Brazos Elec. Power Coop., Inc. v. Tex. Comm'n On Envtl. Quality

• Decision Date: 03 May 2019
• Docket Number: No. 17-1003,17-1003
• Citation: 576 S.W.3d 374
• Parties: BRAZOS ELECTRIC POWER COOPERATIVE, INC., Petitioner, v. TEXAS COMMISSION ON ENVIRONMENTAL QUALITY and Richard A. Hyde, Executive Director of the Texas Commission on Environmental Quality, Respondents
• Court: Texas Supreme Court

576 S.W.3d 374

BRAZOS ELECTRIC POWER COOPERATIVE, INC., Petitioner,

v.TEXAS COMMISSION ON ENVIRONMENTAL QUALITY and Richard A. Hyde, Executive Director of the Texas Commission on Environmental Quality, Respondents

No. 17-1003

Supreme Court of Texas.

Argued January 24, 2019

OPINION DELIVERED: May 3, 2019

Emily A. Fitzgerald, Christopher Smith, Melissa M. Davis, Nathan K. Palmer, for Petitioner.

Daniel C. Wiseman, Charles E. Roy, Jeffrey C. Mateer, Priscilla M. Hubenak, Amy Davis, Atty. Gen. W. Kenneth Paxton Jr., James Edward Davis, Brantley David Starr, for Respondents.

Justice Lehrmann delivered the opinion of the Court.

At issue in this case is whether Texas Tax Code Section 11.31 gives the Texas Commission on Environmental Quality discretion to deny an ad valorem tax exemption for heat recovery steam generators, devices the Legislature has deemed "pollution control property." The court of appeals held that the Commission does have that discretion. We disagree; thus, we reverse the court of appeals' judgment and remand the case to the Commission for further proceedings consistent with this opinion.

I. BACKGROUND

Because this case involves tax exemptions for a particular type of property, we begin with a description of the property at issue—heat recovery steam generators—and the statutory framework governing pollution-control-related tax exemptions.

A. The Property

A heat recovery steam generator, or "HRSG," is a "combined-cycle" method of electricity production that increases power plant efficiency by using waste heat to generate more electricity than a "single-cycle" system. A typical single-cycle facility generates electricity by burning natural gas (or other combustible fuels) in a combustion turbine. This process creates waste heat and produces nitrogen oxides and other pollutants. A HRSG captures some of the waste heat created in the primary cycle and uses it to drive a steam turbine, generating even more electricity.

Diagram of a Combined-Cycle Plant¹

Because a combined-cycle system generates more electricity than a single-cycle system per unit of fuel consumed, it emits fewer harmful pollutants per unit of electricity produced.

B. Statutory Framework

1. The Exemption: § 11.31(a) & (b)

In 1993, the Texas Constitution was amended to authorize the Legislature to exempt from ad valorem taxation

... all or part of real and personal property used, constructed, acquired, or installed wholly or partly to meet or exceed rules or regulations adopted by any environmental protection agency of the United States, this state, or a political subdivision of this state for the prevention, monitoring, control, or reduction of air, water, or land pollution.

TEX. CONST. art VIII, § 1-l (a).² The amendment's ratification made effective a statute passed earlier that year providing that "[a] person is entitled to an exemption from taxation of all or part of real and personal property that the person owns and that is used wholly or partly as a facility, device, or method for the control of air, water, or land pollution." TEX. TAX CODE § 11.31(a).³ The Legislature defined a "facility, device, or method for the control of air, water, or land pollution" (henceforth referred to as "pollution control property") as:

Land ... or any structure, building, installation, excavation, machinery, equipment, or device, and any attachment or addition to or reconstruction, replacement, or improvement of that property, that is used, constructed, acquired, or installed wholly or partly to meet or exceed rules or regulations adopted by any environmental protection agency of the United States, this state, or a political subdivision of this state for the prevention, monitoring, control, or reduction of air, water, or land pollution.

Id. § 11.31(b). In other words, property whose function, id. § 11.31(a), and purpose, id. § 11.31(b), are wholly or partly to prevent, monitor, control, or reduce pollution is "pollution control property" and is at least partly exempt from ad valorem taxation.

2. The Exemption Process: § 11.31(c), (d), & (e)

To obtain an exemption under Section 11.31, the property owner must first submit an application to the Commission's Executive Director that contains the following information:

(1) the anticipated environmental benefits from the installation of the facility, device, or method for the control of air, water, or land pollution;

(2) the estimated cost of the pollution control facility, device, or method; and

(3) the purpose of the installation of such facility, device, or method, and the proportion of the installation that is pollution control property.

Id. § 11.31(c). Applications for property whose use is partly productive and partly for pollution control must also "present such financial or other data as the executive director requires by rule" to determine what proportion of the property is used for pollution control. Id.

Upon submission of an application, the Executive Director "shall determine if the facility, device, or method is used wholly or partly as a facility, device, or method for the control of air, water, or land pollution"; that is, the Executive Director shall determine if the property is pollution control property. Id. § 11.31(d). Subsection (d) further instructs the Executive Director to notify the appraiser for the county where the property is located (1) that the property owner has applied for an exemption and (2) whether and what proportion of the property qualifies. Id. The Executive Director's decision is referred to as a "use determination." See 30 TEX. ADMIN. CODE § 17.2(11). If the Executive Director determines that the property is used wholly or partly for pollution control (and is thus entitled to an exemption), he issues a "positive use determination";⁴ otherwise, he issues a "negative use determination." See id. Applicants may appeal a negative use determination to the Commission. TEX. TAX CODE § 11.31(e).

3. Standards for Making Exemption Determinations: § 11.31(g) & (h)

In 2001, the Legislature amended Section 11.31 to require the Commission to:

(1) establish specific standards for considering applications for determinations;

(2) be sufficiently specific to ensure that determinations are equal and uniform; and

(3) allow for determinations that distinguish the proportion of property that is used to control, monitor, prevent, or reduce pollution from the proportion of property that is used to produce goods or services.

Act of May 22, 2001, 77th Leg., R.S., ch. 881, § 1, 2001 Tex. Gen. Laws 1774, 1775 (codified at TEX. TAX CODE § 11.31(g) ). If the property does not meet the established standards, the Executive Director may not determine that the property is pollution control property. TEX. TAX CODE § 11.31(h).

In response to the statutory amendment, the Commission promulgated new rules requiring exempt property to (1) meet the statutory definition of "pollution control property" and (2) comply with the agency's own rules. See 26 Tex. Reg. 7420, 7421 (2001), adopted by 27 Tex. Reg. 185, 186–87 (2002) (codified at 30 TEX. ADMIN. CODE §§ 17.1 – .25 ). Thus, in addition to showing that the property met the statutory definition of pollution control property, applicants also had to demonstrate that the property satisfied the "requirements of [ 30 TEX. ADMIN. CODE ] § 17.15 and § 17.17." 30 TEX. ADMIN. CODE § 17.4(d) (2002). Those sections established three "tiers" of applications, each tier with its own application rules. Id. § 17.15. Tier I rules applied to property on a "Predetermined Equipment List," a list of property types that the Commission had determined to be wholly pollution control property. Id. Tier II rules applied to wholly pollution control property that did not appear on the list. Id. And Tier III rules applied to pollution control property used partly for production and partly for pollution control. Id.

To determine what proportion of pollution control property was entitled to an exemption, Tier III applications were required to include a cost analysis procedure (CAP) calculation. See id. § 17.17(a) ; see also id. § 17.2(4) (defining "cost analysis procedure"). The calculation seeks to balance the costs of employing "green" property against the commercial benefits by subtracting from the cost of the green property (Capital Cost New) (1) the cost of comparable "dirty" property (Capital Cost Old) and (2) the value of the marketable product produced over the life of the property (Net Present Value of Marketable Product or NPVMP). See id. § 17.17(c). That figure is divided by the Capital Cost New to determine what percentage of the property is installed purely for pollution control purposes. Id. If the formula produces a positive number, the Executive Director issues a positive use determination and the applicant is entitled to an exemption; if the formula's result is zero or negative, the Executive Director issues a negative use determination and the applicant receives no exemption. See id. § 17.17(d).

4. K-list property: § 11.31(k), (l ), & (m)

In 2007, the Legislature amended Section 11.31 to add Subsection (k), which directs the Commission to "adopt rules establishing a nonexclusive list of facilities, devices, or methods for the control of air, water, or land pollution, which must include" HRSGs, among other devices. Act of May 28, 2007, 80th Leg., R.S., ch. 1277, § 4, 2007 Tex. Gen. Laws 4261, 4264 (codified at TEX. TAX CODE § 11.31(k) ). The parties refer to Subsection (k)'s list of qualifying property as "the k-list."

The amendment also added Subsection (m), which modifies the exemption application process for k-list property in three ways. First, it allows k-list applications to omit the description of the property's environmental benefits that is otherwise required by Subsection (c)(1). See TEX. TAX CODE § 11.31(m). Second, it expedites the application process by requiring the Executive Director to issue a determination within thirty days after an application is complete. Id. Third, it provides that...