Brazos Electric Power Cooperative, Inc. v. Texas Commission on Environmental Quality and Richard A. Hyde, Executive Director of TCEQ
538 S.W.3d 666
Tex. App.2017Background
- Brazos Electric installed heat recovery steam generators (HRSGs) at two gas-fired plants to convert single-cycle units to combined-cycle, increasing electricity output by using waste heat. HRSGs are listed in the Tax Code §11.31(k) (the “k‑list”).
- Section 11.31 provides an ad valorem tax exemption for property used wholly or partly to comply with environmental regulations; TCEQ’s Executive Director administers determinations and must apply rules (including the CAP cost‑analysis procedure) to allocate the pollution‑control percentage when property is dual‑use.
- The CAP compares Capital Cost New minus Capital Cost Old, subtracts the net present value of any marketable product (NPVMP), divides by Capital Cost New, and yields a percentage; a zero or negative CAP yields no exemption under TCEQ rules.
- After statutory changes and administrative rule revisions, TCEQ applied the CAP uniformly (per §11.31(g‑1)) to k‑list items; Brazos submitted CAP calculations (including alternatives using $0 or a spool piece for Capital Cost Old) that produced positive results; the Executive Director instead used a boiler as the comparable (Capital Cost Old) and produced negative CAPs, denying exemptions.
- Brazos appealed administratively and to district court; the court affirmed TCEQ. On appeal, Brazos raised three issues: (1) §11.31(m) requires at least some positive determination for k‑list items; (2) TCEQ engaged in unlawful informal rulemaking effectively removing HRSGs from the k‑list; (3) the Executive Director arbitrarily chose a boiler as the comparable, making the CAP outcome irrational.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Whether §11.31(m) requires a positive exemption for k‑list items even if CAP ≤ 0 | Brazos: §11.31(m)’s mandatory language (“shall determine”) compels a positive (non‑zero) use determination for k‑list items | TCEQ: §11.31(m) gives k‑list applicants procedural benefits (presumption of environmental benefit, 30‑day review) but preserves Executive Director’s discretion to determine the actual “wholly or partly” proportion; CAP can produce zero/negative | Court: Affirmed TCEQ — §11.31(m) does not force a per se positive exemption; it grants administrative presumptions and expedited process but not mandatory non‑zero awards. |
| 2. Whether TCEQ engaged in unlawful informal rulemaking to deny HRSG exemptions or removed HRSGs from k‑list without formal rulemaking | Brazos: TCEQ has adopted a de facto policy (and statements in litigation) that HRSGs are never pollution‑control property, amounting to informal rulemaking and k‑list removal without notice and comment | TCEQ: Statements in litigation are not agency rules; no record evidence TCEQ adopted a binding new rule; TCEQ kept HRSGs on the k‑list after triennial review | Court: Brazos waived the issue by inadequate briefing; on merits, found no evidence TCEQ adopted a binding informal rule or removed HRSGs. |
| 3. Whether Executive Director acted arbitrarily in selecting a boiler as Capital Cost Old (CCO) rather than $0 or a spool piece | Brazos: Boiler is not a proper comparable; its higher cost guarantees negative CAP; spool piece or $0 are reasonable comparators and produce positive percentages | TCEQ: Comparable equipment must perform the same function; boilers and HRSGs both produce steam (functional comparability); agency rules provide methods for CCO; applicant bears burden to prove exemption | Court: Not arbitrary or capricious — Executive Director reasonably rejected $0 and spool piece analogues; selecting boiler as comparable was within zone of reasonableness and consistent with CAP rules and burdens. |
| 4. (Underlying) Whether applicant bears burden to prove exemption and whether CAP is the governing standard | Brazos: Agrees CAP applies but seeks statutory reading to require positive result for k‑list items | TCEQ: Applicant bears burden; CAP governs uniformly per §11.31(g‑1) | Court: Applicant bears burden to clearly show entitlement; CAP is the governing methodology; agency decision sustained under arbitrary‑and‑capricious review. |
Key Cases Cited
- Mont Belvieu Caverns, L.L.C. v. Tex. Comm’n on Envtl. Quality, 382 S.W.3d 472 (Tex. App.—Austin 2012) (agency may deny 100% pollution‑control status where equipment yields productive benefits; economic irrationality test informs §11.31 determinations)
- In re Allen, 366 S.W.3d 696 (Tex. 2012) (courts interpret law, not make policy; limits of judicial role)
- Tex. Student Housing Authority v. Brazos County Appraisal Dist., 460 S.W.3d 137 (Tex. 2015) (tax exemption claimant bears burden to clearly show entitlement; resolve doubts for taxing authority)
- Tex. Dep’t of Transp. v. Needham, 82 S.W.3d 314 (Tex. 2002) (statutory terms should be interpreted consistently throughout the act)
- Phillips v. Metro. Life Ins. Co., 405 S.W.3d 880 (Tex. App.—Dallas 2013) (arbitrary‑and‑capricious standard requires agency action to fall on a continuum of reasonableness)