Locke Lord QuickStudy: Texas Third Court of Appeals Overturns TCEQ Action and Confirms that Statutory Provisions Mean What They Say

On July 11, 2017, the Third Court of Appeals at Austin (Texas) issued a decision in Freestone Power Generation, LLC et al. v. Texas Commission on Environmental Quality, Cause Nos. 03-16-00693-CV et al. (“Freestone Power”), holding that Section 11.31 of the Texas Tax Code entitled owners of heat recovery steam generators (“HRSGs”) to at least a partial exemption from Texas property tax. The case overturned the Texas Commission on Environmental Quality’s (“TCEQ”) administrative denial of any exemption for HRSGs, and in doing so reinforced important limits on agencies’ attempts to expand their authority beyond their governing statutes. The case was a consolidation of several HRSG owners’ related appeals, and Locke Lord represented three of the appellants. 

The specific controversy arose under Section 11.31 of the Texas Tax Code, enacted in 1993 to provide an exemption from property tax for equipment used wholly or partly for pollution control purposes. To receive the exemption, a property owner must first apply to the TCEQ for a positive use determination (“PUD”) verifying that all or part of the equipment serves a pollution-control purpose. After receiving an application, the TCEQ can issue a PUD identifying the portion of the property’s value that is attributable to a pollution-control function or, if it determines that no part of the property serves a pollution-control function, it can issue a negative use determination (“NUD”). A NUD forecloses the applicant from obtaining a tax exemption. 

Critical to Freestone Power, in 2007 the Legislature added Section 11.31(k) to the Tax Code to require the TCEQ to create a list of equipment classified as pollution-control property (the “K-list”). The Legislature required the TCEQ to put specified items, including HRSGs, on the list. The Legislature classified HRSGs as pollution-control property because HRSGs, which are components of electrical generating plants, reduce pollution by allowing plants to produce more electricity from a given volume of fuel. 

Shortly after the K-list was established, a number of HRSG owners applied to the TCEQ for PUDs. The TCEQ initially granted 100% PUDs to all HRSG applicants, but several years later the TCEQ’s Executive Director completely reversed course and began issuing NUDs to all HRSGs. Some of the HRSG owners, including the Freestone Power appellants, administratively appealed their NUDs, but the TCEQ Commissioners upheld all the NUDs. 

From the outset, the HRSG owners’ primary position has been that the statutory language unambiguously requires the TCEQ to issue at least a partial PUD for all K-list property, including HRSGs. The TCEQ mounted a flurry of counterarguments, many of which attempted to convince the court either that the statutory language did not require issuance of PUDs for K-list items or that the language was at worst ambiguous, in which case the TCEQ’s interpretation was entitled to judicial deference. The Court of Appeals sided with the HRSG owners, holding that the plain language of the statute strictly limited the TCEQ’s authority: “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. . . . We conclude that it was an abuse of discretion for TCEQ to assign totally negative use determinations to Appellants’ HRSGs.” The Court therefore reversed the NUDs and remanded the cases to the TCEQ “for further proceedings consistent with this opinion,” i.e., to determine the percentage of the HRSGs’ value attributable to their pollution-control function and to issue corresponding PUDs.

Freestone Power should establish that all owners of K-list equipment are entitled by law to at least some pollution-control tax exemption. More broadly, the case illustrates a recent trend by Texas courts to limit agency overreach by rejecting attempts by administrative agencies to rewrite statutes in the guise of interpreting and applying them. See, e.g., Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 637 (Tex. 2013); Hegar v. Sunstate Equip. Co., No. 03-15-00738-CV, 2017 WL 279602, at *5 (Tex. App.—Austin Jan. 20, 2017, no pet. h.); Am. Multi-Cinema, Inc. v. Hegar, No. 03-14-00397-CV, 2017 WL 74416, at *10 (Tex. App.—Austin Jan. 6, 2017, no pet. h.); Allstate Ins. Co. v. Hegar, 484 S.W.3d 611, 616 (Tex. App.—Austin 2016, pet. denied); City of Carrollton v. Paxton, 490 S.W.3d 187, 195 n.35 (Tex. App.—Austin 2016, pet. filed); Titan Transp., LP v. Combs, 433 S.W.3d 625, 637 (Tex. App.—Austin 2014, pet. denied). 

For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.