Appalachian Power Co. v. State Tax Dept. of West Virginia

Page 424

466 S.E.2d 424

195 W.Va. 573

APPALACHIAN POWER COMPANY, Duquesne Light Company Monongahela Power Company, Ohio Power Company, The Potomac Edison Power Company, Virginia Electric and Power Company and West Penn Power Company, Plaintiffs Below, Appellants v. STATE TAX DEPARTMENT OF WEST VIRGINIA and Charles O Lorensen, State Tax Commissioner of West Virginia Defendants Below, Appellees

No. 22795.

Supreme Court of Appeals of West Virginia.

Submitted Sept. 20, 1995.

Decided Dec. 8, 1995.

[195 W.Va. 578] Syllabus by the Court

1. Interpreting a statute or an administrative rule or regulation presents a purely legal question subject to de novo review.

2. In reviewing a rule or regulation of an administrative agency, a West Virginia court must first decide whether the rule is interpretive or legislative. If it is interpretive, a reviewing court is to give it only the deference it commands. If it is a legislative rule, the court first must determine its validity. Assuming its validity, the two-pronged analysis from Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), should be applied.

3. Judicial review of an agency's legislative rule and the construction of a statute that it administers involves two separate but interrelated questions, only the second of which furnishes an occasion for deference. In deciding whether an administrative agency's position should be sustained, a reviewing court applies the standards set out by the United States Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). The court first must ask whether the Legislature has directly spoken to the precise question at issue. If the intention of the Legislature is clear, that is the end of the matter, and the agency's position only can be upheld if it conforms to the Legislature's intent. No deference is due the agency's interpretation at this stage.

4. If legislative intent is not clear, a reviewing court may not simply impose its own construction of the statute in reviewing a legislative rule. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. A valid legislative rule is entitled to substantial deference by the reviewing court. As a properly promulgated legislative rule, the rule can be ignored only if the agency has exceeded its constitutional or statutory authority or is arbitrary or capricious. W.Va.Code, 29A-4-2 (1982).

5. " 'Rules and Regulations of ... [an agency] must faithfully reflect the intention of the legislature; when there is clear and unambiguous language in a statute, that language must be given the same clear and unambiguous force and effect in the ... [agency's] Rules and Regulations that it has in the statute.' Syl. pt. 4, Ranger Fuel Corp. v. West Virginia Human Rights Commission, 180 W.Va. 260, 376 S.E.2d 154 (1988)." Syl. pt. 2, in part, Chico Dairy Company v. Human Rights Commission, 181 W.Va. 238, 382 S.E.2d 75 (1989).

6. "The concept of equal protection of the laws is inherent in article three, section ten of the West Virginia Constitution, and the scope and application of this protection is coextensive or broader than that of the fourteenth amendment to the United States Constitution." Syl. pt. 3, Robertson v. Goldman, 179 W.Va. 453, 369 S.E.2d 888 (1988).

7. "A state by its legislature may make reasonable classifications in enacting statutes provided the classifications are based on some real and substantial relation to the objects sought to be accomplished by the legislation, and a person who assails any such classification has the burden of showing that it is essentially arbitrary and unreasonable." Syl pt. 5, United Fuel Gas Co. v. Battle, 153 W.Va. 222, 167 S.E.2d 890, appeal dismissed, cert. denied, United Fuel Gas Co. v. Haden, 396 U.S. 116, 90 S.Ct. 398, 24 L.Ed.2d 309 (1969).

Robert E. Magnuson, William W. Booker, Kay, Casto, Chaney, Love & Wise, Charleston, for Appellants Appalachian Power Company, Duquesne Light Company, and Ohio Power Company.

Silas B. Taylor, Managing Deputy Attorney General, for Appellees.

Louis S. Southworth II, Jackson & Kelly, Charleston, for Appellants Monongahela Power Company, The Potomac Edison Power Company, Virginia Electric and Power Company, and West Penn Power Company.

CLECKLEY, Justice:

The plaintiffs below and appellants herein, Appalachian Power Company, et al., ¹ appeal an order of the Circuit Court of Kanawha County finding that a legislative regulation, 110 W.Va.C.S.R. 13, § 1a.2.11 (1990), is a valid and enforceable regulation properly interpreting W.Va.Code, 11-13-2n(a)(1) (1990). ² In reaching its decision, the circuit court found there was no express or implied deduction for company use or line loss provided in W.Va.Code, 11-13-2n(a)(1). In its order, the circuit court rejected each of the plaintiffs' exceptions. We affirm this ruling.

I. FACTS AND PROCEDURAL HISTORY

A general overview of this litigation is necessary for a proper resolution of the issues upon which we granted the petition for appeal. During the First Extraordinary Session of 1989, the West Virginia Legislature enacted the West Virginia Fiscal Responsibility Act of 1989, which imposed additional taxes. One of the new sections, W.Va.Code 11-13-2n, taxed the "net generation [of electricity] available for sale[.]"

In June, 1989, the Tax Commissioner filed a proposed regulation that interpreted W.Va.Code, 11-13-2n. This initial proposed regulation defined company use and line loss and permitted plaintiffs to deduct these two costs in order to determine the "net generation available for sale." ³ The attorneys for some of the plaintiffs wrote to the State Tax Department, one of the defendants below and appellees herein, concerning the June, 1989, regulation. These plaintiffs noted they agreed with the Tax Commissioner's general definitions, but objected to the 1.5 percent cap on line loss as being arbitrary.

Subsequently, in August, 1989, the Tax Commissioner changed his position and issued a revised set of proposed rules interpreting W.Va.Code, 11-13-2n. These revised rules prohibited the deduction of either line loss or company use to determine "net generation available for sale." The revised regulation provides:

"1a.2.11 'Kilowatt hours of net generation available for sale that was generated or produced in this State' means gross West Virginia electric energy generation less station use, as defined in these regulations. 'Kilowatt hours of net generation available for sale that was generated or produced in this State' shall not be reduced by company use, line loss or any other use, loss or deduction, except station use, as defined in these regulations.

"1a.2.12 'Line loss' means loss of electrical energy by electrical resistance and electromagnetism occurring from or in electrical transmission lines or apparatus between any two points along such transmission lines or apparatus." (Emphasis added). ⁴

The Tax Commissioner also issued a document entitled "Public Comments on the Business and Occupation Tax Regulations Filed on October 12, 1989" and "Agency Approved West Virginia Legislative Regulations." On October 12, 1989, the Tax Commissioner filed another "Notice of a Comment Period On a Proposed Rule," which permitted comments up to November 13, 1989.

Incident to consideration of the proposed rule by the Legislature, Deborah A. Graham, counsel to the Legislative Rulemaking Committee, prepared a written analysis of the revised rule. Ms. Graham noted that the revised rule conflicted with the statute. The analysis specifically noted "[i]t is counsel's opinion that the language of the statute is clear and unambiguous when it refers to net generation available for sale and that the intent of the statute is to tax that electricity which is ultimately sold to the consumer." (Emphasis in original). The Tax Commissioner responded to Ms. Graham's analysis in a letter dated November 3, 1989. According to this letter, the original regulations were changed because they were based on an erroneous interpretation by the drafters. At a hearing on November 14, 1989, the Legislative Rulemaking Committee approved the revised rule. The Legislature passed an omnibus bill approving promulgation of the regulations proposed by various executive agencies on March 10, 1990. Under the authority of that act, the rules involved here were promulgated by the Tax Commissioner to be effective August 31, 1990.

The plaintiffs filed a complaint in the Circuit Court of Kanawha County stating four claims for relief: (1) statutory authority and jurisdiction was exceeded; (2) emergency rules are invalid and unenforceable; (3) the defendants failed to provide a statutory comment period; and (4) the administrative exemption of certain manufacturers, but not the plaintiffs, violated equal protection principles. The plaintiffs eventually withdrew their claims for relief based on the failure to provide a statutory comment period and on the unenforceability of emergency rules.

Following a one-day trial, the circuit court signed and filed, without modification, the "Proposed Findings of Fact and Conclusions of Law of Defendants State Tax Commissioner and State Tax Department." On September 23, 1994, the court entered an "Amended Final Order" that corrected the caption of the final order, but made no further modifications. In the final order, the circuit court (1) dismissed the procedural counts of the complaint abandoned by the plaintiffs; (2) held the challenged regulation was valid; (3) held W.Va.Code, 11-13-2n(a)(1) did "not contain an express or implied deduction for post-generation, post-transmission 'company use' or for any 'line loss' occurring after the point of generation"; and (4) held that exempting the tax...