Part 1. TEXAS COMMISSION ON ENVIRONMENTAL QUALITY

Chapter 17. TAX RELIEF FOR PROPERTY USED FOR ENVIRONMENTAL PROTECTION

30 TAC §§17.1, 17.2, 17.4, 17.10, 17.12, 17.14, 17.15, 17.17, 17.20

The Texas Commission on Environmental Quality (commission) adopts amendments to §§17.1, 17.2, 17.4, 17.10, 17.12, 17.15, 17.17, and 17.20. The commission also adopts new §17.14.

The commission adopts amendments to §§17.1, 17.4, 17.12, 17.17 and 17.20 without changes to the proposed text as published in the October 5, 2007 issue of the Texas Register (32 TexReg 6985) and will not be republished. The commission adopts amendments to §§17.2, 17.10, 17.15, and new §17.14 with changes to the proposed text.

BACKGROUND AND SUMMARY OF THE FACTUAL BASIS FOR THE ADOPTED RULES

The program for providing tax relief for pollution control property was established under a constitutional amendment listed as Proposition 2 on the state ballot on November 2, 1993. This amendment added §1-1 to the Texas Constitution, Article VIII. The 73rd Legislature added Texas Tax Code (TTC), §11.31, Pollution Control Property, and TTC, §26.045, Rollback Relief for Pollution Control Requirements, to implement the new constitutional provision. The commission adopted 30 TAC Chapter 277 on September 30, 1994, to establish the procedures for obtaining a tax exemption under Proposition 2. In 1998, Chapter 277 was changed to Chapter 17 to be consistent with the commission's policy to place general or multimedia rules within 30 TAC Chapters 1 - 100. In 2001, the Texas Legislature enacted House Bill (HB) 3121 during the 77th Legislative Session. HB 3121 amended TTC, §11.31 in several respects. First, HB 3121 required that the commission adopt specific standards for considering applications to ensure that use determinations are equal and uniform, and to allow for partial determinations. Second, HB 3121 created an appeals process for a person seeking a use determination from the executive director, or the chief appraiser of the appraisal district for the county in which the property is located. Third, HB 3121 required the commission's executive director to provide a copy of the use determination to the chief appraiser of the appraisal district for the county in which the property is located.

In 2007, the Texas Legislature enacted HB 3732 during the 80th Legislative Session. HB 3732 amended TTC, §11.31, Tax Relief for Property Used for Environmental Protection, by adding three new subsections. TTC, §11.31(k) requires the commission to adopt, by rule, a list of pollution control property which must include the listed 18 categories of items. TTC, §11.31(l) requires the commission to adopt a procedure to review the list at least once every three years and allows the removal of items from the list when there is compelling evidence that the item does not provide pollution control. TTC, §11.31(m) requires the executive director to review applications containing only items on the adopted list, and to issue a determination without regard to the information provided in response to TTC, §11.31(c)(1) within 30 days of receipt of the required application documents.

TTC, §11.31(k) requires the TCEQ to adopt a list containing the 18 categories of equipment. However, §11.31(k) does not provide the pollution control percentage for each of the 18 categories of items. Staff reviewed these items and determined that the pollution control percentage could vary depending upon the type of facility where the property is located, and the function of the property. After discussions with stakeholders, program staff developed a two-part list. Part A is the former Predetermined Equipment List, which consisted of the property that the executive director had determined to be used either wholly or partly for pollution control purposes. Part B of the list consists of the 18 property categories listed in TTC, §11.31(k). Part B categories will then be further defined in the program guidelines document. The items in Part B are listed without set use determination percentages. Applicants will be required to calculate an application-specific determination for each piece of equipment. It is the responsibility of the executive director to determine the proper use percentage using the range of 0%-100%. Simply because a piece of equipment is on the Equipment and Categories List or purports to fall under a category set forth on the list, does not mean that it will receive a positive use determination. The use percentage will be calculated for each piece of property on an application-by-application basis.

This adopted rulemaking amended Chapter 17 by adding one new subsection and by modifying the application review process in order to meet the requirements of TTC, §11.31(m).

In addition these adopted amendments corrected references to the TCEQ.

SECTION BY SECTION DISCUSSION

The adopted amendments to §17.1, Scope and Purpose, remove the phrase "including political subdivisions." The adoption of new 30 TAC Chapter 18, Rollback Relief for Pollution Control Requirements, implements Texas Tax Code (TTC), §26.045, Rollback Relief for Pollution Control Requirements. Political subdivisions are no longer covered under Chapter 17.

The adopted amendments to §17.2, Definitions, add definitions for the acronyms TCAA and TSWDA and includes the Texas Tax Code (TTC) in the list of regulations where terms used in this chapter may be defined. The adopted amendment changes the definition of Decision Flow Chart in §17.2(5) to reflect that it will not be used for applications containing property listed or contained in Part B of the Equipment and Categories List (ECL). The adopted amendment adds §17.2(6) which provides the definition for ePay, which is the commission's electronic payment system. The use of ePay provides applicants with an additional method for paying application fees. The adopted amendment adds §17.2(7), which provides the definition for Equipment and Categories List (ECL). The ECL is a two-part list. Part A of this list is the former Predetermined Equipment List, which consists of the property that the executive director has determined is used either wholly or partly for pollution control purposes. Part B includes the property categories listed in TTC, §11.31(k). The adopted amendment renumbers §17.2(6) as §17.2(8). The adopted amendment adds §17.2(9) which provides the definition for the Part B Decision Flow Chart. The adopted amendment renumbers §17.2(7) and (8) as §17.2(10) and (11) respectively. The adopted amendment removes §17.2(9) to reflect the elimination of the Predetermined Equipment List. The adopted amendment renumbers §17.2(10) - (13) as §17.2(12) - (15) respectively. The adopted amendment adds §17.2(16) which provides a definition for Tier IV, the fee level for applications containing property which is listed or contained in Part B of the Equipment and Categories List. The adopted amendment renumbers §17.2(14) and (15) as §17.2(17) and (18) respectively. The adopted amendment adds new §17.2(18)(E) which explains what information will be included with the use determination letter. The adopted amendment reletters existing §17.2(18)(E) as §17.2(18)(F). Section 17.5(15) is adopted with changes to the text. Language was added to clarify that items listed on Part A of the Equipment and Categories List may be listed with partial determinations but do not require a Tier III analysis.

The adopted amendment to §17.4, Applicability, deletes §17.4(c). The property which was listed in the list referred to in this subsection is now included in Part A of the Equipment and Categories List (ECL), set forth in §17.14. The commission will no longer maintain a list called the Predetermined Equipment List. The adopted amendment adds "applicable" to §17.4(d) in order to show the existence of two decision flow charts and two partial determination processes.

The adopted amendment to §17.10, Application for Use Determination, removes "Texas Natural Resource Conservation Commission" from §17.10(a)(1) and replaces it with "commission." The adopted amendment removes the phrase "other than a political subdivision" from §17.10(c). The program for political subdivisions has been relocated to Chapter 18. The adopted amendment corrected grammar in this subsection. The adopted amendment to §17.10(d)(1) adds language in order to show that this subsection does not apply to Tier IV applications. The adopted amendment renumbers §17.10(d)(6) - (9) to §17.10(d)(7) - (10) respectively. The adopted amendment adds §17.10(d)(6) in order to reflect the requirement that a worksheet containing the calculation of the pollution control percentage must be provided for Tier IV applications. The adopted amendment adds the word "appropriate" to §17.10(d)(10) in order to reflect that there are now two Decision Flow Charts. Section 17.10(a)(1) is adopted with changes to the proposed text. The commission received several comments in regards to chief appraiser notification. One common comment was that a complete application should be sent to the chief appraiser along with the required notification letter. The words "and one copy" were added to require the applicant to supply the TCEQ with two full applications. Policy will be developed requiring that staff send the copy to the appraisal district with the appropriate notification.

The adopted amendment to §17.12, Application Review Schedule, changes the 30-day administrative review period listed in §17.12(2) into a three-day period, in order to implement the HB 3732 requirements that the application review process described in TTC, §11.31(m), be limited to 30 days. The adopted amendment removes the word "deficient" from §17.12(2)(A) and inserts the phrase "not administratively complete" to better define the differences between the two types of deficiencies. The adopted amendment adds "For Tier I, II, and III applications" to §17.12(2)(B) in order to differentiate between existing fee levels and the new fee level for Tier IV applications. The adopted amendment adds §17.12(3), which explains that the technical review period for Tier IV applications is limited to 30 days. The adopted amendment renumbers existing §17.12(3) to §17.12(4).

The adopted new §17.14, Equipment and Categories List, provides the Equipment and Categories List (ECL). The ECL is a two-part list. Part A is the former Predetermined Equipment List, which consists of the property that the executive director has determined is used either wholly or partly for pollution control purposes. Part B is a list of the property located in TTC, §11.31(d). Figure: 30 TAC §17.14(a) is adopted with changes. In order to define the basis for calculating the "incremental cost difference" the following language has been added to the end of the description paragraph in Part A of the ECL: "For items where the description limits the use determination percentage to the incremental cost difference, the cost of the property or device without the pollution control feature is compared to a similar device or property that does have the pollution control feature." The following language was also inserted into the description paragraph in Part A of the ECL: "The use percentages on Part A of the ECL are established based on standard uses of the pieces of equipment involved. If the executive director determines that the equipment is not being used in a standard manner, the executive director may require that a Tier III analysis, using the Cost Analysis Procedure, be conducted by the applicant in order to calculate the appropriate use determination percentage. The executive director may also use the Cost Analysis Procedure, where it is appropriate, in order to more accurately reflect the environmental benefit at the site." The language allows for calculation of a use determination percentage which is different from the listed one if it is determined that on a particular application the listed percentage is not appropriate. The following language was added in the description paragraph for Part B of the ECL: "Applicants should first view Part A of the Equipment and Categories List to see if their equipment is already on that list." This will assist applicants in determining the correct Tier level and fee for their application. The description of item A-112 on the ECL was amended to read: "The incremental cost difference between the cost of the original equipment and the replacement equipment is eligible only when the replacement of these parts is done for the sole purpose of eliminating fugitive emissions of volatile organic compounds. New systems do not qualify for this item." This was done to clarify that the 100% use determination relates only to the pollution control aspect of the new device. During the consolidation of the previous Predetermined Equipment List into the new ECL, staff left five items related to painting and blasting operations off of the list. As a result of discussions on incorporating the incremental cost difference concept into the rule, these items have been added to Part A of the list as items A-186 through A-190.

The adopted new §17.14(b) defines the review process of the ECL list as at least once every three years. The adopted amendment created new §17.14(b)(1), which defines the requirements for adding an item to the ECL, and new §17.14(b)(2), which defines the requirements for removing an item from the ECL.

The adopted amendment renumbers §17.15, Review Standards, to §17.15(a) and amends §17.15(a) by removing two incorrect references to the program's name and stating that the chart in Figure: 30 TAC §17.15(a) is not to be used for Tier IV applications. The adopted amendment removes two incorrect references to the program's name from Figure: 30 TAC §17.15(a). Figure: 30 TAC §17.15(a) is adopted with changes. The diagram has been modified to show that a partial analysis must be done first in order to determine the appropriate Tier level. The adopted amendment adds new §17.15(b), which states that both the applicant and the executive director will use the new Part B Decision Flow Chart for applications containing only items listed or contained in Part B of the Equipment and Categories List (ECL). The adopted amendment adds new Figure: 30 TAC §17.15(b) "Part B Decision Flow Chart." This is necessary in order to establish in detail the review process for an application containing only items listed or contained in Part B of the ECL, which differs from the standard review process. Figure: 30 TAC §17.15(b) is adopted with changes. There were two places on the figure that referenced the Decision Flow Chart. The references were amended to read: "Decision Flow Chart located in §17.15(a)." This clarifies which Decision Flow Chart is being referenced by this section.

The adopted amendments to §17.17, Partial Determinations, amends §17.17(a) to reflect that, where applicable, a partial determination must be calculated for all pieces of equipment listed or contained in Part B of the ECL and for property which is not used wholly as pollution control property. The adopted amendment to §17.17(b) reflects that the formula in Figure: 30 TAC §17.17(b) is to be used for all partial determinations except those which contain property listed or contained in Part B of the ECL. 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. In addition, subsection (d) also explains that it is the responsibility of the executive director to determine if the proposed method is appropriate. The adopted amendment reletters existing §17.17(d) as §17.17(e) in order to reflect the addition of new subsection (d). The adopted amendment to subsection (e) adds the "method accepted by the executive director under subsection (d) of this section."

The adopted amendment to §17.20, Application Fees, amends §17.20(a) in order to reflect that there would be four fee levels rather than three. The adopted amendment to §17.20(a)(1) explains that the Tier I fee level applies to applications containing only property listed in part A of the ECL. The adopted amendment to §17.20(a)(2) replaces the reference to the Predetermined Equipment List with a reference to the ECL. The adopted amendment adds new §17.20(a)(4) in order to establish a new Tier IV level for applications containing property which is purported to fall under a category or categories listed on Part B of the Equipment and Categories list. The adopted amendment adds "administratively" to §17.20(b) as a means of defining the word "complete." The adopted amendment to §17.20(c) adds the word "either" and the phrase "or by electronic funds transfer by using the commission's ePay system." This will allow applicants to remit application fees through the electronic payment system. In addition, the adopted amendment to this subsection corrects the agency's name from the "Texas Natural Resource Conservation Commission" to the "Texas Commission on Environmental Quality." The adopted amendment further amends this section by removing the phrase "and delivered with the application to the TNRCC, at the address listed on the application form." This phrase is moved to new §17.20(d). The adopted amendment adds §17.20(d) which requires that the application fee must be delivered with the application. In addition, this adopted new section clarifies that if the applicant pays the applicant fee by using the ePay system, a copy of the receipt must be included with the application form.

FINAL REGULATORY IMPACT ANALYSIS DETERMINATION

The commission reviewed the adopted amendments in light of the regulatory analysis requirements of Texas Government Code, §2001.0225, and determined the rules do not meet the definition of "a major environmental rule." Under Texas Government Code, §2001.0225, "a major environmental rule" means a rule, the specific intent of which is to protect the environment or reduce risks to human health from environmental exposure, and that may adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, or the public health and safety of the state or a sector of the state. Furthermore, it does not meet any of the four applicability requirements listed in §2001.0225(a). Section 2001.0225 applies only to a major environmental rule which 1) exceeds a standard set by federal law, unless the rule is specifically required by state law; 2) exceeds an express requirement of state law, unless the rule is specifically required by federal law; 3) exceeds a requirement of a delegation agreement or contract between the state and an agency or representative of the federal government to implement a state and federal program; or 4) adopts a rule solely under the general powers of the agency instead of under a specific state law. The adopted rulemaking amended the Tax Relief for Pollution Control Property rules. Because the adopted rules are not specifically intended to protect the environment or reduce risks to human health from environmental exposure but to implement a tax incentive program, this rulemaking is not a major environmental rule and does not meet any of the four applicability requirements. These rules do not result in any new environmental requirements and should not adversely affect in a material way the economy, a sector of the economy, productivity, competition, or jobs.

TAKINGS IMPACT ASSESSMENT

The commission evaluated these amended rules and performed an assessment of whether Texas Government Code, Chapter 2007 is applicable. The commission's assessment indicates Texas Government Code, Chapter 2007 does not apply to these adopted amendments. Enforcement of these adopted rules would be neither a statutory nor constitutional taking of private real property. Specifically, the adopted rules do not affect a landowner's rights in private real property, because this rulemaking action does not burden, restrict, or limit the owner's rights to property or reduce its value by 25% or more beyond which would otherwise exist in the absence of the proposed regulations.

CONSISTENCY WITH THE COASTAL MANAGEMENT PROGRAM

The adopted amendments are not a rulemaking identified in the Coastal Coordination Act Implementation Rules, 31 TAC §505, concerning rules subject to the Texas Coastal Management Program (CMP), and will not require that goals and policies of the CMP be considered during the rulemaking process.

PUBLIC COMMENT

A public hearing on this proposal was held in Austin on October 26, 2007, at 10:00 a.m. at the Texas Commission on Environmental Quality complex located at 12100 Park 35 Circle in Building E, Room 201S. This was a joint hearing at which comments were also received on proposed amendments to Chapter 18. The hearing was attended by twenty-three people. Oral comments were provided by four attendees. The commission received comments from State Representative Dennis Bonnen, State Representative Lon Burnam, State Representative Myra Crownover, State Representative Joe Deshotel, State Representative Juan M. Garcia III, State Representative Richard L. "Rick" Hardcastle, State Representative Tan Parker, State Representative Mike O'Day, State Representative Dora Olivo, State Representative Alan B. Ritter, State Representative Beverly Woolley, State Senator Chris Harris, State Senator Robert L. Nichols, State Senator Tommy Williams, City of Houston Mayor Bill White (Houston), Harris County Judge Ed Emmett (Harris), Jefferson County Judge Ronald Walker (Jefferson), Newton County Judge Truman Dougharty (Newton), Nueces County Judge Samuel L. Neal, Jr. (Nueces), Orange County Judge Carl K. Thibodeaux (Orange), San Patricio County Judge Terry Simpson (San Patricio), Harris County Precinct 2 Commissioner Sylvia R. Garcia (Garcia), Harris County Attorney's Office (HCA), Dallas Central Appraisal District Chief Appraiser W. Kenneth Nolan (DCAD), Deer Park Independent School District Superintendent Arnold Adair and Board President Rhonda Lowe (DPISD), Pasadena Independent School District Superintendent Kirk Lewis (PISD), Port Arthur Independent School District Superintendent Johnny E. Browen, Ph.D. (PAISD), Port Neches-Groves Independent School District Superintendent Dr. Lani Randall (PNGISD), Association of Electric Companies of Texas, Inc. (AECT), Clean Coal Technology Foundation of Texas (CCTFT), County Judges & Commissioners Association of Texas (CJCAT), Texas Association of Business (TAB), Texas Association of Counties (TAOC), Texas Association of School Administrators (TASA), Texas Chemical Council (TCC), Texas Conference of Urban Counties (TCUC), Texas Mining and Reclamation Association (TMRA), Texas Oil & Gas Association (TxOGA), Texas Taxpayers and Research Association (TTARA), Jackson Walker, L.L.P. (Jackson), Marathon Petroleum Company, LLC. (Marathon), NRG Texas LLC. (NRG), Pritchard & Abbott, Inc. (Pritchard), Sierra Club (Sierra), Individual.

RESPONSE TO COMMENTS

General comments in support of the rule package and the Tax Relief for Pollution Control Property application process were received from Harris County Judge Ed Emmett, Jefferson County Judge Ronald Walker, Harris County Commissioner Sylvia Garcia, Jackson, TAOC, CCTFT, TMRA, TCUC, TxOGA, and the City of Houston.

The commission appreciates the comments. The commission made no changes to the rule in response to these comments.

Harris County Judge Ed Emmett, Jefferson County Judge Ronald Walker, Harris County Commissioner Sylvia Garcia, and Orange County Judge Carl Thibodeaux specifically endorse the comments provided by the Texas Conference of Urban Counties.

The commission appreciates the comments. Specific responses to the TCUC comments are provided later in this document. The commission made no changes to the rule in response to these comments.

TCC provided general comments supporting the rule and a specific comment stating that they support the comments provided by TTARA, relating to the role of chief appraisers in the use determination process.

The commission appreciates the comments. Please see section on chief appraiser notification for response to TTARA's comments on this issue. No change has been made with regard to these comments.

Pritchard provided comments about the Predetermined Equipment List (PEL) Advisory Group which was formed by the TCEQ in June 2007. Pritchard commented that "industry representatives far outnumber appraisal district representatives and collectively sway the evaluations and determinations."

The commission appreciates the comment, but determined that the comment is outside of the scope of the rulemaking. No changes to the rule were made in response to this comment.

Senator Harris, Senator Nichols, Senator Williams, Representative Crownover, Representative O'Day, Representative Deshotel, Representative Garcia, Representative Olivo, Representative Bonnen, Garcia, San Patricio, Nueces, PAISD, PISD, PNGISD, CJCAT, DPISD, HCA, Harris, Newton, Houston, TASA, and Pritchard expressed concern that the rule changes could lead to a significant negative impact on local property tax revenue and economic growth. The commenters requested that the commission narrowly interpret Texas Tax Code (TTC) §11.31. Newton suggested that any exemptions be phased in as a way to mitigate the loss. CCTFT commented that "{a}llegations that implementing HB 3732 will result in billions of dollars coming off the tax rolls are unsupported conjecture and should be rejected."

The commission appreciates the comments and understands the concerns about potential property tax revenue impacts associated with the amendments to 30 TAC Chapter 17. The tax exemption process for pollution control property is a two-step process. The first step requires the TCEQ to review the property to determine if it qualifies as pollution control property. Once this has occurred, the applicant files an exemption request with the appropriate appraisal district. Except in cases where a partial determination is being calculated, the dollar value of the property does not play a part in the use determination process. In cases where the executive director makes partial determinations, the final determination is expressed as a percentage of the total value of the equipment and not in a dollar amount. TTC, §11.31 does not authorize the commission to, and the commission does not consider the actual dollar amount of tax exemptions received by the applicants. This determination is made by the appraisal districts after the executive director's final decision on whether the equipment is used wholly or partly to control air, water or land pollution. TCEQ is mindful of the fact that laws related to tax exemptions are to be narrowly interpreted. However, when drafting regulations the commission is limited to implementing the clear language in the statute and relying upon legislative intent in cases of ambiguity. TTC, §11.31 does not allow for the phasing in of exemptions. No changes have been made in response to these comments.

TAOC commented that, due to the potential increase in the number of applications and the increased difficulty of the application process the TCEQ should ensure that sufficient resources be provided so that fair and accurate reviews will be conducted.

The commission appreciates this comment. TCEQ management will ensure that any additional necessary resources will be furnished to implement the rule amendments. No changes were made to the rule in response to this comment.

TMRA commented that they support the comments provided by the CCTFT, Jackson, and TTARA.

The commission appreciates the comment. Specific responses to CCTFT, Jackson and TTARA's comments are provided later in this document. No change was made to the rule in response to this comment.

TxOGA commented on the eligibility of "Green Products" to qualify for a positive use determination. In their opinion, property put into place in order to meet a market demand for green products should not be eligible for a positive use determination, but that property installed in order to meet an environmental initiative should be eligible.

The commission appreciates the comment and agrees that property installed to meet a market demand to create a green product would not be eligible for a positive use determination. The commission does not agree that a piece of equipment is automatically eligible for tax exemption under TTC, §11.31 simply because it was installed to meet an environmental initiative. A piece of equipment installed to meet an environmental initiative must also satisfy all statutory and regulatory requirements to qualify for a positive use determination including that it provide a pollution control benefit at the site. No changes were made to the rule in response to this comment.

General Comments Relating to the Scope and Intent of §11.31(k)

During the proposal agenda the commission directed staff to solicit "comments on whether Part B should be limited to pollution control property associated with advanced clean energy projects, as defined in Texas Health and Safety Code, §382.003." Representative Hardcastle, Sierra, Representative Woolley, Representative Parker, and CCTFT provided general comments on this issue.

Representative Hardcastle commented that the overall intent of HB 3732 is to "ensure that Texas continue to build power plants that are" clean and to make electricity affordable. However, the legislature did not intend to limit the categories of equipment listed in HB 3732 to advanced clean energy projects. Sierra commented that their review of the legislative history of HB 3732 leads them to the conclusion that Section 4 of HB 3732 is not tied to clean energy projects. Sierra stated that the TCEQ should perform due diligence to ensure that the use determination includes only the pollution control aspect of the property. Representative Woolley and Representative Parker commented that the purpose of the bill was to provide incentives to electric generation projects. CCTFT, supported by TMRA commented that: "Part B of the ECL should not be limited to pollution control property associated with advanced clean energy projects, as defined in Texas Health and Safety Code, §382.003."

The commission appreciates the comments provided by commenters regarding the scope and legislative intent of HB 3732. As a state agency, the commission is required to follow the mandates of the legislature regarding implementation of the statutes it enforces. When implementing a statute, the commission gives effect to its "plain language." In implementing HB 3732, staff is mindful that tax exemption statutes "are subject to strict construction." In reviewing the text and legislative history of HB 3732, staff concludes that the categories of equipment listed in it are not limited to advanced clean energy projects. However, as urged by the commenters, and consistent with existing regulations unaffected by HB 3732, the executive director is required to consider: 1) whether each category of equipment listed in TTC, §11.31(k) is used wholly or partly to control air, water or land pollution; and 2) whether the equipment provides environmental benefit at the site. No changes were made to the rule in response to these comments.

Comments Relating to Chief Appraiser Notification

During the proposal agenda the commission directed staff to solicit "comments on the appropriate format and process for notifying the chief appraiser for the appraisal district where the pollution control equipment is located." Representative Burnam, TAOC, Sierra, TCUC, Harris, TTARA, TCC, CCTFT, and TAB provided comments on this issue. Representative Burnam commented that the TCEQ should require the applicant to provide a detailed cost analysis and that the local tax assessor should be given an opportunity to review the analysis to ensure the accuracy of the application and the impact on the local tax base. TAOC commented that the TCEQ should provide the chief appraisers enhanced opportunities to comment during the application review process. TAOC suggested that chief appraisers be provided ample notice, a copy of the complete application, and an opportunity to comment before the use determination is issued. Sierra commented that a requirement that the chief appraiser be notified as soon as possible after an application is filed and that notification should include a copy of the complete application and any attachments should be added to the rules. Sierra provided specific language to change §17.12(1). Under Sierra's proposed language, the section would require that notice be sent within ten days of receipt and that a list of equipment and associated dollar values be included. It goes on to say that a copy of the complete application and any supporting materials must be mailed to the chief appraiser within ten days if the chief appraiser requests it. TCUC commented that §17.12 should be amended to allow the appraisal district time to comment on a tax exemption application, ten business days after issuance of notice of an application, and to require that a copy of the administratively complete application be provided to the chief appraiser. Harris commented that TCEQ should provide a complete copy of each application to the appropriate appraisal district and to provide 10 days for the appraiser to comment on each application. TTARA's comments provided an overview of the laws applicable to the Tax Relief Program with regard to notification of the appropriate chief appraiser and participation by the chief appraiser in the review process. TTARA pointed out that the statute created a two-part process for obtaining an exemption for pollution control property. The first part requires the TCEQ to evaluate the property to determine whether or not it provides pollution control. The second part requires the chief appraiser to determine the dollar value of the property. TTC provides the chief appraiser with an appeals process if they disagree with a use determination. TTARA also stated that nowhere in the code is there any language that would suggest that the chief appraisers have involvement in the application review process. TTARA encourages the TCEQ to maintain the separation between the two processes. They provided a specific comment in response to the question asked about chief appraiser notification and involvement. TCC commented in support of TTARA's comments. CCTFT commented that "Section 11.31(d) requires the executive director to notify the chief appraiser that an application has been filed and to send the appraiser the determination letter. Nothing more is required under the statute." TAB commented generally that they support the proposed rule package. They do not support the adoption of any process which would expand the chief appraiser's role in the use determination review process. They expressed preference for the current system that requires the executive director to determine whether the equipment is used for pollution control and the chief appraiser to determine the dollar amount of the tax exemption to be granted to an applicant with a positive use determination.

The commission appreciates the comments, but respectfully disagrees that the rules should be amended to allow chief appraisers or tax assessors to comment on a use determination application before the executive director makes a final determination on the application. TTC §11.31(d) does not authorize this procedure. To allow a comment period for the chief appraiser would also frustrate the speedy review process contemplated by HB 3732 with respect to the categories of equipment listed in TTC, §11.31(k). TTC, §11.31(d) states that the executive director shall: determine if a piece of equipment is used wholly or partly to control air, water or land pollution; send notice to the chief appraiser for the county where the equipment is located "as soon as practicable" that the applicant has applied for a use determination; and send a copy of the use determination letter issued to the applicant to the chief appraiser. The chief appraiser has no role in the determination of whether a piece of equipment provides pollution control benefit. In fact, TTC, §11.31(i) mandates that the "chief appraiser shall accept a final determination by the executive director as conclusive evidence that the facility, device, or method is used wholly or partly as pollution control property." The appeals process contained in TTC, §11.31(e) and 30 TAC §17.25 provides the sole avenue for the chief appraisers to challenge the executive director's use determination on an application. The statutory and regulatory structure would be flustered if the commission were to allow comment on each application for use determination. The executive director is currently required by §17.12(1) to send notice to the chief appraiser as soon as practicable after receipt of an application. Program policy defines "as soon as practicable" to mean when an application is declared to be administratively complete. The TCEQ is confident that the chief appraiser is provided adequate opportunity to consider and exercise its opportunities for appeal under this timeline construction. The executive director is currently working on updating a standard operating procedure (SOP) for use in use determination reviews. It is anticipated that the SOP will formalize the executive director's current procedure of providing notice and a copy of the complete application to the chief appraiser. Section 17.10(a)(1) has been amended to require the applicant to provide an original and one copy of the application. The application will be furnished solely to give the chief appraiser information regarding the property being reviewed for use determination under TTC, §11.31.

Comments Relating to Environmental Benefit at the Site

The commission directed staff to solicit comments on the current regulation pertaining to the requirement that there be an environmental benefit at the site for the facility, device, or method for the control of air, water, or land pollution to be eligible for a positive use determination.

Representative Burnam, CCTFT, Sierra, TAOC, and TxOGA commented on the requirement for environmental benefit at the site issue. CCTFT commented that HB 3732 has no impact on the ongoing debate as to whether pollution control property has to provide an environmental benefit at the site to be eligible for a positive use determination. "CCTFT does not support and the TCEQ should not accept arguments that HB 3732 clarified that off-site benefits should be recognized in issuing exemptions for on-site" benefit. Sierra commented that the commission should continue to require environmental benefit at the site for Tier I, II, and III applications and at least request information regarding environmental benefit at the site for Tier IV applications. They provided suggested changes to §17.10(d)(1) which would implement this proposal. Representative Burnam and TAOC agree with the current regulation requiring environmental benefit at the site. TxOGA commented that a pollution control device should be eligible for a positive use determination even when such a device does not produce environmental benefit at the site. TxOGA proposed that the commission revise box 5 in the current decision flow chart to read "{i}s an environmental benefit created by pollution control property which is located at the site?"

Having reviewed the comments on both sides of this issue, the commission will continue to require environmental benefit at the site as required by the statute and regulations. HB 3732 states that the executive director shall determinate whether a device is used wholly or partly to control pollution within 30 days of receipt of an application without regard to whether information on anticipated environmental benefit has been submitted by the applicant. The bill however, does not nullify the requirement to require environmental benefit at the site. It should be noted that the lack of documentation supporting a use determination application would force the executive director to make a decision on an application without the benefit of having all the information necessary to make a sound scientifically based determination. Such a situation could result in a negative use determination. Finally, staff would note that the issue of requiring environmental benefit at the site was litigated in Trent Wind Farm, L.P v. Texas Commission on Environmental Quality, GN2-04045, 200th Judicial District Court of Travis County (April 19, 2004). The court sustained the regulatory requirement of environmental benefit at the site by granting summary judgment in favor of the TCEQ and the co-defendants in the case. No changes were made to the rules in response to these comments.

Comments Relating to §17.2

Sierra commented that the definition of Tier III should be clarified to ensure that Tier III applications are not submitted for items listed on the ECL under §17.14(a).

The commission appreciates the comment and agrees that additional language similar to that suggested by Sierra is needed to clarify the definition of Tier III. The definition is therefore revised to read as follows: "An application for property used partially for the control of air, water, and/or land pollution, but that is not on the Equipment and Categories List located in §17.14(a) of this title."

Comments Relating to §17.4

Houston commented that the program should be limited so that only property which is installed to exceed an environmental requirement is eligible for the tax incentive.

The commission appreciates the comment, but respectfully disagrees. Article 8, §1-1 of the Texas Constitution provides that property installed to meet or exceed rules or regulations promulgated by any governmental environmental protection agency to control air, water, or land pollution is eligible for pollution control property tax exemption. Similarly, TTC, §11.31(b) defines pollution control property as property "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 control of air, water, or land pollution. Property installed to meet an environmental requirement has the same eligibility as property installed to exceed an environmental requirement. The commission made no changes to the rule in response to this comment.

Pritchard commented that property should be eligible for a positive use determination only if the application is filed in the first year that the property becomes taxable. CCTFT commented that under the statute any pollution control property which became taxable for the first time on or after January 1, 1994, is eligible for a positive use determination.

The commission appreciates both comments. Article 8, §1-1(b) of the Texas Constitution states that tax exemption for pollution control property applies to property which became taxable for the first time on or after January 1, 1994. Neither the constitution nor the statute provides any language which would authorize the commission to limit pollution control property tax exemption applications to be filed within the first year that the property became taxable. No changes were made to the rule in response to this comment.

Comments Relating to §17.10

An individual commented that a minimum pollution control threshold should be established by rule and that this threshold must be met before a piece of equipment is eligible for consideration for a pollution control property tax exemption.

The commission does not see a need for an additional threshold beyond that required by the constitution, the statute and the commission regulations. Under the current and proposed rules, to be eligible for tax exemption: 1) each piece of property must be installed in order to meet or exceed an adopted environmental rule or regulation; and 2) the property must provide an environmental benefit at the site. These statutory and regulatory requirements are designed to ensure that the installation of the property results in pollution control. No changes were made to the rule in response to this comment.

Comments Relating to §17.14

Representatives Ritter, Parker and Hardcastle, and PAISD commented that the TCEQ must exercise discretion in designating property as pollution control, has the authority to add items to the list, and to determine the eligibility of properties listed in HB 3732 as pollution control properties. TAOC expressed concerns about property categories listed in HB 3732 and the potential that partial determinations might reflect not just pollution control, but also contributions to production or energy efficiency.

The commission appreciates the comments. The commission agrees that it has the statutory authority under HB 3732 to remove categories of equipment from the list contained in TTC, §11.31(k) and to review properties to ensure that they control air, water, or land pollution. The commission agrees that the calculation of partial determinations must be done in a way to ensure that the use determination is limited to the pollution control aspect of the property. Under the adopted rules, Tier IV applications will be reviewed on a case-by-case basis; and an applicant submitting a Tier IV application must provide calculations to determine and justify the qualifying pollution use percentage. The commission made no changes to the rule in response to this comment.

TxOGA commented about the pollution control eligibility of manufacturers of pollution control equipment used to manufacture a product which controls or prevents pollution. The comments include a general discussion of TTC, §11.31(a) and a reference to a 1996 Texas Attorney General's opinion. TxOGA's comments include a discussion of the pollution control applicability of equipment installed in order to produce low sulfur diesel and gasoline. TxOGA and Marathon requested that downstream Hydrotreaters and Sulfur Recovery Units be added to Part A of the ECL.

The commission appreciates the comment. TTC, §11.31(a) provides that "person is not entitled to an exemption from taxation under this section solely on the basis that the person manufactures or produces a product or provides a service that prevents, monitors, controls, or reduces air, water, or land pollution." Commission regulations under 30 TAC §17.15 require environmental benefit at the site for an installation to be eligible for pollution control property tax exemption. A piece of equipment used to manufacture a property that controls pollution is not statutorily eligible for pollution tax exemption. Production equipment that does not provide environmental benefit at the site is not eligible for pollution control property tax exemption. Pieces of equipment (such as Hydrotreaters and Sulfur Recovery Units used to manufacture low sulfur diesel and gasoline) installed to meet a federal environmental initiative that does not provide environmental benefit at the site are not eligible for Texas pollution control property tax exemption. The commission made no changes to the rule in response to this comment.

Pritchard provided comments on the removal of three specific items from Part A of the ECL. They requested that Drilling Mud Recycling Systems (M-15); Drilling Rig Spill Response System (blowout preventors) (M-16); and Cathodic Protection (for oil and gas pipelines) (M-31) be removed from Part A of the ECL. While acknowledging that the items have some pollution control benefits, they contend however that they should be removed from Part A of the ECL because they are installed primarily for production and safety purposes.

The commission appreciates this comment, but respectfully disagrees with the comments on items M-15, M-16 and M-31. The executive director has determined that Mud Recycling Systems, Blowout Preventers, and Cathodic Protections are installed for pollution control purposes. The commission sustained the executive director's use determination regarding Mud Recycling Systems and Drilling Rig Spill Response Systems in previous use determination appeal hearings. No changes were made to the rule in response to this comment.

Jackson commented that the HB 3732 property list reaffirms that production equipment using new or advanced technologies may have a pollution control benefit.

The commission appreciates this comment and agrees that certain production equipment using advanced technologies may also have pollution control benefits. However, each category of equipment listed in TTC, §11.31(k) will be considered on an application-specific basis to determine whether the equipment is installed to wholly or partly control air, water, or land pollution. Under the adopted rules, the categories of equipment listed in HB 3732 are incorporated into rule in Part B of the ECL. No changes were made to the rule in response to this comment.

Sierra commented that §17.14(a) should be amended to include: "Applicants should first view Part A of the Equipment and Categories List to see if their equipment might already be on that list."

The commission appreciates this comment and agrees with this suggestion and has amended §17.14(a) accordingly. In addition, the program guidelines manual and application form will be changed to reflect that the applicant should check to see if their equipment is listed on Part A of the ECL before checking Part B. This has the potential of saving the applicant time and money and reducing the required staff review time.

DCAD commented on two specific items on Part A of the ECL; environmental paving and storm-water containment. DCAD is concerned that TCEQ has been too broad in its determinations related to these items, especially for property located at service stations.

The commission appreciates this comment and understands DCAD's concerns over these items. Over the last two years staff has seen a significant increase in the number of applications from service stations which has led staff to review the PEL listed items related to service stations. In response to this review, ECL item M-8 (Environmental Paving) has been modified. This item is now limited to industrial facilities and covers only traffic areas. Only the paving qualifies and the dollar value must be provided on a square foot basis. A plat plan must also be provided. Staff developed new item T-16: Concrete Paving above Underground Tanks and Piping in order to alleviate specific concerns at service stations. Rather than the entire parking and driving area being eligible for a positive use determination, paving is now limited to only the concrete paving which must be installed in order to protect underground tanks and pipes from hydrocarbon leaks or spills. In order to better define the part of the land associated with a storm-water containment structure that is eligible for a positive determination, staff has already incorporated the language suggested by DCAD into the property description. Staff adopted this language as a means of explaining to applicants that only that part of the land that actually houses a piece of pollution control property is eligible for a positive use determination. No changes were made to the rule in response to this comment.

TCUC commented, with the City of Houston's support, that a change in equipment that merely shifts an on-site emission to off-site should not qualify for a use determination. If there was a pollution control benefit then only a partial determination should be made. TCUC cited an example of replacing a gas-fired pump with an electric-fired pump. TCUC suggested that the appropriate determination, if any, should be limited by the productive value of the pump.

The commission appreciates this comment, but respectfully disagrees with the portion of the comment related to the shifting of emissions from one source to another. Under TTC, the TCEQ is charged with evaluating the equipment or project to determine if it meets the definition of pollution control property. Pollution control property as defined includes property that is used for the prevention, monitoring, control, or reduction of air, water, or land pollution. TTC does not require a net reduction in pollution for an item to be eligible for a pollution control property tax exemption. The requirement for an environmental benefit at the site must also be satisfied.

The commission agrees with the second part of the comment related to limiting the exemption to only that portion of the property or project which is related to pollution control or prevention. The appropriate use determination for a project, such as the one in the example, would be one based on determining the amount of additional cost for providing pollution control. Staff refers to this additional cost as the "incremental cost difference". The descriptions for several of the items in the proposed ECL state that the use percentage is based on the incremental cost difference. In reviewing the proposed ECL, staff realized that there was no explanation on how to calculate "incremental cost difference." Accordingly, the following language has been added to the end of the description paragraph, in Part A of the ECL: "For items where the description limits the use determination percentage to the incremental cost difference, the cost of the property or device without the pollution control feature is compared to a similar device or property with the pollution control feature." Also in response to this comment staff modified the description for item A-112 on the ECL, which includes replacements of pumps, seals and valve, to explain that the portion of the equipment which is eligible for exemption is the cost difference between the new equipment and the old equipment.

TCUC commented that a "safety valve" should be added to §17.14 to allow the TCEQ to issue a use determination at a percentage other than that listed on the ECL. This would happen if it was determined that an item filed as a Tier I or Tier IV was entitled to a lesser use percentage, than listed on the ECL. TCUC commented that, under this circumstance, the executive director should require the applicant to re-submit the application under Tier III. From then on all applications for that type of equipment would be considered as Tier III equipment until such time that the ECL could be reviewed under §17.14(b). Harris commented that an amendment should be made to require a Tier III analysis for Tier I or Tier IV if the TCEQ determines that an item does not belong on the ECL.

The commission appreciates these comments, but respectfully disagrees that a "safety valve" other than those provided in TTC, §11.31 and the commission rules are appropriate. All of the categories of equipment listed in Part B of the ECL are listed as having a "variable" percentage. The percentage, if any of items in Part B of the ECL will be determined on a case-by-case basis. Until a percentage is assigned to an item in Part B of the ECL, TCUC's suggested "safety valve" will not work since there is not listed use percentage for the items. The proposed three-year review period for the ECL under the adopted rules will allow enough time for the executive director to evaluate each item on Part B of the ECL to determine if there is a need to remove an item from the list.

Tier I applications are ones which contain property which is listed in Part A of the ECL. Staff agrees that there may be situations where the use determination percentage listed in the ECL may be inappropriate. In order to handle these situations staff has inserted language into the description paragraph in Part A on the ECL. The insertion is before "The commission will review. . ." The new language is: "The use percentages on Part A of the ECL are established based on standard uses of the pieces of equipment involved. If the executive director determines that the equipment is not being used in a standard manner, the executive director may require that a Tier III analysis, using the Cost Analysis Procedure, be conducted by the applicant in order to calculate the appropriate use determination percentage. The executive director may also use the Cost Analysis Procedure where, it is appropriate, in order to more accurately reflect the environmental benefit at the site."

The City of Houston stated that when appropriate only partial exemptions should be provided.

The commission appreciates this comment and agrees that when appropriate only a partial determination should be issued. Several sections within Chapter 17 address the issuance of partial determinations. Part A of the ECL contains several items which are listed as partial percentages. Part B of the ECL lists all of the categories as variable (V) to signify that a partial determination calculation is required. To ensure that both staff and applicants first consider if the piece of property or project is only eligible for a partial determination staff has modified Figure: 30 TAC §17.15(a) - Decision Flow Chart. The new language will require that property first undergo a partial analysis review before the appropriate fee Tier Level is determined. No change has been made to the rule as a result of this comment.

Pritchard commented that power supplies installed for the purpose of operating pollution control property should not be eligible for a positive use determination.

The commission appreciates this comment, but respectfully disagrees. From the inception of the program, staff has considered that the definition of pollution control property includes all equipment necessary in order to operate the specific property item. Included in this definition is that portion of any additional utilities required to operate the pollution control property. No change has been made to the rule as a result of this comment.

Pritchard commented that the substitution of an electric motor for an internal combustion engine should not receive a 100% use determination. The reasoning provided is that while this type of substitution might eliminate air emissions the electric motor is a piece of production equipment.

The commission appreciates this comment and agrees that the value of the pollution control aspect of this type of property substitution is the incremental cost difference between the two items. No change has been made to the rule as a result of this comment.

NRG commented that the list of eighteen property categories listed on Part B of the ECL and in HB 3732 does not specifically include the gasifier and air separation units associated with an integrated coal gasification combined cycle facility. They go on to state that the list contains other pollution control items that would be constructed at this facility and that the legislature must have meant to include these items. They express concern that they may be required to file an application containing this property as a Tier I, II, or III application which would "appear to be contrary to the intention of HB 3732, which was designed to provide advance clean energy projects with expeditious processing and review." They raise concerns that as written they are unable to reliably determine the amount of exemption that the project might receive. They request that the TCEQ amend the rules to state that "pollution control components of an advanced clean energy, including an IGCC gasifier and ASU, that are not specifically listed in B-1 through B-17 of the Part B list will be eligible for a use determination review as category B-18 facilities and that use determination requests containing such equipment will be considered Tier IV applications."

The commission appreciates this comment but declines to address the scope of Category B-18 in this rule. The executive director will determine the scope of Category B-18 in guidance documents and on a case-by-case basis when reviewing actual Tier IV applications. Nevertheless, the commission recognizes that pollution control components of an advanced clean energy project that are not specifically listed in B-1 through B-17 of Part B will be eligible for use determination review under Category B-18 and can be included in a Tier IV application.

Comments Relating to §17.15

Sierra commented that additional language needs to be added to §17.15 to clarify the decision flow chart being referenced in Figure: 30 TAC §17.15(b).

The commission appreciates the comment and agrees that Sierra's proposed changes would provide clarity to the application review process. The two references on Figure: 30 TAC §17.15(b) to the Decision Flow Chart have been modified to reflect that the references are to the Decision Flow Chart located in §17.15(a).

TxOGA recommended that two changes be made to Figure: 30 TAC §17.15(a): Decision Flow Chart. The first proposed change is to re-word Box 5 to read: "Is an environmental benefit created by pollution control property which is located at the site?" The second proposed change is to change the footnote related to Box 5 to read: "Determine that the pollution control property which creates the environmental benefit is installed and operated at the site. If the property that creates the benefit is not located at the site, then that property is not eligible for a positive use determination."

The commission appreciates the comment, but respectfully disagrees with these proposed changes. The purpose of the Tax Relief Program is to allow industry to meet ever more stringent environmental regulations by installing pollution control or prevention property without seeing an increase in their property taxes. Making the changes recommended by TxOGA would lead to situations where the environmental benefit could happen at a distance from the local community. No changes were made in response to this comment.

Comments Relating to §17.17

AECT commented that "{p}ollution-reducing production equipment is eligible for a partial positive use determination."

Staff agrees and established the Tier III application process to review property that is used partly for pollution control and also for production. No change has been made to the rule in response to this comment.

CCTFT commented that: "Production equipment that reduces pollution is eligible for tax exempt usage determination." Jackson expanded on that statement by stating that the statute specifically allowed property that is "wholly or partly" used for pollution control is eligible for a tax exemption.

The commission appreciates this comment and agrees that production property used partly for the control of air, water, or land pollution is eligible for tax exemption if such property provides an environmental benefit at the site. TTC, §11.31 clearly states that equipment used wholly or partly to control pollution is eligible for a pollution control property tax exemption. From its inception the Tax Relief Program has included a method for obtaining a partial determination. No changes were made to the rule in response to this comment.

Comments Relating to §17.10

Sierra suggested that §17.10(d)(6) be changed to require that the use determination percentage for Tier IV applications be calculated by using the Cost Analysis Procedure (CAP) located in §17.17. Sierra suggested changes to §17.17 which would require use of the CAP for Tier IV applications.

The commission appreciates this comment. Staff considered this issue during the rule development process. The concern is that while the Cost Analysis Procedure provides an accurate use percentage for pieces of property which provide both pollution control and production benefits, staff is not confident that it will work for the categories of property listed in Part B of the ECL. Staff determined that a more appropriate course of action would be to allow applicants to suggest methods for calculating the appropriate percentage. The executive director retains the right to evaluate the proposed methods and determine the most appropriate one. No change was made to the rule as a result of this comment.

STATUTORY AUTHORITY

These amendments and new section are adopted under Texas Water Code (TWC), §5.102, which authorizes the commission to perform any acts authorized by the TWC or other law which are necessary and convenient to the exercise of its jurisdiction and powers and §5.103, which authorizes the commission to adopt rules necessary to carry out its powers and duties under the TWC. These rules are also adopted under Texas Tax Code (TTC), §11.31, which authorizes the commission to adopt rules to implement the Pollution Control Property Tax Exemption. The adopted amendments implement the new subsections added to TTC, §11.31.

§17.2.Definitions.

Unless specifically defined in the Texas Clean Air Act (TCAA), the Texas Solid Waste Disposal Act (TSWDA), the Texas Water Code (TWC), the Texas Tax Code (TTC), or the Texas Health and Safety Code (THSC), or in the rules of the commission, the terms used by the commission have the meanings commonly ascribed to them in the fields of pollution control or property taxation. In addition to the terms which are defined by the TCAA, the TSWDA, TWC, TTC, and THSC, the following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Byproduct--A chemical or material that would normally be considered a waste material requiring disposal or destruction, but due to pollution control property is now used as a raw material in a manufacturing process or as an end product. The pollution control property extracts, recovers, or processes the waste material so that it can be used in another manufacturing process or an end product.

(2) Capital cost new--The estimated total capital cost of the equipment or process.

(3) Capital cost old--This is the cost of comparable equipment or process without the pollution control feature.

(4) Cost analysis procedure--A procedure which uses cost accounting principles to calculate the percentage of a project or process that qualifies for a positive use determination as pollution control property.

(5) Decision flow chart--A flow chart which is used to determine if a property or process, which is not listed in Part B of the figure in §17.14(a) of this title (relating to Equipment and Categories List), is eligible for a whole or partial use determination as pollution control property.

(6) ePay--The commission's electronic payment system which is located on the TCEQ's web page at www.tceq.state.tx.us.

(7) Equipment and Categories List--A list of property or categories of property used either wholly or partially for pollution control purposes or that is listed in TTC, §11.31(k).

(8) Installation--The act of establishing, in a designated place, property that is put into place for use or service.

(9) Part B decision flow chart--A flow chart which is used to determine if a property or process, which falls under a category listed in Part B of the figure in §17.14(a) of this title (relating to Equipment and Categories List), is eligible for a whole or partial use determination or a negative use determination as pollution control property.

(10) Partial Determination--A determination that an item of property or a process is not used wholly as pollution control.

(11) Pollution control property--A facility, device, or method for control of air, water, or land pollution as defined by TTC, §11.31(b).

(12) Production capacity factor--A calculated value used to adjust the value of a partial use determination to reflect capacity considerations.

(13) Tier I--An application which contains property that is in Part A of the figure in §17.14(a) of this title or that is necessary for the installation or operation of property located on Part A of the Equipment and Categories List.

(14) Tier II--An application for property that is used wholly for the control of air, water, and/or land pollution, but not on the Equipment and Categories List, located in §17.14(a) of this title.

(15) Tier III--An application for property used partially for the control of air, water, and/or land pollution but that is not included on the Equipment and Categories List, located in §17.14(a) of this title.

(16) Tier IV--An application containing only pollution control property which falls under a category located in Part B of the figure in §17.14(a) of this title.

(17) Use determination--A finding, either positive or negative, by the executive director that the property is used wholly or partially for pollution control purposes and listing the percentage of the property that is determined to be used for pollution control.

(18) Use determination letter--The letter sent to the applicant and the chief appraiser which includes the executive director's use determination. In addition to the use determination, the letter will also include at least the following information:

(A) the name of the applicant;

(B) the name and location of the facility;

(C) the property description;

(D) in the case of a Tier III application, a copy of the Cost Analysis Procedure worksheet;

(E) in the case of a Tier IV application, a copy of the worksheet explaining the calculation of the use percentage; and

(F) any other information the executive director deems relevant to the use determination.

§17.10.Application for Use Determination.

(a) In order to be granted a use determination a person shall submit to the executive director:

(1) a commission application form or a similar reproduction and one copy; and

(2) the appropriate fee, under §17.20 of this title (relating to Application Fees).

(b) An application must be submitted for each unit of pollution control property or for each facility consisting of a group of integrated units which have been, or will be, installed for a common purpose.

(c) If the applicant desires to apply for a use determination for a specific tax year, the application must be postmarked no later than January 31 of the following year. Applications postmarked after this date will not be processed until after review of all applications postmarked by the due date are completed and without regard for any appraisal district deadlines.

(d) Except for paragraph (1) of this subsection, all use determination applications shall contain at least the following:

(1) for Tier I, II, and III use determination applications, the anticipated environmental benefits from the installation of the pollution control property for the control of air, water, or land pollution;

(2) the estimated cost of the pollution control property;

(3) the purpose of the installation of such facility, device, or method, and the proportion of the installation that is pollution control property;

(4) the specific law, rules, or regulations that are being met or exceeded by the use, installation, construction, or acquisition of the pollution control property;

(5) if the installation includes property that is not used wholly for the control of air, water, or land pollution, and is not on the Equipment and Categories List, a worksheet showing the calculation of the Cost Analysis Procedure, §17.17 of this title (relating to Partial Determination), and explaining each of the variables;

(6) if the pollution control property contains equipment which falls under one of the categories listed in Part B of the Equipment and Categories List, located in §17.14 of this title (relating to Equipment and Categories List), a worksheet showing the method and the calculation used to calculate the use percentage;

(7) any information that the executive director deems reasonably necessary to determine the eligibility of the application;

(8) if the property for which a use determination is sought has been purchased from another owner who previously used the property as pollution control property, a copy of the bill of sale or other information submitted by the person or political subdivision that demonstrates, to the satisfaction of the executive director, that the transaction involves a bona fide change in ownership of the property and is not a sham transaction for the purpose of avoiding tax liability;

(9) the name of the appraisal district for the county in which the property is located; and

(10) the appropriate Decision Flow Chart, §17.15 of this title (relating to Review Standards), showing how each piece of pollution control property flows through the applicable diagram.

§17.14.Equipment and Categories List.

(a) The Equipment and Categories List (ECL) is a two-part list. Part A is a list of the property that the executive director has determined is used either wholly or partly for pollution control purposes. Part B is a list of categories of property which is located in Texas Tax Code (TTC), §11.31(k).

Figure: 30 TAC §17.14(a)

(b) The commission shall review and update the ECL at least once every three years.

(1) An item may be added to the list only if there is compelling evidence to support the conclusion that the item provides pollution control benefits and a justifiable pollution control percentage is calculable.

(2) An item may be removed from the list only if there is compelling evidence to support the conclusion that the item does not render pollution control benefits.

§17.15.Review Standards.

(a) The Decision Flow Chart shall be used for each item of property or process, submitted in a non-Tier IV use determination application to determine whether the particular item will qualify as pollution control property. The executive director shall apply the standards in the Decision Flow Chart when acting on a non-Tier IV use determination application.

Figure: 30 TAC §17.15(a) (.pdf)

(b) For applications containing only property located in Part B of the figure in §17.14(a) of this title (relating to Equipment and Categories List), the Part B Decision Flow Chart shall be used for each item or process to determine whether the particular item will qualify as pollution control property. The executive director shall apply the standards in the Part B Decision Flow Chart when acting on an application containing only property which is listed in Part B of the Equipment and Categories List.

Figure: 30 TAC §17.15(b) (.pdf)

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on January 18, 2008.

TRD-200800236

Robert Martinez

Director, Environmental Law Division

Texas Commission on Environmental Quality

Effective date: February 7, 2008

Proposal publication date: October 5, 2007

For further information, please call: (512) 239-0177

30 TAC §§18.1, 18.2, 18.5, 18.10, 18.15, 18.25, 18.30, 18.35

The Texas Commission on Environmental Quality (commission) adopts new §§18.1, 18.2, 18.5, 18.10, 18.15, 18.25, 18.30 and 18.35.

The commission adopts §§18.1, 18.2, 18.5, 18.10, 18.15, 18.30 and 18.35 without changes to the proposed text as published in the October 5, 2007, issue of the Texas Register (32 TexReg 6985) and will not be republished. The commission adopts §18.25 with changes to the proposed text.

BACKGROUND AND SUMMARY OF THE FACTUAL BASIS FOR THE ADOPTED RULES

This rulemaking implements the Rollback Relief for Pollution Control Requirements contained in Texas Tax Code (TTC), §26.045. In 1993 the Texas Legislature, 73rd Session, enacted House Bill 1920, which created TTC, §11.31 and §26.045. TTC, §11.31 established a property tax exemption program for property which is used wholly or partly for pollution control. TTC, §26.045 created a rollback tax relief program for political subdivisions. TTC, §11.31 required the TCEQ to adopt rules to implement the tax relief program. TTC, §26.045 gave the commission the authority to adopt rules but did not require the adoption of rules. In response the commission adopted 30 TAC Chapter 17, Tax Relief for Property Used for Environmental Protection. Chapter 17 implemented TTC, §11.31. Section 17.1, Scope and Purpose, included political subdivisions in the definition of the applicability of the rule. The commission chose not to adopt a separate rule to implement TTC, §26.045.

In 2007 the 80th Legislature, modified the Rollback Relief for Pollution Control Requirements program (TTC, §26.045) through the passage of House Bill 3732 (HB 3732). The legislature modified TTC, §26.045 by adding three new subsections, (f), (g), and (h). TTC, §26.045(f) requires the commission to adopt by rule a list of 18 categories of property listed in §26.045(f). TTC, §26.045(g) requires the commission to adopt a procedure to review the list at least once every three years. In addition, it allows the removal of items from the list when there is compelling evidence that the item does not provide pollution control. TTC, §26.045(h) requires the executive director to review applications, containing only items on the adopted list, and to issue a determination without regard to the information provided in response to TTC, §26.045(c)(1), within 30 days of receipt of the required application documents.

SECTION BY SECTION DISCUSSION

The adopted new §18.1, Scope and Purpose, provides an explanation of the scope and purpose of Chapter 18. The purpose of this chapter is to implement the Rollback Relief for Pollution Control Requirements Program for political subdivisions of this state. The scope of this rule is to provide the framework for political subdivisions to apply to the commission for a determination that a pollution control project qualifies for rollback tax rate relief.

The adopted new §18.2, Definitions, provides definitions for the terms: ePay, Equipment and Categories List, installation, partial determination, permit requirement, pollution control property, Tier I, Tier II, use determination, and use determination letter as these terms are used within Chapter 18. The purpose is to assist in the understanding of the rules and the program.

The adopted new §18.5, Applicability, provides an explanation of the property which is eligible for inclusion under the Rollback Relief Program. It explains that it is the responsibility of executive director to determine the portion of the property which is eligible for Rollback Relief. This section will be used by political subdivisions to determine what property may be eligible under this program.

The adopted new §18.10, Application for Use Determination, provides the information which must be included in an application submitted to the commission. These items include: the appropriate fee, the anticipated environmental benefit from the installation of the property, the estimated cost of the property, the permit requirement being met, a copy of the permit, a partial calculation worksheet if the property is not used wholly for pollution control or if the property is located in Part B of the Equipment and Categories List (ECL), and any other information which the executive director requires. This section will be used by applicants to determine what information they must provide in order to receive a positive determination from the executive director.

The adopted new §18.15, Application Review Schedule, explains the executive director's responsibility once an application has been received. The difference in review time frames between types of applications is explained. This section also explains how positive and negative determinations would be documented. This section will be used by political subdivisions to understand the review process which will occur once the commission has received the application and explains how the executive director's decision will be documented.

The adopted new §18.25, Equipment and Categories List, provides for the ECL, which is a two-part list. Part A is the former predetermined equipment list, which consists of the property that the executive director has determined is used either wholly or partly for pollution control purposes. Part B is a list of categories of property which is located in TTC, §26.045(f). Figure: 30 TAC §18.25(a) is adopted with changes. The three Texas Tax Code citations listed on the figure have been changed to reflect the correct citation for this program. In order to define the basis for calculating the "incremental cost difference" the following language has been added to the end of the description paragraph, in Part A of the ECL: "For items where the description limits the use determination percentage to the incremental cost difference, the cost of the property or device without the pollution control feature is compared to a similar device or property that does have the pollution control feature." The following language was also inserted into the description paragraph in Part A of the ECL: "The use percentages on Part A of the ECL are established based on standard uses of the pieces of equipment involved. If the executive director determines that the equipment is not being used in a standard manner, the executive director may require that a Tier III analysis, using the Cost Analysis Procedure, be conducted by the applicant in order to calculate the appropriate use determination percentage. The executive director may also use the Cost Analysis Procedure, where it is appropriate, in order to more accurately reflect the environmental benefit at the site." This language allows for calculation of a use determination percentage which is different from the listed one if it is determined that on this particular application the listed percentage is not appropriate. The following language was added in the description paragraph for Part B of the ECL: "Applicants should first view Part A of the Equipment and Categories List to see if their equipment is already on that list." This will assist applicants in determining the correct Tier level and fee for their application. The description of item A-112 on the ECL was amended to read: "The incremental cost difference between the cost of the original equipment and the replacement equipment is eligible only when the replacement of these parts is done for the sole purpose of eliminating fugitive emissions of volatile organic compounds. New systems do not qualify for this item." This was done to clarify that the 100% use determination relates only to the pollution control aspect of the new device. During the consolidation of the previous Predetermined Equipment List into the new ECL staff left five items related to painting and blasting operations off of the list. As a result of discussions on incorporating the incremental cost difference concept into the rule these items have been added to Part A of the list as items A-186 through A-190.

The adopted new §18.25(b) states that the commission must review the ECL at least once every three years. The adopted new §18.25(b)(1) defines the requirements for adding an item to the ECL and §18.25(b)(2) defines the requirements for removing an item from the ECL.

The adopted new §18.30, Partial Determinations, explains how to calculate a partial determination. A partial determination must be requested for any property which is on Part B of the ECL and which is not wholly used for pollution control. Calculations for determining a partial percentage are based on determining the incremental cost difference between the property with the pollution control aspect and similar property without the pollution control aspect. The calculation must be documented and included with the application. This section will be used by applicants to determine how to calculate a determination for property not solely used for pollution control.

The adopted new §18.35, Application Fees, establishes a two-tier fee system for the program. The first level, Tier I is a $150 fee, and is to be used for applications containing only items located in Part A of the ECL, adopted under §18.20. The second level, Tier II is a $500 fee, and is to be used for property listed or contained in the ECL and for applications containing property not used wholly for pollution control. The Tier II fee is higher than the Tier I fee in order to reflect the increased difficulty related to agency review of a Tier II application. Failure to pay the appropriate fee can lead to the rejection of the application. Fees may be remitted by attaching a check or money order to the application and mailing it to the appropriate address or be paid using the ePay system located on the commission's web page.

FINAL REGULATORY IMPACT ANALYSIS DETERMINATION

The commission reviewed the adopted rulemaking in light of the regulatory analysis requirements of Texas Government Code, §2001.0225, and determined the rules do not meet the definition of a "major environmental rule." Under Texas Government Code, §2001.0225, "major environmental rule" means a rule, the specific intent of which is to protect the environment or reduce risks to human health from environmental exposure, and that may adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, or the public health and safety of the state or a sector of the state. Furthermore, it does not meet any of the four applicability requirements listed in Texas Government Code, §2001.0225(a). Texas Government Code, §2001.0225 applies only to a major environmental rule which: 1) exceeds a standard set by federal law, unless the rule is specifically required by state law; 2) exceeds an express requirement of state law, unless the rule is specifically required by federal law; 3) exceeds a requirement of a delegation agreement or contract between the state and an agency or representative of the federal government to implement a state and federal program; or 4) adopts a rule solely under the general powers of the agency instead of under a specific state law. The adopted rulemaking implements a Rollback Relief for Pollution Control Requirements program as previously described in the BACKGROUND AND SUMMARY OF THE FACTUAL BASIS FOR THE ADOPTED RULES and SECTION BY SECTION DISCUSSION sections. Because the adopted rules are not specifically intended to protect the environment or reduce risks to human health from environmental exposure but to implement a tax incentive program, this rulemaking is not a major environmental rule and does not meet any of the four applicability requirements. This rule does not result in any new environmental requirements and should not adversely affect in a material way the economy, a sector of the economy, productivity, competition, or jobs.

TAKINGS IMPACT ASSESSMENT

The commission evaluated these adopted rules and performed an assessment of whether Texas Government Code, Chapter 2007 is applicable. The commission's assessment indicates Texas Government Code, Chapter 2007 does not apply to these proposed rules because this action creates a program which is available only to political subdivisions as described in the BACKGROUND AND SUMMARY OF THE FACTUAL BASIS FOR THE ADOPTED RULES and SECTION BY SECTION DISCUSSION sections of this preamble. Promulgation and enforcement of these adopted rules will be neither a statutory nor constitutional taking of private real property. Specifically, the adopted rules do not affect a landowner's rights in private real property, because this rulemaking action does not burden, restrict, or limit the owner's rights to property or reduce its value by 25% or more beyond which would otherwise exist in the absence of the adopted regulations.

CONSISTENCY WITH THE COASTAL MANAGEMENT PROGRAM

The commission reviewed the adopted rulemaking and found the adoption is not a rulemaking identified in the Coastal Coordination Act Implementation Rules, 31 TAC Chapter 505, concerning rules subject to the Texas Coastal Management Program (CMP), and will, therefore, not require that goals and policies of the CMP be considered during the rulemaking process.

PUBLIC COMMENT

A public hearing on this proposal was held in Austin on October 26, 2007, at 10:00 a.m. at the Texas Commission on Environmental Quality complex located at 12100 Park 35 Circle in Building E, Room 201S. This was a joint hearing with comments being received on proposed amendments to Chapter 17. The hearing was attended by twenty-three people. Oral comments were provided by four. No oral comments were received with regard to this proposal. The commission received comments from Representative Richard L. "Rick" HardCastle, Representative Tan Parker, Representative Beverly Woolley, Orange County Judge Carl K. Thibodeaux, Harris County Commissioner Sylvia Garcia, Clean Coal Technology Foundation of Texas (CCTFT), Sierra Club-Lone Star Chapter (Sierra), Texas Conference of Urban Counties (TCUC), and one individual.

RESPONSE TO COMMENTS

General Comments Relating to the Scope and Intent of TTC, §26.045(f)

During the proposal agenda the commission directed staff to solicit "comments on whether Part B should be limited to pollution control property associated with advanced clean energy projects, as defined in Texas Health and Safety Code, §382.003." Representative Hardcastle, Sierra, Representative Woolley, Representative Parker, and CCTFT, provided general comments on this issue. Representative Hardcastle commented that the overall intent of HB 3732 is to "ensure that Texas continue to build power plants that are" clean and to make electricity affordable. However, the legislature did not intend to limit the categories of equipment listed in HB 3732 to advanced clean energy projects. Sierra commented that their review of the legislative history of HB 3732 leads them to the conclusion that HB 3732, Section 5 is not tied to clean energy projects. Sierra stated that the TCEQ should perform due diligence to ensure that the use determination includes only the pollution control aspect of the property. Representative Woolley and Representative Parker commented that the purpose of the bill was to provide incentives to electric generation projects. CCTFT supported by TMRA commented that Part B of the ECL should not be limited to pollution control property associated with advanced clean energy projects, as defined in Texas Health and Safety Code, §382.003.

The commission appreciates the comments provided by the commenters regarding the scope and legislative intent of HB 3732. As a state agency, the commission is required to follow the mandates of the legislature regarding implementation of the statutes it enforces. When implementing a statute, the commission gives effect to its "plain language." In implementing HB 3732, staff is mindful that tax exemption statutes "are subject to strict construction." In reviewing the text and legislative history of HB 3732, staff concludes that the categories of equipment listed in it are not limited to advanced clean energy projects. However, as urged by the commenters, and consistent with existing regulations unaffected by HB 3732, the executive director is required to consider: 1) whether each category of equipment listed in TTC, §26.045(f) is used wholly or partly to control air, water or land pollution; and 2) whether the equipment installed in order to meet a requirement of a permit issued by this agency. No changes were made to the rule in response to these comments.

An individual commented that a minimum pollution control threshold should be established by rule and that this threshold be met before a piece of equipment is eligible for consideration for inclusion in the Rollback Tax Rate program.

The commission appreciates these comments, but respectfully disagrees with the need for an additional threshold. The rules establish a two-part threshold. Each piece of property must provide an environmental benefit at the site and must have been installed in response to a requirement in a permit issued by the TCEQ. These thresholds ensure that the installation of the property results in pollution control. The commission has made no changes to the rule in response to this comment.

TCUC, Orange County Judge Thibodeaux and Harris County Commissioner Garcia generally supported the proposed rule changes including the division of the ECL into two parts and the requirement that the Part B equipment be evaluated on an application specific basis.

The commission appreciates the comments. The changing nature of pollution control regulations and equipment has made the operation of the Tax Relief for Pollution Control Property program challenging. The adoption of these rule changes and the re-writing of the program guidelines manual will add increased certainty to the process. No changes were made to the rule in response to these comments.

TCUC, Orange County Judge Thibodeaux and Harris County Commissioner Garcia commented that a "safety valve" should be added to §18.25, Equipment and Categories List (ECL). The "safety valve" would allow the TCEQ to issue a use determination at a percentage other than that listed on the ECL. This would happen if it was determined that an item filed as a Tier I was entitled to a percentage that was different than that listed on Part A of the ECL. Once this occurred all other applications for this item would be required to be submitted as Tier II applications until such time that the ECL could be reviewed under §18.25(b).

The commission appreciates this comment, but respectfully disagrees that a "safety valve" needs to be added to the rule. Tier I applications are ones which contain property which is listed in Part A on the ECL. The executive director agrees that there may be situations where, due to the particular use of the equipment, the use determination percentage listed in the ECL may be inappropriate. In order to handle these situations we have inserted language into the description paragraph in Part A on the ECL. The insertion is before "The commission will review . . ." The new language is: "The use percentages on Part A of the ECL are established based on standard uses of the pieces of equipment involved. If the executive director determines that the equipment is not being used in a standard manner, the executive director may require that a Tier II partial determination analysis be conducted by the applicant in order to calculate the appropriate use determination percentage. The executive director may conduct a partial determination analysis, where it is appropriate, in order to more accurately reflect the environmental benefit at the site."

Sierra commented that Figure: 30 TAC §18.25(a) should be revised to inform applicants to review Part A of the ECL before filing under Part B.

The executive director agrees with this suggestion and has amended §18.25(a) accordingly. In addition the program guidelines manual and application form will be changed to reflect that the applicant should check to see if their equipment is listed on Part A of the ECL before checking Part B. This has the potential of saving the applicant time and money and reducing the required staff review time.

STATUTORY AUTHORITY

The new sections are adopted under Texas Water Code (TWC), §5.102, which authorizes the commission to perform any acts authorized by the TWC or other law which are necessary and convenient to the exercise of its jurisdiction and powers; and §5.103, which authorizes the commission to adopt rules necessary to carry out its powers and duties under the TWC. The new sections are also adopted under Texas Tax Code (TTC), §26.045, which authorizes that the rollback tax rate for a political subdivision of this state be increased by the rate that, if applied to the total current value, would impose an amount of taxes equal to the amount the political subdivision will spend out of its maintenance and operation funds under TTC, §26.012(16) to pay for a facility, device, or method for the control of air, water, or land pollution that is necessary to meet the requirements of a permit issued by the commission.

The adopted new sections implement TTC, §26.045.

§18.25.Equipment and Categories List.

(a) The Equipment and Categories List (ECL) is a two-part list. Part A is a list of the property that the executive director has determined is used either wholly or partly for pollution control purposes. Part B is a list of categories of property which is located in Texas Tax Code (TTC), §26.045(f).

Figure: 30 TAC §18.25(a)

(b) The commission shall review and update the ECL at least once every three years.

(1) An item may be added to the list only if there is compelling evidence to support the conclusion that the item provides pollution control benefits and a justifiable pollution control percentage is calculable.

(2) An item may be removed from the list only if there is compelling evidence to support the conclusion that the item does not render pollution control benefits.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on January 18, 2008.

TRD-200800237

Robert Martinez

Director, Environmental Law Division

Texas Commission on Environmental Quality

Effective date: February 7, 2008

Proposal publication date: October 5, 2007

For further information, please call: (512) 237-0177