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Freestone Power Generation, LLC v. Texas Commission On Environmental Quality

Court of Appeals of Texas, Third District, Austin

July 11, 2017

Freestone Power Generation, LLC, Appellant
v.
Texas Commission on Environmental Quality; and Richard A. Hyde, P.E., Executive Director of The Texas Commission on Environmental Quality, Appellees Freeport Energy Center, LLC, Appellant
v.
Texas Commission on Environmental Quality; and Richard A. Hyde, P.E., Executive Director of The Texas Commission on Environmental Quality, Appellees Brazos Valley Energy, LLC, Appellant
v.
Texas Commission on Environmental Quality; and Richard A. Hyde, P.E., Executive Director of The Texas Commission on Environmental Quality, Appellees Tenaska Gateway Partners, Ltd., Appellant
v.
Texas Commission on Environmental Quality; and Richard A. Hyde, P.E., Executive Director of The Texas Commission on Environmental Quality, Appellees Ennis Power Company, LLC, Appellant
v.
Texas Commission on Environmental Quality; and Richard A. Hyde, P.E., Executive Director of The Texas Commission on Environmental Quality, Appellees Hays Energy, LLC, Appellant
v.
Texas Commission on Environmental Quality; and Richard A. Hyde, P.E., Executive Director of The Texas Commission on Environmental Quality, Appellees Midlothian Energy, LLC, Appellant
v.
Texas Commission on Environmental Quality; and Richard A. Hyde, P.E., Executive Director of The Texas Commission on Environmental Quality, Appellees Wise County Power Co., LLC, Appellant
v.
Texas Commission on Environmental Quality; and Richard A. Hyde, P.E., Executive Director of The Texas Commission on Environmental Quality, Appellees

         FROM THE DISTRICT COURT OF TRAVIS COUNTY, 200TH JUDICIAL DISTRICT NO. D-1-GN-14-004463, HONORABLE RHONDA HURLEY, JUDGE PRESIDING

         FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT NO. D-1-GN-14-004471, HONORABLE RHONDA HURLEY, JUDGE PRESIDING

         FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT NO. D-1-GN-14-004405, HONORABLE RHONDA HURLEY, JUDGE PRESIDING

         FROM THE DISTRICT COURT OF TRAVIS COUNTY, 126TH JUDICIAL DISTRICT NO. D-1-GN-14-004571, D-1-GN-14-004569, D-1-GN-14-004580, D-1-GN-14-004568, D-1-GN-14-004462, HONORABLE RHONDA HURLEY, JUDGE PRESIDING

          Before Justices Puryear, Pemberton, and Goodwin.

          MEMORANDUM OPINION

          MELISSA GOODWIN, JUSTICE.

         In these 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).[1] Appellants sought property tax exemptions by applying for positive use determinations for heat recovery steam generators (HRSGs) used in their power plants. See Tex. Tax Code § 11.31 (providing for property tax exemptions for pollution control property). The ED issued negative use determinations, and TCEQ upheld his determinations. Appellants filed petitions for judicial review, see Tex. Water Code § 5.351 (providing for judicial review of TCEQ acts), and the cases were assigned to the same judge, consolidated for briefing purposes, and heard together.[2] The trial court affirmed TCEQ's orders, and these appeals followed.[3] For the reasons that follow, we reverse the trial court's judgment and remand for further proceedings.

         BACKGROUND[4]

         Statutory Framework

         In 1993, Texas voters ratified a constitutional amendment authorizing the Legislature to enact general laws exempting 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) (see Tex. H.J.R. Res. 86, §§ 1- 2, 73d Leg., R.S., 1993 Tex. Gen. Laws 5576, 5576-77). The Legislature codified the amendment by enacting section 11.31 of the Tax Code. See Act of May 10, 1993, 73d Leg., R.S., ch. 285, §§ 1, 5, 1993 Tex. Gen. Laws 1322, 1322-24 (codified as amended at Tex. Tax Code § 11.31). Subsection (a) of section 11.31 provides 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). A "facility, device, or method for the control of air, water, or land pollution, " is defined as:

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.

Id. § 11.31(b). Property that meets the statutory definition and qualifies for the exemption is referred to as "pollution control property." See id. § 11.31(c)(3), (f), (h), (i).

         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 id. § 11.31(a)-(d). The applicant must detail "the anticipated environmental benefits from the installation of the" pollution control property, its estimated cost, and "the purpose of the installation . . . and the proportion of the installation that is pollution control property." Id. § 11.31(c). Upon receipt of the application, the ED must determine "if the facility, device, or method is used wholly or partly" to control pollution "and, if applicable, the proportion of the property that is pollution control property." See id. § 11.31(d). He must also notify the chief appraiser of the appraisal district for the county in which the property is located of the use determination. See id.

         The applicant or the appraisal district may appeal the ED's use determination to the TCEQ commissioners. See id. § 11.31(e). The commissioners must consider the appeal at their next regularly scheduled meeting and either affirm the use determination or remand it for re-determination. See id. Such an appeal "is not a contested case" for purposes of the Administrative Procedure Act (APA). See id.; see also Tex. Gov't Code §§ 2001.001-.902. TCEQ's order in such a proceeding may be challenged through a suit for judicial review in district court in Travis County, see Tex. Water Code §§ 5.351, .354, and the district court's judgment is "appealable as are other civil cases in which the district court has original jurisdiction, " id. § 5.355. If an applicant obtains a final positive use determination, i.e., a determination that the property is wholly or partly pollution control property, the applicant can then apply for the exemption with the local appraisal district where the property is located. See Tex. Tax Code § 11.31(i); see also id. § 11.43 (setting forth application requirements). The chief appraiser must accept the ED's positive use determination as "conclusive evidence" that the property (or, if applicable, the proportion of the property that the ED found to be pollution control property) qualifies for the exemption. See id. § 11.31(i).

         2002 Rule Amendments

         In 2001, the Legislature amended section 11.31 to require that TCEQ adopt 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, 2001 Tex. Gen. Laws 1774, 1775 (codified at Tex. Tax Code § 11.31(g)(1), (3)). The amendments prohibited the ED from granting a positive use determination "unless the property meets the standards established under rules adopted under this section." Id. (codified at Tex. Tax Code § 11.31(h)).[5]

         In response, TCEQ amended its rules. See 26 Tex. Reg. 7420 (2001), adopted 27 Tex. Reg. 185 (2002) (codified at 30 Tex. Admin. Code §§ 17.1-.25) (2002 Rules). The 2002 Rules prohibited the ED from determining that property is pollution control property unless (1) the property was "used, constructed, acquired, or installed wholly or partly to meet or exceed 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"-i.e., unless it met the statutory definition of pollution control property-and (2) "the requirements of § 17.15 and § 17.17 of this title (relating to Review Standards and Partial Determination) have been met." See 2002 Rules § 17.4(c). Section 17.15 set out in a "Decision Flow Chart" standards for making use determinations and prescribed three lines of inquiry for the ED to apply. See id. § 17.15 (flow chart located at 27 Tex. Reg. at 303). First, he was to consider whether installation of the equipment allowed the applicant to meet or exceed a specific, identifiable environmental law or regulation. See id. (flow chart and n.3). If he concluded that it did, the ED next was to consider whether the installation provided an environmental benefit "at the site where it was installed." See id. (flow chart and n.4). If the ED answered this second question in the affirmative, the property was considered "eligible" for a positive use determination, and the issue was the proportion of the property that was considered to be pollution control property, as opposed to production property. See id. (flow chart and ns. 6 & 7).

         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 ...

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