Brazos Electric Power Cooperative, Inc. v. Texas Commission on Environmental Quality and Richard A. Hyde, Executive Director of the Texas Commission on Environmental Quality , 576 S.W.3d 374 ( 2019 )

IN THE SUPREME COURT OF TEXAS
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No. 17-1003
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BRAZOS ELECTRIC POWER COOPERATIVE, INC., PETITIONER,
v.
TEXAS COMMISSION ON ENVIRONMENTAL QUALITY AND RICHARD A. HYDE,
EXECUTIVE DIRECTOR OF THE TEXAS COMMISSION ON ENVIRONMENTAL QUALITY,
RESPONDENTS
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ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE EIGHTH DISTRICT OF TEXAS
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Argued January 24, 2019
JUSTICE LEHRMANN delivered the opinion of the Court.
At issue in this case is whether Texas Tax Code Section 11.31 gives the Texas
Commission on Environmental Quality discretion to deny an ad valorem tax exemption for heat
recovery steam generators, devices the Legislature has deemed “pollution control property.” The
court of appeals held that the Commission does have that discretion. We disagree; thus, we
reverse the court of appeals’ judgment and remand the case to the Commission for further
proceedings consistent with this opinion.
I. BACKGROUND
Because this case involves tax exemptions for a particular type of property, we begin
with a description of the property at issue—heat recovery steam generators—and the statutory
framework governing pollution-control-related tax exemptions.
A. The Property
A heat recovery steam generator, or “HRSG,” is a “combined-cycle” method of
electricity production that increases power plant efficiency by using waste heat to generate more
electricity than a “single-cycle” system. A typical single-cycle facility generates electricity by
burning natural gas (or other combustible fuels) in a combustion turbine. This process creates
waste heat and produces nitrogen oxides and other pollutants. A HRSG captures some of the
waste heat created in the primary cycle and uses it to drive a steam turbine, generating even more
electricity.
2
Diagram of a Combined-Cycle Plant 1
Because a combined-cycle system generates more electricity than a single-cycle system per unit
of fuel consumed, it emits fewer harmful pollutants per unit of electricity produced.
B. Statutory Framework
1. The Exemption: § 11.31(a) & (b)
In 1993, the Texas Constitution was amended to authorize the Legislature to exempt from
ad valorem taxation
. . . all or part of real and personal property used, constructed, acquired, or
installed wholly or partly to meet or exceed rules or regulations adopted by any
environmental protection agency of the United States, this state, or a political
subdivision of this state for the prevention, monitoring, control, or reduction of
air, water, or land pollution.
1
This diagram is incorporated from the petitioner’s brief and is included for background purposes. The
Commission does not dispute its accuracy.
3
TEX. CONST. art VIII, § 1-l(a). 2 The amendment’s ratification made effective a statute passed
earlier that year providing that “[a] person is entitled to an exemption from taxation of all or part
of real and personal property that the person owns and that is used wholly or partly as a facility,
device, or method for the control of air, water, or land pollution.” TEX. TAX CODE § 11.31(a). 3
The Legislature defined a “facility, device, or method for the control of air, water, or land
pollution” (henceforth referred to as “pollution control property”) as:
Land . . . or any structure, building, installation, excavation, machinery,
equipment, or device, and any attachment or addition to or reconstruction,
replacement, or improvement of that property, that is used, constructed, acquired,
or installed wholly or partly to meet or exceed rules or regulations adopted by any
environmental protection agency of the United States, this state, or a political
subdivision of this state for the prevention, monitoring, control, or reduction of
air, water, or land pollution.
Id. § 11.31(b). In other words, property whose function, id. § 11.31(a), and purpose, id.
§ 11.31(b), are wholly or partly to prevent, monitor, control, or reduce pollution is “pollution
control property” and is at least partly exempt from ad valorem taxation.
2. The Exemption Process: § 11.31(c), (d), & (e)
To obtain an exemption under Section 11.31, the property owner must first submit an
application to the Commission’s Executive Director that contains the following information:
(1) the anticipated environmental benefits from the installation of the
facility, device, or method for the control of air, water, or land pollution;
(2) the estimated cost of the pollution control facility, device, or method;
and
2
Adopted at the Nov. 2, 1993 election (see Tex. H.R.J. Res. 86, § 2, 73d Leg., R.S., 1993 Tex. Gen. Laws
5576).
3
See Act of May 10, 1993, 73d Leg., R.S., ch. 285, §§ 1, 5 (codified at TEX. TAX CODE § 11.31) (act to
take effect upon voters’ approval of constitutional amendment proposed by House Joint Resolution 86).
4
(3) the purpose of the installation of such facility, device, or method, and
the proportion of the installation that is pollution control property.
Id. § 11.31(c). Applications for property whose use is partly productive and partly for pollution
control must also “present such financial or other data as the executive director requires by rule”
to determine what proportion of the property is used for pollution control. Id.
Upon submission of an application, the Executive Director “shall determine if the facility,
device, or method is used wholly or partly as a facility, device, or method for the control of air,
water, or land pollution”; that is, the Executive Director shall determine if the property is
pollution control property. Id. § 11.31(d). Subsection (d) further instructs the Executive
Director to notify the appraiser for the county where the property is located (1) that the property
owner has applied for an exemption and (2) whether and what proportion of the property
qualifies. Id. The Executive Director’s decision is referred to as a “use determination.” See 30
TEX. ADMIN. CODE § 17.2(11). If the Executive Director determines that the property is used
wholly or partly for pollution control (and is thus entitled to an exemption), he issues a “positive
use determination”; 4 otherwise, he issues a “negative use determination.” See id. Applicants
may appeal a negative use determination to the Commission. TEX. TAX CODE § 11.31(e).
3. Standards for Making Exemption Determinations: § 11.31(g) & (h)
In 2001, the Legislature amended Section 11.31 to require the Commission to:
(1) establish specific standards for considering applications for
determinations;
(2) be sufficiently specific to ensure that determinations are equal and
uniform; and
4
The applicant must provide a copy of a positive use determination to the chief appraiser of the pertinent
tax district to obtain the exemption. TEX. TAX CODE § 11.31(i).
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(3) allow for determinations that distinguish the proportion of property
that is used to control, monitor, prevent, or reduce pollution from the proportion
of property that is used to produce goods or services.
Act of May 22, 2001, 77th Leg., R.S., ch. 881, § 1, 2001 Tex. Gen. Laws 1774, 1775 (codified at
TEX. TAX CODE § 11.31(g)). If the property does not meet the established standards, the
Executive Director may not determine that the property is pollution control property. TEX. TAX
CODE § 11.31(h).
In response to the statutory amendment, the Commission promulgated new rules
requiring exempt property to (1) meet the statutory definition of “pollution control property” and
(2) comply with the agency’s own rules. See 26 Tex. Reg. 7420, 7421 (2001), adopted by 27
Tex. Reg. 185, 186–87 (2002) (codified at 30 TEX. ADMIN. CODE §§ 17.1–.25). Thus, in addition
to showing that the property met the statutory definition of pollution control property, applicants
also had to demonstrate that the property satisfied the “requirements of [30 TEX. ADMIN. CODE]
§ 17.15 and § 17.17.” 30 TEX. ADMIN. CODE § 17.4(d) (2002). Those sections established three
“tiers” of applications, each tier with its own application rules. Id. § 17.15. Tier I rules applied
to property on a “Predetermined Equipment List,” a list of property types that the Commission
had determined to be wholly pollution control property. Id. Tier II rules applied to wholly
pollution control property that did not appear on the list. Id. And Tier III rules applied to
pollution control property used partly for production and partly for pollution control. Id.
To determine what proportion of pollution control property was entitled to an exemption,
Tier III applications were required to include a cost analysis procedure (CAP) calculation. See
id. § 17.17(a); see also id. § 17.2(4) (defining “cost analysis procedure”). The calculation seeks
to balance the costs of employing “green” property against the commercial benefits by
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subtracting from the cost of the green property (Capital Cost New) (1) the cost of comparable
“dirty” property (Capital Cost Old) and (2) the value of the marketable product produced over
the life of the property (Net Present Value of Marketable Product or NPVMP). See id.
§ 17.17(c). That figure is divided by the Capital Cost New to determine what percentage of the
property is installed purely for pollution control purposes. Id. If the formula produces a positive
number, the Executive Director issues a positive use determination and the applicant is entitled
to an exemption; if the formula’s result is zero or negative, the Executive Director issues a
negative use determination and the applicant receives no exemption. See id. § 17.17(d).
4. K-list property: § 11.31(k), (l), & (m)
In 2007, the Legislature amended Section 11.31 to add Subsection (k), which directs the
Commission to “adopt rules establishing a nonexclusive list of facilities, devices, or methods for
the control of air, water, or land pollution, which must include” HRSGs, among other devices.
Act of May 28, 2007, 80th Leg., R.S., ch. 1277, § 4, 2007 Tex. Gen. Laws 4261, 4264 (codified
at TEX. TAX CODE § 11.31(k)). The parties refer to Subsection (k)’s list of qualifying property as
“the k-list.”
The amendment also added Subsection (m), which modifies the exemption application
process for k-list property in three ways. First, it allows k-list applications to omit the
description of the property’s environmental benefits that is otherwise required by
Subsection (c)(1). See TEX. TAX CODE § 11.31(m). Second, it expedites the application process
by requiring the Executive Director to issue a determination within thirty days after an
application is complete. Id. Third, it provides that if the property at issue is k-list property, the
Executive Director
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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.
Id. Finally, Subsection (l) directs the Commission to “update the [k-list] at least once every three
years” and provides that “[a]n item may be removed from the list if the commission finds
compelling evidence to support the conclusion that the item does not provide pollution control
benefits.” Id. § 11.31(l).
In response to the 2007 statutory amendments, the Commission again amended its rules.
See 32 Tex. Reg. 6979, 6982–85 (2007), adopted by 33 Tex. Reg. 932, 941–43 (2008) (codified
at 30 TEX. ADMIN. CODE §§ 17.1–.20). First, the agency modified the Predetermined Equipment
List to include two parts: Part A, listing predetermined Tier I property (i.e., wholly pollution
control property), and Part B, listing each k-list category. See 30 TEX. ADMIN. CODE § 17.14(a)
(2008). The list was renamed more generally the Equipment and Categories List. See id. The
Commission also established a new review tier—Tier IV—which applied exclusively to k-list
property. See id. § 17.2(16). Tier IV applicants were not required to use the CAP formula and
were instead permitted to submit their own methods for calculating the proportion of k-list
property used for pollution control, subject to the Executive Director’s approval. See id.
§ 17.17(d). Tier IV review led to a significant number of 100% positive use determinations for
k-list property and several appeals by county appraisers. See Freestone Power Generation, LLC
v. Tex. Comm’n on Envtl. Quality, 564 S.W.3d 1, 8 (Tex. App.—Austin 2017), aff’d, ___ S.W.3d
___ (Tex. 2019).
Responding to the controversy, the Legislative Budget Board recommended that the
Legislature amend the statute to set the maximum exemption amount no higher than the amount
8
produced using the CAP formula. Tex. Leg. Budget Bd., Texas State Government Effectiveness
and Efficiency: Selected Issues and Recommendations at 109 (Jan. 2009). The Legislature
amended the statute in 2009 to add Subsection (g-1), which provides that “[t]he 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 [k-list property].” Act of May 25, 2009, 81st Leg., R.S.,
ch. 962, §§ 3, 5–6, 2009 Tex. Gen. Laws 2556, 2557–58 (codified at TEX. TAX CODE
§ 11.31(g-1)). The Commission interpreted this amendment to require that k-list property be
evaluated using the CAP formula like any other application for dual-use property. 35 Tex. Reg.
6255, 6255 (2010). It thus amended its rules to abandon Tier IV review for k-list property and
instead require k-list applicants to apply using Tier III rules. Id. at 6260, adopted by 35 Tex.
Reg. 10964, 10969–70 (2010) (codified at 30 TEX. ADMIN. CODE §§ 17.2–17.25). Although the
statutory amendment went into effect on September 1, 2009, all applications filed on or after
January 1, 2009, for which decisions were not finalized before the amendment’s effective date
were subject to the new rule. 2009 Tex. Gen. Laws at 2558.
C. Factual Background and Procedural History
In April 2009, Brazos Electric applied for an exemption under Tier IV, seeking a 100%
positive use determination for the HRSG used in its Johnson County facility. The following
month, the Executive Director informed Brazos Electric its application had been put on hold
pending the resolution of the county appraisers’ appeals regarding Tier IV use determinations.
And in September 2009, the Executive Director informed Brazos Electric that because its
application was filed after January 1, 2009, it was subject to the rules that would be promulgated
9
in light of Subsection (g-1). After this letter, no activity appears in the administrative record
until March 2012, when Brazos Electric submitted a revised application for its Johnson County
facility and a new, independent application for its Jack County facility, which also employs
HRSGs. Both applications cited environmental regulations that the HRSGs were installed to
meet or exceed. And both applications applied the CAP formula, using values for Capital Cost
New, Capital Cost Old, and NPVMP that produced positive numbers which, if accepted, would
result in positive use determinations—60.73% for the Johnson County facility and 74.66% for
the Jack County facility.
In July 2012, the Executive Director issued negative use determinations for the
applications on the grounds that “[h]eat recovery steam generators are used solely for
production; therefore, are [sic] not eligible for a positive use determination.” Brazos Electric
appealed the negative use determinations to the Commission, which docketed them along with
twelve other appeals by HRSG owners. The Commission set aside the Executive Director’s
negative use determinations and remanded the cases for new determinations.
The Executive Director subsequently issued notices of deficiency regarding the variables
Brazos Electric proposed for use in the CAP calculation with respect to both of its facilities. For
the Johnson County facility, the Executive Director proposed variables that produced a result of
–82.55%. And for the Jack County facility, the Executive Director proposed variables that
produced a result of –277.5%.
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Brazos Electric contested the Executive Director’s proposed variables and resubmitted its
applications. 5 The Executive Director issued negative use determinations for the facilities
utilizing the CAP formula and the Director’s proposed variables. Brazos Electric appealed to the
Commission, which affirmed the Executive Director’s determinations as to both facilities.
Brazos Electric sought judicial review in Travis County district court, which consolidated the
cases and affirmed the determinations. Brazos Electric appealed, and we transferred the appeal
from the Third Court of Appeals to the Eighth Court of Appeals pursuant to our docket
equalization authority.
While the appeal was pending, the Third Court of Appeals issued its opinion in
Freestone, reversing the trial court’s affirmance of the Commission’s negative use
determinations in a similar case involving HRSGs, and holding that k-list property cannot be
determined to be 100% non-pollution-control property because Section 11.31 defines k-list
property as at least “partly” pollution control property. 564 S.W.3d at 15. Two months later,
notwithstanding this precedent from the Third Court, the Eighth Court of Appeals affirmed the
trial court’s judgment in this case in a divided opinion. 538 S.W.3d 666 (Tex. App.—El Paso
2017). The dissent argued that the court should have applied the Third Court’s precedent, 6
5
The value of the Capital Cost Old variable was the parties’ primary sticking point. Capital Cost Old is the
“cost of comparable equipment or process without the pollution control.” 30 TEX. ADMIN. CODE § 17.17(c)(1).
Commission regulations state that “[i]f comparable equipment without the pollution control feature is on the market
in the United States, then an average market price of the most recent generation of technology must be used.” Id. In
making its negative use determinations, the Executive Director used as Capital Cost Old the cost of a new boiler
system that produces the same amount of steam as that produced by a HRSG. Brazos Electric, in turn, proposed a
figure of $150,000—the cost of the piping that, if not for the HRSG, would carry the exhaust produced by the
primary gas turbine system to the exhaust stack.
6
Under the Texas Rules of Appellate Procedure, a court of appeals to whom an appeal has been transferred
“must decide the case in accordance with the precedent of the transferor court under principles of stare decisis if the
transferee court’s decision otherwise would have been inconsistent with the precedent of the transferor court.” TEX.
R. APP. P. 41.3. A comment to the rule explains that it “requires the transferee court to ‘stand in the shoes’ of the
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which in any event was correct on the merits. Id. at 724 (Palafox, J., dissenting). We granted
Brazos Electric’s petition for review.
II. DISCUSSION
Brazos Electric presents three issues for our review, arguing that: (1) Section 11.31
requires a positive use determination for HRSGs; (2) the Commission cannot categorically treat
HRSGs as non-exempt without formally removing them from the k-list by using its
Subsection (l) authority; and (3) the manner in which the Commission applied the CAP formula
to the HRSGs is an abuse of discretion. We agree that Section 11.31 mandates a positive use
determination for HRSGs and thus do not reach Brazos Electric’s second and third issues.
A. Standard of Review and Rules of Construction
A proceeding under Section 11.31 is not considered a “contested case” for purposes of
the Administrative Procedure Act and its corresponding substantial evidence standard of review.
TEX. TAX CODE § 11.31(e); TEX. GOV’T CODE § 2001.174. And although the Water Code allows
parties affected by Commission decisions to seek judicial review of those decisions, the
transferor court so that an appellate transfer will not produce a different outcome, based on application of
substantive law, than would have resulted had the case not been transferred.” TEX. R. APP. P. 41.3 cmt. The Eighth
Court concluded that Freestone was not binding because a motion for rehearing remained pending in that case as of
the date of issuance. 538 S.W.3d at 684 n.14. Though it does not affect the outcome of this case, we disagree with
that conclusion, as “the fact that a petition for rehearing is pending in another case does not change the status of [an
opinion] as binding precedent.” United States v. Espinosa, 327 F. App’x 848, 850 (11th Cir. 2009). Certainly we
would expect the courts of appeals to treat our opinions as binding precedent even while a motion for rehearing is
pending, and that expectation does not change when the binding precedent comes from another panel (or an en banc
decision) of the same court of appeals. See Swilley v. McCain, 374 S.W.2d 871, 875 (Tex. 1964) (“After a principle,
rule or proposition of law has been squarely decided by the Supreme Court, or the highest court of the State having
jurisdiction of the particular case, the decision is accepted as a binding precedent by the same court or other courts
of lower rank when the very point is again presented in a subsequent suit between different parties.”); see also Perez
v. State, 495 S.W.3d 374, 391–92 (Tex. App.—Houston [14th Dist.] 2016, no pet.) (affirming stare decisis principle
that a trial court may not decide cases contrary to the opinion of an appellate court within its jurisdiction on the same
question, even while a petition for discretionary review of that decision is pending); Chase Home Fin., L.L.C. v. Cal
W. Reconveyance Corp., 309 S.W.3d 619, 630 (Tex. App.—Houston [14th Dist.] 2010, no pet.) (“Absent a decision
from a higher court or this court sitting en banc that is on point and contrary to the prior panel decision or an
intervening and material change in the statutory law, this court is bound by the prior holding of another panel of this
court.”).
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authorizing statute does not specify the standard of review. See TEX. WATER CODE § 5.351.
Under these circumstances, we review the Commission’s decision for an abuse of discretion. See
Tex. Comm’n on Envtl. Quality v. City of Waco, 413 S.W.3d 409, 423–25 (Tex. 2013) (applying
abuse of discretion standard in reviewing Commission’s decision to deny a contested case
hearing, where the decision was not itself the product of a contested case hearing and the
relevant statutes did not specify a standard of review). The Commission abuses its discretion “by
failing to analyze or apply the law correctly.” Iliff v. Iliff, 339 S.W.3d 74, 78 (Tex. 2011).
Further, the primary issue presented is one of statutory interpretation, which we consider
de novo even when reviewing agency decisions. Cadena Comercial USA Corp. v. Tex. Alcoholic
Beverage Comm’n, 518 S.W.3d 318, 325 (Tex. 2017). Our objective in statutory construction is
to give effect to the Legislature’s intent, “which we ascertain from the plain meaning of the
words used in the statute” because the best indicator of what the Legislature intended is what it
enacted. Sw. Royalties, Inc. v. Hegar, 500 S.W.3d 400, 404 (Tex. 2016); see also Combs v.
Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635 (Tex. 2013). Thus, “[w]here text is
clear, text is determinative of that intent.” Entergy Gulf States, Inc. v. Summers, 282 S.W.3d
433, 437 (Tex. 2009). We presume lawmakers chose statutory language “with care and that
every word or phrase was used with a purpose in mind.” Tex. Lottery Comm’n v. First State
Bank of DeQueen, 325 S.W.3d 628, 635 (Tex. 2010). We read these words and phrases in
context and construe them according to the rules of grammar and common usage. TEX. GOV’T
CODE § 311.011; see also TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex.
2011) (“Undefined terms in a statute are typically given their ordinary meaning [unless] a
different or more precise definition is apparent from the term’s use in the context of the
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statute . . . .”). Importantly, we do not consider those words and phrases in isolation; rather, “we
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, 74 (Tex.
2016). Moreover, “[s]tatutory 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). Finally, we presume that
the Legislature intended the statute to comply with the Texas Constitution. TEX. GOV’T CODE
§ 311.021(1); In re Allcat Serv., L.P., 356 S.W.3d 455, 468 (Tex. 2011) (orig. proceeding).
We have also explained that we construe statutory exemptions from taxation strictly
“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.” N. Alamo
Water Supply Corp. v. Willacy Cty. Appraisal Dist., 804 S.W.2d 894, 899 (Tex. 1991). Thus, all
doubts are resolved against the granting of an exemption. See id. But while “a plain-meaning
determination should not disregard the economic realities underlying the transactions in issue,”
Roark Amusement, 422 S.W.3d at 637, courts are not authorized to read in an entirely new
requirement “in the guise of considering the economic realities or essence of the transaction,”
Combs v. Health Servs. Corp., 401 S.W.3d 623, 627 n.8 (Tex. 2013).
Finally, we have recognized that an agency’s interpretation of a statute is entitled to
“serious consideration.” TGS-NOPEC Geophysical Co., 340 S.W.3d at 438. But “deferring to
an agency’s construction is appropriate only when the statutory language is ambiguous.” Sw.
Royalties, 500 S.W.3d at 405 (emphasis omitted). Otherwise, agency deference “has no place.”
TracFone Wireless, Inc. v. Comm’n on State Emergency Commc’ns, 397 S.W.3d 173, 182 (Tex.
2013).
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B. Analysis
The plain meaning of Section 11.31 is clear: property that qualifies in whole or in part as
pollution control property is entitled to a tax exemption, and HRSGs qualify, at least in part, as
pollution control property. Thus, assuming the applicant otherwise complies with the statute’s
requirements, the Executive Director may not issue a negative use determination for HRSGs.
Subsection (a) exempts from taxation “all or part” of real or personal property “used
wholly or partly as a facility, device, or method for the control of air, water, or land pollution”
(i.e., pollution control property). TEX. TAX CODE § 11.31(a). The Legislature further defines
pollution control property in Subsection (b), in accordance with the Texas Constitution, as
property “that is used, constructed, acquired, or installed wholly or partly to meet or exceed rules
or regulations adopted by any [government entity] for the prevention, monitoring, control, or
reduction of air, water, or land pollution.” Id. § 11.31(b); see also TEX. CONST. art VIII, § 1-l(a).
To administer this exemption, the Executive Director is required to answer two related questions:
Following submission of the information required by Subsection (c), the
executive director . . . shall determine if the [property] is [pollution control
property] . . . . The executive director shall issue a letter . . . stating the . . .
determination of whether the [property] is used wholly or partly to control
pollution and, if applicable, the proportion of the property that is pollution control
property.
TEX. TAX CODE § 11.31(d) (emphasis added). In other words, the Executive Director must
determine both whether the property is pollution control property and how much of it is pollution
control property.
The statute generally grants the Executive Director broad discretion to make these
determinations. See id. § 11.31(d), (g), (g-1). But in 2007, the Legislature modified that grant of
discretion by amending Section 11.31 to add Subsections (k), (l), and (m). See Act of June 15,
15
2007, 80th Leg., R.S., ch. 1277, § 4, 2007 Tex. Gen. Laws 4261, 4264. The effect of these
provisions is to curb the Executive Director’s discretion as to the first question by creating a list
of per se pollution control property (the k-list). First, Subsection (k) provides that the
Commission “shall adopt rules establishing a nonexclusive list of [pollution control property],
which must include . . . heat recovery steam generators.” TEX. TAX CODE § 11.31(k)(8)
(emphasis added). Second, applications for exemptions for k-list property are not required to
describe the property’s “anticipated environmental benefits” as otherwise required by
Subsection (c)(1). Id. § 11.31(m). Third, the Executive Director “shall determine that the [k-list
property] is [pollution control property] and shall take the actions that are required in Subsection
(d) in the event such a determination is made” (i.e., issue a letter informing the applicant of the
determination within 30 days of receiving the application). Id. (emphasis added).
In other words, the Legislature has affirmatively designated HRSGs, along with certain
other facilities, devices, and methods, as pollution control property and has directed the
Commission to “determine that” a HRSG is at least partly pollution control property. Id.
§ 11.31(m) (emphasis added). By contrast, with respect to non-k-list property, the Executive
Director “shall determine if the [property] is [pollution control property].” Id. § 11.31(d)
(emphasis added). The language of Subsection (m) is mandatory and withdraws the Executive
Director’s discretion to determine whether k-list property is pollution control property because
the Legislature has already determined that it is. 7
7
The Commission argues that Subsection (m), which requires the Executive Director both to “determine
that” k-list property is pollution control property and to “take the actions that are required in Subsection (d) in the
event such a determination is made,” is not so clear. Specifically, the Commission argues that the phrase “in the
event such a determination is made” negates the mandatory character of “shall determine that.” We disagree. The
sentence’s structure makes it clear that “in the event such a determination is made” merely modifies “the actions that
are required by Subsection (d),” meaning that when the Executive Director determines that k-list property is
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For k-list property, then, the Executive Director’s sole responsibility is to determine what
proportion of the property is purely productive and what proportion is for pollution control. See
id. (“The executive director shall issue a letter to the [applicant] stating the executive director’s
determination of . . . the proportion of the property that is pollution control property.”). But it
may not determine that the pollution control proportion is zero or negative—the Legislature took
“zero” off the table when it instructed the Executive Director to determine that k-list property is
pollution control property, meaning it is used at least “partly” for pollution control. Id.
§ 11.31(m). “Partly,” after all, cannot mean “in no part.” Rather, the common, ordinary
meaning of “partly” is “in some measure,” or “with respect to a part rather than a whole.”
WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1648 (2002). “Part,” in turn, means “a
unit (as a number, quantity or mass) held to constitute with one or more other units something
larger.” Id. at 1645. Here, the proportion of a HRSG that is pollution control property
constitutes, together with the proportion of the HRSG that is productive, a larger quantity: the
HRSG’s full value. This accords with our jurisprudence, in which we have defined “part” as
“one of several . . . units of which something is composed.” Marsh USA Inc. v. Cook, 354
S.W.3d 764, 775 (Tex. 2011) (alteration in original) (citation and internal quotation marks
omitted).
In these terms, the full value of a HRSG is composed of two units: “the proportion of
property that is used to control, monitor, prevent, or reduce pollution [and] the proportion of
pollution control property, as he is required to do, he must then take the same actions that are required when
non-k-list property is determined to be pollution control property. See TEX. TAX CODE § 11.31(d) (requiring the
Executive Director to issue a letter to the applicant stating his determination and to send a copy of the letter to the
chief appraiser of the appropriate appraisal district). The Commission’s interpretation is unreasonable because it
requires us to read Subsection (m) as simultaneously mandatory and permissive.
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property that is used to produce goods or services.” TEX. TAX CODE § 11.31(g)(3). As the Third
Court of Appeals correctly noted in Freestone:
Property cannot qualify as 100% pollution control property if any portion of its
value is attributable to its capacity to produce goods and services. The inverse is
also true. The Legislature has mandated that HRSGs are, at least “partly,”
pollution control property; therefore, they cannot be determined to be 100%
non-pollution control property.
564 S.W.3d at 15 (internal citation and quotation marks omitted). There appears to be no dispute
that some portion of a HRSG’s value is attributable to its production capacity; thus, the
Executive Director’s discretion is limited to making a use determination that is greater than 0%
and less than 100%. It may, of course, issue negative use determinations for Tier III applications
for property that is not on the k-list, TEX. TAX CODE § 11.31(d), either because the Legislature
chose not to include it on the list in the first instance or because the Commission has formally
removed it from the list pursuant to its authority under Subsection (l), see id. § 11.31(l) (“An
item may be removed from the list if the commission finds compelling evidence to support the
conclusion that the item does not provide pollution control benefits.”). The Legislature chose to
include HRSGs on the k-list, and the Commission has yet to exercise its Subsection (l) authority
to remove them. Accordingly, as long as HRSGs remain on the k-list, the agency has no
discretion to issue a negative use determination for compliant HRSG applications.
The Commission argues that this holding renders portions of Section 11.31 meaningless,
namely Subsections (c), (g)(3), (g-1), and (h). We disagree. Subsection (c) states that the
applicant shall present, with respect to property that is used only partly for pollution control,
“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.” Id. § 11.31(c).
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Subsection (g)(3) similarly states that the Commission’s rules must “distinguish the proportion of
property that is used to control, monitor, prevent, or reduce pollution from the proportion of the
property that is used to produce goods or services.” Id. § 11.31(g)(3). Those provisions are
consistent with the Commission’s continuing duty to determine how much of the property at
issue is pollution control property, a determination it must still make even after it determines that
the device is at least partly pollution control property.
Subsection (g-1), in turn, requires that the Commission’s rules “apply uniformly to all
applications for determinations under this section, including applications relating to [k-list
property].” Id. § 11.31(g-1). The Commission contends that it must maintain the discretion to
issue negative use determinations in order to uniformly apply the CAP formula to k-list and
non-k-list property alike. But our holding does not require the Commission’s rules to be applied
disparately. We do not opine here on whether the CAP formula is itself problematic or whether
it is merely being applied problematically. We hold only that, whatever formula the Commission
uses and however it applies that formula, the Commission has no discretion (apart from its
authority under Subsection (l)) to determine that property on the k-list is not at least partly
pollution control property.
Finally, Subsection (h) forbids the Executive Director to determine that property is
pollution control property “unless the property meets the standards established under the rules
adopted under this section.” Id. § 11.31(h). However, the rules themselves must comply with
the Legislature’s statutory directives. Tex. Catastrophe Prop. Ins. Ass’n v. Council of Co-
Owners of Saida II Towers Condo. Ass’n, 706 S.W.2d 644, 645 (Tex. 1986) (“[T]he
Legislature . . . prescribe[s] rules and regulations to govern the administrative body and the
19
method by which the rights determined by such body will be enforced.”), abrogated on other
grounds by Dubai Petroleum Co. v. Kazi, 12 S.W.3d 71 (Tex. 2000). To the extent the
Commission enacts or applies its rules regarding pollution control property in a manner that is
contrary to or inconsistent with Section 11.31’s requirements, the statute must prevail.
The Commission next contends that it must conduct case-by-case determinations for
k-list applications pursuant to the 1993 constitutional amendment, which reads:
The legislature by general law may exempt from ad valorem taxation all or part of
real and personal property used, constructed, acquired, or installed wholly or
partly to meet or exceed rules or regulations adopted by any environmental
protection agency of the United States, this state, or a political subdivision of this
state for the prevention, monitoring, control, or reduction of air, water, or land
pollution.
TEX. CONST. art. VIII, § 1-l. As noted, Section 11.31 echoes this language by exempting
property “that is used wholly or partly as a facility, device, or method for the control of air,
water, or land pollution,” defined as 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.” TEX. TAX CODE § 11.31(a)–
(b). According to the Commission, if the 2007 statutory amendment grants a per se exemption
for k-list property, the amendment effectively decoupled the statutory definition of exempt
property from the constitutional definition with regard to k-list property. Thus, the Commission
argues that it must conduct independent constitutional and statutory inquiries for each
application. Even if the property satisfies the statutory definition of “pollution control property,”
the agency says, it might not satisfy the constitutional definition.
20
We agree of course with the general proposition that statutory provisions granting a tax
exemption cannot exceed the bounds of the constitutional provision that empowers the
Legislature to grant the exemption. See Dickison v. Woodmen of the World Life Ins. Soc’y, 280
S.W.2d 315, 317 (Tex. Civ. App.—San Antonio 1955, writ ref’d) (noting that the Legislature
“may not broaden [a constitutionally authorized tax exemption] beyond the constitutional
confines”); cf. N. Alamo Water Supply, 804 S.W.2d at 899 (“Before an organization can be
considered for qualification for tax exempt status [under section 11.18 of the Tax Code], that
organization must first meet the applicable constitutional requirements which entitle those
organizations to seek the exemption.”). But the Commission is wrong that Section 11.31 does
so. In enacting Subsection (k) and related provisions, the Legislature did not authorize
unconstitutional exemptions for k-list property. Instead, it determined that k-list property
necessarily meets the statutory definition of pollution control property, which is itself
coextensive with the constitutional exemption standard. And the Legislature gave the
Commission a mechanism to remove property from that list in the event “compelling
evidence . . . support[s] the conclusion that the item does not provide pollution control benefits.”
TEX. TAX CODE § 11.31(l).
Even if we were to accept the Commission’s premise—that issuing a positive use
determination for all HRSGs would violate the constitution and make it difficult for the
Commission to comply with other portions of the statute—the agency’s recourse under these
circumstances is not to unilaterally ignore the Legislature’s clear instructions. As explained, the
Legislature itself recognized that the k-list contains categories whose suitability for the list might
change over time. Accordingly, it ordered the Commission to “update the list adopted under
21
Subsection (k) at least once every three years,” and it authorized the Commission to remove an
item “from the list if the commission finds compelling evidence to support the conclusion that
the item does not provide pollution control benefits.” Id. But again, the Commission has not
seen fit to remove HRSGs from the k-list under subsection (l). Until it does, it must follow the
Legislature’s instructions as enacted.
In sum, we see nothing in Subsection (k) or (m) indicating that the Legislature exceeded
its constitutional authority to exempt pollution control property from taxation. To the contrary,
by providing the subsection (l) mechanism for removal of items from the k-list, the Legislature
sought to ensure the k-list would not exceed the bounds of the Constitution.
Finally, the Commission argues that our holding will lead to absurd results. What would
prevent, it asks, an eccentric billionaire from obtaining an exemption after purchasing a HRSG
and burying it in the desert in an apparent homage to Amarillo’s Cadillac Ranch? See Sonia
Smith, Forty Years of the Cadillac Ranch, TEXAS MONTHLY (June 12, 2014),
https://www.texasmonthly.com/travel/forty-years-of-the-cadillac-ranch. Setting aside the
questionable appraisal value of delicate and sophisticated equipment buried in the West Texas
desert, see id., the statute provides two safeguards against such unmeritorious applications. First,
Subsection (c)(3) requires applicants to state “the purpose of the installation of such facility,
device, or method,” meaning the applicant would essentially have to lie in its application to
obtain an exemption. TEX. TAX CODE § 11.31(c)(3); see TEX. PENAL CODE § 37.10(a)(1)
(establishing an offense for “knowingly mak[ing] a false entry in . . . a governmental record”).
Second, as the dissent in the court of appeals noted, Section 11.31 renders ineligible for the
exemption “[p]roperty used for residential purposes, or for recreational, park, or scenic uses as
22
defined by Section 23.81.” 8 TEX. TAX CODE § 11.31(a). We will not engage in a tortured
reading of the statute to account for one unlikely hypothetical that, in any event, is adequately
addressed when the statutory provisions are viewed as a whole and in context.
III. CONCLUSION
The Commission abused its discretion in issuing negative use determinations on Brazos
Electric’s applications for tax exemptions for the HRSGs used in its facilities in Jack and
Johnson Counties. Accordingly, we reverse the court of appeals’ judgment and remand the case
to the Commission for further proceedings consistent with this opinion.
________________________________
Debra H. Lehrmann
Justice
OPINION DELIVERED: May 3, 2019
8
“Recreational, park, or scenic use” is defined as “use for individual or group sporting activities, for park
or camping activities, for development of historical, archaeological, or scientific sites, or for the conservation and
preservation of scenic areas.” TEX. TAX CODE § 23.81(1).
23