In thеse related appeals, Freestone Power Generation, LLC; Freeport Energy Center, LLC; Brazos Valley Energy, LLC; Tenaska Gateway Partners, Ltd.; Ennis Power Co., LLC; Hays Energy, LLC; Midlothian Energy, LLC; and Wise County Power Co., LLC (Appellants) appeal from the trial court's judgment affirming the orders of the Texas Commission on Environmental Quality (TCEQ) upholding the decision of Richard A. Hyde, P.E., Executive Director of TCEQ (the ED) (sometimes jointly TCEQ) to issue negative use determinations in response to Appellants' applications for use determinations for pollution control property. See 30 Tex. Admin. Code. § 17.2(17) (2008) (Tex. Comm'n on Envtl. Quality, Definitions) (defining "use determination" as positive or negative finding by ED that property is used wholly or partly for pollution control purposes and listing percentage of property determined to be used for pollution control).
BACKGROUND
Statutory Framework
In 1993, Texas voters ratified a constitutional amendment authorizing the Legislature to enact general laws exempting from ad valоrem 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) (see Tex. H.J.R. Res. 86, §§ 1-2, 73d Leg., R.S.,
land that is acquired after January 1, 1994, 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.
A person who wishes to obtain an exemption for particular property must apply for a "use determination" from the ED that the property "is used wholly or partly as a facility, device, or method for the control of air, water, or land pollution"-i.e., that the property is pollution-control property eligible for the exemption. See
The applicant or the appraisal district may appeal the ED's use determination to the TCEQ commissioners. See
2002 Rule Amendments
In 2001, the Legislature amended section 11.31 to require that TCEQ аdopt rules that "establish specific standards for considering applications for determinations" and "allow for determinations that distinguish the proportion of the property that is used to control, monitor, prevent, or reduce pollution from the proportion of property that is used to produce goods or services." See Act of May 22, 2001, 77th Leg., R.S., ch. 881, § 1,
For determining the proportion of the property that was pollution control property, the Decision Flow Chart and other 2002 Rules created three categories of applications for use determination:
1. Tier I applications for property that TCEQ had predetermined were partially or wholly pollution control property and were listed on a "predetermined equipment list" (PEL). See id. § 17.2(9), (11).
2. Tier II applications for property that was used wholly for pollution control purposes but was not on the predetermined equipment list. See id. § 17.2(12).
3. Tier III applications for property used partially for pollution control purposes but was not on the PEL. See id. § 17.2(7), (13).
Tier III applications for partial use determinations were required to show what portion of the property the applicant estimated was attributable to pollution control purposes through a series of calculations derived from cost accounting principles. See id. § 17.17(b); see also id. § 17.2(4) (defining "cost analysis procedure" (CAP) as a "procedure which uses cost accounting principles to calculate the percentage of a project or process that qualifies for a positive use determination as pollution control property").
Simply described, the cаlculations sought to identify the percentage of the property's total capital costs that were attributable to the property's pollution-control feature by (1) comparing the total capital costs to the cost of comparable equipment without the pollution-control feature, and (2) adjusting downward for (a) any increases in productive capacity attributable to the new property and (b) the value of any waste byproducts that could be reused or recycled due to the new pollution-control feature. See [2002 Rules] § 17.17 (referenced charts located at27 Tex. Reg. at 305-06 );
see also id. § 17.2(1), (2), (3), (10) (defining "byproduct," "capital cost new," "capital cost old," and "production capacity factor" respectively).
Mont Belvieu Caverns, LLC v. Texas Comm'n on Envtl. Quality ,
2008 Rule Amendments
In 2007, the Legislature again amended section 11.31, requiring TCEQ to promulgate rules establishing "a nonexclusive list of facilities, devices, or methods for the control of air, water, or land pollution" (the K-list). See Act of May 28, 2007, 80th Leg., R.S., ch. 1277, § 4,
To implement the statutory amendments, TCEQ promulgated rule amendments. See
2010 Rule Amendments
In 2009, the Legislature once again amended section 11.31. See Act of May 25, 2009, 81st Leg., R.S., ch. 962, §§ 3, 5-6,
Factual and Procedural Background
Appellants are power-generation plants that operate combined-cycle plants, as opposed to single-cycle plants, which for purposes of this appeal, can be simply described as follows: A single-cycle facility involves a compressor, which feeds compressed air into a combustion system, where fossil fuel such as natural gas is mixed with the compressed air and burned at high temperatures, and a turbine, which spins at high speed and, when connected to a generator, produces electricity. Approximately two-thirds of the fuel burned to generate electricity in single-cycle plants is lost in the process in the form of waste heat, which contains various pollutants. Combined-cycle facilities, such as those operated by Appellants, use HRSGs to capture hot exhaust from a gas turbine and use the recovered heat to generate steam, which is then used to propel a steam generator that produces additional electricity. While HRSGs are used to produce electricity, Appellants contend that they also reduce pollution by reducing the amount of fossil fuel that must be burned to produce a given amount of electricity and the amount of emissions discharged into the air.
In 2008, Appellants applied for use determinations for HRSGs under TCEQ's Tier IV rules, proposing their own "avoided emissions" methodologies for calculating the portion of the property used for pollution control purposes.
On remand, the ED issued twо notices of deficiencies to all Appellants requesting that they update their applications, cite applicable environmental rules, explain and correct errors in their proposed methodologies, and calculate a percentage of pollution control using the CAP method with specified inputs. Appellants objected to being required to cite environmental rules and use the CAP method but complied subject to their objections. The ED rejected Appellants' proposed methodologies, applied the CAP method with the specified inputs, and issued negative use determinations with pollution control percentages ranging from -2% to -2602%. The ED's stated reasons for the negative use determinations were that (1) he could not find that the property was used, сonstructed, acquired, or installed wholly or partly to meet or exceed any cited laws, rules, or regulations adopted by any environmental protection agency of the United States, Texas, or a political subdivision of Texas for the prevention, monitoring, control, or reduction of air, water, or land pollution;
STANDARD OF REVIEW
Appellants challenge TCEQ's order affirming the ED's negative use determinations for their HRSGs. Although Water Code section 5.351 provides for judicial review of TCEQ orders, it does not specify the standard of review. See Tex. Water Code § 5.351(a) ("A person affected by a ruling, order, decision, or other act of the commission may appeal the action by filing a petition."). And because Appellants' appeal of the ED's determinations was not a contested case for purposes of the APA, the "substantial evidence" standard under the APA does not apply. See Tex. Tax Code § 11.31(e) ; Tex. Gov't Code § 2001.174 (providing standard of review if law authorizing judicial review of contested case does not define standard of review, generally referred to as "substantial evidence" standard and contained in subchapter G of APA, entitlеd "Contested Cases: Judicial Review"); Mont Belvieu ,
Although this case does not involve a denial of a contested case hearing, the Texas Supreme Court's decisions in City of Waco and Bosque River Coalition inform our standard of review here, where there was no contested case hearing and the statute authorizing judicial review does not define a standard of review. Accordingly, we review TCEQ's order affirming the ED's negative use determinations for an abuse of discretion. " 'An agency's decision is arbitrary or ... an abuse of discretion if the agency: (1) failed to consider a factor the legislature directs it to consider; (2) considers an irrelevant factor; or (3) weighs only relevant factors that the legislature directs it to consider but still reaches a completely unreasonable result.' " Cascos v. Tarrant Cty. Democratic Party ,
Our resolution of this matter also requires us to construe applicable statutes. Statutory construction is a question of law that we review de novo. See Railroad Comm'n v. Texas Citizens for a Safe Future & Clean Water ,
ANALYSIS
In their first issue, Appellants argue that TCEQ had no statutory authority to issue negative use determinations for their HRSGs and that in issuing its order affirming the ED's negative use determinations, it therefore exceeded its authority. They contend that the language of section 11.31 unambiguously establishes that HRSGs are pollution control property entitled to positive use determinations and that the only authority TCEQ has in making use determinations for K-list property is to distinguish the value of the proportion of the property used for pollution control from the value of that used for production. We agree with Appellants' interpretation of section 11.31, construed as a whole.
Under subsection (a), a person is entitled to an exemption from taxation for property "used wholly or partly as a facility, device, or method for the control of air, water, or land pollution"-i.e., for pollution control property. See Tex. Tax Code § 11.31(a). Subsection (d) generally requires TCEQ to determine whether property is pollution control property and, if so, what proportion is attributable to the pollution control function. See
This construction of subsections (a), (d), (k), and (l ) is reinforced by subsection (m), which provides as follows:
Notwithstanding the other provisions of this section , if the facility, device, or method for the control of air, water, or land pollution described in an application for an exemption under this section is a facility, device, or method included on the list adopted under Subsection (k), the executive director of the Texas Commission on Environmental Quality, not later than the 30th day after the date of receipt of the information required by Subsections (c)(2) and (3) and without regard to whether the information required by Subsеction (c)(1) has been submitted, shall determine that the facility, device, or method described in the application is used wholly or partly as a facility, device, or method for the control of air, water, or land pollution and shall take the actions that are required by Subsection (d) in the event such a determination is made.
Tex. Tax Code § 11.31(m) (emphases added). In short, subsection (m) provides for an expedited review (within 30 days) of an abbreviated application (without submission of information regarding environmental benefits generally required under subsection (c)(1) ) for K-list property, which has been deemed pollution control property. While subsection (d), the general rule governing applications for positive use determinations, states that the ED "shall determine if " the property is pollution control property, see
TCEQ argues that this construction of section 11.31 reads it to say that K-list property is eligible for a tax exemption regardless of how it is used or whether it was installed to comply with an environmental regulation and thus conflicts with the constitutional amendment and subsection (b), which define pollution control property as property "used, constructed, acquired, or installed wholly or partly to meet or exceed rules or regulations" of an environmental agency to prevent, control, or reduce pollution. See Tex. Const. art. VIII, § 1-l (a); Tex. Tax Code § 11.31(b). To resolve that conflict, TCEQ contends, it must determine what portion of a K-list property is used for pollution control on a case-by-case basis. However, subsection (c)(3) requires the applicant to provide the purpose of the installation of the property, ensuring that the applicant must report an environmental use. See Tex. Tax Code § 11.31(c)(3). And the plain language of section 11.31 provides that an HRSG is a "facility, device, or method for the control of air, water, or land pollution," see
TCEQ contends that "the statute required applicants to identify the environmental regulation that the HRSG was installed to comply with," that the ED makes the final determination as to whether K-list property qualifies as pollution control property, and that the TCEQ reasonably rejected the rules cited by Appellants.
TCEQ also argues that the K-list is not "the final word" because the Legislature directed it to review and revise it. It is true that the Legislature expressly directed that TCEQ update the K-list every three years and authorized it to remove an item upon "compelling evidence" that it "does not provide pollution control benefits." See Tex. Tax Code § 11.31(l ). However, TCEQ has not acted to remove HRSGs from the K-list, and they are still among the "facilities, devices, or methods for the control of air, water, or land pollution" that TCEQ is required to include on the K-list and treat accordingly.
Further, TCEQ's construction of subsection (m) is flawed. TCEQ argues that subsection (m) states that if the property is used or installed to meet or exceed an environmental regulation, then subsection (m) applies. Therefore, TCEQ contends, if the ED determines that the applicant failed to show that it was legally compelled to invest in the property even partly to meet an environmental regulation, then subsection (m) does not apply. Subsection (m) actually provides that if the property described in the application is on the K-list , then the following provisions contained in subsection (m) apply. See
TCEQ also contends that the provision that the ED "shall determine that" the property is used wholly or partly for pollution control should be construed to mean that the ED "shall determine if" the property is used for pollution control. We cannot agree. First, such a construction conflicts with the express statutory language. See Pochucha ,
Finally, TCEQ argues that the last phrase of subsection (m)-requiring the ED to take the action required by subsection (d) "in the event such a determination is made"-means "if such a determination is made," supporting its contention that the ED may determine case-by-case that K-list property is not pollution control property. However, the phrase's meaning "cannоt be determined in isolation but must be drawn from the context in which it is used." Zanchi v. Lane ,
In Mont Belvieu , we concluded that "property cannot qualify as 100% pollution-control property if any portion of its value is attributable to its capacity to produce goods and services."
CONCLUSION
Having concluded that TCEQ abused its discretion in issuing negative use determinations for Appellants' HRSGs, we reverse the judgment of the trial court and remand to TCEQ for further proceedings consistent with this opinion.
Notes
All citations to 30 Tex. Admin. Code are to rules promulgated by the Texas Commission on Environmental Quality. It is undisputed that the 2008 rules apply in this case, and citations are to the 2008 rules except where otherwise indicated.
Appellants also sought declaratory relief below, but the trial court "dismissed, or in the alternative, ... denied" those claims, and Appellants do not complain of that ruling on appeal.
At the request of the parties, the appeals were consolidated for purposes of the briefing and consideration.
Some of the actions or events discussed involved TCEQ's predecessor, the Texas Natural Resources Conservation Commission. For clarity, we refer to both as TCEQ.
As this Court observed in Mont Belvieu Caverns, LLC v. Texas Commission on Environmental Quality , in requiring TCEQ to distinguish between pollution control property and production property, the Legislature "drew a conceptual line similar to one suggested by the Attorney General in an opinion he had issued a few weeks eаrlier construing section 11.31."
While the 2002 Rules required the ED to establish the PEL as part of its percentage-of-use analysis, TCEQ did not include the PEL in its rules but instead attached it as an appendix to its Technical Guidelines Manual, published to provide guidance to applicants. See 2002 Rules §§ 17.2(9), (11), .4(c), .15 ;
Appellants state that their methodologies were "output-based emissions" methodologies that were "based on the actual amount of emissions that werе avoided by the use of the HRSGs." Appellants contend that by helping to produce a given amount of electricity using less fuel and emitting fewer contaminants, HRSGs help to prevent, control, or reduce pollution.
The four Appellants that initially received 100% positive use determinations were Freestone, Freeport, Brazos Valley, and Tenaska.
Like the other four Appellants, Ennis, Hays, Midlothian, and Wise had filed Tier IV applications under the 2008 Rules.
This finding applied to five Appellants-Freestone, Tenaska, Ennis, Hays, and Wise. The ED found that the HRSGs were not used to meet or exceed the environmental laws these Appellants cited in their applications. See
As noted above, the rules cited by three Appellants were accepted, and those cited by the other five were rejected. See supra note 9.
TCEQ cites to its general authority to adopt rules to establish standards. See Tex. Tax Code § 11.31(g)(1). However, section 11.31(g)(1) does not authorize TCEQ to adopt standards that conflict with the provisions of section 11.31, and a rule construed to effectively negate all positive pollution control value of a statutorily defined pollution control property would do just that.