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Brazos Electric Power Cooperative, Inc. v. Texas Commission On Environmental Quality

Court of Appeals of Texas, Eighth District, El Paso

September 15, 2017

BRAZOS ELECTRIC POWER COOPERATIVE, INC., Appellant,
v.
TEXAS COMMISSION ON ENVIRONMENTAL QUALITY and RICHARD A. HYDE, Executive Director of TCEQ, Appellees.

         Appeal from the 98th District Court of Travis County, Texas (TC# D-1-GN-14-004531)

          Before Rodriguez, J., Palafox, J., and Larsen, Senior Judge, Larsen, Senior Judge (Sitting by Assignment)

          OPINION

          YVONNE T. RODRIGUEZ, Justice

         The Brazos Electric Power Cooperative (Brazos Electric) and the Texas Commission on Environmental Quality (TCEQ) do not agree on much in this administrative tax appeal, but when it comes to the science underlying this dispute, both parties mostly sing from the same hymnal.

         In a "single-cycle power plant, " a generator uses a single turbine powered by a natural gas combustion engine to generate electricity. The engine gives off heat and the pollutant precursor gas nitrogen oxide (NOx), both of which are vented off into the atmosphere through piping known as a spooling device. By placing a heat steam recovery generator (HRSG) where the spooling device used to be, Brazos Electric can turn its single-cycle power plants into "combined-cycle" power plants that use wasted heat from the gas engine to boil water, create steam, and pass the steam through the blades of a second, steam-powered turbine. A combined-cycle power plant with a HRSG still vents NOx into the atmosphere, but the HRSG lets a plant use a given amount of fossil fuel to effectively power two engines instead of just one, thereby generating more electricity.

         The issue in this case is whether by purchasing and using HRSGs at its two power plants, Brazos Electric is entitled to an ad valorem tax break reserved for devices that are installed to comply with state and federal regulations aimed at abating air pollution. See Tex.Tax Code Ann. §§ 11.31(a)-(b)(West 2015).

         Section 11.31 requires TCEQ's Executive Director to determine whether a device is being used "wholly or partly" for regulatory compliance purposes before granting a tax break. Id. Where a dual-use device has a pollution control function, but the device also makes a facility more productive and more profitable, the Executive Director is limited to granting a tax break that is proportionate with the device's pollution abatement value. See Tex.Tax Code Ann. § 11.31(g)(3)(West 2015). To make this relative function determination, TCEQ uses an algebraic formula known as the cost analysis procedure (CAP) that balances any increased marginal capital costs associated with upgrading from "dirty" technology to "green" technology against any positive potential return on investment, applying a tax rate accordingly. See generally 30 Tex.Admin.Code § 17.17 (2017)(Tex. Comm'n on Envtl. Quality, Partial Determinations)

         TCEQ's administrative rules allow for the CAP formula to result in a zero or negative value. When that happens, TCEQ denies the tax break. 30 Tex.Admin Code § 17.17(d). TCEQ reasons that the Legislature intended for the Section 11.31 tax break to be used only to coax businesses into complying with environmental regulations when compliance would otherwise be "economically irrational" and cost-prohibitive. But if an applicant either saves money on the front end by adopting cheaper green technology over "dirty" technology, or if on the back end more expensive green technology ultimately pays for itself in the long run by increasing profits, TCEQ believes regulatory compliance would be economically rational, rendering Section 11.31 tax break unnecessary and unavailable.

         That brings us to the second point on which Brazos Electric and TCEQ agree. For purposes of this appeal, both parties concede that the CAP formula is the only proper decisional framework to apply, at least in theory. But in its primary appellate issue, Brazos Electric maintains that even if the CAP formula results in a zero or negative number in a HRSG application, TCEQ cannot by statute deny HRSGs a tax break, since HRSGs appear on a preordained list of properties at Tex.Tax Code Ann. § 11.31(k)(West 2015)(referred to by the parties as "the k-list") that are mandatorily entitled to receive some kind of tax break under Tex.Tax Code Ann. § 11.31(m).

         We disagree with Brazos Electric's reading of Subsection (m), and instead agree with TCEQ's position that Subsection (m) does not require the agency to issue a tax break to k-list properties. Rather, Subsection (m) only requires TCEQ to give k-list applicants certain administrative preferences during TCEQ's decisional process; the agency still retains the discretion to decide whether and on what terms a k-list applicant receives a tax break. We also disagree with Brazos Electric's other two alternative appellate contentions: namely, that TCEQ has engaged in informal rulemaking in violation of the Administrative Procedure Act's formality requirement; and that no reasonable person could reject the three alternative proposed CAP formulations Brazos Electric submitted in its tax applications to TCEQ.

         For the following reasons, we will affirm the judgment of the trial court.

         BACKGROUND

         The Administrative Framework

         Beginning in 1994, the Texas Constitution permitted the Legislature to pass laws exempting from taxation "all or part of real and personal property used, constructed, acquired, or installed wholly or partly to meet" state and federal environmental regulations aimed at "the prevention, monitoring, control, or reduction of air, water, or land pollution." Tex.Const. art.VIII, § 1-l (a)-(b). Relying on that grant of authority, the 73rd Legislature passed a law granting a person 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." See Tex.Tax Code Ann. § 11.31(a). A facility, device, or method for controlling air pollution is defined as "any . . . equipment[] or device . . . that is used, constructed, acquired, or installed wholly or partly to meet or exceed rules or regulations adopted by any environmental protection agency . . . for the prevention, monitoring, control, or reduction of air . . . pollution." Tex.Tax Code Ann. § 11.31(b).

         To qualify for this tax break, an applicant must submit an application detailing three factors:

(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.

Tex.Tax Code Ann. § 11.31(c). "If the installation includes property that is not used wholly for the control of air . . . pollution, the person seeking the exemption shall also present such financial or other data as the executive director [of TCEQ] requires by rule for the determination of the proportion of the installation that is pollution control property." Id.

         The Texas Legislature vested TCEQ's Executive Director with the power to administer this tax break, see Tex.Tax Code Ann. § 11.31(d), and created a two-step process for seeking a tax exemption. First, the exemption-seeker must file an application for a use "determination" with the Executive Director, who decides whether certain property qualifies wholly or partially as pollution-control property. Tex.Tax Code Ann. §§ 11.31(c), (d). If the property is only partially used for pollution control, the Executive Director can only grant an exemption that is proportional to that property's use for pollution control. Tex.Tax Code Ann. §§ 11.31(c), (g)(3). Once the Executive Director has rendered his or her decision, the applicant may take the decision to its local appraisal district and obtain tax relief. Tex.Tax Code Ann. § 11.31(d). However, if the applicant or the appraisal district is unhappy with the Executive Director's decision, either party may appeal to the TCEQ commissioners. Tex.Tax Code Ann. § 11.31(e); 30 Tex.Admin.Code § 17.25 (2017)(Tex. Comm'n on Envtl. Quality, Appeals Process). The appeal hearing is uncontested for purposes of the Administrative Procedures Act. Id. At this second step of the process, the TCEQ commissioners, sitting at a regularly scheduled meeting, may either affirm the Executive Director's decision or else remand to the Executive Director for a redetermination. Id. From there, an aggrieved party may seek judicial review of the agency determination in district court. Tex.Water Code Ann. § 5.351(a)(West 2008).

         TCEQ's Cost-Analysis Procedure and the "k-List"

         The adjudicative process TCEQ has for Section 11.31 tax breaks has changed throughout the years. We discuss the previous processes leading up to Brazos Electric's applications fully in order to provide context about how for years now TCEQ and stakeholders have struggled with determining tax breaks for HRSGs.

         Initially, in determining whether and to what extent property qualified for a tax break, the TCEQ processed exemption applications using a three-tiered process:

Tier I-reserved for equipment identified on an internal TCEQ list that TCEQ had previously determined qualified for a 100% exemption;
Tier II-reserved for equipment not on the TCEQ list that nevertheless qualified for a 100% exemption; and
Tier III-reserved for equipment not on the TCEQ list that was partially exempt from qualification.

See 30 Tex.Admin.Code §§ 17.2(8-10)(2017)(Tex. Comm'n on Envtl. Quality, Definitions). For Tier III applicants, TCEQ used and continues to use the CAP formula to determine an applicant's effective tax break rate. See 30 Tex.Admin.Code § 17.17(a)(2017)(Tex. Comm'n on Envtl. Quality, Partial Determinations). At core, the CAP balances out the marginal capital costs of upgrading equipment against any potential return on investment, expressing that value as a percentage of the new technology's overall cost. The percentage is used to determine if an applicant may receive a tax break, and if so, how much.

         The CAP first takes the capital cost of comparable equipment without the pollution control feature (Capital Cost Old), and then subtracts that value from the capital cost of the actual equipment at issue with the pollution control feature (Capital Cost New). 30 Tex.Admin.Code § 17.17(c)(1). The difference is the marginal cost that TCEQ asserts is the capital value attributable to pollution control efforts. From there, the CAP further deducts the net value of any marketable material generated by the equipment over its lifetime; this variable is known as the "net present value of the marketable product" (NPVMP). Id. §§ 17.17(c)(1)-(2). Whatever amount is leftover once the NPVMP is subtracted then is divided by the capital cost of the actual equipment (Capital Cost New) to get a percentage. Id. If the amount is a positive percentage, that percentage is used as the percentage of the tax break. "If the cost analysis procedure . . . produces a negative number or a zero, the property is not eligible for a positive use determination." Id. § 17.17(d). We set out a simplified algebraic representation of the CAP formula below in Table 1.1:

         (Image Omitted)[1]

         Table 1.1

         While the CAP functioned well as a tool to compare old technology with new technology, both parties agree that the CAP presented a challenge for TCEQ's use determination process both for dual-use properties that served joint pollution control and production purposes, and for emergent technologies whose capital costs could not be neatly tethered to those of previously-known technical analogues.

         In 2007, the Legislature amended the Tax Code by creating eighteen categories of property, technology, and equipment located in Tex.Tax Code Ann. § 11.31(k) that both parties refer to as the "k-list." See Act of June 15, 2007, 80th Leg., R.S., ch. 1277, § 4, 2007 Tex.Gen.Laws 4261, 4264. HRSGs are among the technologies that appear on the k-list. Tex.Tax Code Ann. § 11.31(k)(8).

         Brazos Electric and TCEQ clash over what placement on the k-list actually means, and we will address that specific controversy later in the opinion. Suffice to say, in response to the new legislation, TCEQ took the position that the k-list created an expedited review process for those particularly listed technologies, but that the Legislature did not require the agency to issue per se positive use determinations for those technologies. See 33 Tex.Reg. 932, 933 (2008)(codifying former 30 Tex.Admin.Code 17.17(d) and (e))(Tex. Comm'n on Envtl. Quality, Background and Summary of the Factual Basis for the Adopted Rules).[2]

         TCEQ created a new category of applications-Tier IV-for k-list technologies. Id. at 942. TCEQ also adopted a new rule allowing Tier IV applicants to propose their own ad hoc methodologies that TCEQ could use to calculate use percentages for that technology, all subject to the Executive Director's approval. See id. at 934 (adopting 30 Tex.Admin.Code § 17.17 (d), (e)(2008), repealed and modified in part, 33 Tex.Reg. 10964, 10982 (2010))("The adopted amendment adds new §17.17(d) which explains that it is the responsibility of the applicant to determine a reasonable method for calculating a partial determination for all items submitted under a category or categories contained in Part B of the ECL [i.e. the k-list].").

         TCEQ Tackles Tax Breaks for HRSGs Using Ad Hoc Tier IV Review; Appraisal Districts Revolt; Legislature Requires TCEQ to Apply Rules "Uniformly to All Applicants, " Including k-List Applicants

         Following the Legislature's adoption of the k-list and TCEQ's adoption of Tier IV review for k-list properties and technologies, TCEQ received at least 35 applications for use determinations for HRSGs and the related enhanced steam turbine systems (ESTs) under Tier IV. See Tex. Leg. Budget Bd., Texas State Government Effectiveness and Efficiency: Selected Issues and Recommendations at 109, 111-12 (Jan. 2009). According to TCEQ, various applicants proposed various methods for calculating pollution control percentages. On May 1, 2008, TCEQ's Executive Director, using the ad hoc formulas proposed by the applicants themselves, approved twenty-five applications for 100 percent positive use determinations for HRSG applicants, but he made negative use-determinations for the steam turbines attached to the HRSGs.

         Appraisal districts appealed positive-use determinations in six cases, arguing that the HRSGs in those specific applications were being used solely as production equipment and should not receive any tax breaks at all (the Group 1 Appeals). Efforts at obtaining a mediated settlement on proper HRSG use-determination methodology through a "workgroup" between applicants and appraisal districts failed, and TCEQ's commissioners docketed the Group 1 Appeals for February 2009. Those appeals were continued indefinitely at the Executive Director's request.

         Meanwhile, in January 2009, the Legislative Budget Board, considering the Tier IV controversy, its effect on HRSG applicants, and the potential loss of millions of dollars of tax revenue as a result of inconsistent decisional methodologies, [3] recommended that the Legislature

[A]mend Texas Tax Code, Section 11, to require TCEQ to use the CAP formula as a maximum exemption when making a use determination for equipment listed in Texas Tax Code, Section 11.31(k). The maximum exemption granted any applicant requesting an exemption for equipment [on the k-list] . . . should not exceed the exemption that would be granted if the applicant were using the formula. The CAP formula includes variables that account for the economic benefit to the property owner of the pollution control equipment. TCEQ allows Tier IV applicants to develop their own methodology to encourage innovation in use determination. If the agency would prefer to continue to use such innovation, the statutory change should be permissive in allowing applicants to develop their own use determination methodology. However, that methodology should not exceed the maximum allowable use determination from an application of the CAP formula.

Tex.Leg.Budget Bd., at 113-14.

         After the Legislative Budget Board issued its recommendation, the Texas Legislature altered the landscape yet again in May 2009 by passing Tex.Tax Code Ann. § 11.31(g-1). See Act of May 25, 2009, 81st Leg., R.S., ch. 962, § 3, 2009 Tex.Gen.Laws 2556, 2557-58 (effective Sept. 1, 2009). That subsection states:

The standards and methods for making a determination under this section that are established in the rules adopted under Subsection (g) apply uniformly to all applications for determinations under this section, including applications relating to facilities, devices, or methods for the control of air, water, or land pollution included on a list adopted by the Texas Commission on Environmental Quality under Subsection (k).

         According to its brief, TCEQ interpreted Subsection (g-1) as requiring it to abandon ad hoc Tier IV review and instead apply the CAP formula to all applications for use determinations moving forward, including those applications concerning k-list properties. In 2010, TCEQ finally codified this understanding by repealing Tier IV review and instead requiring all applicants to use the CAP formula to determine use percentages, regardless of whether the subject property appeared on the k-list or not. See 33 Tex.Reg. 10964, 10982 (2010).

         Brazos Electric's HRSG Exemptions are Rejected

         The Initial Applications

         In Application #13544, Brazos Electric sought a 100 percent positive use determinations for its Johnson County facility in April 2009. In May 2009, TCEQ informed Brazos Electric that it was abating its technical review of the Johnson County application until the six Group 1 Appeals were resolved. In September 2009, TCEQ informed Brazos Electric that it was subject to the uniform-decision requirements of the newly-enacted Subsection (g-1), which would affect its application.[4] From that point, administrative activity apparently stopped until March 7, 2012, when Brazos Electric submitted a revised use determination application for its Johnson County facility. At that time, Brazos Electric also submitted Application #16413, seeking a separate use determination for the HRSG at its Jack County facility.

         In its revised Johnson County application, Brazos Electric applied the CAP formula using $28, 111, 986 as the Capital Cost New variable, $0 as the Capital Cost Old variable, and $11, 039, 233.23 as the projected NPVMP production variable, which resulted in a positive use determination of .73%.[5] In its Jack County application, Brazos Electric used $105, 244, 426.00 as the Capital Cost New variable, $0 as the Capital Cost Old variable, and $26, 671, 381.03 as the projected NPVMP production variable, which resulted in a positive use determination of .66%.[6]

         The Executive Director summarily rejected both application and issued a negative use determination on July 2012, stating only: "Heat recovery steam generators and associated dedicated ancillary equipment are used solely for production; therefore, are not [sic] eligible for a positive use determination." Brazos Electric appealed to the Commissioners. On December 10, 2012, the TCEQ Commissioners reversed thirteen of the Executive Director's HRSG use determinations (including Brazos Electric's two appeals), vacated his orders, and remanded the applications to him for new use determinations.

         Proceedings on Remand to the Executive Director

         On remand, the Executive Director issued Notices of Deficiency to Brazos Electric with respect to both the Johnson and Jack County facilities, requesting more information and stating that he believed the appropriate Capital Cost Old variable that should be used was not "$0, " but rather the cost of a boiler that produced the same amount of steam as a HRSG. In response, Brazos Electric objected to the use of the boiler as the Capital Cost Old variable. Brazos Electric recalculated the original CAP formulation using a slightly lower NPVMP value at the Johnson County facility, resulting in a proposed positive use determination of .29%.[7] The Jack County percentage stayed the same. "Without waiving its right to pursue" those use determinations, Brazos Electric also proposed four alternative methods for determining the tax break. Two methods did not apply the CAP formula. Brazos Electric has abandoned these options on appeal; we need not discuss them further. The other two methods applied the CAP using different variables.

         In the first revised CAP formulation, Brazos Electric suggested that a spooling device worth $150, 000 could be used to determine that Capital Cost Old factor, since the spooling device-essentially, piping-would fill the space between the natural gas generator and the exhaust stack if the HRSG were removed from the plant. It is undisputed that a spooling device does not produce steam and has no productive value. This proposed CAP formulation would result in a .76% usage score at the Johnson County facility[8] and a .52% usage score at the Jack County facility.[9]

         In its second revised CAP formulation, Brazos Electric reiterated its position that $0 should be used as the Capital Cost Old variable because no technology comparable to a HRSG existed, and the company replaced the original $11 million NPVMP variable proposed in its initial application with a $0 NPVMP variable, resulting in a 100 percent use determination at both facilities.[10] Brazos Electric reasoned that the $0 NPVMP input was appropriate because the CAP formula required it to "imagine a world that bears little resemblance to reality" and presuppose that a HRSG that was a "stand-alone" item not connected to either a fuel input or an energy output; under those conditions, the HRSG had zero productive value.

         Following a second Notice of Deficiency issued by the Executive Director and a response from Brazos Electric in which both parties respective positions remained unchanged, the Executive Director ultimately rejected all of Brazos Electric's proposed calculations, finding that the technology most similar to a HRSG was not spooling device/piping, but rather a steam boiler whose value exceeded the value of the HRSG. In applying the cost of this boiler using the CAP, the Executive Director issued negative scores for both the the Johnson County facility HRSG (-82.55%)[11] and the Jack County facility HRSG (-277.50%).[12] Based on these scores, the Executive Director issued a negative use determination and denied the tax break. The Executive Director explained his reasons for rejecting Brazos Electric's proposed methodologies:

• Modified CAP Calculation (64%) [Spooling Device as CCO]: Capital Cost New (CCN) includes dedicated ancillary systems. Allowing Capital Cost Old (CCO) to be equal a pipe [sic] or spool piece ignores that HRSGs are alternative production equipment. CCO is the cost of comparable equipment without the pollution control. If the HRSGs produce steam, then comparable equipment that produces steam without pollution control is a boiler. The ED does not find it reasonable to equate CCO to a spool piece.
• Modified CAP Calculation (100%): Capital Cost New (CCN) includes dedicated ancillary systems. Allowing Capital Cost Old (CCO) to be $0 ignores that HRSGs are alternative production equipment. CCO is the cost of comparable equipment without the pollution control. If the HRSGs produce steam, then comparable equipment that produces steam without pollution control is a boiler. The ED does not find it resoanable to attribute $0 cost to CCO in the CAP.
• CAP as proposed by the executive director . . .: The CAP formula was adopted by the commission to provide a methodology for determinations that distinguishes [sic] 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. The fact that the CAP calculated results in a negative number shows that the HRSGs' and dedicated ancillary equipment's pollution prevention benefit is negative by its ability to produce a product.

         On second appeal, the Commissioners affirmed the Executive Director's decision.

         Proceedings in District Court

         Brazos Electric brought an action under Tex.Water Code Ann. § 5.351 seeking declaratory relief in Travis County district court. Following review of the administrative record and a hearing, the Travis County district court affirmed TCEQ's denial of the tax break. This appeal followed. We hear this case on transfer from our sister court, the Third Court of Appeals in Austin, by order of the Texas Supreme Court. We apply the precedent of that court and defer to that court's decisions to the extent required by the Rules of Appellate Procedure. Tex.R.App.P. 41.3.

         DISCUSSION

         Introduction

         The Court's Limited Role in Administrative Appeals and What Questions We May Answer

         This case has many moving parts on both a macro and micro level. At the macro level, it implicates numerous important questions about Texas' environmental policy and the tax incentives given to encourage businesses to "go green." It also implicates our fidelity to the Texan constitutional principle that taxes should be equal and uniform unless voters amend the Constitution to say otherwise, as well as our deference to the legislative balancing act of ensuring both that businesses prosper and that our schools, roads, and infrastructure are all properly funded with taxes. Although the litigants on both sides paint with broad strokes, our role to play in answering these macro-level questions is much narrower and largely limited by the micro-level action of administrative mechanisms and appellate rules. We only answer those questions which are necessary to the resolution of this appeal as between the two parties before us, and only reach those questions actually raised by these two parties. We winnow away side issues to keep our opinions clear, focused, usable, and as short as practicable. Tex.R.App.P. 47.1. So we pause at the outset to clarify what this case is not about.

         This case is not about whether we believe it would be good policy for Brazos Electric to get a tax break for using HRSGs at their power plants. We do not make policy; we interpret law. In re Allen, 366 S.W.3d 696, 708 (Tex. 2012). Deciding who should get what tax break and under what circumstances is the Legislature's job, not ours, Tex.Const. art. VIII, §§ 1(a), 1-l, and administering the tax break set by the Legislature is the TCEQ Executive Director's job, not ours. Tex.Tax Code Ann. § 11.31(d). "Where the action under review involves a matter that the legislature has committed to the agency's discretion or judgment, a court will not determine the advisability or wisdom of the agency's action but will sustain that action if it is reasonably supported by substantial evidence." 2 Tex.Jur.3d Administrative Law § 220 (2017). We are limited to determining whether TCEQ, in rendering its tax decision, acted arbitrarily and capriciously, or otherwise exceeded the statutory authority granted to it by the Legislature. Mont Belvieu Caverns, L.L.C. v. Tex. Comm'n on Envtl. Quality, 382 S.W.3d 472, 489 (Tex.App.--Austin 2012, no pet.). If TCEQ acted within the reasonable bounds of its statutory authority, we have no role to play here. Id.

         This case is also not about whether we believe the CAP formula itself is reasonable, fair, wise, outdated, or prescient, or even whether we believe it takes into account all the intangible factors that might be relevant in determining whether equipment serves a pollution-control function and whether its adoption is economically rational. Why not? Because the Rules of Appellate Procedure prohibit us from entertaining those questions here. While Brazos Electric complains about a laundry-list of bureaucratic indignities, Brazos Electric also repeatedly disavows any challenge to the reasonableness of the CAP formula on appeal.[13] The parties both agree in their briefs that the CAP formula is the yardstick we must use in deciding whether TCEQ-acting within the proper bounds of its statutory authority-can grant the tax break in this case. We are constrained to considering only those legal issues raised in the briefs. Tex.R.App.P. 38.1(f). Brazos Electric asks us primarily to sketch out the boundaries of the statute and then decide whether the Executive Director acted permissibly within those boundaries. Any ancillary issues not fairly subsumed within the statutory construction question, including the reasonableness of the CAP formula, have not been assigned for our review, and in civil cases, we are prohibited from reaching out and reversing a judgment on the basis of unassigned error. See Pat Baker Co., Inc. v. Wilson, 971 S.W.2d 447, 450 (Tex. 1998).

         Accepting as we must that the only measure we can employ in determining whether Brazos Electric is entitled to the tax break is the CAP formula-with the caveat that TCEQ can only apply the CAP formula within the proper constraints of the enabling provisions of the Tax Code-we proceed.

         The Precise Issues Raised by Brazos Electric's Opening Brief

         Brazos Electric raises three issues on appeal. In Issue One, Brazos Electric challenges TCEQ's authority to deny the tax break at all, arguing that Tex.Tax Code Ann. § 11.31(m) requires TCEQ to grant HRSG users some kind of tax break-though Brazos does not specify in what amount. In Issue Two, Brazos Electric contends that TCEQ violated that Administrative Procedures Act by effectively adopting an "informal practice" of denying all HRSG tax applications and refusing to allow any HRSG user to claim an exemption without undergoing the formal rulemaking process. Finally, in Issue Three, Brazos maintains if TCEQ retained discretion to decide whether the tax break applies, TCEQ arbitrarily and capriciously denied the tax break in this case by comparing a HRSG to a particular kind of boiler steam generator, the value of which exceeds a HRSG.

         I.

         Issue One: Statutory Construction

         In Light of Subsection (m), Can TCEQ Deny a Section 11.31 Tax Break to k-list Properties When the Application of the CAP Formula Results in a Zero or Negative Value?

         We begin with the statutory construction problem underpinning most of Brazos Electric's arguments. In Issue One, Brazos Electric contends that Subsection (m) withdraws from TCEQ any ability or discretion to deny HRSGs a Section 11.31 tax break. Thus, even if an objective application of the CAP formula results in a zero or a negative number-indicating that TCEQ has determined the HRSG was not, in fact, installed for a pollution-control purpose-TCEQ must still grant Brazos Electric a tax break of some kind per Subsection (m).

         We disagree.

         A.

         Standard of Review and Statutory Construction Standards

         The limits of TCEQ's discretionary authority under Subsection (m) implicate a question of statutory construction. We review questions of statutory construction de novo. Mont Belvieu Caverns, L.L.C., 382 S.W.3d at 486. However, we are also mindful that we hear this case on transfer from the Third Court of Appeals by order of the Supreme Court of Texas. In this procedural posture, we are bound to apply the precedent of that court. See Tex.R.App.P. 41.3. To the extent that the Third Court has answered an open statutory construction question relevant to this case, we cannot disregard that interpretation but must apply it, regardless of whether we personally might have decided the issue differently. Id.[14]

         Our primary purpose in construing a statute is to give effect to the Legislature's intent. TG S-Nopec Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011). The Code Construction Act recognizes that in interpreting statutes, this Court has leeway to consider many disparate factors, regardless of whether a statute is ambiguous or not. See Tex.Gov't Code Ann. § 311.023 (West 2013). That being said, the Texas Supreme Court has instructed us to always begin our construction of the statute by using the statute's words, as the Legislature's carefully-chosen words are the truest measure of legislative intent. TG S-Nopec Geophysical Co., 340 S.W.3d at 439. "[I]f a statute is unambiguous, we adopt the interpretation supported by its plain language unless such an interpretation would lead to absurd results." Id. "[I]n the area of tax law, like other areas of economic regulation, a plain-meaning determination should not disregard the economic realities underlying the transactions in issue." Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 637 (Tex. 2013).

         In interpreting provisions of the Tax Code, "[w]ords and phrases shall be read in context and construed according to the rules of grammar and common usage." Tex.Gov't Code Ann. § 311.011(West 2013). "Words and phrases that have acquired a technical or particular meaning, whether by legislative definition or otherwise, shall be construed accordingly." Id. We read statutes as cohesive texts; we do not cherry-pick words and phrases, read them in isolation, and then decide they alone represent the Legislature's intent while ignoring the proper context of those words and phrase. Harmonization of all statutory provisions in a way that is consistent with legislative intent is always our primary goal, if at all possible. "[W]e consider the statute as a whole, giving effect to each provision so that none is rendered meaningless or mere surplusage."

          TIC Energy & Chem., Inc. v. Martin, 498 S.W.3d 68, 75 (Tex. 2016). We presume that the Legislature intended for its statutes to be constitutional, and we will strive to give statutes a reading that renders them constitutional. Tex.Gov't Code Ann. § 311.021(1); In re Allcat Claims Srv., L.P., 356 S.W.3d 455, 468 (Tex. 2011)(orig. proceeding).

         "In addition to these general principles that guide our construction of tax code section 11.31, statutory exemptions from taxation, like the pollution-control exemption, are subject to strict construction because they undermine equality and uniformity by placing a greater burden on some taxpaying businesses and individuals rather than placing the burden on all taxpayers equally." [Internal citations, quotation marks, and alterations omitted]. Mont Belvieu Caverns, 382 S.W.3d at 486-87. "All doubts are resolved against the granting of an exemption." Id. at 487.

         In interpreting the relevant Tax Code provisions, there is also a potential administrative deference principle at play. An agency's interpretation of a statute is entitled to our "serious consideration." TG S-Nopec Geophysical Co., 340 S.W.3d at 438. If the statute is clear, both we and the administrative agency have a duty to apply that statute, and we may overrule an administrative interpretation of a statute. But "[i]f there is vagueness, ambiguity, or room for policy determinations in a statute or regulation . . . we normally defer to the agency's interpretation unless it is plainly erroneous or inconsistent with the language of the statute, regulation, or rule." Id.

         B.

         The General Purpose and Provisions of Section 11.31 as a Whole

         As the principles of statutory construction make clear, the language of Subsection (m) is meaningless without context. Before we can understand what Subsection (m) means, we must first understand how the tax break in Section 11.31 works generally, what the neighboring provisions around Subsection (m) mean, and where Subsection (m) fits into this legal schematic. In reading the neighboring subsections of Section 11.31, we find these to be Section 11.31 provision's relevant highlights:

• Subsection (a)-The property must actually function to control pollution as a tax break condition: Subsection (a) defines the threshold scope of the tax break at issue: "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."
This provision establishes that an applicant can receive a tax break only if their property "is used wholly or partly" for pollution-control purposes. The negative implication of this provision is that if property is not used for pollution-control purposes, the tax break must be denied. Subsection (a) sets eligibility for the tax break in terms of the property's function.
Subsection (b)-Pollution-control property must also actually be adopted for the specific purpose of complying with environmental regulations or else the tax break must be denied: Subsection (b) defines what a "facility, device, or method for the control of air, water, or land pollution" is: "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 party to meet or exceed rules or regulations adopted by any environmental protection agency . . . for the prevention, monitoring, control, or reduction of air, water, or land pollution." [Emphasis added].
This subsection makes clear that in evaluating eligibility for this tax break, the agency must not only consider whether property has a pollution-control function, but also the subjective purpose behind the adoption of that property. Under Subsection (b), if an applicant shows it has adopted "green" technology that wholly or partly reduces pollution, but the purpose of that adoption was not to comply with regulations, the tax break must be denied.
Subsection (c)-Applicants must submit, and TCEQ may consider, information related to the environmental benefits of the property, the cost of the property, the purpose of the property, and any other "financial or other data" the Executive Director requires by rule, before a decision can be made about if the applicant is eligible for the tax break under the threshold requirements set by Subsections (a) and (b): Subsection (c) requires applicants to submit to TCEQ's Executive Director information regarding the following three factors: (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.
The Executive Director also has the explicit authority to require and consider additional information if the application involves property that is not "wholly" used to prevent pollution: "the person seeking the exemption shall also present such financial or other data as the executive director requires by rule for the determination of the proportion of the installation that is pollution control property." This provision gives the Executive Director the power to balance disparate factors and information in coming to his decision.
• Subsections (d) and (h)-The Executive Director has discretion to determine if a particular applicant has shown they are statutorily eligible for the tax break, and, if so, in what amount; he may not grant a tax break if the applicant is ineligible for the tax break under TCEQ's rules: Subsection (d) states: "Following submission of the information required by Subsection (c), the executive director of the Texas Commission on Environmental Quality 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." Subsection (h) states: "The executive director may not may a determination that property is pollution control property unless the property meets the standards established under rules adopted under this section."
These provision shows the Legislature vested a specific officer-the Executive Director of TCEQ-with decision-making authority. Indeed, on appeal, the Commissioners have no power to overrule him and substitute their own judgment for his; they may only affirm his judgment, or else remand for further proceedings. Tex.Tax Code Ann. § 11.31(e). The Executive Director is limited to grant a tax break only when the applicant proves it is entitled to the tax break under TCEQ's internal rules.
• Subsection (g)-The Commission has explicit rulemaking authority to implement its own rules in deciding how it wants to administer Section 11.31 tax break applications, so long as the rules are sufficiently specific to ensure equal and uniform application across the board and the rules allow for distinctions to be made between proportion of property used to prevent pollution v. proportion used to produce goods or services. Per Third Court precedent, this rulemaking authority allows TCEQ to consider "economic irrationality" as a factor in assessing purpose of installation: Subsection (g) allows the Commission to adopt rules to implement Section 11.31, provided that those rules must "(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."
This subsection tracks the language of Subsection (a) and (b) and implicitly recognizes that the Executive Director can only grant tax breaks to entities with property that both functions as a pollution-control device and is adopted for the purpose of complying with environmental regulations. It also implicitly recognizes that the Commission can adopt rules, like the CAP formula, that balance the relative values of pollution control and productive aspects in determining whether the property was actually adopted for purposes of complying with environmental regulations under Subsection (b).
• The Third Court of Appeals, whose precedent we must apply in this case, has put a further gloss on this particular subsection and what we may infer about the Legislature's intent. In interpreting Subsection (g)(3)--the provision directing TCEQ to adopt rules of determination that account for the difference between pollution-control and productive aspects of property--, the Third Court held that this subsection "reflected] legislative intent to limit the pollution-control property exemption solely to capital investment made to comply with state or federal environmental regulations that does not yield productive benefits and would thus otherwise be irrational economically." [Emphasis added]. Mont Belvieu Caverns, 382 S.W.3d at 489. The Third Court also noted that its plain-language read of Subsection (g)(3) as allowing TCEQ to consider economic irrationality as a factor was reflected in the law's legislative history. Id. (citing relevant portions of legislative history). Thus, in considering the purpose of property's installation under Subsection (b), the Third Court of Appeals has found that Subsection (g)(3) allows TCEQ to consider economic irrationality in its analysis, and to limit the granting of these tax breaks to situations in which compliance with an environmental regulation would be economically irrational.[15]
• Subsection (g-1)-The Commissions' Rules of Decision apply uniformly to all Section 11.31 tax break applicants, even to those properties that appear on the k-list: Subsection (g-1) makes clear that k-list properties are not exempt from the generally applicable rules of decision As we will explain below, k-list properties do get some administrative preferences: under Subsection (m), k-list applicants are excused from providing one of the three required categories of information mandated by Subsection (c)(i.e., k-list applicants do not have to show their property has an environmental benefit), and Subsection (m) applicants are also entitled to expedited view within 30 days. Still, Subsection (g-1) makes clear that k-list applicants do not otherwise receive special treatment in the administrative decision-making process and should be subject to the same standards as all other applicants. In this context, this also means that we use the CAP formula to measure tax break eligibility, since that is the specific rule that TCEQ has chosen to implement.

         In summary, after reading all the relevant provisions of Section 11.31 together and in concert with the relevant case law, we distill the Legislature's intent into four overarching points:

1) Property is eligible for a tax break under Section 11.31 if it is used wholly or partly for pollution control, (i.e. the property has a "green" function); AND
2) The property does not qualify as being wholly or partly for pollution control purposes unless it is adopted for the specific purpose of complying with an environmental regulation (i.e. the property has to be installed for a "green" purpose as defined by government regulators); AND
3) TCEQ must make proportional determinations as to how much of a property's purpose actually goes to pollution control, and how much goes to production purposes that generate more profit for the applicant (i.e. the purpose of this specific tax break is to encourage compliance with environmental regulations, not to encourage productivity and allow businesses to get a financial boon and then exempt their higher profits from taxation); AND
4) In considering whether the actual purpose for the installation of the subject property is pollution control, TCEQ must take into account financial realities and must consider whether it would otherwise be economically irrational for the applicant to adopt "green" technology and comply with governmental regulations (i.e. if it is economically rational for the applicant to adopt "green" technology, say because the technology is so productive or so much cheaper than "dirty" alternatives, then the tax break must be denied, as the Legislature intended for this tax break only to be used to coax businesses into complying with environmental regulations where compliance would otherwise be cost-prohibitive once return on investment is taken into account).

         Under Section 11.31, a property's green function and green purpose must be balanced against the countervailing need to ensure that the tax break is given only to that portion of the property actually attributable to pollution control efforts and not profitable production efforts, and only to the extent that compliance with regulations would be economically irrational, all things considered-including overall return on investment. Having put the legal scaffolding around Section 11.31 together, we must now determine whether and to what extent Subsection (m) alters or destroys the general premises underpinning Section 11.31's purpose with respect to k-list properties.

         C. Where Does Subsection (m) Fit In To Section 11.31's Overall Framework?

         Brazos Electric threads a fine needle on appeal. It does not challenge the CAP formula, but asserts only that TCEQ cannot deny k-list properties a Section 11.31, even when the CAP formula equals zero or less, [16] because Subsection (m) contains mandatory language that always requires a positive use determination for k-list properties.

         Subsection (m) states:

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 Subsection (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 Ann. § 11.31(m).

         For two reasons, we reject the argument that an application of the CAP formula that results in an answer of zero or less is prohibited by statute because that is the functional equivalent of a negative-use determination, and Subsection (m) requires the Executive Director to always issue a positive-use determination for k-list property.

         First, while Subsection (m) does require the Executive Director to assume k-list properties have an environmental benefit under Subsection (c)(1) and to grant k-list applicants expedited review, Subsection (m) also does not withdraw all discretion from the hands of the Executive Director. He must still determine to what extent the pollution-control property was actually installed "wholly or partly" for regulatory compliance purposes.

         Second, in measuring the Executive Director's discretion set by the phrase "wholly or partly, " we find that the "part" in "partly" is consistently used throughout Section 11.31 to mean "less than whole, " which can embrace zero or negative values-and, by extension, negative use determinations. As such, when viewed with the understanding that phrases should be defined consistently throughout a statute, and when read in harmony with the other portions of Section 11.31, Subsection (m) does not stand as a bar to a zero or negative finding. Subsection (m) simply creates a presumption that k-list property has an environmental benefit, but TCEQ may still find, once all relevant factors are considered, that a specific applicant is not actually using k-list property for the purpose of complying with cost-prohibitive environmental regulations.

         1.

         Subsection (m) Does Not Eliminate TCEQ's Discretion in Administering the Section 11.31, Nor Does it Abrogate the Executive Director's Duty to Determine Which "Part" of a k-List Property is Actually Being Used for Pollution Control Purposes and Not Productive Purposes

         In determining whether, as Brazos Electric contends, TCEQ must grant a HRSG "something" in terms of a tax break, we must address which portions of Subsection (m) are mandatory, and which are not.

         At issue here is what the word "shall" means in the phrase "the executive director . . . 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 . . . ." [Emphasis added]. Brazos Energy is correct in pointing out that "unless the context in which the word or phrase appears necessarily requires a different construction or unless a different construction is expressly provided by statute . . . '[s]hall' imposes a duty." Tex.Gov't Code Ann. § 311.016(3)(West 2013). "We generally construe the word 'shall' as mandatory, unless legislative intent suggests otherwise." Albertson's, Inc. v. Sinclair, 984 S.W.2d 958, 961 (Tex. 1999). However, words and phrases in a statute are read in context, not in isolation, and separate provisions of the same statute are read harmonically so that they do not conflict, if at all possible. TIC Energy & Chem., Inc., 498 S.W.3d at 75. As the Code Construction Act and the case law both acknowledge, "shall" can mean different things in different contexts. "In determining whether the Legislature intended a provision to be mandatory or directory, we consider the plain meaning of the words used, as well as the entire act, its nature and object, and the consequences that would follow from each construction." Albertson's, Inc., 984 S.W.2d at 961.

         Here, the use of the word "shall" when read in context does not require the Executive Director to issue per se positive use determinations to k-list property. Yes, Subsection (m) is largely framed in terms of mandatory language: if property appears on the k-list, then "not later than the 30th day after the date of receipt of the information required by Subsections (c)(2)[cost of the facility] and (3)[information about the purpose of the facility], and without regard to whether the information required by Subsection (c)(1)[environmental impact information] 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 . . . ." [Emphasis added]. But "shall determine" is only half the story. The prepositional phrase in the middle of Subsection (m) is the real focus of this passage. Reworked, the sentence reads that the Executive Director "shall determine that the facility . . . is used wholly or partly" to control air pollution "not later than the 30th day after" the application is received and "without regard to whether the information required by Subsection (c)(1) has been submitted." This subsection merely sets the conditions and timelines of decisions; it does not preordain a specific decision. The proper reading of this section is that it commands the Executive Director to make a decision within certain timelines, and to give k-list properties the benefit of the doubt with regard to Subsection (c)(1) information. It does not mandate a positive-use determination, but instead requires the Executive Director to exercise his discretion-in compliance with TCEQ's internal rules of decision, Tex.Tax Code Ann. 11.31(g), (g-1)(h)-to determine proportionality ("wholly or partly") of the tax break for k-list properties.

         Subsection (m) says the Executive Director shall determine the facility is "used wholly or partly" as pollution-control property. Notably, Subsection (m) does not say that the Executive Director must grant a k-list applicant something. The "wholly or partly" phrase in Subsection (m), which is a phrase repeated over and over again throughout Section 11.31, is especially vital to our understanding of the Executive Director's power. "Statutory terms should be interpreted consistently in every part of an act." Tex. Dep't of Transp. v. Needham, 82 S.W.3d 314, 318 (Tex. 2002). In other subsections of Section 11.31, "wholly or partly" is a discretionary signifier showing that the Executive Director still retains discretion to determine what "part" of a property is actually attributable to pollution-control purposes. See Mont Belvieu Caverns, 382 S.W.3d at 488-89 (discussing the use determination process generally).

         Brazos Electric does not dispute that the Executive Director retains some discretion over Subsection (m) applications. Thus, the true statutory question here is not whether the Executive Director has discretion, but how far this discretion goes for k-list properties. More to the point: bearing in mind that phrases should generally be interpreted consistently throughout an act, and given that use of the phrase "partly" in other parts of Section 11.31 allows the Executive Director to make negative use determinations generally, does "partly" nevertheless mean something different in Subsection (m) than it does in other parts of Section 11.31?

         We think not.

         2.

         TCEQ's Discretion is Not Statutorily Limited to Making Non-Zero Pollution Control Findings for k-List Properties

         a.

         The Plain Contextual Meaning of "Part" As Used in the Section 11.31 Means "Less than Whole, " Which Embraces Zero or Negative Amounts; Its Use in Subsection (m) Indicates a Legislative Intent to Allow for Negative Use Determinations for k-List Properties

         Brazos Electric argues that notwithstanding the use of the phrase "wholly or partly" as a discretionary signifier that encompasses negative use determinations in other portions of the statute, "partly" takes on a new meaning in Subsection (m), one that forces the Executive Director to grant the electric company "something." Why? In Brazos Electric's view, the "part" in "partly" has only one possible meaning-it necessarily means "more than nothing." See "Partly, " Merriam-Webster's Collegiate Dictionary 904 (11th ...


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