Case No. VED-0001

May 12, 2000

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Interlocutory Order

Name of Case: State of Washington

Date of Filing: May 5, 2000

Case Number: VED-0001

This decision will consider a Motion to Conduct Depositions that the Department of Energy (DOE) Office of Civilian Radioactive Waste Management (OCRWM) filed with the Office of Hearings and Appeals (OHA) on February 3, 2000, in connection with an appeal that the State of Washington Department of Revenue (DOR) filed on April 26, 1999.

Procedural Background

The underlying appeal, OHA Case No. VPA-0001, was filed 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 will grant, to a local jurisdiction in which a candidate site for a high-level nuclear waste repository is located, a payment equal to the amount that jurisdiction 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." The history of the PETT program and the Basalt Waste Isolation Project (BWIP) at the Hanford site is described at length in Benton County, Washington, 26 DOE ¶ 80,145 (1996), and will not be repeated here.

By letter dated March 23, 1999, DOE denied the State’s application for a PETT grant based on Washington’s Business and Occupation (“B&O”) Tax. The amount in controversy is substantial; with interest through September 30, 1998, the State calculated the value of its claim as $13,083,694. The fundamental dispute between the State and OCRWM can be summarized as follows for purposes of the present decision. The B&O tax is based on the taxpayer’s gross income. Since the BWIP did not have any gross income, the State based its PETT claim on “the most comparable surrogate, the amount of expenditures associated with site characterization at Hanford.” Petitioner’s Statement of Position at 7. OCRWM maintains that since the BWIP had no gross income, its site characterization activities cannot form the basis for taxation under the Washington B&O tax, and no PETT is due under the theory advanced by the State. The present appeal challenges OCRWM’s denial of the State’s PETT claim based on the B&O tax.

After the appeal was filed, OHA and the parties held an initial conference on procedures, and agreed that each party would file a “statement of position” by July 15, 1999. Next, OCRWM suggested and the State agreed that the parties pursue discovery through two rounds of requests for admissions, the second of which was completed in December 1999. Based on our experience in the Benton County PETT case, which involved many of the same lawyers and OHA officials, all wanted to minimize the time and expense of extensive deposition discovery, and to obviate the need for an evidentiary hearing if possible.

During the next two conferences, which took place on January 7 and 21, 2000, OCRWM indicated that it was still not satisfied with the State’s answers to its requests for admissions, and asked to take oral depositions of four named current or former employees of the Washington DOR to question them about “dissenting views” at the DOR on the application of the B&O tax to the BWIP in connection with the State’s PETT request. The State opposed this request on the grounds that “probing the mind of the decision maker” should not be done, and expressed frustration that so much time had been spent trying to do discovery by the admission requests, apparently without satisfying OCRWM. As an alternative, the State offered to designate some witnesses to be deposed under the type of procedure in Rule 30(b)(6) of the Federal Rules of Civil Procedure (FRCP). OCRWM declined to accept the State’s offer. The OCRWM counsel explained that “DOE doesn’t know what it doesn’t know,” and that the DOE had an obligation to build a good factual record before approving a PETT payment, which is in the nature of a grant from the Nuclear Waste Fund. That fund has the money contributed on behalf of the nation’s electric utility ratepayers for establishing a nuclear waste repository. He maintained that only the State of Washington has expertise on its own tax laws, regulations and cases, and indicated that OCRWM wants to take Rule 26(b)(4) wide-ranging depositions to probe what he called “inconsistencies” in the State’s “Statement of Position” paper. The parties agreed that OCRWM would file the present discovery motion, and that OHA would resolve the dispute after the State filed a reply to the request. This exchange of pleadings was completed when OCRWM filed a response to the DOR’s submission on February 18, 2000. We now turn to the motion.

OCRWM’s Motion for Depositions and the State’s Reply

In its motion OCRWM seeks to depose “four individuals who have been identified as Washington State B&O tax experts in the employ of the State and other State tax law experts who may be identified as State B&O tax experts by these deponents.” Motion at 1. The named individuals and their 1993 job titles are: Frank Ackerly, Revenue Auditor; David Wiest, Revenue Auditor; Don Taylor, Tax Research Program Manager; and Don Rankin, Regional Audit Supervisor.

According to OCRWM, it not only needs to clarify the State’s positions, but “also to explore alternative tax theories, and DOR customs and procedures that may be relevant.” Id. at 2. OCRWM asserts that since these alternative theories may imply a smaller PETT grant, the State cannot be relied upon to come forward with witnesses and information that may support them. OCRWM also claims that it has “no expertise in these matters, and requires the expert views of [the State’s] experts in the B&O tax area.” Id. In addition, OCRWM argues that expertise regarding the B&O tax is rare, and primarily confined to a very small group of current and former employees of the Washington DOR, and that the named deponents will assist it in locating other witnesses with relevant expertise. Finally, OCRWM points to evidence in papers it has already obtained from the State that there was some internal debate in the DOR concerning the soundness of the State’s PETT claim, and OCRWM asserts that it needs to explore this area to determine whether the debate was “based upon a lack of consistency between [the State’s] PETT calculations and calculation methods applied to private taxpayers.” Id.

The OHA Procedural Regulations governing Appeals, in 10 CFR Part 1003, Subpart C, contain no specific provision for discovery, but a motion for discovery will be granted by OHA if it is concluded that discovery is necessary for a party to obtain relevant and material evidence, and that discovery will not unduly delay the proceedings. Benton County, Washington, 26 DOE ¶ 80,145 (1996). Further, the requested discovery would be authorized under the FRCP and Washington State tax procedures, and the State does not dispute that OCRWM is entitled to discovery through depositions in this case.

The State’s objections are based instead on its concerns for administrative efficiency. The State asserts that the principal issues separating the parties “are legal in nature and can likely be resolved on summary judgment motions.” Petitioner’s Reply to Respondent’s Motion to Conduct Depositions at 1. The State maintains that the parties already “charted a discovery course using requests for admission that was designed to clear away expeditiously any factual issues.” Id. According to the State, OCRWM’s motion fails to show how the selected discovery course has proved to be insufficient. Id. at 2. To prove its point, the State has attached copies of its answers to both sets of the OCRWM’s requests for admissions. The State claims that they show its candor in answering the requests. While the State concedes it once suggested during an early stage of the PETT process that OCRWM would have the opportunity to depose some of the four named individuals if an appeal were filed, it now implies that would be inefficient, given the prior decision to pursue discovery through requests for admissions. Id. at 4-5. Finally, the State argues that one of the reasons cited by OCRWM for deposing the named witnesses, i.e. to delve into “Mr. Wiest’s objections [questioning the soundness of Petitioner’s claim.],” id. at 4, n. 3., is not proper since it would entail probing the mental processes utilized by an administrative decision maker, contrary to the principle recognized by the Supreme Court in United States v. Morgan, 313 U.S., 409, 422, 61 S.Ct. 999, 85 L.Ed. 1429 (1941), and adopted by the Washington Supreme Court in Ledgering v. State, 63 Wn. 2d 94, 101, 385 P.2d 522 (1963).

Analysis

Although the background of this case is complicated, the resolution of the pending motion is a simple matter. After considering the arguments for and against the requested depositions, we have determined that OCRWM’s present motion should be granted. We are persuaded that the admissions process, while helpful to a certain extent, did not answer enough questions about the application of the B&O tax, and thus failed to obviate OCRWM’s need for further discovery. We find that deposing the named witnesses and perhaps others whose identities may be uncovered is likely to lead to relevant and material evidence, and that it will not unduly delay the proceedings. As in the prior PETT appeal, the parties have staked out extreme positions. A limited amount of additional discovery may help to narrow that chasm. The amount at stake is not trivial–now roughly $15 million including interest–and if a PETT grant is made as a result of this appeal or a negotiated settlement, it must be paid from the Nuclear Waste Fund. OCRWM argues convincingly that given its responsibilities for the Nuclear Waste Fund under the NWPA, it is vitally important to have as well-developed a factual record as possible to form a proper basis for final action on the State’s PETT claim for the B&O tax. I take note of the State’s desire to proceed directly to cross motions for summary judgment and a decision on the merits. Nevertheless, OCRWM has the right to pursue limited additional discovery. Thus we will grant the motion and the parties should proceed with the deposition process.

That being determined, we also note our agreement with the point raised by the State that under the Morgan case, “probing the mind” of an administrative decision maker is not proper evidence in an appeal of a final agency action. Agency action must stand on its own as the final word. As an administrative decision maker, the OHA understands and has applied this principle. See, e.g., Atlantic Richfield Co., 5 DOE ¶ 82,521 (1980) (standards for granting “contemporaneous construction discovery” of agency officials’ interpretations of the regulatory scheme) and cases and authorities cited therein. Thus, the parties should keep this principle in mind during the course of the discovery process and in all subsequent substantive pleadings.

IT IS THEREFORE ORDERED THAT:

(1) The Motion to Conduct Depositions filed by the Office of Civilian Radioactive Waste Management is hereby granted.

(2) This is an interlocutory order of the Department of Energy.

George B. Breznay

Director

Office of Hearings and Appeals

Date: May 12, 2000