbook 502, page 147
                   Unitary Valuation Methods                    1                                    March 2003