DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Appeal

Name of Petitioner:Benton County, Washington

Date of Filing:November 4, 1993

Case Number: LPA-0001

This decision will consider an appeal that Benton County, Washington filed with the Office of Hearings and Appeals (OHA) on November 4, 1993, under the Notice of Interpretation and Procedures (NOIP) implementing the "payments-equal-to-taxes" (PETT) provisions of the Nuclear Waste Policy Act of 1982, as amended (NWPA), 42 U.S.C. § 10101 et seq. Under the NOIP, the Department of Energy (DOE) will grant, to a county in which a candidate site for a high-level nuclear waste repository is located, a payment equal to the amount that county would receive if it were authorized to tax site characterization activities at that site. See 56 Fed. Reg. 42314 (August 27, 1991). The payment authorized by the NWPA is known as a "PETT grant." Benton County appeals the amount of the PETT grant awarded to it by DOE's Richland Operations Office (DOE/RL).

On May 28, 1993, Benton County submitted to DOE/RL an estimate of $45.7 million as the PETT grant amount it should receive for site characterization activities at the Basalt Waste Isolation Project (BWIP) on the Hanford Nuclear Reservation. On September 24, 1993, the DOE/RL issued an initial DOE determination which denied Benton County's PETT claim. In its initial appeal letter filed on November 4, 1993, Benton County requested a hearing and stated that "extensive briefing will be required." The County was granted several extensions of time to enable it to obtain outside counsel and permit its attorneys to submit a brief setting forth its position in detail. Benton County's brief, along with extensive exhibits, was filed on May 2, 1994. DOE/RL submitted a reply brief on July 5, 1994. A series of pre-hearing conferences was held by telephone during the next several months, and the parties conducted discovery. OHA issued an interlocutory decision to resolve pre-hearing procedural issues. Richland Operations Office, 24 DOE ¶ 82,504 (1994). An evidentiary hearing was held in Seattle, Washington from January 9 through 12, 1995. Post-hearing briefs were submitted, and a second interlocutory decision was issued to resolve post-hearing procedural issues. Benton County, Washington, 25 DOE ¶ 82,502 (1995). Post-hearing depositions of three witnesses were conducted, and DOE/RL was permitted to file an amended post-hearing brief. An oral argument was held in Washington, D.C. on October 24, 1995.

I. Background

A. The Nuclear Waste Policy Act of 1982, as amended

A principal purpose of the NWPA was to provide for the development of a geologic repository for the permanent storage of high-level radioactive waste and spent nuclear fuel from domestic electric utilities. Section 302 of the NWPA authorized the Secretary of Energy to collect fees from electric utilities that generated nuclear power to establish a "Nuclear Waste Fund" to pay for the repository project. 42 U.S.C. § 10222. As originally enacted, section 112(b) of the NWPA directed the Secretary of Energy to recommend to the President three candidate sites for the repository. Section 112(c) required approval by the President of these sites. Under these provisions, the Secretary recommended sites in Benton County (the BWIP); Nye County, Nevada (Yucca Mountain); and Deaf Smith County, Texas. On May 28, 1986, the President accepted the Secretary's recommendation and approved these sites. Section 116(c)(3) of the NWPA directed the DOE to make PETT grants to the state and local governments in which potential repository sites were located:

The Secretary shall also grant to each State and unit of general local government in which a site for a repository is approved under section 112(c) an amount each fiscal year equal to the amount such State and unit of general local government, respectively, would receive were they authorized to tax such site characterization activities at such site, and the development and operation of such repository, as such State and unit of general local government tax other real property and industrial activities occurring within such State and unit of general local government. Such grants shall continue until such time as all such activities, development, and operation are terminated at such site.

42 U.S.C. § 10136(c)(3) (emphasis added). PETT grants to eligible jurisdictions were to be paid from the Nuclear Waste Fund. 42 U.S.C. § 10136(c)(5).

According to two witnesses in this case who had worked on the project, the BWIP was "way out in front" of other potential candidate sites, including Yucca Mountain, when the NWPA was enacted in 1982. December 14, 1994 Deposition of Stephen P. Reidel (former BWIP staff geologist) at 39. To prevent the stoppage of work at the BWIP, Rep. Sid Morrison (R. Wash.), whose Fourth Congressional District included Benton County, inserted a special "grandfather clause" into the NWPA. December 14, 1994 Deposition of Raymond E. Isaacson (former BWIP Feasibility Study technical director) at 52. This provision, section 112(f) of the 1982 NWPA, authorized the Secretary of Energy to continue work at the BWIP on its original schedule, notwithstanding the candidate site selection procedure prescribed elsewhere in section 112:

Nothing in this section may be construed as prohibiting the Secretary from continuing ongoing or presently planned site characterization at any site on Department of Energy land for which the location of the principal borehole has been approved by the Secretary by August 1, 1982, except that (1) the environmental assessment described in subsection (b)(1) shall be prepared and made available to the public before proceeding to sink shafts at any such site; and (2) the Secretary shall not continue site characterization at any such site unless such site is among the candidate sites recommended by the Secretary under the first sentence of subsection (b) for site characterization and approved by the President under subsection (c); and (3) the Secretary shall conduct public hearings under 113(b)(2) and comply with the requirements under section 117 of this Act within one year of the date of enactment.

42 U.S.C. § 10132(f) (1982) (emphasis added). Section 112(f) applied solely to the BWIP because it was the only site where the location of the principal borehole had been approved by the specified date. It gave the Secretary the option of continuing work at the BWIP before completing the candidate site selection process spelled out in the 1982 NWPA, but all the rigorous procedural requirements still would have applied. For example, section 113 prescribed the contents of site characterization plans and required DOE to submit them for comment to the state legislature and Governor, and to hold public hearings on those plans, before sinking any shafts at a candidate site. Section 117 required further consultations with state governments and affected Indian tribes. The Secretary's option to expedite site characterization at the BWIP under section 112(f) was never exercised.

The BWIP's status as a candidate site was short lived. Only 19 months after the President approved the BWIP as a candidate site for the repository, the relevant statute was amended. Congress enacted the NWPA Amendments of 1987 in Title V of the Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203. Congress thereby narrowed the search for a repository site by designating Yucca Mountain under section 112 of the NWPA as the sole candidate for characterization in accordance with section 113, 42 U.S.C. § 10133. Section 112(f) was deleted. DOE was directed to terminate all site characterization activities at the BWIP within 90 days after December 22, 1987, the date on which the NWPA Amendments of 1987 were signed into law. 42 U.S.C. § 10172. The 90 day period ended on March 21, 1988.

B. History of The Basalt Waste Isolation Project

In 1968, DOE's predecessor (then the Atomic Energy Commission, or AEC) began to examine the potential for storing high-level defense wastes from over two decades of producing plutonium for nuclear weapons at Hanford. The waste would be stored in a subterranean tunnel, made out of the basalt underlying the Pasco Basin. Isaacson Deposition at 6. The Pasco Basin is an area in southeastern Washington and adjacent portions of Oregon and Idaho, where lava flows accumulated after erupting from fissures or fractures in the earth's surface from 6 to 16.5 million years ago. Over time, the basalt flows in the Pasco Basin attained a thickness of over 3,048 meters (10,000 feet). These layered basalt flows have been named the Columbia River Basalt Group. Within this group is a formation known as the Cold Creek Syncline. This formation, which underlies the Hanford Reservation, contains several different layers of basalt thick enough to house a repository.

The earliest phase of the AEC's investigation consisted of drilling a number of exploratory boreholes to create a stratigraphic diagram depicting the various layers of the Columbia River Basalt Group. In addition, the researchers examined the hydrology of the deep basalts to ascertain how underground water flowed in the confined aquifers located between the layers of basalt. However, work ceased on the project in 1972, after the AEC announced that the United States was not ready to make a decision on how to dispose of nuclear waste.

In 1975, the Energy Research and Development Administration (ERDA), which had succeeded the AEC, assigned the Office of Waste Isolation (OWI) at the Oak Ridge National Laboratory to explore the potential for storing nuclear wastes from commercial electric generators in underground mine caverns of various rock types. The OWI learned about the work that had been done at Hanford, and created the BWIP as a separate project in 1976. Between 1976 and enactment of the NWPA in 1982, preliminary studies went on to characterize and evaluate the environmental (geologic, hydrologic, and geochemical) suitability of the Hanford site for the development of a repository in the underlying basalt. See generally Site Characterization Report for the Basalt Waste Isolation Project, DOE/RL 82-3, vol. 1 (November 1982) ("BWIP Site Characterization Report") at 3, Benton County Hearing Exhibit 2. The BWIP Site Characterization Report, published in November 1982, explained the status of the project in elaborate detail. DOE published a three-volume Environmental Assessment in May 1986, when it recommended the BWIP to the President as a candidate site. Environmental Assessment, Reference Repository Location, Hanford Site, Washington DOE/RW-0070 (May 1986), Exhibit 2 to Brief of Petitioner. Over the life of the project, 33 test boreholes were drilled at various different places on the Hanford Reservation. But the once-planned principal borehole, which would have been the site of horizontal excavations for in situ exploration of the basalt, was never drilled. After the BWIP was canceled by the 1987 amendments to the NWPA, the General Accounting Office (GAO) reviewed DOE's efforts to terminate the project, and issued a report entitled Nuclear Waste: Termination of Activities at Two Sites Proceeding in an Orderly Manner, GAO/RCED-89-66 (February 1989). The GAO report noted that termination plans for the sites were developed to "protect large investments in property, data, and technologies...." Id. at 3. After the project was terminated, three activities that had been undertaken during the BWIP were transferred to other projects for continuation with different funding: Eastern Washington seismic monitoring, Hanford seismic monitoring, and the management of 33 boreholes drilled for the BWIP. Id. at 4.

There were two major concerns in the post-1982 phase of the BWIP. The first concern was the suitability of the quality assurance procedures that had been followed during the early phases of the BWIP. When the BWIP was approved by the President as a candidate site in May 1986, DOE/RL stopped most of the site characterization activities at the BWIP until quality assurance procedures could be adopted that would meet Nuclear Regulatory Commission (NRC) requirements for licensing a repository. Isaacson Deposition at 45-46; see generally 10 C.F.R. Part 60-- Disposal of High-Level Radioactive Wastes in Geologic Repositories; Appendix B to Part 50--Quality Assurance Criteria for Nuclear Power Plants and Fuel Reprocessing Plants. The Yucca Mountain project experienced similar problems with the adequacy of its quality assurance procedures during the same time period. Much of the work analyzing core samples had to be repeated at Yucca Mountain after appropriate quality assurance procedures were implemented.

The second concern was the hydrology of the deep basalts, which was viewed as a critical factor in evaluating the suitability of the Hanford site. This is important because the movement of ground water is one of the principal ways in which radionuclides, meant to remain safely isolated, could escape from a repository and reach the human environment. Unlike the Yucca Mountain site, where it might be possible to build a repository situated in the "unsaturated zone" above the water table, the Reference Repository Location at the BWIP site was located entirely in the "saturated zone" below the water table. Even though the basalts themselves are relatively impermeable, there are interbed zones between the basalt flows that consist of different rock types. Some types of sedimentary rock in the interbed zones contain confined aquifers through which water can move. The "ground water travel time," i.e. the rate at which ground water could move through a potential repository horizon, was an important issue that was under study at the BWIP. Isaacson Deposition at 39-43. Important questions about the hydrology of the basalts underlying the Hanford Reservation were still unanswered when the BWIP was canceled as a result of the 1987 NWPA amendments. It was never determined whether the groundwater travel time at the site could meet NRC licensing requirements for a repository. Isaacson Deposition at 43.

C. DOE's Notice of Interpretation and Procedures

In August 1991, the DOE's Office of Civilian Radioactive Waste Management issued a final Notice of Interpretation and Procedures (NOIP) for administering the relevant PETT provisions of the NWPA, as amended. 56 FR 42314 (August 27, 1991). The final NOIP addressed comments received in response to a Proposed Notice issued on March 7, 1990. Several of the changes adopted in response to those comments are relevant to the present case. First, the interpretation of "site" was expanded to include site characterization activities associated with a candidate site coextensive with the taxing jurisdiction's taxing authority, whether or not those activities are conducted on site. Id. at 42316. This means that BWIP-related activities and property that were located in the city of Richland and elsewhere within the County are eligible for inclusion in the Benton County PETT claim, in addition to those physically located at the actual Hanford BWIP site. Second, the NOIP provided for an appeal process through the OHA for those jurisdictions having disputes with DOE regarding PETT, and stated that OHA's decision on an appeal will serve as the final DOE action with respect to PETT. Id. at 42317. In addition, the NOIP considered comments about the commencement and termination of PETT eligibility. DOE determined that Benton County's eligibility for PETT would begin on May 28, 1986, the date on which the President approved the BWIP as one of the three candidate sites, and end on December 22, 1987, the date of enactment for the NWPA Amendments of 1987. Finally, the NOIP established administrative procedures for considering PETT claims. See 56 FR at 42318-20.

In setting time limits for the County's PETT eligibility, the NOIP considered comments submitted by the State of Washington and the Mid-Columbia Consortium of Governments. These commenters had claimed that DOE's proposed selection of May 28, 1986 as the commencement date for PETT eligibility was unreasonable, since site characterization activities were under way at the BWIP before it was formally recommended for site characterization under the NWPA procedures. In considering these comments, DOE took the position that the preliminary activities undertaken before any site was designated as a "candidate site" under the NWPA did not constitute "site characterization" within the meaning of section 2(21) of the NWPA. That term is defined as:

(A) siting research activities with respect to a test and evaluation facility at a candidate site; and

(B) activities, whether in the laboratory or in the field, undertaken to establish the geologic condition and the ranges of the parameters of a candidate site relevant to the location of a repository, including borings, surface excavations, excavations of exploratory shafts, limited subsurface lateral excavations and borings, and in situ testing needed to evaluate the suitability of a candidate site for the location of a repository, but not including preliminary borings and geophysical testing needed to assess whether site characterization should be undertaken.

42 U.S.C. § 10101(21) (emphasis added). The NOIP explained that although various laboratory and field activities may have been under way at the sites prior to May 28, 1986, "these activities were neither related to a test and evaluation facility nor were they undertaken to establish the geologic condition or ranges of the parameters relevant to the location of a repository." 56 FR at 42317-18. The NOIP goes on to state that "[e]ven if some of the data collected before the May 28, 1986 date were relevant to the overall characterization of the site, that fact alone would not qualify the data collection process as ?site characterization' for purposes of the NWPA." Id. at 42318. However, the NOIP did make one concession on the issue of PETT eligibility for activities carried out at the BWIP before May 28, 1986. It stated that some of these activities may be included in the computation of a jurisdiction's PETT grant, but only to the extent that the residual value of those activities after May 28, 1986 is treated as an improvement to real estate used in support of site characterization, for purposes of assessment valuation. Id. at 42319.

In addition to setting the time limits that apply to Benton County, the NOIP specified the following general requirements for a jurisdiction to be eligible to receive PETT payments for site characterization activities: (i) the jurisdiction must have the requisite taxing authority, and (ii) the jurisdiction must levy taxes applicable to non-Federal activities that are similar to the site characterization activities conducted by the Federal Government. Id. at 42318.

Based on the definition of site characterization in section 2(21) of the NWPA, the NOIP determined that the following types of activities would be eligible for PETT: (i) activities that impact the assessed value of real property; (ii) activities carried out prior to May 28, 1986, but only to the extent that the residual value of these activities after May 28, 1986, are treated as improvements to real property, used in support of site characterization for purposes of assessment valuation; (iii) ownership or possessory use of personal property; (iv) purchase or transfer of personal property acquired in one State for use in an eligible State; (v) use of motor vehicles; (vi) use of special fuels; (vii) payment of salaries to Federal employees; and (viii) activities subject to business or income taxes. The preceding list is not exclusive, and the NOIP recognized that other activities undertaken by DOE to evaluate the geologic suitability of the site that an eligible jurisdiction is authorized to tax may also be considered in the calculation of PETT. Id.

The NOIP also contained an "Administrative Procedures" section which stated that the eligible jurisdictions should submit an "estimated PETT analysis" to the DOE. For the period concerned in the present Appeal, only two jurisdictions were eligible to submit estimates for PETT payments: Nye County, Nevada, home of the Yucca Mountain site, and Benton County. According to the NOIP, the estimated PETT analysis should include the following:

1. Basis for eligibility showing how the jurisdiction meets the requirement for eligibility as set forth in this Notice. 2. Citations of relevant tax rules, regulations, rates, and bases for applying the rates. 3. Lists of Federal site characterization activities considered in estimating the PETT. 4. Calculations supporting the estimates in sufficient detail to allow DOE to verify the estimates. 5. Estimate of PETT liability for each tax type to which DOE's site characterization activities are subject and estimates of PETT liability for each tax type in accordance with the appropriate tax laws.

Id. at 42319. The NOIP states that DOE will review these analyses to verify that they are complete and correct regarding DOE's site characterization activities, the assessed value of DOE's property used to support its site characterization activities, DOE's operational activities subject to tax, and the tax laws of the eligible jurisdiction. The Notice provides that "late payments shall include interest, if appropriate, in accordance with applicable requirements of the taxing jurisdiction." Id.

Finally, the NOIP emphasizes that the NWPA does not constitute a waiver of the Federal Government's sovereign immunity from taxation by local jurisdictions under the Constitution's Supremacy Clause. Benton County and the State of Washington have no authority to tax DOE's activities at the BWIP site. Instead, the NWPA requires DOE to pay PETT grants to local jurisdictions equal to the amounts they would receive if DOE's activities were not tax-exempt. Under this statutory scheme, DOE is required to document its analysis of the information contained in estimates submitted by eligible jurisdictions, but the ultimate authority for determining the amount of PETT payments rests with DOE.

The estimated PETT analysis that Benton County was required to submit to the DOE under the NOIP was a starting point for DOE/RL's determination of the amount of its PETT grant and for our analysis on this appeal. Benton County properly reasoned that since the amount of its PETT grant is based on the BWIP site as it existed in the 1980s, the PETT analysis had to be based on a retrospective appraisal and tax assessment for the real estate and personal property used for the site characterization process. The validity of these appraisals for each of the years during the relevant period is one of the central issues in the present appeal.

II. The Positions of the Parties

A. Benton County's Revised May 28, 1993 PETT Estimate

By the time the NOIP was issued, several years had elapsed since the termination of site characterization activities at the BWIP. During this interval, considerable changes had occurred at the BWIP site. After the project was closed down due to the choice of Yucca Mountain as the sole candidate site for characterization, the equipment on the BWIP site at Hanford was removed, and the area was restored to its prior state. In addition, BWIP-related activities in the city of Richland had also ceased, and their personnel and equipment were transferred to other projects. See Nuclear Waste: Termination of Activities at Two Sites Proceeding in an Orderly Manner, GAO/RCED-89-66 (February 1989). As a result, Benton County officials had to reconstruct the activities that had taken place during the period of PETT eligibility by obtaining records pertaining to that period from the DOE. In order to comply with the relatively short, 120 day PETT estimate filing deadline specified in the NOIP, Benton County submitted a preliminary PETT assessment to DOE in December 1991. This first submission, which was supported by detailed documentation of the types specified in the NOIP, only sought PETT payments for site characterization activities conducted during the 1986 and 1987 tax years. The preliminary PETT estimate requested a total amount of tax equivalents, plus interest, of $20,563,514. In July 1992, DOE made a preliminary and "partial payment" to Benton County in the amount of $770,709.

After obtaining additional information from DOE about the BWIP, the County submitted an updated and revised version of its PETT estimate on May 28, 1993. The revised PETT estimate increased the amount claimed by including tax equivalents based on activities that began in 1982 and continued through 1988, a period considerably greater than the narrow, 18-month time window established in the NOIP. It sought a total of $45,751,726, including interest, from the DOE.

Benton County's PETT estimate is based on a number of fundamental assumptions, each of which, as explained below, is disputed by DOE/RL. First, the County claims that since the BWIP project began site characterization in 1977, it should be eligible to receive PETT payments beginning with 1983, the first tax year after the effective date of the NWPA of 1982. This is contrary to DOE's position in the NOIP that Benton County's PETT eligibility is limited to the period May 1986 through December 1987. Second, while the County based its overall appraisal of the BWIP on the "cost approach," it appraised the bare land on the BWIP site by the "sales comparison approach," i.e. by determining the "highest and best use" of a given parcel, then finding comparable sales of land in the same market area, and multiplying the acreage in the relevant BWIP parcel by the per acre value of the comparable land. Third, the County counted the value of all DOE funds spent on BWIP, minus the sum of those funds either conferred as "grants" or spent on "capital improvements," as "improvements to real estate." Since the County used the cost approach to the overall BWIP appraisal, the amount that DOE spent on the BWIP, minus the sum of those funds either conferred as "grants" or spent on "capital improvements," was added to the appraised valuation of the bare land to make a grand total value used to determine the appropriate amount of real property taxes. In the application of the cost approach to the valuation of improvements to real property, the County included both direct ("hard") costs and indirect ("soft") costs incurred in connection with the BWIP. Fourth, the County used the depreciated cost of all "personal property" (including most of the funds spent for "capital improvements") attributed to BWIP, both at Hanford and in Richland, to figure the appropriate amount of personal property tax. The County claims personal property tax liability should begin with the 1986 tax year. Fifth, the County's PETT estimate includes amounts reflecting both interest and "interest penalties" which can be assessed against a delinquent taxpayer under Washington State law. In order to decide the present appeal, we will focus on these five basic areas of dispute between the parties.

B. DOE/RL's Initial DOE determination

On September 24, 1993, DOE/RL issued its initial DOE determination on Benton County's PETT estimate. In effect, this determination disputed every important aspect of Benton County's PETT estimate, but it provided almost no explanation for the result which it reached. Referring to the "direction contained in the [NOIP]," it rejected Benton County's claim that its eligibility for PETT payments should have begun in January 1983, for all site characterization activities conducted on the BWIP after the effective date of the original NWPA. Relying on the NOIP, DOE/RL maintained that BWIP activities before May 28, 1986 did not constitute "site characterization" within the meaning of the NWPA. DOE/RL also implied that Benton County had not computed the appropriate tax amounts for the BWIP "in the same manner as [it] taxes the non-Federal property and industrial activities occurring within its jurisdiction." The determination disputed the County's use of the sales comparison approach to the appraisal and assessment of different parcels of bare land on the BWIP site. In addition, DOE/RL rejected Benton County's inclusion of the amount of DOE funds spent on BWIP (minus grants and capital improvements) as improvements to real estate under the cost approach. DOE/RL also disagreed with the County's inclusion of both hard costs and soft costs incurred in connection with the BWIP as improvements to real property in the application of the cost approach under Washington State law. The determination also rejected Benton County's interpretation of Washington State law regarding the incidence of personal property taxes. Based on its analysis of the County's revised 1993 submission, DOE/RL determined that DOE's PETT liability was only $446,956, and that Benton County owed DOE a refund from the partial payment of $770,709 made by DOE/RL in July 1992. Although there was no specific mention of interest or interest penalties in the initial DOE determination, DOE/RL's rejection of Benton County's underlying PETT estimate implicitly denied the significant portion of the $45 million claim which was based on interest and interest penalties.

C. Benton County's Contentions on Appeal

Benton County alleges DOE/RL's initial DOE determination contained the following fundamental errors:

III. Analysis of Legal Issues

A. Standard of Review

Although Benton County may submit an estimated PETT analysis to the DOE, the responsibility for determining the amount of its PETT grant rests solely with DOE. 42 U.S.C. § 10136(c)(3); see also NOIP, 56 FR at 42314-20; Comments of Respondent DOE/RL at 2-6. Thus, in order to prevail in the present appeal, Benton County has the burden of coming forward with evidence to establish that DOE/RL's initial DOE determination was erroneous in fact or in law, or that it was arbitrary and capricious. 10 C.F.R. § 1003.36(c).(1)

For the reasons explained below, we find that DOE/RL was correct in rejecting certain portions of Benton County's revised PETT estimate, and that DOE/RL's initial DOE determination should be affirmed in part. However, we also find that Benton County has met its burden of proving that DOE/RL's initial PETT determination was erroneous in several respects. Benton County's appeal should therefore be granted in part.

Before we begin our analysis of the real estate appraisal issues which were the primary focus of the evidentiary hearing in the case, we will address three legal issues related to assessment of ad valorem property taxes on the BWIP real estate. These concern the starting date for Benton County's PETT eligibility under the NWPA, the authority of the County under the NWPA to assess interest penalties against the DOE for late payment of the PETT amounts for the tax years involved, and the authority of the County to collect personal property taxes for the 1986 tax year. As discussed in the ensuing sections, we find that DOE/RL was correct in its interpretation of the law on each of these three issues.

B. The Starting Date for Benton County's PETT Eligibility under the NWPA

Benton County claims that under section 116(c)(3) of the 1982 NWPA it should receive PETT payments beginning with 1983, the first tax year after the effective date of the NWPA. A favorable decision on this issue would greatly increase the amount of Benton County's PETT payment, by including taxes for three additional years, plus interest on those amounts. According to the County, site characterization at the BWIP commenced in 1977, and the process continued until it was terminated by the enactment of the 1987 NWPA Amendments effective on March 21, 1988, 90 days after December 20, 1987. As evidence of the fact that "site characterization" was taking place at the BWIP before it was approved by the President under section 112(c) on May 28, 1986, the County points to the language in section 112(f) of the 1982 NWPA, which states in pertinent part that:

Nothing in this section may be construed as prohibiting the Secretary from continuing ongoing or presently planned site characterization at any site on Department of Energy land for which the location of the principal borehole has been approved by the Secretary by August 1, 1982....

42 U.S.C. § 10132(f) (1982). DOE/RL argues that section 112(f) is entirely permissive, and that the Secretary elected not to conduct site characterization under the authority conferred by this provision. Instead, according to DOE/RL, the DOE implemented the process of repository site selection under the NWPA by issuing "General Guidelines for the Recommendation of Sites for the Nuclear Waste Repositories," which were published in the Federal Register on December 6, 1984, 49 FR 47714, along with accompanying regulations, codified at 10 C.F.R. Part 960. The guidelines spelled out a five step process:

  1. The Screening Phase
  2. The Site-Nomination Phase
  3. The Site-Recommendation Phase
  4. The Site-Characterization Phase
  5. The Site-Selection Phase

According to DOE's guidelines, "Site characterization will occur only at the sites recommended to, and approved by, the President. It will involve studies that are much more detailed than those conducted during the screening phase." 49 FR at 47717. DOE/RL maintains there was no informal site characterization that was carried out after enactment of the NWPA; the guidelines were followed and formal site characterization under the auspices of the NWPA was conducted only after three sites received Presidential approval on May 28, 1986. DOE/RL also points out that the definition of "site characterization" in section 2(21) of the NWPA specifically excludes "preliminary borings and geophysical testing needed to assess whether site characterization should be undertaken," implying that the work done at BWIP before the Presidential approval was "preliminary" in nature. For these reasons, DOE/RL contends that OHA should reject Benton County's argument that section 116(c)(3) allows PETT grants for "site characterization" prior to the Presidential approval on May 28, 1986. See DOE/RL Post-Hearing Comments at 46-48.

After considering the arguments of the parties and the legislative and regulatory history of the NWPA and the repository siting program, we have determined that Benton County is not eligible for PETT grants under the NWPA for the period before the BWIP was approved for site characterization by the President on May 28, 1986. "Site characterization" for purposes of triggering eligibility for PETT payments under section 116(c)(3) is a term of art that refers specifically to an activity that can occur only after a potential repository site has been recommended by the Secretary of Energy and approved by the President. Section 2(21) of the NWPA defined the term "site characterization" as activities occurring at or affecting a candidate site. 42 U.S.C. § 10101(21). Under this statutory and regulatory scheme, a potential site could not become a candidate site until it was approved by the President. Thus, "site characterization" activities, as defined by the NWPA, are clearly distinguishable from the type of preliminary testing done at BWIP to determine whether it was suitable for recommendation by the Secretary to the President as a potential candidate for site characterization.

The clear intent of Congress and the DOE was that the specified condition precedent had to be met before "site characterization," that would give rise to PETT eligibility under section 116(c)(3), could occur. While there are anomalies in the way the term "site characterization" appears in the record that would tend to support Benton County's position, we find that each of them can be explained and is thus not determinative here. The only anomaly in the statutory scheme was created by the unfortunate use of the term "site characterization" in section 112(f). As explained in the one brief reference to this provision in the legislative history of the 1982 NWPA, it referred specifically to the BWIP site:

While the purpose of this limited exception is to avoid unnecessary disruption in the existing Federal nuclear waste management program, the Secretary's actions must ultimately comply with the provisions of this Act . . . . The Committee intends that this subsection apply solely to the Hanford Reservation in Washington.

H.R. Rep. No. 785, 97th Cong., 2d Sess., pt 1, at 66 (1982). As noted above, this provision had been inserted into the legislation through the efforts of Rep. Sid Morrison, the Congressman whose District included Benton County. It gave the Secretary an option to continue with the research work that had been going on at the BWIP when the NWPA was enacted, provided that the DOE also comply with the procedures set forth in sections 113 and 117 of the Act. DOE/RL is correct in describing this provision as "entirely permissive," and in fact, the Secretary never exercised the authority granted in section 112(f). Isaacson Deposition at 52.

This reference to section 112(f) in the legislative history cannot be read to mean that activities during the early period qualified for PETT grants under section 116(c)(3) of the NWPA. Instead, it refers to the historical context in which the 1982 NWPA was enacted. As noted above, it is unquestionably true that activities which were then called "site characterization" had been done during the course of work at the BWIP site for several years before the enactment of the NWPA. In its pre-hearing brief, the County mentions a study entitled Site Characterization Report for the Basalt Waste Isolation Project, prepared for DOE by Rockwell International, then the prime contractor at Hanford. See Brief of Petitioner at 41, citing DOE/RL 82, vol. 1, at 3 (November 1982) ("BWIP Site Characterization Report"), Benton County Hearing Exhibit 2. Two witnesses at the hearing (Raymond Isaacson and Stephen Reidel) also testified about the nature of "site characterization" studies at BWIP during the period before the enactment of the NWPA in 1982, and before the site was recommended by the Secretary and approved by the President in May 1986. See Transcript of January 9, 1995 Hearing at 116-24 [hereinafter cited as "Jan.[date of hearing] Tr."]; Jan. 11 Tr. at 7-30.

The explanation for these apparently inconsistent uses in the record of the term "site characterization" lies in the fact that the Federal government's program for the development of geologic repositories for nuclear waste had been going on long before the passage of the NWPA of 1982. In the Federal Register notice establishing guidelines for the DOE siting process under the NWPA, the DOE stated that the program had begun three decades earlier, and went on to describe how the 1982 Act "established a process for the siting of repositories by integrating the then-existing DOE siting program into its requirements and procedures." 49 FR at 47715. When viewed in the proper historical context, it becomes clear that the term "site characterization" was used during the early days of the nuclear waste program to refer to activities that would not qualify as such under the specific definition later adopted in section 2(21) of the NWPA. The NWPA is not a seamless document, and it used that term in section 112(f) in a sense that was inconsistent with the special definition in section 2(21) of "site characterization" at a candidate site which would trigger a jurisdiction's eligibility for PETT grants under section 116(c)(3). It is also important to note that NWPA section 112(c) and DOE's guidelines for a five step site selection process in 10 C.F.R. Part 960, which required Presidential approval of a candidate site as a prerequisite for site characterization under the NWPA, were irreversibly followed in lieu of the option created under section 112(f). Even if section 112(f) theoretically could have been used to by-pass the five step site selection process later adopted in the guidelines, that provision proved to be a nullity since the Secretary never exercised the option. As a result, section 112(f) did not make Benton County eligible for PETT grants for any period before the Presidential approval of the BWIP as a candidate site on May 28, 1986. The necessary condition precedent for PETT eligibility under NWPA sections 2(21) and 112(c) and the guidelines implementing the DOE siting process was not met until that date. See 49 FR at 47714-17.

Our determination that Benton County's PETT eligibility did not begin until May 28, 1986 is consistent with the interpretation of the NWPA contained in the NOIP. It is also consistent with the manner in which DOE/NV treated Nye County in the process of establishing that County's PETT amount. It is important to note, however, that the NOIP does require DOE/RL to include the pre- May 28, 1986 BWIP activities in the assessment valuation used to compute Benton County's PETT amount, to the extent that the residual value of those activities after May 28, 1986 is treated as an improvement to real estate used in support of site characterization. 56 FR at 42319. The proper valuation of "improvements to real estate" is an important issue that will be addressed later in this decision.

Finally, although this related issue was not directly argued by the parties during the course of the present appeal, we have determined, sua sponte, that the termination date of Benton County's PETT eligibility should be March 21, 1988, the effective termination date for BWIP site characterization activities figured according to the NWPA Amendments of 1987. 42 U.S.C. § 10172. In specifying that Benton County's PETT eligibility ended on December 22, 1987, the NOIP erred by failing to consider that the statute directed DOE to terminate all site characterization activities at the BWIP 90 days after December 22, 1987. Id. Section 116(c)(3) of the NWPA specifies that PETT grants "shall continue until such time as all [site characterization] activities ... are terminated at such site."

C. The Authority of Benton County under the NWPA to Assess Interest Penalties against DOE for Late PETT Payments

Under Washington State law, all property taxes are due and payable on or before April 30th, and are delinquent after that date. Washington Revised Code (hereinafter cited as "RCW") § 84.56.020 provides for the imposition and collection of both interest and penalties. Delinquent taxes are subject to interest, computed monthly from the date of delinquency until paid. RCW § 84.56.020(2). In addition, a penalty of three percent is also assessed on the amount of the delinquency on June 1st of the year in which the tax is due and an additional penalty of eight percent is assessed on the total amount of the tax delinquent on December 1st of the year in which the tax is due. RCW § 84.56.020 (2). RCW § 84.56.020 (4) defines the term "interest" to mean both interest and penalties.

The NOIP states that "late payments shall include interest, if appropriate, in accord with applicable requirements of the taxing jurisdiction." 54 FR at 42319. In addition to interest, Benton County applied statutory interest penalties under Washington State law to calculate its estimate of DOE's PETT liability. See Letter from Treasurer, Benton County to DOE/RL (May 28, 1993) ("PETT Claim Letter"). Interest and interest penalty costs for the years 1983 through 1989, the entire period for which Benton County claims that it is owed PETT payments, total $21,310,945, on an overdue tax obligation the County calculates as $24 million. See PETT Claim Letter at 3.

Benton County advised DOE in writing that no interest would be due if its PETT claim was paid by July 1, 1993. The County also encouraged DOE to make a payment under protest, pursuant to RCW § 84.68.020, to avoid further interest accruals on past due obligations. See PETT Claim Letter at 3. If such a payment had been made, interest on tax claims would have ceased to accumulate on the date of payment. Id. However, as we have seen from the history of this dispute, the parties were far apart as to the appropriate amount of the tax equivalent due.

For the reasons explained below, we have concluded that DOE/RL was correct in determining that Benton County lacks the authority to assess interest penalties against DOE for late payment of its PETT grant. We therefore reject the County's suggestion that we direct DOE/RL to include interest penalties in the amount of its PETT grant.

To support its position that state law controls DOE's obligation to pay interest penalties, the County relies heavily on Federal Reserve Bank of Richmond v. City of Richmond, 957 F.2d 134 (4th Cir. 1992) (Federal Reserve Bank). That case involved the interpretation of 12 U.S.C. § 531, which exempts Federal Reserve Banks from all state and local taxes except taxes on real estate. The Federal Reserve Bank of Richmond (FRB) failed to pay its real estate tax bill on time, and was assessed a penalty and interest for late payment. The FRB paid the tax bill, refused to pay penalty and interest charges, and then filed suit, arguing that the penalty and interest were barred. Id. at 135. The FRB prevailed in the lower court, but on appeal the United States Court of Appeals for the Fourth Circuit held that Virginia law governs whether interest and penalties are part of the tax. See Federal Reserve Bank, 957 F.2d at 137. Benton County also relies on Irving Independent School District v. Packard Properties, 970 F.2d 58 (5th Cir. 1992) (Irving). In Irving, another federal entity, the FDIC, was statutorily exempt from liability for penalties on unpaid taxes. When a local jurisdiction imposed penalties on the FDIC, the court looked to Texas state law for its definition of interest and penalty. Because Texas state law considered interest on unpaid taxes a form of penalty, the FDIC was exempt from the penalty payment. Benton County maintains that these cases support the proposition that Washington State law should determine DOE's liability to pay interest penalties in the instant case, and argues that under the provisions of RCW § 84.56.020 which are discussed above, DOE is obliged to pay them.

To justify its rejection of Benton County's claim for interest penalties, DOE/RL invokes the Federal government's sovereign immunity from taxes imposed by state and local governments. DOE/RL points out that Congress did not waive the Federal government's sovereign immunity in the NWPA. As that statute has been interpreted by DOE in the NOIP, the DOE is not a taxpayer, and the PETT grants paid under section 116(c)(3) of the NWPA do not constitute a tax. Instead, the PETT grants represent amounts voluntarily paid by the Federal government to compensate affected jurisdictions for the revenue they would otherwise have received if the industrial activities associated with site characterization were carried out within the jurisdiction by private entities. Because the purpose of the Washington State interest penalty is to punish taxpayers who pay their taxes late, DOE/RL argues that it is exempt from this obligation. Pre-Hearing Brief of Respondent at 46.

According to DOE/RL, it is under no obligation to pay a penalty imposed for the purpose of punishing delinquent taxpayers "merely because its procedures for granting money to Benton County are not consistent with the normal schedule for taxpaying." Comments of Respondent at 47. It should be noted, however, that DOE/RL does not dispute its obligation to pay the basic tax equivalency. Nor does DOE/RL dispute its obligation to pay interest on that amount to compensate for the time value of money which the County lost because of DOE's delay in making the PETT payment. Id.

We agree with DOE/RL that the Federal government's sovereign immunity bars imposition of interest penalties. Although the NOIP acknowledges DOE's intention to pay interest on untimely PETT grants, it does not permit the taxing jurisdiction to impose penalties on the agency for late payments. Interest and penalties imposed in connection with late taxes serve different functions; penalties are meant to punish a party for late payment, and to deter others from doing the same, while interest is intended to compensate the party to whom the sum is owed for use of his or her money during the period of nonpayment. Cool Homes, Inc. v. Fairbanks North Star Borough, 860 P.2d 1248 (9th Cir. 1993). See also State ex rel. Nevada Tax Commission v. Saveway Super Service Stations, 668 P.2d 291 (9th Cir. 1983). The payment of interest to compensate the County for the time value of money lost as a result of DOE's delay is fair and equitable, and its purpose is consistent with the policy goals underlying the NWPA. By contrast, interest penalties are a punitive measure whose use is unnecessary and would not only result in an unjustified windfall to Benton County, but would also divert the monies in the Nuclear Waste Fund for an unauthorized purpose. There is no indication of legislative intent that penalties should be applied in the PETT context. In addition, the imposition of penalties on DOE would not further an appropriate state purpose since there is no likelihood of DOE seeking to evade the jurisdiction's laws.

Benton County's claim for interest penalties flies in the face of long-held, weighty authority to the contrary. It is well-established that in the absence of specific provision by contract or statute, or express consent by Congress, interest does not run on a claim against the United States. See Library of Congress v. Shaw, 487 U.S. 310 (1986). In the NOIP, DOE interpreted the statute to authorize the inclusion of interest with the late payment of a PETT grant under the NWPA. 56 FR 42319. The policy underlying this statement manifests the intention of the Congress to compensate affected jurisdictions for federal activities which, had they been performed by a private entity, could have been subject to taxation by the jurisdiction. Since the NOIP was not published until 1991, three years after Benton County's period of PETT eligibility ended, the DOE has acknowledged its willingness to pay interest on late PETT payments to compensate the County for not having the use of that money during the intervening years. However, nothing in the NOIP can be said to authorize the payment of penalties. The NOIP clearly emphasized that the NWPA does not constitute a waiver of the Federal government's sovereign immunity from taxation by local jurisdictions. 56 FR 42318.

Benton County contends that DOE has consented to be treated like an ordinary taxpayer. This unsupported assertion offers little analytical weight here, and we disagree with the notion that penalties can be properly assessed. A waiver of sovereign immunity would be required for DOE to be treated like an ordinary Washington taxpayer, and none has occurred. Our conclusion is supported by a recent case arising under the NWPA's PETT provisions, in which the Ninth Circuit refused a petition by the state of Nevada to allow Nevada law to control the implementation of the NOIP. See Nevada v. DOE, 993 F.2d 1442 (9th Cir. 1993) (Nevada). The court stated that it would find a willingness to be subjected to a state scheme only if explicitly stated, and it found no "express waiver of federal immunity from state taxation." Id. at 1444. One cannot equate legislation providing that a jurisdiction will receive a grant "equal to the amount . . ." it would receive from a tax with an express waiver of sovereign immunity. The Supreme Court has held that waivers of sovereign immunity must be strictly construed in favor of the United States. Ardestani v. INS, 502 U.S. 129, 137 (1991). See also OPM v. Richmond, 496 U.S. 414, 432 (1990). Based on the doctrine of sovereign immunity, we hold that Washington State law does not govern DOE/RL's liability for interest penalties.

The lack of a waiver of sovereign immunity in the present case also explains why the Federal Reserve Bank case cited by Benton County does not govern the present appeal. The underlying statutes involved are fundamentally different. The NWPA did not waive DOE's sovereign immunity from state taxation, while 12 U.S.C. § 531 did waive the Federal Reserve Banks' immunity from state and local real estate taxes. The DOE is directed to grant "payments equal to taxes" to affected jurisdictions for site characterization activities. The application of state rules allowing DOE to be penalized for not paying Benton County's PETT grant on time "would run counter to the terms of the statute involved." Federal Reserve Bank, 957 F.2d at 136. The objective of the NWPA is to make an affected jurisdiction whole, not to provide that entity with an economic windfall. See Nevada, 993 F.2d at 1444 (the NWPA was not intended to be a vehicle for Nevada to increase its revenue base).

D. The Authority of Benton County to Collect Personal Property Tax for the Year 1986

Benton County included in its PETT claim taxes on personal property associated with the BWIP in the year 1986. (As indicated in our discussion of the NOIP earlier in this Decision, the County may properly include in its PETT claim personal property located anywhere in Benton County, as long as it was used in connection with the BWIP.) In support of this claim, Benton County relied on applicable Washington State statutes and regulations governing the ad valorem personal property tax. DOE/RL denied this portion of Benton County's claim on the grounds that the property did not become subject to PETT until May 28, 1986, the date on which the President approved the BWIP for site characterization. According to DOE/RL, no PETT is due to Benton County for personal property taxes attributable to the 1986 tax year because the owner of the property was "tax exempt" on January 1, 1986, the statutory date for determining its taxability vel non. For the reasons explained below, we have concluded that DOE/RL was correct in determining that Benton County lacked authority to tax the BWIP personal property until the 1987 tax year.

Benton County bases its argument that its PETT claim should include personal property taxes for 1986 on the following three provisions of Washington law:

All property now existing, or that is hereafter created or brought into this state, shall be subject to assessment and taxation for state, county, and other taxing district purposes, upon equalized valuations thereof, fixed with reference thereto on the first day of January at twelve o'clock meridian each year, excepting such as is exempted from taxation by law.

RCW § 84.36.005. Benton County also cites a similar provision in RCW § 84.40.020: "All personal property in this state subject to taxation shall be listed and assessed every year, with reference to its value and ownership on the first day of January in the year in which it is assessed." The statutory scheme also provides for the taxation of personal property moved into the state or a county after January first of the assessment year as follows:

The owner of personal property removing from one county to another between the first day of January and the first day of July shall be assessed in either in which he is first called upon by the assessor. The owner of personal property moving into this state from another state between the first day of January and the first day of July shall list the property owned by him on the first day of January of such year in the county in which he resides: PROVIDED, That if such person has been assessed and can make it appear to the assessor that he is held for the tax of the current year on the property in another state or county, he shall not again be assessed for such year.

RCW § 84.44.080. Benton County reads all three of these provisions together to mean that personal property that is moved into a Washington county between January 1 and July 1 of a year is generally subject to taxation by that county into which it is moved in that year. Based on this interpretation of the law, Benton County maintains that once the BWIP became eligible for PETT on May 28, 1986, its personal property should be treated like property that was moved in from another county, and made subject to taxation in 1986 under RCW § 84.44.080.

DOE/RL argues that the critical issue is whether the owner of the personal property in question was exempt from taxation on January 1, 1986. According to DOE/RL, on January 1, 1986, the BWIP property was owned by an exempt entity which became the equivalent of a non-exempt entity later in the year. DOE/RL relies on a decision by the Washington State Supreme Court in the case of Timber Traders v. Johnson, 87 Wash.2d 42, 548 P.2d 1080 (1976). This decision reviewed the language of those statutes, and related exemption provisions, and concluded that the legislature intended for personal property to be taxed with reference to its ownership on the 1st of January. Comments of Respondent DOE/RL at 48, Exhibit 44.

We agree with DOE/RL that the decision of the Washington State Supreme Court in the Timber Traders case is controlling, and Benton County cannot include personal property taxes for the year 1986 in its PETT claim. The issue here is timing. DOE, as the owner of the personal property involved, was exempt from Washington State taxation on the relevant January 1, 1986 date for making that determination. The DOE property did not become subject to Washington State taxation (figuratively speaking) until the BWIP was approved by the President as a candidate site under the NWPA on May 28, 1986. The facts in Timber Traders are closely analogous to the situation of the BWIP during 1986. Timber Traders involved a taxpayer who had purchased timber located in Pierce County from the state (a tax-exempt entity) after January 1st, but before the date the Assessor valued it. The Pierce County Assessor levied a tax on the timber for the year in which it was purchased from the state, and the owner sued. The Circuit Court of Pierce County enjoined the collection of taxes on the timber, the Court of Appeals reversed, and the Washington State Supreme Court, after analyzing all of the relevant statutes, reversed its prior interpretation of the law in Star Iron & Steel Co. v. Pierce County, 81 Wash.2d 680, 504 P.2d 770 (1972), and determined that the legislature intended personal property to be taxed by reference to its ownership on January 1st. The court held that Timber Traders, the new owner who had purchased the property after January 1st, could not be taxed in that year because the prior owner had been tax-exempt on January 1st. In reaching its decision, the court noted the following language in RCW § 84.40.020 that Benton County quoted in its pre-hearing brief: "All personal property in this state subject to taxation shall be listed and assessed every year, with reference to its value and ownership on the first day of January of the year in which it is assessed." 548 P.2d at 1081 (emphasis added). The court further relied on RCW § 84.36.855, which provides that property which changes from exempt to taxable status shall be placed on the assessment roll for taxes due and payable in the following year. 548 P.2d at 1082.

The situation of the Benton County Assessor vis-à-vis the taxability of the BWIP personal property in 1986 is comparable to that of the Pierce County Assessor in the Timber Traders case. The BWIP personal property was owned by a tax-exempt entity on January 1, 1986. The status of the owner changed later in that year when the President approved the BWIP as a candidate site under the NWPA and Benton County became eligible to receive a PETT grant. Under RCW § 84.36.855 as interpreted by the state supreme court in Timber Traders, the BWIP property could not be taxed until the year after the owner's status changed, i.e. 1987. We therefore find that Benton County's interpretation of the law is clearly incorrect. Although Benton County reads particular significance into RCW § 84.44.080, which prescribes how to determine which county within the state may properly tax personal property which is moved during the relevant period, that provision offers no help to us in reaching a conclusion on the issue of taxability vel non, which is determined here by the tax-exempt status of the owner on January 1, 1986.

E. Summary of Determinations on Legal Issues

In this section, we have considered and ultimately rejected Benton County's arguments regarding three legal issues. The first issue concerns the starting date for Benton County's PETT eligibility under the NWPA. We find that DOE/RL was correct in determining that the County's PETT eligibility began on May 28, 1986 when the President approved the BWIP as a candidate site under section 116(c)(3) of the NWPA. However, we have also determined, sua sponte, that the termination date of Benton County's PETT eligibility should be March 21, 1988, the effective termination date for BWIP site characterization activities figured according to the NWPA Amendments of 1987.

The second issue concerns the authority of the County under the NWPA to assess interest penalties against the DOE for late payment of the PETT amounts for the tax years involved. We find that Benton County is barred by the doctrine of sovereign immunity from assessing interest penalties against the DOE under provisions of Washington State law that are applicable to ordinary taxpayers.

The third issue concerns the County's authority to collect personal property taxes for the 1986 tax year. We find that personal property attributable to BWIP site characterization activities would not have been figuratively subject to taxation in the 1986 tax year because that property was tax-exempt on January 1, 1986, the date on which its taxability vel non is determined under Washington State law.

IV. Appraisal of the BWIP Site

A. Introduction

The appraisal of real estate is "a process of estimating value." See generally The Appraisal of Real Estate (10th ed. 1992). It is not an exact science, and as a practical matter, appraisals are often used as the basis for negotiation between parties who have competing interests in the value of a property, such as a buyer and a seller, or a local taxing authority and an owner. In the present case, the interests of DOE/RL and Benton County are diametrically opposed. DOE/RL knows that the repository will not be built at the former BWIP site, that site characterization there is a dead letter, and thus wants to minimize the amount of the PETT payment to Benton County. On the other side, Benton County wants to obtain the highest possible PETT payment, based on the status of the site characterization done before the 1987 amendments to the NWPA eliminated the BWIP as a potential repository location. During the course of this appeal, the parties have held to their extreme positions, with Benton County seeking an amount ($45 million, plus additional interest) that is more than one hundred times greater than the amount DOE/RL is prepared to pay ($400,000). To our knowledge, the parties have not seriously attempted to resolve their differences or negotiate a compromise, and the matter is now before OHA to decide.

In the ensuing sections of this decision, we address a series of complex issues concerning the proper appraisal of the BWIP real estate. The BWIP appraisal forms the basis for the County's assessment of real property taxes, which in turn constitute the principal factor in determining the amount of Benton County's PETT grant. First, we must decide when the BWIP should have been appraised. Benton County contends the BWIP appraisal should have been done during the 22-month period of PETT eligibility in 1986-1988, and DOE/RL maintains it was proper to have done the appraisal in 1993. Resolving the timing issue requires us to examine the historical context in which the NWPA was enacted, and the manner in which DOE's Nevada Operations Office (DOE/NV) approached its PETT obligation to Nye County for site characterization activities at Yucca Mountain. On these issues, we find that the NWPA requires the payment of PETT grants to be roughly contemporaneous with the tax year concerned, and that the BWIP appraisal should have been done during the 22-month period of PETT eligibility. We also find that although it was resolved by a negotiated settlement, DOE/NV's approach to its PETT obligation vis-à-vis Nye County properly considered the appraised value of the Yucca Mountain real estate at the beginning of the PETT eligibility period. In DOE/NV's Nye County PETT settlement, a substantial portion (approximately 40 percent) of the funds expended on Yucca Mountain before May 28, 1986 was reflected in residual value as improvements to real estate used in connection with site characterization activities. We find that DOE/NV's approach is more consistent with the Department's statutory PETT obligation under the NWPA than the approach used by DOE/RL in its initial Benton County PETT determination, and that the DOE/NV interpretation should be adopted in our analysis of the present appeal.

Second, we discuss generally-accepted principles of real estate appraisal that are relevant to the Benton County appeal. These include the concept of appraising real estate at a property's "highest and best use," and the three fundamental approaches used by professional appraisers to estimate the value of real estate, including both bare land and improvements. Third, we apply those principles to analyze the parties' positions on the proper determination of the highest and best use of the BWIP site. We find that Benton County correctly specified the highest and best use of the BWIP during the relevant period as "industrial use" for site characterization as a potential high level nuclear waste repository under the NWPA. Fourth, we consider a contested issue on the proper appraisal of one portion of the bare land on the BWIP site. Based on our determination of the highest and best use of the BWIP during the relevant period, we affirm DOE/RL's position on that parcel and find that it should have been appraised at a lower value than claimed by Benton County.

The fifth issue we consider is the proper appraisal of the improvements to real estate on the BWIP site. Under the NOIP, this entails determining the amount of money expended prior to May 28, 1986 that was reflected in residual value as improvements to real estate used in conjunction with site characterization activities at the BWIP during the relevant 22-month period. Up until its post-hearing brief, Benton County has argued that the entire amount of more than $400 million spent by DOE on the BWIP should be included in the appraisal as improvements. DOE/RL has maintained that none of the money spent on the BWIP should be considered as improvements for appraisal purposes. Benton County has introduced evidence of other business properties under development that were appraised in Washington State to include costs similar to site characterization as improvements. Accepting Benton County's position on the highest and best use of the BWIP for purposes of argument only, DOE/RL has introduced many contrary examples. After analyzing this evidence, and considering the arguments of the parties, we find that some portion of the money expended on the BWIP prior to May 28, 1986 was reflected in residual value as improvements to real estate. Finally, we acknowledge Benton County's willingness to use the methodology in the Nye County PETT settlement to resolve its present appeal.

We conclude the decision by directing DOE/RL to confer in good faith with Benton County and apply the approach used to negotiate the Nye County PETT settlement to resolve this case within a specified time period, according to principles of alternative dispute resolution applicable to government agencies. The parties are directed to submit a detailed report to the OHA appeal panel at the expiration of the remand period, if they are unable to reach a resolution by that time. In the event that the parties fail to resolve the case through a negotiated settlement on remand, the OHA will issue a supplemental order fixing the amount of Benton County's PETT grant.

B. The Proper Date for Doing the BWIP Appraisal

1. Historical Context of the NWPA's PETT Provision

The payment of PETT grants to affected jurisdictions has historical precedent in the disbursement by DOE and its predecessors of "payments in lieu of taxes" ("PILT") and payments for "special burdens" to assist local governmental entities in "atomic communities," e.g., Los Alamos, Oak Ridge, and Richland, that were built by the government during World War II to house the people who worked for the Manhattan Engineer District. In the Atomic Energy Act of 1946, the Congress determined that it was necessary to compensate local jurisdictions for the expenses of providing public services to those communities, even though the activities of the federal government were exempt from taxation under the doctrine of sovereign immunity. See Atomic Energy Act of 1954, as amended, 42 U.S.C. § 2208; Atomic Energy Community Act of 1955, 42 U.S.C. § 2301; § 2391 ("Assistance to local governmental entities"); DOE Order 2100.12 (6-9-92) ("Payments for Special Burdens and In Lieu of Taxes"). The Atomic Energy Community Act authorized an ongoing process of annual payments to local entities. It can be inferred from this historical context that Congress envisioned that the cycle for the payment of PETT grants under the NWPA would follow a similar pattern, in which the process of determining the amount of payments-equal-to-taxes would occur on an ongoing basis that was roughly contemporaneous with the tax year concerned. This is reflected in the language of section 116(c)(3) of the NWPA, which requires PETT grant payments "each fiscal year equal to the amount such [jurisdictions] would receive were they authorized to tax such site characterization activities," and directs that "[s]uch grants shall continue until such time as all such activities . . . are terminated at such site." 42 U.S.C. § 10136(c)(3) (emphasis added).

We would probably not be considering this appeal if the DOE had been able to put the PETT process into motion on a timely basis. The difficulty in this case arises from the fact that the DOE did not implement the PETT process during site characterization of the BWIP, and several more years passed after the 1987 NWPA amendments before DOE set ground rules for the payment of PETT grants. These time delays were detrimental to Benton County, and they should not be allowed to produce a different result in this case. As indicated below, we have concluded that DOE/RL was obliged under the NWPA to consider Benton County's PETT submission on a retrospective basis as if it had been filed during the 22-month period that commenced on May 28, 1986. The legislative purpose of the statute cannot be achieved if the real estate appraisal and assessment process, which forms the principal basis for determining the amount of Benton County's PETT grant, is distorted by hindsight.

2. DOE/NV's Approach to the Nye County PETT Grant, and the Need for One Consistent Departmental Interpretation of DOE's Statutory PETT Obligation Under the NWPA

Since Benton County and Nye County, Nevada were the only two counties eligible under the NOIP to submit PETT estimates, it is relevant for purposes of Benton County's appeal to consider the manner in which DOE handled the PETT process with Nye County. The PETT claim of Nye County was resolved through a negotiated settlement. The present record includes some documents that reveal the process leading up to that settlement. See Benton County Post-Hearing Brief Exhibits 1 and 2. In particular, these documents show that Nye County submitted a PETT estimate based on a 1992 appraisal of Yucca Mountain, which was done by a contract appraisal firm, Robert L. Foreman Associates of Newport Beach, California. The Foreman appraisal, which used the cost approach, is in the record as Benton County Hearing Exhibit 27. DOE/RL's counterpart, the DOE Nevada Operations Office (DOE/NV), used the Foreman Yucca Mountain appraisal as a starting point for determining, through its negotiations with Nye County, the value of the site at the beginning of the PETT eligibility period in the NOIP, i.e. May 28, 1986. By contrast, DOE/RL declined to apply the cost approach to appraise the BWIP at the beginning of the PETT eligibility period on May 28, 1986. For purposes of the present appeal, we will take judicial notice of the facts leading up to the Nye County PETT settlement. See Fed. R. Evid. 201(b); Mack v. Bay Beer Distributors, 798 F.2d 1279, 1282 (9th Cir. 1986).

For the reasons discussed below, we find that DOE/NV's interpretation of its PETT obligation vis-à- vis Nye County was more consistent with the statutory objectives of the NWPA than the interpretation used by DOE/RL to determine the amount of Benton County's PETT grant. DOE/NV's interpretation of its PETT obligation to Nye County was also more consistent with the generally accepted principles of real estate appraisal, and in particular, with the principles underlying the cost approach to the appraisal of special purpose properties. There is nothing in the NWPA statute or the NOIP that would warrant using fundamentally inconsistent interpretations of DOE's PETT obligation under section 116(c)(3) to determine the amount to be paid to the two different counties where the candidate sites were located. This is especially true for the period before the termination of site characterization activities at the BWIP in March 1988, when the two candidate sites enjoyed equal status under the law. We therefore find that DOE, to the extent possible, should adopt one consistent interpretation of its PETT obligation in section 116(c)(3) of the NWPA. We also find that the DOE/NV interpretation is the preferable one, which we shall apply in the analysis of this appeal. As explained in the remainder of this decision, this finding means that some of the factual and legal bases for DOE/RL's initial PETT determination are erroneous, and that the corresponding points of Benton County's appeal have merit.

Computation of the appropriate tax equivalent on the BWIP site requires us to consider the value of the land and improvements to real estate under Washington State law. See NOIP, 56 FR at 42319. For this purpose, a thorough and well-documented appraisal is critical. The views of Benton County and DOE/RL regarding the proper appraisal of BWIP differ significantly. According to the County, the amount of its PETT payment under the NWPA should be based on the appraised value of the BWIP site as it existed during the period May 28, 1986 through March 21, 1988, when NWPA- sanctioned site characterization activities were being conducted there. This is similar to the way in which DOE/NV treated Nye County in the settlement of its Yucca Mountain PETT claim. We find it is the proper way to treat Benton County's claim under the NWPA and the NOIP, as well. DOE/RL's appraisal contractors specifically repudiated Benton County's "industrial use" classification and appraised nearly the entire BWIP site in 1993 as "unimproved range land" valued at $300 per acre. Even though DOE/RL properly assigned a higher value to a 23 acre "primary site" where the "Near Surface Test Facility" had been located, its contract appraiser was apparently instructed to proceed with an estimate based on the assumption that there were no improvements on the BWIP site during the 22-month period when Benton County was eligible for PETT. This post hoc view of the BWIP appraisal, however well-intentioned, is inconsistent with the policy underlying the PETT provision of the NWPA, as interpreted by DOE in the NOIP:

These excerpts from the legislative history demonstrate the Congress intended to provide a level of compensation for the affected jurisdictions that would be coextensive with the amounts the taxing jurisdictions otherwise could collect as taxes if site characterization activities were carried on by private parties.

NOIP, 56 FR at 42317.

It would not be fully in accord with this provision and Congressional intent if we were to value the BWIP real estate as "unimproved range land." The record shows that DOE spent nearly a decade doing preliminary studies at the Hanford site, expended hundreds of millions of dollars in the process, and completed 22 months of official, NWPA-sanctioned "site characterization" activities at the BWIP after being selected as one of three potential repository locations approved by the President under NWPA section 112(c). Any reasonable application of generally accepted principles of real estate appraisal dictates that some of the costs incurred in connection with these activities should properly be taken into account when valuing the BWIP site and determining the amount of Benton County's PETT grant. We therefore conclude that DOE/RL's initial DOE determination of the appraised value of the BWIP land and improvements as they existed in 1993 was erroneous in fact and in law, and failed to meet the Department's statutory obligation under the NWPA.

C. Generally-Accepted Principles of Real Estate Appraisal Relevant to the PETT Process

We next turn our attention to the real estate appraisal process itself. A basic principle of real estate appraisal is that land should be appraised at its "highest and best use." This is defined by Washington State tax regulations as "the most profitable, likely use to which a property can be put. It is the use which will yield the highest return on the owner's investment." Washington Administrative Code (hereinafter cited as WAC) § 458-12-330. The Appraisal Institute, a trade association of professional real estate appraisers, defines "highest and best use" similarly:

the reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.

The Appraisal of Real Estate at 275 (10th ed. 1992). A substantial amount of the conflicting expert testimony at the hearing in this case concerned the proper application of the highest and best use concept to the BWIP appraisal.

Once the highest and best use is determined, the next steps in the appraisal process are estimating the value of the bare land, and estimating the value of any improvements to the real estate involved. There are three fundamental approaches that appraisers use to estimate the value of real estate: (1) the cost approach; (2) the sales comparison or market approach; and (3) the income capitalization approach. In the cost approach, the value of a property is derived by adding the estimated value of the land to the current cost of constructing a reproduction or replacement for the improvements and then subtracting the amount of depreciation. In applying the cost approach, both direct (or "hard") costs, such as construction materials and labor, and indirect (or "soft") costs, such as professional fees, design, planning, and other pre-construction activities, are generally included in the appraised value of property. The Appraisal of Real Estate, supra, at Chapter 14 ("The Cost Approach"). This approach is particularly useful for valuing "special use" properties that are not frequently exchanged in the market. In the sales comparison or market approach, the appraisal is based on transactions in comparable properties. The market approach is commonly used when a number of similar properties have recently been bought and sold. In the income approach, the present value of the future benefits of property ownership is projected by mathematical formulas using estimates of a property's income streams, its future resale value, and a rate of return on the invested capital. An appraisal will often use more than one approach, or techniques drawn from different approaches. If more than one approach is used, the appraisal will conclude with a reconciliation of the various estimates.

In this case, it was evident that neither the market approach nor the income approach could alone provide a complete answer to the question of how much the BWIP real estate was worth, given the special nature of the BWIP site. Instead, a combination of approaches was used. To assess the value of the bare land, the Benton County appraiser used a market approach and we endorse that choice. However, since site characterization for a potential nuclear waste repository is a unique and unprecedented activity, neither the market approach nor the income approach, each of which relies on data drawn from properties with comparable characteristics, could be used to appraise the value of improvements to the BWIP real estate. Attention thus centered on the cost approach. As with the related highest and best use issue, there was a substantial amount of conflicting expert testimony presented at the hearing on the proper application of the cost approach to the BWIP appraisal.

D. Highest and Best Use Analysis

The appraisal of the BWIP site is a complex problem that involves the analysis of a number of related issues. The first issue to resolve in the appraisal process is the proper specification of the highest and best use of the BWIP site during the relevant period.

Benton County hired an experienced local appraiser, Nick Yaksic, to conduct the appraisal which formed the basis for its PETT claim. See "Appraisal Report B.W.I.P." in Appendix B to Benton County's Appeal. Yaksic determined that the highest and best use of the BWIP during the PETT eligibility period was "industrial use" for site characterization as a potential high-level nuclear waste repository, which was the actual use of the property at that time.

DOE/RL's principal argument why its BWIP appraisal (mostly range land without any improvements) is more appropriate than the Benton County appraisal centers on the concept of highest and best use. A trio of expert witnesses summoned by DOE/RL asserted that the County's appraisal was based on the erroneous premise that the highest and best use of the BWIP was a high level nuclear waste repository. These witnesses attacked each and every element of the underlying highest and best use analysis which DOE/RL attributed to the Benton County appraisal. However, we find that DOE/RL's evidence on this issue, while credible in theory, was based on a fatal mischaracterization of the Benton County appraisal, and missed the point. It addressed the wrong issue. Moreover, our analysis shows that when the status of the BWIP during the PETT eligibility period is viewed from the contemporaneous perspective under the applicable provisions of the NWPA and the DOE repository siting process regulations in 10 C.F.R. Part 960, it is the Benton County appraisal, not the DOE/RL appraisal, that is clearly more appropriate.

The Benton County appraiser determined that the highest and best use of the BWIP was "industrial use" for site characterization as a potential nuclear waste repository. This was based on DOE's own guidance in the NOIP for the submission of PETT estimates. It is also clearly correct, since by definition, once a candidate site was approved by the President for characterization as a potential repository location under the NWPA, the "industrial activities" on that site would give rise to an obligation on the part of DOE to make PETT grants to the local taxing authority. It is difficult to read this underlying principle of the Benton County BWIP appraisal in the manner that DOE/RL read it, i.e. that the highest and best use of the BWIP was an operating high level nuclear waste repository. Nevertheless, much of DOE/RL's attack on Benton County's appraisal is based on this erroneous assumption.

For example, DOE/RL argues that the Benton County Assessor should have considered the fact that there was local political opposition in Washington and Oregon to the selection of the Hanford site as one of the three candidates for the repository. See DOE/RL Post-Hearing Comments at 22. The implication is that knowledge of this factor should have led the County to conclude that the BWIP would never be selected as the repository and that the appraisal was flawed as a result. Valuation of the BWIP site is not an ordinary exercise in real estate appraisal, and there is no basis for this conclusion. First, the BWIP's chance of being selected as the repository was irrelevant at the time concerned. According to Benton County, the highest and best use of the BWIP during the PETT eligibility period was for site characterization as a potential repository, not an actual repository. This work was ongoing in the 1986-1988 period, despite any local opposition. Second, the existence of local political opposition is a given, and certainly not unique to Benton County. One need only look at the State of Nevada's vigorous and thus far unsuccessful opposition to the selection of the Yucca Mountain site for characterization as a potential repository to elucidate this point. We take judicial notice of the fact that many U.S. citizens would not want a nuclear waste repository in their back yard, their county or even their state. The mere fact that there is political opposition to the characterization of a site as a potential repository does not mean the site cannot be appraised as if its actual use at the time is its highest and best use.

Similarly, DOE/RL is unpersuasive in its arguments that the Benton County appraisal failed to take proper account of zoning restrictions, or the lack of a repository license from the Nuclear Regulatory Commission. Id. at 23-25. Under the NWPA, zoning restrictions are simply not relevant to the retrospective appraisal of the BWIP as it existed during the PETT eligibility period. Nor is the final approval of a repository license by the NRC relevant to the PETT eligibility period. These points simply underscore the faulty premise and inapt comparisons on which DOE/RL has based its highest and best use argument.

Instead, for the purpose of this case, it is sufficient that the BWIP had met all of the then-relevant criteria for selection as one of three candidate sites for characterization as a potential repository location under the governing statutory and regulatory scheme. As noted by DOE in the preamble to 10 C.F.R. Part 960 ("Nuclear Waste Policy Act of 1982; General Guidelines for the Recommendation of Sites for Nuclear Waste Repositories"), 49 FR 47714 (December 6, 1984), the siting process is divided into the following phases: (1) screening, (2) site nomination, (3) site recommendation for characterization (4) site characterization, and (5) site selection (recommendation as a repository). By May 28, 1986, only Yucca Mountain and the BWIP had made it through a labyrinth of scientific and political obstacles to reach the fourth phase of the siting process:

The selection of sites in basalt and tuff began on the basis of land use: the DOE began to search for suitable repository sites on some Federal lands where radioactive materials were already present; this approach was recommended by the Comptroller General of the United States and a House resolution. Although land use was the beginning basis for this screening of Federal lands, the subsequent progression to smaller land units was based primarily on evaluations of geologic and hydrologic suitability. The studies began at roughly the area stage, and the screening has now progressed to two sites: the site in basalt is on the Hanford Site, and the site in tuff is adjacent to the Nevada Test Site.

49 FR at 47716 (footnotes omitted). (No activities eligible for PETT payments ever took place at the third site that was selected by the President for characterization, in Deaf Smith County, Texas.) Despite the fact that the BWIP had met every relevant type of criterion that governed its selection for the industrial use of site characterization activities, DOE/RL's expert appraisal witnesses opined that Benton County's highest and best use analysis was deficient. See, e.g., Jan. 11 Tr. at 113-25, 167-77; Jan. 12 Tr. at 11-16, 55-56. We find that testimony uniformly unconvincing. Colored by hindsight, it failed to use the proper contemporary frame of reference as specified in the NWPA and the NOIP. We find that for real estate appraisal purposes, computing a value for the BWIP site must properly take into account activities in furtherance of site characterization undertaken because BWIP was a potential nuclear waste repository. Finally, it is significant to note that none of these witnesses, Paula Thoreen, Douglas Main and Joseph Eckert, had ever conducted an appraisal of the BWIP site, and none of them had ever performed a highest and best use analysis of the BWIP. (Nor, in all fairness, had either of Benton County's expert witnesses, Joseph Simmonds and Michael Goodwin, ever performed these functions for the BWIP.) No assemblage of appraisal experts could justify DOE/RL's rejection of the highest and best use analysis in Benton County's appraisal, and DOE/RL's consequent low appraisal of the BWIP. We find that DOE/RL erred in failing to accept Benton County's characterization of the highest and best use of the BWIP as "industrial use" for site characterization as a potential high level nuclear waste repository.

E. Appraisal of the Bare Land on the BWIP Site

Once he determined the highest and best use of the BWIP during the PETT eligibility period was industrial use for site characterization as a potential nuclear waste repository, the Benton County appraiser had to estimate the value of the bare land on the BWIP site. Since there were no sales of comparable potential repository properties, and no operating repositories from which to obtain the data needed for the income capitalization approach, Yaksic concluded that the cost approach was the most appropriate way of appraising the BWIP. As the first step in using the cost approach for the overall appraisal, Yaksic followed generally accepted appraisal practice and borrowed a technique from the market approach to appraise the bare land. He looked to recent sales of comparable industrial properties in the Pacific Northwest area to estimate the value of the various parcels of BWIP land. He divided the 11,520 acre BWIP site into three types of land and assigned a per acre valuation to each, as follows: (1) a 23 acre primary industrial site valued at $8,700 per acre; (2) 3,340 acres of buffer land valued at $300 per acre; and (3) 8,157 acres of land allocated to the actual repository at $1,500 per acre (the "maximum potential underground facility" or "MPUF"). The MPUF valuation was based on what Yaksic found to be sales of comparable property in a neighboring Oregon county, properties purchased for hazardous waste disposal, long term storage of solid waste or area landfill. See Jan. 10 Tr. at 129-32; Jan. 11 Tr. at 108-12.

DOE/RL's September 24, 1993 initial DOE determination agreed with Benton County's valuation of the primary site and the buffer land, but denied the County's $1,500 per acre valuation for the MPUF land. It substituted a value of $300 per acre based on a BWIP appraisal done for DOE/RL by Ross Mellor. DOE/RL challenged Yaksic's use of market sales of landfills in valuing the MPUF land on the ground that no permit to operate a landfill at the BWIP site had been issued. DOE/RL argued that without a permit, the MPUF parcel was more comparable to unimproved range land worth $300 per acre than to a potential landfill site. In its briefs, through the testimony of its witnesses at the hearing, and by the documentary evidence it submitted in this appeal, DOE/RL also argued that the BWIP site did not have a highest and best use as a high-level nuclear waste repository site. See Jan. 11 Tr. at 109-11, 177. DOE/RL maintains that the BWIP should not have been appraised as a nuclear waste repository because no license had been obtained and it was uncertain if the site could ever qualify for such a highest and best use. Based on its contention that the BWIP did not have a highest and best use as a repository, DOE/RL asserts that there was no basis for assessing the MPUF as anything other than buffer land bordering the Near Surface Test Facility.

The resolution of this issue follows from our previous holding that DOE/RL erred in appraising the BWIP as it existed in 1993, instead of doing a retrospective appraisal of the real estate as it existed during the PETT eligibility period in 1986-1988. This holding is a double-edged sword, favoring Benton County's position on some issues, and favoring DOE/RL's position on other issues. During the period of PETT eligibility, the BWIP was not a repository, and its facilities did not include an actual MPUF. The MPUF was only a theoretical concept. Ultimately, if development and activity at the site had proceeded, the MPUF would have become relevant. In the preamble to the repository siting regulations in 10 C.F.R. Part 960, DOE described the site characterization process:

During site characterization, the DOE will collect detailed information on the geologic, hydrologic, and other characteristics that determine compliance with the siting guidelines requiring site characterization. Standard geophysical tests and exploratory drilling from the surface will continue throughout site characterization. For subsurface investigations, exploratory shafts will be constructed to the depth at which a repository will be built. Limited subsurface excavations (tunnels and rooms) for testing purposes will be made in the host rock in the immediate vicinity of the shafts. The shafts will be large enough to allow people and test equipment to be transported from the surface to the rooms. The shafts, tunnels, and exploratory rooms will allow detailed study of the host rock, including lateral exploratory drilling. A variety of tests will be performed in these underground facilities, including, for example, measurements of in-situ stress and permeability and heat transfer experiments. Every 6 months, the DOE will report to the NRC and to the affected States and Indian tribes on the nature and extent of the site-characterization activities and the information obtained from these activities.

49 FR at 47717 (emphasis added).

However, at the relevant time for the appraisal, i.e. during the period of PETT eligibility, the BWIP was undergoing only limited site characterization activities. The principal exploratory shaft had not yet been drilled beneath the Near Surface Test Facility, nor had subsurface testing activities begun. Those testing activities would have included lateral exploratory drilling, which would have been necessary to map out the MPUF if the process had continued. Only a series of exploratory boreholes had been drilled to ascertain some of the geological and hydrological characteristics of the underlying basalt flows. See Brief of Petitioner at 41, citing Site Characterization Report for the Basalt Waste Isolation Project, DOE/RL 82, vol. 1 at 3 (November 1982), Benton County Hearing Exhibit 2. According to Benton County witness Raymond Isaacson, there never was a final design of the underground facility before the BWIP was canceled. Isaacson Deposition at 37-38. Thus, we find that the BWIP site characterization process had not reached the stage where there was a sufficient level of "activities that impact the assessed value of real property" relating to the potential Hanford repository, except on the 23 acre primary site where the Near Surface Test Facility was located, and in the related program support activities taking place elsewhere within Benton County. See NOIP, 56 FR at 42318. On this issue, we agree with DOE/RL that the status of the BWIP during the PETT eligibility period was not comparable to the status of a parcel of land purchased by a waste disposal firm for use as a landfill. The BWIP site characterization would have had to have progressed far beyond the preliminary stage where it was during the period 1986-1988 before it would be appropriate to consider its highest and best use to be a high-level nuclear waste repository, and appraise the 8,157 acres of MPUF land (which Benton County allocated to the actual repository) at $1,500 per acre. During the relevant period, the "actual repository site" represented by the MPUF, as described by Benton County, was more potential than real. No separate parcel of land was ever specifically set aside for that purpose. Isaacson Deposition at 37-38. It therefore was not eligible for a $1,500 per acre appraisal for purposes of determining the amount of the County's PETT grant. Instead, we find that this parcel should have been appraised as part of the buffer land, with a value of $300 per acre. On remand, this determination should be taken into account by DOE/RL in recalculating the value of the BWIP land and improvements as they existed at the beginning of the PETT eligibility period on May 28, 1986.

In the final analysis, however, our rejection of Benton County's appraisal of the bare land which it allocated to the MPUF does not have a great impact on the proper determination of its PETT grant amount. This result occurs because under the cost approach, the value of a property is derived by adding the estimated value of the bare land to the current cost of constructing a reproduction or replacement for the improvements and then subtracting the amount of depreciation. As explained more fully below, by far the largest item to be considered in appraising the BWIP under the cost approach is the value of the improvements as they existed during the 22-month PETT eligibility period.

F. Proper Appraisal of Improvements to the BWIP Real Estate

The next issue is the proper appraisal of the improvements to real estate on the BWIP site. In the cost approach, the value of a property is derived by adding the estimated value of the land to the current cost of constructing a reproduction or replacement for the improvements and then subtracting the amount of depreciation. As noted above, when estimating reproduction or replacement cost of improvements it is appropriate to consider both direct (hard) costs and indirect (soft) costs. See The Appraisal of Real Estate at 317. Under the NOIP, an important step in this process entails determining the amount of money expended prior to May 28, 1986 that was reflected in residual value as improvements to real estate used in conjunction with site characterization activities at the BWIP during the relevant 22-month period. As indicated earlier in this decision, we find that DOE/RL erred in its determination that none of the money DOE spent on the BWIP had any residual value for appraisal purposes.

Benton County maintains that during the 1986-1988 PETT eligibility period, all DOE funds spent on BWIP, minus the sum of those funds either conferred as "grants" or spent on "capital improvements," had residual value which should have been counted as "improvements to real estate," and added to the estimated value of the land.(2) The net amount of money DOE spent on the BWIP was over $400 million. The effect of including all or a part of this sum as "improvements" in the appraised value of the property dramatically influences the amount of Benton County's PETT grant. Benton County maintains that it is proper to include the entire amount of these DOE expenditures as improvements under the cost approach, since they would have to be expended by an owner trying to replicate the BWIP as of the effective date of the appraisal. While adhering to its position that none of the money spent on the BWIP should be considered as improvements for appraisal purposes, DOE/RL contends for purposes of argument that Benton County did not estimate the value of improvements on the BWIP in a manner consistent with Washington State appraisal practice.

In support of its argument that it was proper under Washington State law and appraisal practice to include as "improvements" all or a significant portion of the costs expended on the BWIP prior to the 1986-1988 PETT eligibility period, Benton County relies on the expert testimony of two witnesses, Joseph D. Simmonds and Michael W. Goodwin. Simmonds is the Property Tax Manager - Southern Region, for the State of Washington Department of Revenue, Property Tax Division. See April 22, 1994 Affidavit of Joseph D. Simmonds (attached as Exhibit A to Simmonds' December 1, 1994 Deposition). According to Simmonds, responsibility for the appraisal of real (and personal) property typically rests with the individual county in which the property is located. Jan. 10 Tr. at 10. After reviewing the two Benton County PETT claim submissions, Simmonds affirmed that their use of the cost approach was "consistent with applicable . . . statutes, regulations, and appraisal practices in the State." Id. at 2; see also Jan. 10 Tr. at 25-27. He also stated that the cost approach is regularly used by his Department "in cases where a unique special purpose property like the BWIP is under construction and where information is nonexistent for developing other traditional approaches." Simmonds Affidavit at 2. Finally, Simmonds opined that the "?site characterization' costs incurred as part of the BWIP are among the types of ?soft' costs which the State of Washington typically includes in the appraisal of real property improvements." Id. at 3; see also Jan. 10 Tr. at 27.

Goodwin is an independent consultant on the appraisal of special purpose properties who has worked for state and local assessing agencies in over 30 states. Before he was retained by Benton County for the present appeal, Goodwin had testified as an expert valuation witness before administrative tax boards, state courts and federal courts in 22 states, including Washington. See April 29, 1994 Affidavit of Michael W. Goodwin; Jan. 10 Tr. at 109. However, Goodwin admitted that he is not certified as an appraiser in Washington State. Jan. 10 Tr. at 172. Goodwin also supported Benton County's use of the cost approach to appraise the BWIP. It was his opinion with regard to the indirect cost issue that "all costs incurred by the DOE as a part of the site characterization process must be included in the cost of improvements, whether incurred on-site or off-site." Goodwin Affidavit at 2-4; Jan. 10 Tr. at 109-13. Goodwin cited the example of electric utilities to illustrate "the normal practice of including indirect costs of property in private industry." Goodwin Affidavit at 4; Jan. 10 Tr. at 158-59. He noted that the Federal Energy Regulatory Commission (FERC) has promulgated regulations prescribing the inclusion of indirect costs in its uniform system of accounts for electric utilities at 18 C.F.R. Part 101. Jan. 10 Tr. at 160. According to Goodwin, several types of studies which the FERC regulations permit utilities to include as indirect costs are similar to the site characterization costs incurred by DOE for the BWIP. These include nuclear operational, safety, or seismic studies, and environmental studies mandated by regulatory bodies relative to plants under construction. Goodwin Affidavit at 4. He asserted that these indirect costs are included in the cost approach in property tax appraisal of public utilities which are assessed by the Washington Department of Revenue. Id. In addition, Goodwin opined that Benton County's inclusion of those costs was "conservative" because it omitted several categories of costs that would normally be included in an appraisal using the cost approach. Jan. 10 Tr. at 165. These omitted categories included entrepreneurial profit, interest during construction, amounts attributed to grants (which were here deducted from the cost of improvements), cost increases attributable to inflation (which were not taken into account by "indexing" to current cost levels). Goodwin Affidavit at 5-8. Finally, Goodwin stated that DOE/RL's appraisal of the BWIP was erroneous because it failed to recognize the large expenditures made for "site characterization" and preliminary costs of a related nature, which would be considered together as "site development" costs in the private sector. Id. at 8.

Benton County has drawn on the basic principles laid out in the testimony of Simmonds and Goodwin to support its PETT claim. The County compared the BWIP to a number of different types of industrial properties in Washington State that have been taxed before they were fully developed or operating, including a nuclear power plant under construction, land purchased for a gold mine, and land purchased for solid waste disposal in a landfill.

1. Benton County's Examples of Costs Appraised as Improvements to Real Estate

The County cites Washington State real property tax cases involving partially completed nuclear power plants, in which private utilities' shares in the WNP-3 reactor in Grays Harbor County were appraised at cost during construction for purposes of determining property tax liability. See, e.g., Pacific Power & Light et al. v. Easter, BTA No. 88-15, 1990 Wash. Tax LEXIS 24, *5-6 (Feb. 15, 1990). As Benton County's expert witness Goodwin observed in his affidavit, utilities are required under the FERC accounting regulations to accumulate certain costs incurred each year while the plant was under construction, and to report their cumulative value to the state for assessment purposes. Under the FERC regulations, the amounts of indirect costs recorded in certain capital accounts can form the basis for taxation by state and local authorities, even before the project is completed. Benton County claims that many of the indirect costs incurred by DOE at the BWIP (including the types of studies mentioned above in the discussion of the Goodwin affidavit) would give rise to taxation if they had been expended by a utility as part of the process of constructing a new power plant. This type of real property appraisal for taxation is generally known as the "utility under construction model."

In addition, Benton County witnesses pointed to the manner in which land purchased for a gold mine was taxed in Okanogan County, Washington, even though the mine had not received the necessary permits for minerals production, and no gold had as yet been produced from the site. See Deposition of Scott Furman at 11-14; see also Deposition of John Sweetman at 21-23. John Sweetman, the Ferry County Assessor, explained that he looks for "indicators of value" to determine when an activity has crossed the line from a speculative venture to one where there is a defensible appraisal value. Sweetman Deposition at 9. One of Sweetman's tests was whether or not the mining activity is taking place in "elephant country"--that is, areas in which productive mines have historically operated. Id. at 33. Benton County emphasizes the fact that the BWIP's location in and adjacent to the 200 West "waste management" area of the Hanford Reservation was an indicator in 1986 of its potential for development as a high level nuclear waste repository. The County also relies on the general practice in Washington and Oregon counties of taxing land purchased for solid waste disposal after the required types of environmental landfill permits are issued but before the landfills are placed into actual use.

Finally, Benton County points out that its BWIP appraisal uses the same approach that the Nye County appraiser used to value Yucca Mountain. As noted above, both the Yaksic BWIP appraisal and the Foreman Yucca Mountain appraisal determined that the present (during their respective periods of PETT eligibility) use of the sites for characterization as potential repositories was the highest and best use for appraisal purposes. Compare Tr. at 244 (Yaksic testimony) with Benton County Hearing Exhibit 27 at 25 (Foreman Yucca Mountain Appraisal). According to Benton County, the Foreman appraisal of Yucca Mountain is consistent with the Washington State appraisal practices discussed above, and it further supports the validity of Benton County's BWIP appraisal. Benton County emphasizes that the appraisals of both potential repository sites recognized that the sites derived value from their potential use as repositories, just as the WNP-3 nuclear power plant in Grays Harbor County and the pre-permitted mine in Okanogan County derived taxable value from their potential for development or operation. Benton County Post-Hearing Brief at 32.

2. DOE/RL's Contrary Examples of Costs Not Included in Appraisals as Improvements

By contrast, under DOE/RL's restrictive approach to Benton County's PETT claim, no improvement costs were added to the BWIP appraisal value. The BWIP was appraised as of 1993, on the assumption that there were no improvements to the real estate. DOE/RL's appraisal considered that after enactment of the 1987 amendments to the NWPA, there was no chance that the BWIP would be selected as the repository site. Based on hindsight, DOE/RL argued that Benton County erred in appraising the BWIP with a highest and best use as a potential repository site. Three of the appraisal professionals called as expert witnesses by DOE/RL at the hearing supported the proposition that Benton County had based its appraisal on this faulty highest and best use analysis. See, e.g., Jan. 11 Tr. at 113-14 (Paula Thoreen), 175 (Joseph Eckert); January 12 Tr. at 14 (Douglas Main). These witnesses testified that it was never likely enough that the BWIP would be selected as the repository site for the County to consider its highest and best use as a potential repository. According to DOE/RL's theory of the case, none of the more than $400 million dollars expended by DOE on the BWIP had any residual value on the PETT eligibility starting date of May 28, 1986. As explained more fully below, DOE/RL therefore argued that there could be no costs, either direct or indirect, available to be taken into account as improvements to real estate in estimating the value of the BWIP for appraisal purposes.

At the early stages of the present appeal, DOE/RL advanced two arguments on the improvements issue that can be summarily rejected before we turn to the questions of appraisal theory and practice that were debated at the hearing. DOE/RL asserted in its pre-hearing brief that "improvements" could include only "fixtures," and argued that any fixtures that had once been attached to the BWIP real estate were gone by the time its contractor Mellor did his appraisal in 1993. Comments of Respondent at 11-13. DOE/RL also argued that the information generated from the preliminary studies of the BWIP done before May 28, 1986, and from NWPA site characterization after that date, had no residual value as an improvement, since the information was all in the public domain. Id. at 14. These early arguments reflect DOE/RL's initial lack of familiarity with the generally accepted principles of real estate appraisal that were later presented during the hearing process, and they have no merit. It is generally agreed by professional appraisers that under the cost approach, indirect or "soft" costs of pre-development studies are to be considered improvements to real estate if they add value to the property, and would have to be incurred to reproduce or replicate the property. See generally The Appraisal of Real Estate, supra, at Chapter 14 ("The Cost Approach"). DOE/RL's argument that the BWIP information had no market value as intellectual property because it was in the public domain is equally irrelevant in the context of applying the cost approach to appraisal of soft costs as improvements to real property. In this instance, the relevant measure is the amount of costs incurred by DOE that added value to the BWIP before May 28, 1986, not the market value of the BWIP information as intellectual property in 1993. Indeed, both of these arguments fail as a result of our determination that DOE/RL should have appraised the BWIP as it existed during the PETT eligibility period in 1986-1988, when the BWIP site was under active consideration as a potential waste repository site.

In defense of its initial DOE determination, DOE/RL specifically challenged every instance in which Benton County compared the BWIP to another type of industrial property during the developmental stage, when certain direct and indirect costs would be subject to taxation by local authorities under Washington State law and assessment practice. DOE/RL attacked Benton County's gold mine example on the grounds that the Ferry County Assessor, John Sweetman, testified that he would only tax land purchased for mining if it was "in elephant country," i.e. if it were situated in an area known to contain gold. According to DOE/RL, the BWIP never attained that status because it was at best only one of three potential repository sites approved by the President for site characterization under the NWPA. Likewise, DOE/RL discounted Benton County's comparison of the BWIP to a landfill site or a partially completed nuclear power plant on the grounds that those examples were inappropriate because the BWIP lacked any of the permits necessary for development of those types of industrial land use projects. In connection with Benton County's reliance on the "utility under construction model," DOE/RL presented testimony from Lorin Drennan, an expert on the FERC utility accounting regulations, who maintained that under the FERC accounting system, none of the BWIP expenditures could be credited to the specific capital account that would give rise to a taxable presence in Washington State. Jan. 11 Tr. at 95-99. DOE/RL contends that every dollar of the more than $400 million spent at BWIP by DOE over the years constituted "sunk costs."

DOE/RL introduced several examples of industrial properties in Washington State that were not taxed by different state and local authorities while they were under development, to illustrate its point that the BWIP was at too early a stage in its development during the period of PETT eligibility to warrant its taxation in the manner asserted by Benton County. The first example cited in DOE/RL's Post Hearing Comments involved the proposed Creston electric generating plant in Lincoln County. The utility company spent $11 million on the project before it was abandoned, and Drennan testified that all the costs would be booked into FERC Account 183. Id. at 95. DOE/RL asserted that cost method appraisals administered by the Washington State Department of Revenue do not count expenses logged by utilities in that account. DOE/RL Post Hearing Comments at 7. According to DOE/RL, this testimony shows that if the BWIP had been a nuclear power plant under construction, the "soft costs" which the County included in its appraisal as "improvements" would not have given rise to a taxable presence.

The second example concerned a proposed Waste Management Incorporated landfill project in Adams County. According to the deposition testimony of Adams County Assessor Gerald Crossler, the $5 million in expenditures for a preliminary environmental impact statement (EIS) at the project do not add value to the site for assessment purposes. DOE/RL Post Hearing Comments at 8. The third example cited by DOE/RL was an expansion project for the Boeing Company's 747 Assembly Plant at Everett, Washington in Snohomish County. Gary Pickett, a commercial appraisal supervisor for Snohomish County, testified in his deposition that Snohomish County did not tax construction costs for projects like the 747 Assembly Plant until construction is partially complete. Id. at 9. According to DOE/RL, the Snohomish County practice is supervised by the Washington State Department of Revenue, which suggests that the approach taken by DOE/RL on the BWIP appraisal is generally in accord with typical Washington State taxation practices. Since, in the Boeing 747 Plant example, not even actual construction was deemed to add value until partially complete, DOE/RL argues that pre-construction EIS and site characterization activities certainly do not add to value. Id. at 10. DOE/RL gives the further example of several exploratory oil and gas wells located in Benton County. DOE/RL argues that these properties are not taxed at all in Washington State unless they are actually placed into production, to support its position that Benton County's appraisal of the BWIP would not be permitted for other types of industrial properties under development in Washington State. Id. at 10-13.

DOE/RL also argues that the Benton County Assessor changed the treatment of another property after the filing of the present PETT appeal, in order to buttress the County's claim that environmental planning and EIS work for the BWIP add value for purposes of applying the cost approach. This was the Seneca Foods spray field waste disposal project at Prosser, Washington. There, Benton County did not initially increase the appraisal to include the costs of a full EIS, but later reassessed the property to include the value of those site preparation costs. DOE/RL claims this represents a departure from Benton County's historic practice, and contrasts the treatment of the sludge field project of B&B Enterprises, for which the Benton County Assessor added no value for the costs of work done to obtain permits necessary during the development stage. Id. at 14-15. DOE/RL argues that since the BWIP was never even close to the stage where an EIS for construction of a repository would be required, it was improper for the County to infer that any of the funds expended by DOE on the BWIP from the beginning of the project up through the enactment of the 1987 Amendments to the NWPA should be recognized as "improvements" for appraisal purposes.

In addition to its arguments about the examples discussed above, DOE/RL challenges Simmonds' fundamental testimony about the tax assessment practices in other Washington counties which he claims use the cost approach to include indirect costs as "improvements to real estate." DOE/RL points out that on cross-examination at the hearing and in his depositions, Simmonds was generally unable to answer questions about a number of specific cases which Benton County used to support its PETT claim. In addition, Simmonds admitted that he had not done an appraisal of the BWIP itself. E.g., December 1, 1994 Deposition of Joseph Simmonds at 11; Jan. 10 Tr. at 39.

DOE/RL also takes issue with Goodwin's opinions about Benton County's inclusion of the entire value of DOE's BWIP expenditures as "improvements to real property" under the cost approach. According to DOE/RL, the Benton County appraisal "did not employ the cost approach in a competent manner." DOE/RL Post-Hearing Comments at Comment V. In particular, DOE/RL maintains that Benton County did not properly deduct depreciation from the value of the expenditures, and it failed to mention the concepts of reproduction or replacement costs of the BWIP facilities, as required to apply the cost approach. In this vein, DOE/RL's witness Joseph K. Eckert, an economist who is an expert in the mass assessment of urban real estate, conceded that the BWIP appraisal presented an unusual challenge because its situation was unique and unprecedented. Jan. 11 Tr. at 152. Eckert suggested that perhaps Benton County should have performed a study to make a better determination of what the actual replacement or reproduction cost would be to bring the BWIP to the same level of development where it stood at the beginning of the PETT eligibility period. Id. at 95-99.

3. Analysis of the Improvements Issue

As shown in the preceding discussion of the parties' detailed arguments regarding the proper appraisal of the BWIP improvements under the cost approach, they have each embraced extreme positions. Benton County has argued for the highest possible appraisal value, and DOE/RL has argued for the lowest possible value. In our view, neither side in this dispute is entirely persuasive, and the correct answer to the BWIP appraisal problem lies in between the two extremes they have staked out. For the reasons explained below, we have concluded that Benton County's solution to the BWIP appraisal problem is correct in its basic theoretical approach, and thus significantly closer to the result which a reasoned and proper application of the law requires.

In its Notice of Interpretation and Procedures for the PETT process, DOE recognized that money spent by the Department before the May 28, 1986 selection date, on preliminary studies of candidate sites that are similar in nature to activities which would qualify as "site characterization" after that date, could have residual value that would be taxable as "improvements" by affected jurisdictions. NOIP, 56 FR at 42317-19. Therefore, DOE has unquestionably acknowledged that improvements add value to a site characterization property. It is difficult to argue, as DOE/RL has done in this case, that the money expended by DOE on the BWIP had no residual value whatsoever at the commencement of the 22-month PETT eligibility period, when at the same time DOE/NV has determined that the money expended by DOE at Yucca Mountain during a similar period had a considerable residual value. Here it is important to note that at the beginning of the PETT eligibility period on May 28, 1986, both the Nye County and Benton County locations were in the same position under the law as potential repository sites under the selection process mandated by the NWPA and the DOE regulations in 10 C.F.R. Part 960. DOE/RL's position is therefore erroneous and cannot stand.

None of the many examples the parties cited to show how county Assessors in Washington State appraised business properties "under development" provides an easy answer to the BWIP appraisal problem. None of them involved exactly the same factual and legal situation as the status of the BWIP during the relevant period under the NWPA's PETT provision. Even though the process is subject to some limited oversight by state government officials (like Simmonds) from the Department of Revenue in Olympia, the Assessors in different Washington counties work independently. This becomes clear after examining some of the examples debated by the parties in their post-hearing briefs. The diversity of results in those examples confirms that the appraisal process varies from county to county and from case to case. Nevertheless, the expert testimony presented by both parties about generally accepted appraisal principles, and their varied application by county Assessors, is useful, because it provides a theoretical foundation for resolving the BWIP appraisal dispute.

To illustrate the principle that it is a common practice to include indirect costs such as pre- development studies in an appraisal using the cost method, Benton County witness Goodwin cited the example of the FERC accounting regulations for utilities. Jan.