Court Opinion

ID: 4205591
Source: CourtListenerOpinion
Date Created: 2017-09-22 17:17:13.241069+00
Date Added: 2024-06-11T14:41:33.039996
License: Public Domain

COURT OF APPEALS
                                 EIGHTH DISTRICT OF TEXAS
                                      EL PASO, TEXAS

  BRAZOS ELECTRIC POWER                          §
  COOPERATIVE, INC.,                                             No. 08-16-00069-CV
                                                 §
                    Appellant,                                     Appeal from the
                                                 §
  v.                                                              98th District Court
                                                 §
  TEXAS COMMISSION ON                                          of Travis County, Texas
  ENVIRONMENTAL QUALITY and                      §
  RICHARD A. HYDE, Executive Director                         (TC# D-1-GN-14-004531)
  of TCEQ,                                       §

                    Appellees.                   §

                                         OPINION

       The Brazos Electric Power Cooperative (Brazos Electric) and the Texas Commission on

Environmental Quality (TCEQ) do not agree on much in this administrative tax appeal, but when

it comes to the science underlying this dispute, both parties mostly sing from the same hymnal.

       In a “single-cycle power plant,” a generator uses a single turbine powered by a natural gas

combustion engine to generate electricity. The engine gives off heat and the pollutant precursor

gas nitrogen oxide (NOx), both of which are vented off into the atmosphere through piping known

as a spooling device. By placing a heat steam recovery generator (HRSG) where the spooling

device used to be, Brazos Electric can turn its single-cycle power plants into “combined-cycle”

power plants that use wasted heat from the gas engine to boil water, create steam, and pass the
steam through the blades of a second, steam-powered turbine. A combined-cycle power plant with

a HRSG still vents NOx into the atmosphere, but the HRSG lets a plant use a given amount of

fossil fuel to effectively power two engines instead of just one, thereby generating more electricity.

       The issue in this case is whether by purchasing and using HRSGs at its two power plants,

Brazos Electric is entitled to an ad valorem tax break reserved for devices that are installed to

comply with state and federal regulations aimed at abating air pollution. See TEX.TAX CODE ANN.

§§ 11.31(a)-(b)(West 2015).

       Section 11.31 requires TCEQ’s Executive Director to determine whether a device is being

used “wholly or partly” for regulatory compliance purposes before granting a tax break. Id. Where

a dual-use device has a pollution control function, but the device also makes a facility more

productive and more profitable, the Executive Director is limited to granting a tax break that is

proportionate with the device’s pollution abatement value.              See TEX.TAX CODE ANN.

§ 11.31(g)(3)(West 2015). To make this relative function determination, TCEQ uses an algebraic

formula known as the cost analysis procedure (CAP) that balances any increased marginal capital

costs associated with upgrading from “dirty” technology to “green” technology against any

positive potential return on investment, applying a tax rate accordingly.          See generally 30

TEX.ADMIN.CODE § 17.17 (2017)(Tex. Comm’n on Envtl. Quality, Partial Determinations)

       TCEQ’s administrative rules allow for the CAP formula to result in a zero or negative

value. When that happens, TCEQ denies the tax break. 30 TEX.ADMIN CODE § 17.17(d). TCEQ

reasons that the Legislature intended for the Section 11.31 tax break to be used only to coax

businesses into complying with environmental regulations when compliance would otherwise be

“economically irrational” and cost-prohibitive.       But if an applicant either saves money on the

front end by adopting cheaper green technology over “dirty” technology, or if on the back end

                                                  2
more expensive green technology ultimately pays for itself in the long run by increasing profits,

TCEQ believes regulatory compliance would be economically rational, rendering Section 11.31

tax break unnecessary and unavailable.

       That brings us to the second point on which Brazos Electric and TCEQ agree. For purposes

of this appeal, both parties concede that the CAP formula is the only proper decisional framework

to apply, at least in theory. But in its primary appellate issue, Brazos Electric maintains that even

if the CAP formula results in a zero or negative number in a HRSG application, TCEQ cannot by

statute deny HRSGs a tax break, since HRSGs appear on a preordained list of properties at

TEX.TAX CODE ANN. § 11.31(k)(West 2015)(referred to by the parties as “the k-list”) that are

mandatorily entitled to receive some kind of tax break under TEX.TAX CODE ANN. § 11.31(m).

       We disagree with Brazos Electric’s reading of Subsection (m), and instead agree with

TCEQ’s position that Subsection (m) does not require the agency to issue a tax break to k-list

properties.   Rather, Subsection (m) only requires TCEQ to give k-list applicants certain

administrative preferences during TCEQ’s decisional process; the agency still retains the

discretion to decide whether and on what terms a k-list applicant receives a tax break. We also

disagree with Brazos Electric’s other two alternative appellate contentions: namely, that TCEQ

has engaged in informal rulemaking in violation of the Administrative Procedure Act’s formality

requirement; and that no reasonable person could reject the three alternative proposed CAP

formulations Brazos Electric submitted in its tax applications to TCEQ.

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

                                         BACKGROUND

                                 The Administrative Framework

       Beginning in 1994, the Texas Constitution permitted the Legislature to pass laws

                                                 3
exempting from taxation “all or part of real and personal property used, constructed, acquired, or

installed wholly or partly to meet” state and federal environmental regulations aimed at “the

prevention, monitoring, control, or reduction of air, water, or land pollution.” TEX.CONST. art.VIII,

§ 1-l (a)-(b). Relying on that grant of authority, the 73rd Legislature passed a law granting a person

an “exemption from taxation of all or part of real and personal property that the person owns and

that is used wholly or partly as a facility, device, or method for the control of air, water, or land

pollution.” See TEX.TAX CODE ANN. § 11.31(a). A facility, device, or method for controlling air

pollution is defined as “any . . . equipment[] or device . . . that is used, constructed, acquired, or

installed wholly or partly to meet or exceed rules or regulations adopted by any environmental

protection agency . . . for the prevention, monitoring, control, or reduction of air . . . pollution.”

TEX.TAX CODE ANN. § 11.31(b).

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

factors:

           (1) The anticipated environmental benefits from the installation of the facility, device, or
               method for the control of air, water, or land pollution;

           (2) The estimated cost of the pollution control facility, device, or method; and

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

TEX.TAX CODE ANN. § 11.31(c). “If the installation includes property that is not used wholly for

the control of air . . . pollution, the person seeking the exemption shall also present such financial

or other data as the executive director [of TCEQ] requires by rule for the determination of the

proportion of the installation that is pollution control property.” Id.

           The Texas Legislature vested TCEQ’s Executive Director with the power to administer

this tax break, see TEX.TAX CODE ANN. § 11.31(d), and created a two-step process for seeking a

                                                     4
tax exemption. First, the exemption-seeker must file an application for a use “determination” with

the Executive Director, who decides whether certain property qualifies wholly or partially as

pollution-control property. TEX.TAX CODE ANN. §§ 11.31(c), (d). If the property is only partially

used for pollution control, the Executive Director can only grant an exemption that is proportional

to that property’s use for pollution control. TEX.TAX CODE ANN. §§ 11.31(c), (g)(3). Once the

Executive Director has rendered his or her decision, the applicant may take the decision to its local

appraisal district and obtain tax relief. TEX.TAX CODE ANN. § 11.31(d). However, if the applicant

or the appraisal district is unhappy with the Executive Director’s decision, either party may appeal

to the TCEQ commissioners. TEX.TAX CODE ANN. § 11.31(e); 30 TEX.ADMIN.CODE § 17.25

(2017)(Tex. Comm’n on Envtl. Quality, Appeals Process). The appeal hearing is uncontested for

purposes of the Administrative Procedures Act. Id. At this second step of the process, the TCEQ

commissioners, sitting at a regularly scheduled meeting, may either affirm the Executive

Director’s decision or else remand to the Executive Director for a redetermination. Id. From there,

an aggrieved party may seek judicial review of the agency determination in district court.

TEX.WATER CODE ANN. § 5.351(a)(West 2008).

                       TCEQ’s Cost-Analysis Procedure and the “k-List”

       The adjudicative process TCEQ has for Section 11.31 tax breaks has changed throughout

the years. We discuss the previous processes leading up to Brazos Electric’s applications fully in

order to provide context about how for years now TCEQ and stakeholders have struggled with

determining tax breaks for HRSGs.

         Initially, in determining whether and to what extent property qualified for a tax break, the

TCEQ processed exemption applications using a three-tiered process:

   •   Tier I—reserved for equipment identified on an internal TCEQ list that TCEQ had
       previously determined qualified for a 100% exemption;

                                                 5
   •   Tier II—reserved for equipment not on the TCEQ list that nevertheless qualified
       for a 100% exemption; and

   •   Tier III—reserved for equipment not on the TCEQ list that was partially exempt
       from qualification.

       See 30 TEX.ADMIN.CODE §§ 17.2(8-10)(2017)(Tex. Comm’n on Envtl. Quality,

Definitions). For Tier III applicants, TCEQ used and continues to use the CAP formula to

determine an applicant’s effective tax break rate. See 30 TEX.ADMIN.CODE § 17.17(a)(2017)(Tex.

Comm’n on Envtl. Quality, Partial Determinations). At core, the CAP balances out the marginal

capital costs of upgrading equipment against any potential return on investment, expressing that

value as a percentage of the new technology’s overall cost. The percentage is used to determine

if an applicant may receive a tax break, and if so, how much.

       The CAP first takes the capital cost of comparable equipment without the pollution control

feature (Capital Cost Old), and then subtracts that value from the capital cost of the actual

equipment at issue with the pollution control feature (Capital Cost New). 30 TEX.ADMIN.CODE

§ 17.17(c)(1).   The difference is the marginal cost that TCEQ asserts is the capital value

attributable to pollution control efforts. From there, the CAP further deducts the net value of any

marketable material generated by the equipment over its lifetime; this variable is known as the

“net present value of the marketable product” (NPVMP). Id. §§ 17.17(c)(1)-(2). Whatever amount

is leftover once the NPVMP is subtracted then is divided by the capital cost of the actual equipment

(Capital Cost New) to get a percentage. Id. If the amount is a positive percentage, that percentage

is used as the percentage of the tax break. “If the cost analysis procedure . . . produces a negative

number or a zero, the property is not eligible for a positive use determination.” Id. § 17.17(d). We

set out a simplified algebraic representation of the CAP formula below in Table 1.1:

                                                 6
         TCEQ’s Simplified Cost Analysis Procedure Formula

               ( x1 – x2 ) – y
          _____________________
                                                              ·      100           =              z%
                              x1

        x1 : Capital cost of the actual equipment at issue, with pollution control feature
        (Capital Cost New)1
        x2 : Capital cost of comparable equipment without pollution control feature
        (Capital Cost Old)
        y : Net value of any marketable material generated by equipment over lifetime
        (NPVMP)
        · : Multiplication sign
        z : Percentage of equipment’s capital cost attributable to pollution control/tax
        break percentage
                                              Table 1.1

         While the CAP functioned well as a tool to compare old technology with new technology,

both parties agree that the CAP presented a challenge for TCEQ’s use determination process both

for dual-use properties that served joint pollution control and production purposes, and for

emergent technologies whose capital costs could not be neatly tethered to those of previously-

known technical analogues.

         In 2007, the Legislature amended the Tax Code by creating eighteen categories of property,

technology, and equipment located in TEX.TAX CODE ANN. § 11.31(k) that both parties refer to as

the “k-list.” See Act of June 15, 2007, 80th Leg., R.S., ch. 1277, § 4, 2007 TEX.GEN.LAWS 4261,

1
 In the full CAP formula, the Capital Cost New variable is multiplied by a Production Capacity Factor variable, which
“is used to adjust the capacity of the new equipment or process to the capacity of the existing equipment or process.”
30 TEX.ADMIN.CODE 17.17(c)(1). The full CAP formula is:

Production Capacity Factor x Capital Cost New   Capital Cost Old  NPVMP  100
                                 Capital Cost New

The Production Capacity Factor has been omitted from the simplified CAP formula we use because both parties agree
that variable is not at issue in this case. As such, x1 represents only the Capital Cost New amount.

                                                          7
4264. HRSGs are among the technologies that appear on the k-list. TEX.TAX CODE ANN.

§ 11.31(k)(8).

            Brazos Electric and TCEQ clash over what placement on the k-list actually means, and we

will address that specific controversy later in the opinion. Suffice to say, in response to the new

legislation, TCEQ took the position that the k-list created an expedited review process for those

particularly listed technologies, but that the Legislature did not require the agency to issue per se

positive use determinations for those technologies. See 33 TEX.REG. 932, 933 (2008)(codifying

former 30 TEX.ADMIN.CODE 17.17(d) and (e))(Tex. Comm’n on Envtl. Quality, Background and

Summary of the Factual Basis for the Adopted Rules).2

            TCEQ created a new category of applications—Tier IV—for k-list technologies. Id. at

942. TCEQ also adopted a new rule allowing Tier IV applicants to propose their own ad hoc

methodologies that TCEQ could use to calculate use percentages for that technology, all subject

to the Executive Director’s approval. See id. at 934 (adopting 30 TEX.ADMIN.CODE § 17.17 (d),

(e)(2008), repealed and modified in part, 33 TEX.REG. 10964, 10982 (2010))(“The adopted

amendment adds new §17.17(d) which explains that it is the responsibility of the applicant to

determine a reasonable method for calculating a partial determination for all items submitted under

2
    TCEQ’s specific administrative findings on that point read as follows:

            [Texas Tax Code] §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 B of the list consists of the 18 property categories listed in TTC, §11.31(k). . . . 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.

                                                               8
a category or categories contained in Part B of the ECL [i.e. the k-list].”).

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

          Following the Legislature’s adoption of the k-list and TCEQ’s adoption of Tier IV review

for k-list properties and technologies, TCEQ received at least 35 applications for use

determinations for HRSGs and the related enhanced steam turbine systems (ESTs) under Tier IV.

See TEX. LEG. BUDGET BD., TEXAS STATE GOVERNMENT EFFECTIVENESS                              AND   EFFICIENCY:

SELECTED ISSUES      AND   RECOMMENDATIONS at 109, 111-12 (Jan. 2009). According to TCEQ,

various applicants proposed various methods for calculating pollution control percentages. On

May 1, 2008, TCEQ’s Executive Director, using the ad hoc formulas proposed by the applicants

themselves, approved twenty-five applications for 100 percent positive use determinations for

HRSG applicants, but he made negative use-determinations for the steam turbines attached to the

HRSGs.

          Appraisal districts appealed positive-use determinations in six cases, arguing that the

HRSGs in those specific applications were being used solely as production equipment and should

not receive any tax breaks at all (the Group 1 Appeals). Efforts at obtaining a mediated settlement

on proper HRSG use-determination methodology through a “workgroup” between applicants and

appraisal districts failed, and TCEQ’s commissioners docketed the Group 1 Appeals for February

2009. Those appeals were continued indefinitely at the Executive Director’s request.

          Meanwhile, in January 2009, the Legislative Budget Board, considering the Tier IV

controversy, its effect on HRSG applicants, and the potential loss of millions of dollars of tax

revenue as a result of inconsistent decisional methodologies,3 recommended that the Legislature

3
  The Legislative Budget Board noted that “[b]ecause the first 35 applications for pollution control property tax
exemptions related to HRSGs and ESTs account for equipment valued at more than $2.0 billion, TCEQ’s use

                                                       9
        [A]mend Texas Tax Code, Section 11, to require TCEQ to use the CAP formula as
        a maximum exemption when making a use determination for equipment listed in
        Texas Tax Code, Section 11.31(k). The maximum exemption granted any applicant
        requesting an exemption for equipment [on the k-list] . . . should not exceed the
        exemption that would be granted if the applicant were using the formula. The CAP
        formula includes variables that account for the economic benefit to the property
        owner of the pollution control equipment. TCEQ allows Tier IV applicants to
        develop their own methodology to encourage innovation in use determination. If
        the agency would prefer to continue to use such innovation, the statutory change
        should be permissive in allowing applicants to develop their own use determination
        methodology. However, that methodology should not exceed the maximum
        allowable use determination from an application of the CAP formula.

TEX.LEG.BUDGET BD., at 113-14.

        After the Legislative Budget Board issued its recommendation, the Texas Legislature

altered the landscape yet again in May 2009 by passing TEX.TAX CODE ANN. § 11.31(g-1). See

Act of May 25, 2009, 81st Leg., R.S., ch. 962, § 3, 2009 TEX.GEN.LAWS 2556, 2557-58 (effective

Sept. 1, 2009). That subsection states:

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

        According to its brief, TCEQ interpreted Subsection (g-1) as requiring it to abandon ad hoc

Tier IV review and instead apply the CAP formula to all applications for use determinations

moving forward, including those applications concerning k-list properties. In 2010, TCEQ finally

codified this understanding by repealing Tier IV review and instead requiring all applicants to use

the CAP formula to determine use percentages, regardless of whether the subject property

appeared on the k-list or not. See 33 TEX.REG. 10964, 10982 (2010).

                          Brazos Electric’s HRSG Exemptions are Rejected

determination of 100 percent for HRSGs and 0 percent for ESTs could reduce taxable property value in the affected
tax districts by as much as $1.5 billion for these applications alone.” Id. at 113.

                                                       10
                                             The Initial Applications

           In Application #13544, Brazos Electric sought a 100 percent positive use determinations

for its Johnson County facility in April 2009. In May 2009, TCEQ informed Brazos Electric that

it was abating its technical review of the Johnson County application until the six Group 1 Appeals

were resolved. In September 2009, TCEQ informed Brazos Electric that it was subject to the

uniform-decision requirements of the newly-enacted Subsection (g-1), which would affect its

application.4 From that point, administrative activity apparently stopped until March 7, 2012,

when Brazos Electric submitted a revised use determination application for its Johnson County

facility. At that time, Brazos Electric also submitted Application #16413, seeking a separate use

determination for the HRSG at its Jack County facility.

           In its revised Johnson County application, Brazos Electric applied the CAP formula using

$28,111,986 as the Capital Cost New variable, $0 as the Capital Cost Old variable, and

$11,039,233.23 as the projected NPVMP production variable, which resulted in a positive use

determination of +60.73%.5 In its Jack County application, Brazos Electric used $105,244,426.00

4
  The session law enacting Subsection (g-1), which dictates that TCEQ apply its standards and methods of
determination “uniformly” to all applicants including k-list applicants, specifies that Subsection (g-1) only applied to
cases filed after January 1, 2009, that were not yet final as of the Act’s enactment date of September 1, 2009. See Act
of May 25, 2009, 81st Leg., R.S., ch. 962, § 3(a), 2009 TEX.GEN.LAWS 2556, 2557-58.

Because Brazos Electric filed its Johnson County application after January 1, 2009, and because TCEQ’s decision on
the Johnson County facility had not become final as of September 1, 2009, TCEQ was required to decide the Johnson
County facility application in accordance with the uniform rules of decision mandate of TEX.TAX CODE ANN.
§ 11.31(g-1). Presumably, this is why Brazos Electric has elected to use the CAP as its lodestar on appeal and does
not challenge TCEQ’s rejection of the non-CAP formulations as being erroneous.

That being said, we are aware that our sister court in Austin has decided a consolidated set of appellate cases all
dealing with HRSG applicants who originally applied under Tier IV review, before Subsection (g-1) was enacted. See
Freestone Power Generation, L.L.C. et al v. Tex. Comm'n on Envtl. Quality, Nos. 03-16-00692-CV, No. 03-16-00692-
CV, No. 03-16-00693-CV, No. 03-16-00694-CV, No. 03-16-00695-CV, No. 03-16-00698-CV, No. 03-16-00699-CV,
No. 03-16-00700-CV, and No. 03-16-00701-CV, 2017 WL 3044547 (Tex.App.--Austin July 11, 2017, no
pet.h.)(mem. op.). We address the effect of Freestone later in this opinion.
5
    Initial Johnson County CAP formulation, represented mathematically:

                                                          11
as the Capital Cost New variable, $0 as the Capital Cost Old variable, and $26,671,381.03 as the

projected NPVMP production variable, which resulted in a positive use determination of

+74.66%.6

           The Executive Director summarily rejected both application and issued a negative use

determination on July 2012, stating only: “Heat recovery steam generators and associated

dedicated ancillary equipment are used solely for production; therefore, are not [sic] eligible for a

positive use determination.” Brazos Electric appealed to the Commissioners. On December 10,

2012, the TCEQ Commissioners reversed thirteen of the Executive Director’s HRSG use

determinations (including Brazos Electric’s two appeals), vacated his orders, and remanded the

applications to him for new use determinations.

                             Proceedings on Remand to the Executive Director

           On remand, the Executive Director issued Notices of Deficiency to Brazos Electric with

respect to both the Johnson and Jack County facilities, requesting more information and stating

that he believed the appropriate Capital Cost Old variable that should be used was not “$0,” but

rather the cost of a boiler that produced the same amount of steam as a HRSG. In response, Brazos

Electric objected to the use of the boiler as the Capital Cost Old variable. Brazos Electric

recalculated the original CAP formulation using a slightly lower NPVMP value at the Johnson

County facility, resulting in a proposed positive use determination of +64.29%.7 The Jack County

($28,111,986.00  $0)  $11,039,233.23
                                       100  60.73%
           $28,111,986.00
6
    Initial Jack County CAP formulation, represented mathematically:
($105,244,426.00  $0)  $26,671,381.03
                                        100  74.66%
           $105,244,426.00
7
    Updated initial CAP, represented mathematically:

                                                         12
percentage stayed the same. “Without waiving its right to pursue” those use determinations,

Brazos Electric also proposed four alternative methods for determining the tax break. Two

methods did not apply the CAP formula. Brazos Electric has abandoned these options on appeal;

we need not discuss them further. The other two methods applied the CAP using different

variables.

           In the first revised CAP formulation, Brazos Electric suggested that a spooling device

worth $150,000 could be used to determine that Capital Cost Old factor, since the spooling

device—essentially, piping—would fill the space between the natural gas generator and the

exhaust stack if the HRSG were removed from the plant. It is undisputed that a spooling device

does not produce steam and has no productive value. This proposed CAP formulation would result

in a +63.76% usage score at the Johnson County facility8 and a +74.52% usage score at the Jack

County facility.9

           In its second revised CAP formulation, Brazos Electric reiterated its position that $0 should

be used as the Capital Cost Old variable because no technology comparable to a HRSG existed,

and the company replaced the original $11 million NPVMP variable proposed in its initial

application with a $0 NPVMP variable, resulting in a 100 percent use determination at both

($28,111,986.00  $0)  $10,097,697.34
                                       100  64.29%
           $28,111,986.00
8
    Revised CAP Option #1 for Johnson County facility, represented mathematically:
($28,111,986.00  $150,000.00)  $10,037,697.34
                                                100  63.76%
                 $28,111,986.00

Where $150,000 is the cost of a spooling device, and $10,037,697.34 is the adjusted NPVMP. We note that the
NPVMP factor in this formulation is different that the NPVMP factor used in the updated initial CAP formulation
supra.
9
    Revised CAP Option #1 for Jack County facility, represented mathematically:
($105,244,426.00  $150,000.00)  $26,671,384.03
                                                  100  74.52%
               $105,244,426.00
                                                         13
facilities.10 Brazos Electric reasoned that the $0 NPVMP input was appropriate because the CAP

formula required it to “imagine a world that bears little resemblance to reality” and presuppose

that a HRSG that was a “stand-alone” item not connected to either a fuel input or an energy output;

under those conditions, the HRSG had zero productive value.

           Following a second Notice of Deficiency issued by the Executive Director and a response

from Brazos Electric in which both parties respective positions remained unchanged, the Executive

Director ultimately rejected all of Brazos Electric’s proposed calculations, finding that the

technology most similar to a HRSG was not spooling device/piping, but rather a steam boiler

whose value exceeded the value of the HRSG. In applying the cost of this boiler using the CAP,

the Executive Director issued negative scores for both the the Johnson County facility HRSG (-

82.55%)11 and the Jack County facility HRSG (-277.50%).12 Based on these scores, the Executive

Director issued a negative use determination and denied the tax break. The Executive Director

explained his reasons for rejecting Brazos Electric’s proposed methodologies:

           •   Modified CAP Calculation (64%) [Spooling Device as CCO]: Capital Cost
               New (CCN) includes dedicated ancillary systems. Allowing Capital Cost Old
               (CCO) to be equal a pipe [sic] or spool piece ignores that HRSGs are alternative
               production equipment. CCO is the cost of comparable equipment without the

10
          Revised       CAP       Option       #2      for      Jack/Johnson,      represented       mathematically:
($28,111,986.00  $0)  $0
                           100  100%
     $28,111,986.00
11
     Executive Director’s CAP formulation for Johnson County facility, represented mathematically:
($28,111,986.00  $41,280,000.00)  $10,037,697.34
                                                    100  82.55%
                  $28,111,986.00

Where $134.4 million represents the value of a boiler that produces the same amount of steam as a HRSG.
12
     Executive Director’s CAP formulation for Jack County facility, represented mathematically:
($43,225,585.41  $134,400,000.00)  $28,774,661.00
                                                     100  227.50%
                   $43,225,585.41

Where $134.4 million represents the value of a boiler that produces the same amount of steam as a HRSG.

                                                          14
            pollution control. If the HRSGs produce steam, then comparable equipment
            that produces steam without pollution control is a boiler. The ED does not find
            it     reasonable     to    equate     CCO         to     a    spool     piece.

        •   Modified CAP Calculation (100%): Capital Cost New (CCN) includes
            dedicated ancillary systems. Allowing Capital Cost Old (CCO) to be $0 ignores
            that HRSGs are alternative production equipment. CCO is the cost of
            comparable equipment without the pollution control. If the HRSGs produce
            steam, then comparable equipment that produces steam without pollution
            control is a boiler. The ED does not find it resoanable to attribute $0 cost to
            CCO                       in                     the                     CAP.

        •   CAP as proposed by the executive director . . . : The CAP formula was adopted
            by the commission to provide a methodology for determinations that
            distinguishes [sic] the proportion of property that is used to control, monitor,
            prevent, or reduce pollution from the proportion of property that is used to
            produce goods or services. The fact that the CAP calculated results in a
            negative number shows that the HRSGs’ and dedicated ancillary equipment’s
            pollution prevention benefit is negative by its ability to produce a product.

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

                                  Proceedings in District Court

        Brazos Electric brought an action under TEX.WATER CODE ANN. § 5.351 seeking

declaratory relief in Travis County district court. Following review of the administrative record

and a hearing, the Travis County district court affirmed TCEQ’s denial of the tax break. This

appeal followed. We hear this case on transfer from our sister court, the Third Court of Appeals

in Austin, by order of the Texas Supreme Court. We apply the precedent of that court and defer

to that court’s decisions to the extent required by the Rules of Appellate Procedure. TEX.R.APP.P.

41.3.

                                          DISCUSSION

                                           Introduction

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

        This case has many moving parts on both a macro and micro level. At the macro level, it

                                                15
implicates numerous important questions about Texas’ environmental policy and the tax incentives

given to encourage businesses to “go green.”          It also implicates our fidelity to the Texan

constitutional principle that taxes should be equal and uniform unless voters amend the

Constitution to say otherwise, as well as our deference to the legislative balancing act of ensuring

both that businesses prosper and that our schools, roads, and infrastructure are all properly funded

with taxes. Although the litigants on both sides paint with broad strokes, our role to play in

answering these macro-level questions is much narrower and largely limited by the micro-level

action of administrative mechanisms and appellate rules. We only answer those questions which

are necessary to the resolution of this appeal as between the two parties before us, and only reach

those questions actually raised by these two parties. We winnow away side issues to keep our

opinions clear, focused, usable, and as short as practicable. TEX.R.APP.P. 47.1. So we pause at the

outset to clarify what this case is not about.

       This case is not about whether we believe it would be good policy for Brazos Electric to

get a tax break for using HRSGs at their power plants. We do not make policy; we interpret law.

In re Allen, 366 S.W.3d 696, 708 (Tex. 2012). Deciding who should get what tax break and under

what circumstances is the Legislature’s job, not ours, TEX.CONST. art. VIII, §§ 1(a), 1-l, and

administering the tax break set by the Legislature is the TCEQ Executive Director’s job, not ours.

TEX.TAX CODE ANN. § 11.31(d). “Where the action under review involves a matter that the

legislature has committed to the agency’s discretion or judgment, a court will not determine the

advisability or wisdom of the agency’s action but will sustain that action if it is reasonably

supported by substantial evidence.” 2 TEX.JUR.3D ADMINISTRATIVE LAW § 220 (2017). We are

limited to determining whether TCEQ, in rendering its tax decision, acted arbitrarily and

capriciously, or otherwise exceeded the statutory authority granted to it by the Legislature. Mont

                                                 16
Belvieu Caverns, L.L.C. v. Tex. Comm’n on Envtl. Quality, 382 S.W.3d 472, 489 (Tex.App.--

Austin 2012, no pet.). If TCEQ acted within the reasonable bounds of its statutory authority, we

have no role to play here. Id.

        This case is also not about whether we believe the CAP formula itself is reasonable, fair,

wise, outdated, or prescient, or even whether we believe it takes into account all the intangible

factors that might be relevant in determining whether equipment serves a pollution-control

function and whether its adoption is economically rational. Why not? Because the Rules of

Appellate Procedure prohibit us from entertaining those questions here. While Brazos Electric

complains about a laundry-list of bureaucratic indignities, Brazos Electric also repeatedly

disavows any challenge to the reasonableness of the CAP formula on appeal.13 The parties both

agree in their briefs that the CAP formula is the yardstick we must use in deciding whether

TCEQ—acting within the proper bounds of its statutory authority—can grant the tax break in this

case. We are constrained to considering only those legal issues raised in the briefs. TEX.R.APP.P.

38.1(f). Brazos Electric asks us primarily to sketch out the boundaries of the statute and then

decide whether the Executive Director acted permissibly within those boundaries. Any ancillary

issues not fairly subsumed within the statutory construction question, including the reasonableness

of the CAP formula, have not been assigned for our review, and in civil cases, we are prohibited

from reaching out and reversing a judgment on the basis of unassigned error. See Pat Baker Co.,

Inc. v. Wilson, 971 S.W.2d 447, 450 (Tex. 1998).

        Accepting as we must that the only measure we can employ in determining whether Brazos

13
  See, e.g., App. Br. 39 (opining that TCEQ may be wise to change the rules in the future but asserting that “in this
appeal, Brazos Electric does not challenge any of the TCEQ’s formally adopted rules. . . . [T]he TCEQ’s decision to
instead retain and expand its use of the CAP formula is not what necessitates negative-use determinations . . . .”);
Reply Br. at 25 (“The TCEQ raises several reasonableness arguments. Most of these arguments relate to the
reasonableness of the CAP formula, which Brazos does not challenge. Instead, Brazos Electric challenges the TCEQ’s
ad hoc decision to insist on using the cost of a new boiler for the ‘Capital Cost Old’ variable when applying the CAP
formula to HRSGs.”).

                                                        17
Electric is entitled to the tax break is the CAP formula—with the caveat that TCEQ can only apply

the CAP formula within the proper constraints of the enabling provisions of the Tax Code—we

proceed.

                  The Precise Issues Raised by Brazos Electric’s Opening Brief

       Brazos Electric raises three issues on appeal. In Issue One, Brazos Electric challenges

TCEQ’s authority to deny the tax break at all, arguing that TEX.TAX CODE ANN. § 11.31(m)

requires TCEQ to grant HRSG users some kind of tax break—though Brazos does not specify in

what amount. In Issue Two, Brazos Electric contends that TCEQ violated that Administrative

Procedures Act by effectively adopting an “informal practice” of denying all HRSG tax

applications and refusing to allow any HRSG user to claim an exemption without undergoing the

formal rulemaking process. Finally, in Issue Three, Brazos maintains if TCEQ retained discretion

to decide whether the tax break applies, TCEQ arbitrarily and capriciously denied the tax break in

this case by comparing a HRSG to a particular kind of boiler steam generator, the value of which

exceeds a HRSG.

                                                I.

                              Issue One: Statutory Construction

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

       We begin with the statutory construction problem underpinning most of Brazos Electric’s

arguments. In Issue One, Brazos Electric contends that Subsection (m) withdraws from TCEQ

any ability or discretion to deny HRSGs a Section 11.31 tax break. Thus, even if an objective

application of the CAP formula results in a zero or a negative number—indicating that TCEQ has

determined the HRSG was not, in fact, installed for a pollution-control purpose—TCEQ must still

grant Brazos Electric a tax break of some kind per Subsection (m).

                                               18
         We disagree.

                                                           A.

                        Standard of Review and Statutory Construction Standards

         The limits of TCEQ’s discretionary authority under Subsection (m) implicate a question of

statutory construction. We review questions of statutory construction de novo. Mont Belvieu

Caverns, L.L.C., 382 S.W.3d at 486. However, we are also mindful that we hear this case on

transfer from the Third Court of Appeals by order of the Supreme Court of Texas. In this

procedural posture, we are bound to apply the precedent of that court. See TEX.R.APP.P. 41.3. To

the extent that the Third Court has answered an open statutory construction question relevant to

this case, we cannot disregard that interpretation but must apply it, regardless of whether we

personally might have decided the issue differently. Id.14

14
   During the pendency of this case, our sister court in Austin decided the case Freestone Power Generation, L.L.C.
v. Texas Commission on Environmental Quality, No. 03–16–00692–CV et al., 2017 WL 3044547 (Tex.App.--Austin
July 11, 2017, no pet.h.)(mem. op.). In Freestone, the Austin court held that TCEQ exceeded its statutory authority
by denying tax breaks to HRSGs because the statute required TCEQ to issue some sort of tax break to k-list
properties. Id. at *6-*7.

Per Rule 41.3, as the transferee court, we are bound by the transferor court’s precedent, even if we would have decided
the case differently working on a clean slate. This Rule has placed us in a difficult position. In truth, given that both
Freestone and this case partially embrace the same open question of law, and that given that Austin is the ultimate
decider under Rule 41.3, it may have served both our courts better if this orphan appeal had not found itself on the
transfer docket in the first place. We respectfully request that the Supreme Court of Texas consider revising the
transfer rule to prevent transfers in situations like this where true issues of first impression are simultaneously
presented in a transferor and transferee court. It creates a serious dilemma for the transferee court: should the
transferee court—often a smaller court—proceed forward allocating limited judicial resources to the case’s resolution
knowing that the transferor court could issue a contrary opinion in the interim that would undercut the transferee’s
work? Or should the transferee court wait until the transferor court decides the issue and let the case potentially sit
on its dockets for months in hopes that the transferor court will, for lack of a better phrase, “do our homework” for
us?

The Court in this case has elected to issue our split-decision opinion in this case as-is. Our reasoning is this: while
Freestone and this case both deal with an overlapping dispositive issue of first impression, and while Freestone’s
holding may be contrary to the majority’s opinion here, the parties in Freestone moved for rehearing. As of the date
of this opinion’s issuance, rehearing was still pending in our sister court, meaning that the Freestone opinion is not yet
final. Because Freestone is not yet final and mandate has not issued, it is not binding and does not constitute
“precedent;” thus we may issue a contrary decision in good faith without violating Rule 41.3.

We do so here not to abdicate our duty to apply our sister court’s law as a virtual panel of that court, or as an affront
to the deciding panel in Freestone; instead we simply seek to offer our sister court the product of our deliberations

                                                           19
         Our primary purpose in construing a statute is to give effect to the Legislature’s intent. TG

S-Nopec Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011). The Code Construction

Act recognizes that in interpreting statutes, this Court has leeway to consider many disparate

factors, regardless of whether a statute is ambiguous or not. See TEX.GOV’T CODE ANN. § 311.023

(West 2013). That being said, the Texas Supreme Court has instructed us to always begin our

construction of the statute by using the statute’s words, as the Legislature’s carefully-chosen words

are the truest measure of legislative intent. TG S-Nopec Geophysical Co., 340 S.W.3d at 439. “[I]f

a statute is unambiguous, we adopt the interpretation supported by its plain language unless such

an interpretation would lead to absurd results.” Id. “[I]n the area of tax law, like other areas of

economic regulation, a plain-meaning determination should not disregard the economic realities

underlying the transactions in issue.” Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d
632, 637 (Tex. 2013).

         In interpreting provisions of the Tax Code, “[w]ords and phrases shall be read in context

and construed according to the rules of grammar and common usage.” TEX.GOV’T CODE ANN.

§ 311.011(West 2013). “Words and phrases that have acquired a technical or particular meaning,

whether by legislative definition or otherwise, shall be construed accordingly.” Id. We read

statutes as cohesive texts; we do not cherry-pick words and phrases, read them in isolation, and

then decide they alone represent the Legislature’s intent while ignoring the proper context of those

words and phrase. Harmonization of all statutory provisions in a way that is consistent with

legislative intent is always our primary goal, if at all possible. “[W]e consider the statute as a

whole, giving effect to each provision so that none is rendered meaningless or mere surplusage.”

and additional perspectives that the Austin court, as final intermediate appellate arbiter and court of administrative
law expertise, could consider and either accept or reject. What Austin has found to be straightforward has been an
issue that has resulted in differing opinions in El Paso.

                                                         20
TIC Energy & Chem., Inc. v. Martin, 498 S.W.3d 68, 75 (Tex. 2016).               We presume that the

Legislature intended for its statutes to be constitutional, and we will strive to give statutes a reading

that renders them constitutional. TEX.GOV’T CODE ANN. § 311.021(1); In re Allcat Claims Srv.,

L.P., 356 S.W.3d 455, 468 (Tex. 2011)(orig. proceeding).

        “In addition to these general principles that guide our construction of tax code section

11.31, statutory exemptions from taxation, like the pollution-control exemption, are subject to

strict construction because they undermine equality and uniformity by placing a greater burden on

some taxpaying businesses and individuals rather than placing the burden on all taxpayers

equally.” [Internal citations, quotation marks, and alterations omitted]. Mont Belvieu Caverns,
382 S.W.3d at 486-87. “All doubts are resolved against the granting of an exemption.” Id. at 487.

        In interpreting the relevant Tax Code provisions, there is also a potential administrative

deference principle at play. An agency’s interpretation of a statute is entitled to our “serious

consideration.” TG S-Nopec Geophysical Co., 340 S.W.3d at 438. If the statute is clear, both we

and the administrative agency have a duty to apply that statute, and we may overrule an

administrative interpretation of a statute. But “[i]f there is vagueness, ambiguity, or room for

policy determinations in a statute or regulation . . . we normally defer to the agency’s interpretation

unless it is plainly erroneous or inconsistent with the language of the statute, regulation, or rule.”

Id.

                                                   B.

                 The General Purpose and Provisions of Section 11.31 as a Whole

        As the principles of statutory construction make clear, the language of Subsection (m) is

meaningless without context. Before we can understand what Subsection (m) means, we must

first understand how the tax break in Section 11.31 works generally, what the neighboring

                                                   21
provisions around Subsection (m) mean, and where Subsection (m) fits into this legal schematic.

In reading the neighboring subsections of Section 11.31, we find these to be Section 11.31

provision’s relevant highlights:

   •   Subsection (a)—The property must actually function to control pollution as a
       tax break condition: Subsection (a) defines the threshold scope of the tax break
       at issue: “A person is entitled to an exemption from taxation of all or part of real
       and personal property that the person owns and that is used wholly or partly as a
       facility, device, or method for the control of air, water, or land pollution.”

       This provision establishes that an applicant can receive a tax break only if their
       property “is used wholly or partly” for pollution-control purposes. The negative
       implication of this provision is that if property is not used for pollution-control
       purposes, the tax break must be denied. Subsection (a) sets eligibility for the tax
       break in terms of the property’s function.

   •   Subsection (b)—Pollution-control property must also actually be adopted for
       the specific purpose of complying with environmental regulations or else the tax
       break must be denied: Subsection (b) defines what a “facility, device, or method
       for the control of air, water, or land pollution” is: “any structure, building,
       installation, excavation, machinery, equipment or device, and any attachment or
       addition to or reconstruction, replacement, or improvement of that property, that is
       used, constructed, acquired, or installed wholly or party to meet or exceed rules or
       regulations adopted by any environmental protection agency . . . for the prevention,
       monitoring, control, or reduction of air, water, or land pollution.” [Emphasis
       added].

       This subsection makes clear that in evaluating eligibility for this tax break, the
       agency must not only consider whether property has a pollution-control function,
       but also the subjective purpose behind the adoption of that property. Under
       Subsection (b), if an applicant shows it has adopted “green” technology that wholly
       or partly reduces pollution, but the purpose of that adoption was not to comply with
       regulations, the tax break must be denied.

   •   Subsection (c)—Applicants must submit, and TCEQ may consider,
       information related to the environmental benefits of the property, the cost of the
       property, the purpose of the property, and any other “financial or other data” the
       Executive Director requires by rule, before a decision can be made about if the
       applicant is eligible for the tax break under the threshold requirements set by

                                               22
    Subsections (a) and (b): Subsection (c) requires applicants to submit to TCEQ’s
    Executive Director information regarding the following three factors: (1) the
    anticipated environmental benefits from the installation of the facility, device, or
    method for the control of air, water, or land pollution; (2) the estimated cost of the
    pollution control facility, device, or method;  and (3) the purpose of the installation
    of such facility, device, or method, and the proportion of the installation that is
    pollution                               control                              property.

    The Executive Director also has the explicit authority to require and consider
    additional information if the application involves property that is not “wholly” used
    to prevent pollution: “the person seeking the exemption shall also present such
    financial or other data as the executive director requires by rule for the
    determination of the proportion of the installation that is pollution control
    property.” This provision gives the Executive Director the power to balance
    disparate factors and information in coming to his decision.

•   Subsections (d) and (h)—The Executive Director has discretion to determine if
    a particular applicant has shown they are statutorily eligible for the tax break,
    and, if so, in what amount; he may not grant a tax break if the applicant is
    ineligible for the tax break under TCEQ’s rules: Subsection (d) states:
    “Following submission of the information required by Subsection (c), the executive
    director of the Texas Commission on Environmental Quality shall determine if the
    facility, device, or method is used wholly or partly as a facility, device, or method
    for the control of air, water, or land pollution.” Subsection (h) states: “The
    executive director may not may a determination that property is pollution control
    property unless the property meets the standards established under rules adopted
    under                                 this                                   section.”

    These provision shows the Legislature vested a specific officer—the Executive
    Director of TCEQ—with decision-making authority. Indeed, on appeal, the
    Commissioners have no power to overrule him and substitute their own judgment
    for his; they may only affirm his judgment, or else remand for further proceedings.
    TEX.TAX CODE ANN. § 11.31(e). The Executive Director is limited to grant a tax
    break only when the applicant proves it is entitled to the tax break under TCEQ’s
    internal rules.

•   Subsection (g)—The Commission has explicit rulemaking authority to
    implement its own rules in deciding how it wants to administer Section 11.31 tax
    break applications, so long as the rules are sufficiently specific to ensure equal
    and uniform application across the board and the rules allow for distinctions to
    be made between proportion of property used to prevent pollution v. proportion
                                              23
         used to produce goods or services. Per Third Court precedent, this rulemaking
         authority allows TCEQ to consider “economic irrationality” as a factor in
         assessing purpose of installation: Subsection (g) allows the Commission to adopt
         rules to implement Section 11.31, provided that those rules must “(1) establish
         specific standards for considering applications for determinations; (2) be
         sufficiently specific to ensure that determinations are equal and uniform;  and (3)
         allow for determinations that distinguish the proportion of property that is used to
         control, monitor, prevent, or reduce pollution from the proportion of property that
         is        used          to        produce         goods         or        services.”

         This subsection tracks the language of Subsection (a) and (b) and implicitly
         recognizes that the Executive Director can only grant tax breaks to entities with
         property that both functions as a pollution-control device and is adopted for the
         purpose of complying with environmental regulations. It also implicitly recognizes
         that the Commission can adopt rules, like the CAP formula, that balance the relative
         values of pollution control and productive aspects in determining whether the
         property was actually adopted for purposes of complying with environmental
         regulations under Subsection (b).

          The Third Court of Appeals, whose precedent we must apply in this case, has
           put a further gloss on this particular subsection and what we may infer about
           the Legislature’s intent. In interpreting Subsection (g)(3)--the provision
           directing TCEQ to adopt rules of determination that account for the difference
           between pollution-control and productive aspects of property--, the Third Court
           held that this subsection “reflect[ed] legislative intent to limit the pollution-
           control property exemption solely to capital investment made to comply with
           state or federal environmental regulations that does not yield productive
           benefits and would thus otherwise be irrational economically.” [Emphasis
           added]. Mont Belvieu Caverns, 382 S.W.3d at 489. The Third Court also noted
           that its plain-language read of Subsection (g)(3) as allowing TCEQ to consider
           economic irrationality as a factor was reflected in the law’s legislative history.
           Id. (citing relevant portions of legislative history). Thus, in considering the
           purpose of property’s installation under Subsection (b), the Third Court of
           Appeals has found that Subsection (g)(3) allows TCEQ to consider economic
           irrationality in its analysis, and to limit the granting of these tax breaks to
           situations in which compliance with an environmental regulation would be
           economically irrational.15

15
   Brazos Electric contends that the Third Court’s interpretation of Subsection (g)(3) as containing an economic-
irrationality component does not bind us as precedent because Mont Belvieu Caverns arose in a 100 percent-use
determination context rather than a partial-use determination context like the case at bar, thereby making the true legal
interpretation of Subsection (g)(3) subject to our scrutiny and potential revision. This argument misses the mark.

                                                          24
    •    Subsection (g-1)—The Commissions’ Rules of Decision apply uniformly to all
         Section 11.31 tax break applicants, even to those properties that appear on the
         k-list: Subsection (g-1) makes clear that k-list properties are not exempt from the
         generally applicable rules of decision As we will explain below, k-list properties
         do get some administrative preferences: under Subsection (m), k-list applicants are
         excused from providing one of the three required categories of information
         mandated by Subsection (c)(i.e., k-list applicants do not have to show their property
         has an environmental benefit), and Subsection (m) applicants are also entitled to
         expedited view within 30 days. Still, Subsection (g-1) makes clear that k-list
         applicants do not otherwise receive special treatment in the administrative decision-
         making process and should be subject to the same standards as all other applicants.
         In this context, this also means that we use the CAP formula to measure tax break
         eligibility, since that is the specific rule that TCEQ has chosen to implement.

         In summary, after reading all the relevant provisions of Section 11.31 together and in

concert with the relevant case law, we distill the Legislature’s intent into four overarching points:

         1) Property is eligible for a tax break under Section 11.31 if it is used wholly or
            partly for pollution control, (i.e. the property has a “green” function); AND

         2) The property does not qualify as being wholly or partly for pollution control
            purposes unless it is adopted for the specific purpose of complying with an
            environmental regulation (i.e. the property has to be installed for a “green”
            purpose as defined by government regulators); AND

Under the principles of stare decisis, where an intermediate appellate court “gives a particular effect to a statute” in a
case, and that ruling is not overruled by a higher court, “that determination is binding and conclusive on all later suits
involving the same subject matter” in that district. Messina v. State, 904 S.W.2d 178, 181 (Tex.App.--Dallas 1995,
no writ). An interpretation of a particular statute does not change across contexts under stare decisis. Rather, the law
stays the same and it is in the application of the law to the facts that distinctions emerge. See id. (stare decisis does
not preclude a court from deciding cases differently while applying the same law if relevant factual distinctions change
the outcome). To say otherwise disregards the principle of consistency underlying stare decisis and improperly opens
the door to results-oriented decision-making.

We find that the Third Court’s interpretation of the statutory language as revealing a certain legislative intent binds
us. In terms of the interpretation of Tax Code provisions at play, this case involves the same subject matter as Mont
Belvieu Caverns. The Third Court’s interpretation of Subsection (g)(3) arose, like this case, in the context of a Section
11.31 tax application that was rejected by TCEQ and, like this case, involved a determination of the limits of TCEQ’s
tax break-granting authority. The Third Court’s interpretation of Subsection (g)(3) also arose, like this case, in the
context of harmonizing all portions of Section 11.31 so that they may be read consistently, which is what we must
endeavor to do here. Our reading of Subsection (m) is informed by the provisions around it. Mont Belvieu Caverns
interprets the provisions around Subsection (m) and found that economic irrationality is a factor TCEQ must consider
in reaching its tax decision for Section 11.31 generally. Whether we agree with that proposition or not, it is precedent
of the transferor court that binds us, the transferee court, under TEX.R.APP.P. 48.1.

                                                           25
       3) TCEQ must make proportional determinations as to how much of a property’s
          purpose actually goes to pollution control, and how much goes to production
          purposes that generate more profit for the applicant (i.e. the purpose of this
          specific tax break is to encourage compliance with environmental regulations,
          not to encourage productivity and allow businesses to get a financial boon and
          then exempt their higher profits from taxation); AND

       4) In considering whether the actual purpose for the installation of the subject
          property is pollution control, TCEQ must take into account financial realities
          and must consider whether it would otherwise be economically irrational for
          the applicant to adopt “green” technology and comply with governmental
          regulations (i.e. if it is economically rational for the applicant to adopt “green”
          technology, say because the technology is so productive or so much cheaper
          than “dirty” alternatives, then the tax break must be denied, as the Legislature
          intended for this tax break only to be used to coax businesses into complying
          with environmental regulations where compliance would otherwise be cost-
          prohibitive once return on investment is taken into account).

       Under Section 11.31, a property’s green function and green purpose must be balanced

against the countervailing need to ensure that the tax break is given only to that portion of the

property actually attributable to pollution control efforts and not profitable production efforts, and

only to the extent that compliance with regulations would be economically irrational, all things

considered—including overall return on investment. Having put the legal scaffolding around

Section 11.31 together, we must now determine whether and to what extent Subsection (m) alters

or destroys the general premises underpinning Section 11.31’s purpose with respect to k-list

properties.

                                                 C.

              Where Does Subsection (m) Fit In To Section 11.31’s Overall Framework?

       Brazos Electric threads a fine needle on appeal. It does not challenge the CAP formula,

but asserts only that TCEQ cannot deny k-list properties a Section 11.31, even when the CAP

                                                 26
formula equals zero or less,16 because Subsection (m) contains mandatory language that always

requires a positive use determination for k-list properties.

         Subsection (m) states:

         Notwithstanding the other provisions of this section, if the facility, device, or
         method for the control of air, water, or land pollution described in an application
         for an exemption under this section is a facility, device, or method included on the
         list adopted under Subsection (k), the executive director of the Texas Commission
         on Environmental Quality, not later than the 30th day after the date of receipt of the
         information required by Subsections (c)(2) and (3) and without regard to whether
         the information required by Subsection (c)(1) has been submitted, shall determine
         that the facility, device, or method described in the application is used wholly or
         partly as a facility, device, or method for the control of air, water, or land pollution
         and shall take the actions that are required by Subsection (d) in the event such a
         determination is made.

TEX.TAX CODE ANN. § 11.31(m).

         For two reasons, we reject the argument that an application of the CAP formula that results

in an answer of zero or less is prohibited by statute because that is the functional equivalent of a

negative-use determination, and Subsection (m) requires the Executive Director to always issue a

positive-use determination for k-list property.

         First, while Subsection (m) does require the Executive Director to assume k-list properties

16
  We pause briefly to take issue with Brazos Electric’s proposed application of the CAP formula to avoid the zero
problem. Brazos Electric asks us to remand this case and instruct TCEQ that in applying the CAP formula in k-list
cases, it must scrupulously do so in a way that ensures that whatever result it gets always comes out to more than zero.
But Brazos Electric’s proposed results-driven application of the CAP formula violates Section (g-1), which requires
TCEQ to apply its administrative rules of decision-making consistently across contexts, even to k-list properties.

The CAP formula rule requires all applicants to submit proposed factors that appear on the left-side of the equal sign
to TCEQ, and whatever appears on the right side of the equal sign after the objective application of the fundamental
rules of mathematics is the number all parties use as reference. That is common-sense arithmetic. An approach that
preordains a solution to the CAP formula and then forces TCEQ to choose variable that fit that a purpose-driven
solution is an arbitrary and capricious approach that contravenes mathematical common sense. “[I]f an agency ‘does
not follow the clear, unambiguous language of its own regulation, we reverse its action as arbitrary and capricious.’”
Tex. Indus. Energy Consumers v. CenterPoint Energy Hous. Elect., L.L.C., 324 S.W.3d 95, 104 (Tex. 2010). More to
the point, Brazos Electric asks for k-list applicants to receive the type of special treatment that Section (g-1) does not
permit. We are unpersuaded that this approach is correct, and cannot endorse it. Further, because we find the statute
does allow negative use determinations here, the question of whether TCEQ can reject a tax break application if the
CAP equals zero or less is moot.

                                                           27
have an environmental benefit under Subsection (c)(1) and to grant k-list applicants expedited

review, Subsection (m) also does not withdraw all discretion from the hands of the Executive

Director. He must still determine to what extent the pollution-control property was actually

installed “wholly or partly” for regulatory compliance purposes.

        Second, in measuring the Executive Director’s discretion set by the phrase “wholly or

partly,” we find that the “part” in “partly” is consistently used throughout Section 11.31 to mean

“less than whole,” which can embrace zero or negative values—and, by extension, negative use

determinations. As such, when viewed with the understanding that phrases should be defined

consistently throughout a statute, and when read in harmony with the other portions of Section

11.31, Subsection (m) does not stand as a bar to a zero or negative finding. Subsection (m) simply

creates a presumption that k-list property has an environmental benefit, but TCEQ may still find,

once all relevant factors are considered, that a specific applicant is not actually using k-list property

for the purpose of complying with cost-prohibitive environmental regulations.

                                                   1.

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

        In determining whether, as Brazos Electric contends, TCEQ must grant a HRSG

“something” in terms of a tax break, we must address which portions of Subsection (m) are

mandatory, and which are not.

        At issue here is what the word “shall” means in the phrase “the executive director . . . shall

determine that the facility, device, or method described in the application is used wholly or partly

as a facility, device, or method for the control of air, water, or land pollution . . . .” [Emphasis

added]. Brazos Energy is correct in pointing out that “unless the context in which the word or

                                                   28
phrase appears necessarily requires a different construction or unless a different construction is

expressly provided by statute . . . ‘[s]hall’ imposes a duty.”                 TEX.GOV’T CODE ANN.

§ 311.016(3)(West 2013).        “We generally construe the word ‘shall’ as mandatory, unless

legislative intent suggests otherwise.” Albertson’s, Inc. v. Sinclair, 984 S.W.2d 958, 961 (Tex.

1999). However, words and phrases in a statute are read in context, not in isolation, and separate

provisions of the same statute are read harmonically so that they do not conflict, if at all possible.

TIC Energy & Chem., Inc., 498 S.W.3d at 75. As the Code Construction Act and the case law

both acknowledge, “shall” can mean different things in different contexts. “In determining

whether the Legislature intended a provision to be mandatory or directory, we consider the plain

meaning of the words used, as well as the entire act, its nature and object, and the consequences

that would follow from each construction.” Albertson’s, Inc., 984 S.W.2d at 961.

        Here, the use of the word “shall” when read in context does not require the Executive

Director to issue per se positive use determinations to k-list property. Yes, Subsection (m) is

largely framed in terms of mandatory language: if property appears on the k-list, then “not later

than the 30th day after the date of receipt of the information required by Subsections (c)(2)[cost of

the facility] and (3)[information about the purpose of the facility], and without regard to whether

the information required by Subsection (c)(1)[environmental impact information] has been

submitted, shall determine that the facility, device, or method described in the application is used

wholly or partly as a facility, device, or method for the control of air, water, or land pollution . . . .”

[Emphasis added]. But “shall determine” is only half the story. The prepositional phrase in the

middle of Subsection (m) is the real focus of this passage. Reworked, the sentence reads that the

Executive Director “shall determine that the facility . . . is used wholly or partly” to control air

pollution “not later than the 30th day after” the application is received and “without regard to

                                                    29
whether the information required by Subsection (c)(1) has been submitted.” This subsection

merely sets the conditions and timelines of decisions; it does not preordain a specific decision.

The proper reading of this section is that it commands the Executive Director to make a decision

within certain timelines, and to give k-list properties the benefit of the doubt with regard to

Subsection (c)(1) information. It does not mandate a positive-use determination, but instead

requires the Executive Director to exercise his discretion—in compliance with TCEQ’s internal

rules of decision, TEX.TAX CODE ANN. 11.31(g), (g-1)(h)—to determine proportionality (“wholly

or partly”) of the tax break for k-list properties.

        Subsection (m) says the Executive Director shall determine the facility is “used wholly or

partly” as pollution-control property. Notably, Subsection (m) does not say that the Executive

Director must grant a k-list applicant something. The “wholly or partly” phrase in Subsection (m),

which is a phrase repeated over and over again throughout Section 11.31, is especially vital to our

understanding of the Executive Director’s power.           “Statutory terms should be interpreted

consistently in every part of an act.” Tex. Dep’t of Transp. v. Needham, 82 S.W.3d 314, 318 (Tex.

2002). In other subsections of Section 11.31, “wholly or partly” is a discretionary signifier

showing that the Executive Director still retains discretion to determine what “part” of a property

is actually attributable to pollution-control purposes. See Mont Belvieu Caverns, 382 S.W.3d at

488-89 (discussing the use determination process generally).

        Brazos Electric does not dispute that the Executive Director retains some discretion over

Subsection (m) applications. Thus, the true statutory question here is not whether the Executive

Director has discretion, but how far this discretion goes for k-list properties. More to the point:

bearing in mind that phrases should generally be interpreted consistently throughout an act, and

given that use of the phrase “partly” in other parts of Section 11.31 allows the Executive Director

                                                      30
to make negative use determinations generally, does “partly” nevertheless mean something

different in Subsection (m) than it does in other parts of Section 11.31?

       We think not.

                                                 2.

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

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

       Brazos Electric argues that notwithstanding the use of the phrase “wholly or partly” as a

discretionary signifier that encompasses negative use determinations in other portions of the

statute, “partly” takes on a new meaning in Subsection (m), one that forces the Executive Director

to grant the electric company “something.” Why? In Brazos Electric’s view, the “part” in “partly”

has only one possible meaning—it necessarily means “more than nothing.”              See “Partly,”

MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 904 (11th ed.)(defining “partly” as “in some

measure or degree; PARTIALLY”).

       We disagree that “partly” as used in Subsection (m) absolutely requires the Executive

Director to grant k-list applicants “more than nothing.” To say that the “part” in “partly”

conclusively means “more than nothing” and thus cabins the agency’s discretion into finding non-

zero use per se does not acknowledge the inherent elasticity of the language at issue. We interpret

words in light of common understanding and definitions. Contrary to Brazos Electric’s assertion,

“part” as commonly understood is not a word with one sole definition. Brazos Electric cites to

Merriam-Webster’s Collegiate Dictionary as a source, but even in that dictionary, multiple

definitions of the word emerge. Indeed, it is reasonable to understand “part,” “partly,” and

                                                31
“partially” in ways that cut both for and against both parties. “Part” can mean “less than whole”

(which embraces zero or negative values),17 or “part” can mean “more than nothing” (which

excludes zero and negative values).18 So which definition do we apply here? Both are reasonable,

commonly understood interpretations of that word. At best, Brazos Electric’s proposed definition

only conjures up a linguistic ambiguity. “Ambiguity exists if reasonable persons can find different

meanings in the statute.” Tex. Dep’t of Pub. Safety v. Swierski, 49 S.W.3d 417, 419 (Tex.App.--

Fort Worth 2001, no pet.).

         But we do not read words in isolation from the subsection in which they appear, and we do

not read subsections in isolation from their place in a statutory scheme. “The meaning of a word

that appears ambiguous when viewed in isolation may become clear when the word is analyzed in

light of the terms that surround it.” TG S-NOPEC Geophysical Co., 340 S.W.3d at 441. Here,

when Subsection (m) is read in the context of the statute as a whole, giving effect to the

Legislature’s intent as expressed in the text it adopted, the meaning becomes obvious because the

word appears in a phrase that is consistently applied across various subsections of Section 11.31—

“partly” means “less than whole,” which can also mean “zero.”19 The scope of the Executive

Director’s discretion for k-list properties is the same as the scope of his discretion for Section 11.31

applications generally: he is confined to granting tax breaks only where a facility, device, or

17
  See, e.g., Part, Dictionary.com, http://www.dictionary.com/browse/part (“Part . . . refer[s] to something that is less
than the whole.”); “Part,” Merriam-Webster’s Collegiate Dictionary 902 (11th ed.)(“syn PART, PORTION, PIECE,
MEMBER, DIVISION, SECTION, SEGMENT, FRAGMENT mean something less than the whole. PART is a
general term appropriate when indefiniteness is required . . .”).

 “Partly,” Merriam-Webster’s Collegiate Dictionary 904 (11th ed.)(defining “partly” as “in some measure or degree;
18

PARTIALLY”).
19
   Even if we are wrong that “part” when read in context clearly means “less than whole,” as we have said, the best
that Brazos Electric can do is present this Court with a linguistic ambiguity in the statute. “Part” can just as easily
mean either “more than nothing” as it can mean “less than whole.” When a statute is ambiguous and can be read
multiple reasonable ways, we defer to the agency’s choice among the reasonable interpretations. Mont Belvieu
Caverns, L.L.C., 382 S.W.3d at 487. That means that under agency deference principles, we would still be required
to recognize that that statute allows for negative-use determinations, even for k-list properties.

                                                          32
method was used wholly or partly as a method of controlling pollution. See TEX.TAX CODE ANN.

§ 11.31(a). If no part of the device is being used for pollution control purposes, the tax break must

be denied.

       As TCEQ intones in its brief, purpose of adoption matters even when it comes to k-list

property, and as the agency posits in its colorful hypothetical, an eccentric billionaire cannot

simply purchase k-list property like a HRSG, bury it in the desert outside Marfa, call it an art

installation, and expect to receive a tax break simply because HRSGs are on the k-list. Subsection

(m) still requires the Executive Director to make a use determination. But to read Subsection (m)’s

“shall determine that” language as mandating a tax break in every situation ignores the meaning

that the phrase “wholly or partly” has acquired in other parts of the same statute; indeed, it writes

those words out of Subsection (m) completely. It also ignores other provisions of Section 11.31

requiring the Executive Director to carefully weigh disparate factors in making a use

determination. We must give all words in a text meaning if possible. The statute requires the

Executive Director to make a decision and to grant k-list applicants certain administrative

preferences in terms of initial burden and speed of decision, but nothing in Subsection (m) clearly

restricts TCEQ to solely making positive-use determinations for k-list properties.

                                                 b.

     Brazos Electric’s Alternative Reading is Unworkable and Would Invite Constitutional
                                          Challenges

       We are further convinced TCEQ’s plain language reading of Subsection (m) is correct by

the fact that Brazos Electric’s alternative reading is not complete or workable. For example, while

Brazos Electric maintains that Subsection (m) requires a non-zero tax break, the company also

never specifies how much the minimum acceptable tax break for k-list properties is under its

reading of Subsection (m). Is it 10 percent? Is it 65 percent? Is it a de minimis amount awarded

                                                 33
simply to vindicate rights? Brazos Electric never says, nor does it explain how we or TCEQ could

ascertain what the minimum tax rate for k-list properties from Subsection (m)’s facial silence on

that issue.

        These questions are not merely rhetorical. We are mindful of our duty to fashion useable

standards that the agency can apply on remand and other courts may apply in the future. See

TEX.GOV’T CODE ANN. § 311.021 (West 2013)(instructing courts to presume the Legislature

intends to write statutes that have “a result feasible of execution”). In its prayer, Brazos Electric

simply asks us to declare that the statute requires a certain minimum tax rate not apparent from the

face of Section 11.31, and then remand the case to TCEQ with orders to figure out what that

ephemeral non-zero tax rate might be. Brazos Electric’s inability to point to specific, workable

standards we can apply in determining a “minimum tax break” cuts against the validity of that

interpretation, particularly when TCEQ’s approach harmonizes Subsection (m) with all parts of

Section 11.31. TCEQ’s is the only sensible, workable reading of Subsection (m)’s plain language.

Subsection (m) states that if a k-list device is installed for air pollution control purposes, “the

executive director . . . shall determine that the . . . device . . . is used wholly or partly as a . . .

device . . . for the control of air . . . pollution[.]” We cannot, at Brazos Electric’s request, strike

out the phrase beginning “is used wholly or partly” from Subsection (m) and then replace it with

the words “is entitled to a non-zero tax break” in an attempt to make the statute say what we think

the Legislature was trying to say. We are not legislators, nor are we the Congress’ copy editors.

We take the law as we find it and interpret the law as written. See Tex. Lottery Comm’n v. First

State Bank of DeQueen, 325 S.W.3d 628, 637-38 (Tex. 2010)(courts may not “fix” legislative

“mistakes” made in a statute to comport with what they think the Legislature meant, but must

instead follow “direct and clear statutory language that does not create an absurdity”).

                                                  34
       We also hesitate to endorse Brazos Electric’s reading because if Subsection (m) applies as

broadly as Brazos Electric suggests and encompasses positive use determination for businesses

that would otherwise recover increased marginal costs with return on investment, that could result

in Subsection (m)’s constitutionality being called into question. “When construing statutes we

presume the Legislature intended them to comply with the Texas Constitution.” In re Allcat

Claims Serv., L.P., 356 S.W.3d 455, 468 (Tex. 2011)(orig. proceeding).                “[I]n construing

amendments to the Texas Constitution we ascertain and give effect to the plain intent and language

of the framers of the amendments and of the people who adopted them, beginning with and giving

primacy to the language that was adopted.” Id. The relevant constitutional provision authorizing

the enactment of Section 11.31 states:

       The legislature by general law may exempt from ad valorem taxation all or part of
       real and personal property used, constructed, acquired, or installed wholly or partly
       to meet or exceed rules or regulations adopted by any environmental protection
       agency of the United States, this state, or a political subdivision of this state for the
       prevention, monitoring, control, or reduction of air, water, or land pollution.

TEX.CONST. art. VIII, § 1-l(a).

       As with Section 11.31, the constitutional provision authorizing the tax break calls for

proportionality in use determinations. We read this provision as allowing the Legislature to grant

tax breaks to properties that actually serve pollution control functions. Brazos Electric insists that

Subsection (m) requires TCEQ to grant k-list property applicants some amount of a tax break,

regardless of whether it was adopted for the purpose of pollution control. As we read Brazos

Electric’s argument, k-list property would be entitled to a tax break even if it were being used

solely as production equipment. Not only does this reading contravene the amendment’s plain

language mandate, it contravenes the intent of this amendment’s framers. As the House Research

Organization noted, the framers of Proposition 2—which would eventually become TEX.CONST.

                                                  35
art. VIII, § 1-l—did not intend to grant the Legislature the power to give tax breaks to production

equipment. Rather, the specific concern of proponents was addressing the rising cost of regulatory

compliance and ensuring that Texas both incentivized compliance and remained competitive with

other states who provided similar tax off-sets. Supporters made clear that they did not intend for

the Legislature to pass tax breaks that would simply make facilities more productive, and

opponents specifically complained that the Legislature should not be allowed to subsidize

profitable ventures veiled as pollution control efforts:

       Proposition 2 would amend the Texas Constitution to permit the Legislature to
       exempt from property taxation all or part of property used, constructed, acquired or
       installed wholly or partly to meet federal, state or local regulations for the
       prevention, monitoring, control or reduction of air, water or land pollution.

                                        .         .         .

       Supporters Say: Proposition 2 would promote voluntary compliance with
       environmental regulations and help preserve jobs by offering a property-tax
       exemption for pollution control.

                                        .         .         .

       It is unfair to tax businesses on property they are required by law to purchase. There
       is a growing public consensus that businesses should be required to minimize
       pollution, but most companies that must buy pollution control devices now were
       doing nothing illegal in the past. They should not face the double burden of
       mandatory expenses and increased taxes paid on the property value added by those
       expenses.

       Proposition 2 is not some benefit just for big business. Small companies would be
       entitled to seek the same exemptions as a large refinery. Many small businesses --
       including dry cleaners, gas stations, auto body shops, dentists, printers and photo
       labs -- face large expenses to comply with new environmental regulations. The tax
       exemption would provide an economic incentive for these small companies, which
       generate a large proportion of all pollution, to comply fully with all environmental
       requirements.

                                        .         .         .

       Only the value of that part of a new device that actually relates to pollution control
       would receive an exemption. A device that only increased a plant's productivity or

                                                 36
          capacity would not qualify for an exemption. All applications for exemption would
          have to be certified by the state and go through a state permit process, assuring that
          application of the exemption would be uniform and nondiscriminatory.

                                          .         .          .

          Opponents Say: . . . Because many pollution control devices also increase the
          productivity of a plant, a company may reap economic benefits from pollution
          control and does not need an extra benefit in the fo[rm] of a government subsidy.

House Research Org., Special Legislative Report No. 184, 1993 Constitutional Amendments: The

November          2      Election     (Aug.      30,     1993),      at     8-11,      available   at

http://www.lrl.state.tx.us/scanned/Constitutional_Amendments/amendments73_HRO_1993-11-

02.pdf.

          Brazos Electric’s proposed reading would leave Subsection (m) open to a potential

constitutional challenge that the Legislature exceeded its constitutional authority by enacting

Subsection (m) and granting a per se tax break to k-list properties, even if they were being used

solely for productive purposes. We believe that TCEQ’s reading of Subsection (m) not only

harmonizes all Section 11.31’s provisions together, but it is also consistent with the intent of the

constitutional amendment’s framers and does not leave Subsection (m) open to a potential

constitutional attack.

                                                    c.

  Legislative History Confirms k-List Was Created to Speed Up the Administrative Process for
                      Certain Properties, Not Eliminate Agency Discretion

          We find the statute to be unambiguous as written. The text of Subsection (m) can be

harmonized with the remaining portions of Section 11.31, meaning that our search for legislative

intent should end with the text itself and consideration of Subsection (m)’s legislative history is

unnecessary. Nevertheless, while we may not use legislative history to contravene a statute’s plain

language, we may still consult legislative history for other purposes, such as to bolster a plain

                                                   37
reading of the statute or else to clarify any ambiguities in an unclear statute. See Mont Belvieu

Caverns, 382 S.W.3d at 489 (using legislative history to bolster its conclusion that its plain

language reading of the statute was correct). While the legislative history of Subsections (k) and

(m) is scant, what little on-point history we have found confirms that the Legislature intended for

TCEQ to retain discretion to deny tax breaks, even for items that appear on the k-list, and that the

Legislature’s primary intent in adopting the k-list was to eliminate some administrative hurdles for

certain tax applicants.

       The k-list and Subsection (m) have their genesis in House Bill 3732, proposed during the

80th Legislature’s Regular Session. H.B. 3732 contained a package of several incentives aimed

generally at promoting clean energy, and when was H.B. 3732 was ultimately passed, it made

changes and additions to numerous provisions of the Texas Tax, Health, and Government Codes.

With respect to Section 11.31 specifically, H.B. 3732 added Subsection (k) and (m). See Act of

Sept. 1, 2007, 80th Leg., R.S., ch. 1277, § 4, 2007 TEX.GEN.LAWS 4261, 4264 (codified at

TEX.TAX CODE ANN. §§ 11.31(k), (m)).

       In a bill analysis generated April 25, 2007, the day that the House Committee on Energy

Resources unanimously voted the bill out of committee, the Texas House Research Organization

outlined the properties that would eventually be included on the k-list, including HRSGs, and

specifically explained what placement on the k-list would mean:

       The bill would require the TCEQ to establish a non-exclusive list of pollution-
       control facilities, devices, or methods, which would have to be updated at least once
       every three years and include:

                                       .         .         .

       •   heat recovery steam generators;
                                       .         .         .

       If an applicant intended to seek a tax exemption or tax rollback, used one of the

                                                38
       methods from the list above, and detailed the estimated cost and purpose of a
       project, the executive director of TCEQ would have no more than 30 days to
       determine if the facility, device, or method was used wholly or partly as a method
       of controlling pollution and take actions as required by Tax Code, 11.31(d), without
       regard to whether information had been submitted about the anticipated
       environmental benefits of the project. [Emphasis added].

       House Comm. on Energy Resources, Bill Analysis, Tex. H.B. 3732, 80th Leg., R.S.

(Apr. 25, 2007).

       This bill analysis shows that the Legislature intended for Subsections (k) and (m) to provide

k-list properties with certain administrative benefits so as to streamline and expedite considerations

of those applications. The bill analysis also shows the Legislature clearly contemplated that even

under expedited consideration, the Executive Director would retain discretion to issue a negative

use determination if the applicant failed to establish eligibility for the tax break. The Legislature’s

intent in establishing the k-list was to make the administrative process more streamlined, not to

overrule the Executive Director’s judgment by legislative fiat and create a ministerial duty to grant

a tax break. All things considered, Brazos Electric’s reading of Subsection (m) is untenable.

                                             4.
                    Conclusion: What Placement on the k-List Actually Means

       The plain language of Subsection (m), properly harmonized with its neighboring

provisions, does not reflect an unequivocal intent to give every k-list applicant some kind of tax

break, even where k-list property is not subjectively used for pollution control purposes, but only

to strengthen a company’s bottom line. On the contrary, the use of the phrase “wholly or partly”

in Subsection (m) signifies that the Legislature intended to leave the Executive Director’s

discretion to issue negative use determination intact. The legislative history of H.B. 3732 confirms

this intent. This reading is workable, and it is consistent with the text and intent of the enabling

constitutional amendment.

                                                  39
        Brazos Electric largely argues that it would be bad policy for TCEQ to deny HRSGs a tax

break. “[P]olicy arguments cannot prevail over the words of the statute.” [Internal quotes

omitted]. In re Blair, 408 S.W3d 843, 869 (Tex. 2013). If, as Brazos Electric claims, the

Legislature did intend for all k-list applicants to get “something” in terms of a tax break, then the

solution is not for us to edit the statute, insert or remove words, and fashion the tax break into

something we think the Legislature and the people of this State would approve of. That is

legislating from the bench, and it would necessarily involve making a slew of policy judgment

relating to state energy goals and the shifting of burdens on taxpayers that are beyond both our

constitutional mandate and our institutional competence. We only say what the law is, and we

believe our interpretation of the law as written is correct. If the statute was miswritten in a way

that does not comport with the Legislature’s actual intent, the Legislature is free to amend the

statute to make its will clearer.

        Placement on the k-list entitles an applicant to a presumption that the property has an

environmental benefit under Subsection (c)(1). It entitles an applicant to expedited review within

30 days. It does not entitle an applicant to a per se tax break.

        Issue One is overruled.

                                                 II.

                         Informal Rulemaking In Violation of the APA

Has TCEQ Adopted a Policy of Denying All HRSGs a Tax Break Or Else Removed HRSGs from
   the k-List Without First Undergoing Formal Rulemaking As Required By Subsection (l)?

        In Issue Two, Brazos Electric asserts that TCEQ has “decided to apply the CAP equation

in a manner that guarantees that a HRSG will never qualify for the tax exemption[,]” thereby

effectively removing HRSGs from the k-list without first undertaking the formal rulemaking

process for k-list removal as required by TEX.TAX CODE ANN. § 11.31(l). Brazos Electric also

                                                 40
avers that multiple statements that the Executive Director made in court filings are “irrefutable”

proof that TCEQ has informally adopted a policy of denying tax breaks to all HRSGs, despite the

fact that the Legislature has already identified HRSGs as clean technology. Specifically, Brazos

Electric directs our attention to the following statements made in the Executive Director’s

Response Brief in the appeal before the TCEQ commissioners:

        •   “HRSGs do not provide an environmental benefit.”

        •   “HRSGs are not used wholly or partly to prevent, monitor, or control air, water, or land
            pollution.”

        •   “HRSGs are not pollution control devices.”

We deal with Brazos Electric’s evidentiary contention first, and will not belabor this point:

arguments made by an agency in a legal brief are not “rules.” See Tex. Mut. Ins. Co. v. Vista Cmty.

Med. Ctr., L.L.P., 275 S.W.3d 538, 555 (Tex.App.--Austin 2008, pet. denied). To hold that every

statement an agency makes, including those made in court filings, constitute “rules” would cripple

an agency’s ability to “carry out its legislative functions[,]” “state its reasons for denying a petition

to adopt a rule[,] or file a brief in a court or agency proceeding[.]” Id. While Brazos Electric is

correct that the Executive Director has made broad statements about the inadequate environmental

benefits of HRSGs in legal briefs at various stages of litigation, these statements are no evidence

of intent to adopt a widespread policy applicable in every case. We must take these statements in

context and recognize that these are comments made in the course and scope of adversarial

advocacy before the courts. Id.

        As for Brazos Electric’s sweeping allegations that TCEQ essentially adopted an informal

new rule that will foreclose all HRSG applications moving forward, the company cites no factual

or legal authority in support of this proposition. Brazos Electric asserts that (1) TCEQ has stated

in some way that it will always plug in the cost of a new boiler into the Capital Cost Old portion

                                                   41
of the CAP when dealing with HRSG applications, and that (2) use of a new boiler’s cost as the

Capital Cost Old variable in the CAP formula will guarantee that every HRSG tax break

application from here on out will fail.

         But Brazos Electric does not direct us to anything competent in the record that says that

TCEQ will use the cost of a new boiler as the “Capital Cost Old” value in the CAP for each and

every HRSG application, nor does Brazos Electricity explain how TCEQ’s application of the CAP

will make every application for a HRSG tax break mathematically futile. Instead, Brazos Electric

states in its brief that “the TCEQ does not deny that the variable it insists on using for ‘Capital

Cost Old’ in the CAP formula, which applies to all exemption applications, will always yield a

negative result for HRSGs.” But TCEQ does deny that its application of the CAP formula will

always yield negative results, meaning that we cannot rely on Brazos Electric’s bare assertion as

dispositive evidence, particularly given the lack of citations. See TEX.R.APP.P. 38.1(g)(“In a civil

case, the court will accept as true the facts stated unless another party contradicts them. The

statement must be supported by record references.”).20 TCEQ also denies making any attempt to

remove HRSGs from the k-list, noting that when it last performed its statutorily-mandated triennial

review of k-list technologies in August 2014, it ultimately elected not to remove any technologies

from that list. See 39 TEX.REG. 6483, 6484 (2014)(Tex. Comm’n on Envt’l Quality, Tax Relief

for Property Used for Environmental Protection, Background and Summary of Factual Basis for

the Adopted Rules)(“A triennial review is required for the Expedited Review List by § 17.17(b),

in accordance with Texas Tax Code, § 11.31(l). The Expedited Review List has been reviewed

20
  TCEQ does admit that since reverting from Tier IV review back to the CAP formula, it has denied all the HRSG
applications it has received. However, TCEQ explains that the percentages for varying facilities have differed greatly,
and that one facility applying for an HRSG tax break received a -2% rating, right on the cusp of a positive-use
determination. TCEQ maintains that if the price of electricity or steam had been different, the NPVMP would have
been lower, and that facility may have obtained a positive-use determination.

                                                         42
and the commission determined that no updates are necessary. Therefore, no charges to § 17.17

were proposed for this rule-making.”).

       The Rules of Appellate Procedure requires factual assertions to be supported by record

references. TEX.R.APP.P. 38.1(g). Brazos Electric’s factual assertions in this portion of its brief

are not supported by record citations. Beyond citations to TCEQ’s pleadings and statements made

in the course of litigation—which are incompetent evidence here—and beyond insinuations that

the Executive Director is biased against HRSG technology, Brazos Electric never directs our

attention to any document or piece of evidence that would constitute proof of an informal rule

adoption. It may be that there is administrative resistance to recognizing the environmental

benefits of HRSGs, but Brazos Electric has failed to prove up that thesis here.

       In addition to citing to facts in the record, litigants in the Court of Appeals must also cite

legal authorities in support of their arguments. TEX.R.APP.P. 38.1(i). Although Brazos Electric

cites generally to cases that say an agency action cannot conflict with a statute, and although

Brazos Electric generally maintains that TCEQ’s actions conflict with the statute because they are

ultra vires, Brazos Electric never puts those principles in context. See Nevarez v. Inv. Retrievers,

Inc., 324 S.W.3d 238, 240 (Tex.App.--El Paso 2010, no pet.)(failure to explain how cases cited

apply to a particular case does not meet TEX.R.APP.P. 38.1 briefing standard); Valadez v. Avitia,

238 S.W.3d 843, 845 (Tex.App.--El Paso 2007, no pet.)(holding that while briefing is sufficient

“if it directs the reviewing court’s attention to the error about which the complaint is made,”

briefing requirements are not met when litigant fails to “provide substantive analysis of the legal

issue”). Brazos Electric’s brief (1) fails to cite authority defining what a “rule” is for purposes of

the Administrative Procedures Act, (2) fails to apply the definition in explaining why TCEQ’s

actions constituted the adoption of a “new rule,” (3) fails to explain what the significance of

                                                 43
adopting a new rule without complying with the APA is, and (4) fails to request specific relief for

this alleged violation of the APA.

         It is not the job of this Court to connect unrelated dots, hunt down relevant authority, or

speculate as to what exactly it is a party is attempting to argue or what relief it is requesting. Doing

so would risk placing this Court in the position of having to guess what a litigant means, or worse—

inadvertently becoming an advocate for a party as the Court attempts to fill in the blanks. Valadez,
238 S.W.3d at 845. The briefing rules also serve a claims-processing purpose, and particularly in

cases regarding technical subject matter, and particularly in cases that are granted oral argument

before this Court, good briefing matters. “Failure to provide citations or argument and analysis as

to an appellate issue may waive it.” Ross v. St. Luke’s Episcopal Hosp., 462 S.W.3d 496, 500

(Tex. 2015). That is the situation here.

         Issue Two is waived for lack of adequate briefing.21

                                                         III.

                                 Improper Application of CAP Formula

21
  Even if we are incorrect and the issue is adequately brief, we have found no evidence in the record that would show
TCEQ adopted a statement of general applicability regarding HRSG applicants, that such a statement was binding, or
that such a statement would have the practice effect of “removing” HRSGs from the k-list. A rule under the APA:

         (A) means a state agency statement of general applicability that:
                  (i) implements, interprets, or prescribes law or policy; or
                  (ii) describes the procedure or practice requirements of a state agency;
         (B) includes the amendment or repeal of a prior rule; and
         (C) does not include a statement regarding only the internal management or organization of a state agency
         and not affecting private rights or procedures.

TEX.GOV’T CODE ANN. § 2001.003(6)(West 2016).

The process Brazos Electric describes appears to be more akin to an application of nonbinding guidelines in the process
of evaluating rights under a properly promulgated rule. See Tex. State Bd. of Pharmacy v. Witcher, 447 S.W.3d 520,
529 (Tex.App.--Austin 2014, pet. denied)(“nonbinding evaluative guidelines that take into consideration case-specific
circumstances” are generally not “rules” under the APA); Slay v. Tex. Comm’n on Envtl. Quality, 351 S.W.3d 532,
546 (Tex.App.--Austin 2011, pet. denied)(guidelines TCEQ staff used in determining when to recommend
administrative sanctions were not “rules”). Based on the record before us, we would find on the merits that HRSGs
remain on the k-list and TCEQ has not adopted any policies that would undercut that fact.

                                                         44
       Finally, in Issue Three, Brazos Electric argues that TCEQ acted arbitrarily and capriciously

by selecting a boiler as technology that was comparable to a HRSG and applying the cost of a

boiler as the Capital Cost Old variable in the CAP formula. TCEQ defends its choice of the boiler

as being reasonable, but the agency asserted during oral argument that the boiler issue is a red

herring, and we may affirm TCEQ’s decision to reject Brazos Electric’s tax request on alternative

grounds. Namely, TCEQ maintains that Brazos Electric has flipped the threshold burden of proof

in its brief; it was actually Brazos Electric’s burden to establish it was entitled to a tax break, and

that burden included furnishing comparable variables that would still result in a positive outcome

once they were run through the CAP formula. Using that burden of proof and applying the abuse

of discretion standard, TCEQ argues we cannot overturn TCEQ’s rejection of Brazos Electric’s

application because its decision regarding the CAP variables fell within the zone of reasonable

disagreement.

       We agree with TCEQ on all points.

                                                  A.

                         Standard of Review for Administrative Decisions

       The standard of review “defines the relationship between this Court and the court below.”

State v. Villegas, 506 S.W.3d 717, 727 (Tex.App.--El Paso 2016, pet. granted). “These standards

frame the issues, define the depth of review, assign power among judicial actors, and declare the

proper material to review.” [Internal citation and quotation marks omitted]. W. Wendall Hall et

al., Hall’s Standard of Review in Texas, 42 ST. MARY’S L.J. 1, 9 (2010). The standard of review

framework limits this Court’s ability to review lower court rulings and constrains our power to

overturn them.

       Our review of agency decisions is similarly limited. We review TCEQ’s determination of

                                                  45
entitlement to a Section 11.31 tax break in a non-contested case such as this one under the arbitrary

and capricious standard. Mont Belvieu Caverns, 382 S.W.3d at 485. Our power on appeal under

this standard is extremely limited. On arbitrariness review, “[a] court is not to ask whether a

regulatory decision is the best one possible or even whether it is better than the alternatives.” Fed.

Energy Reg. Comm’n v. Elec. Power Supply Ass’n, 136 S. Ct. 760, 782, 193 L. Ed. 2d 661

(2016)(discussing meaning of “arbitrary and capricious” in federal administrative context); accord

2 TEX.JUR.3D ADMINISTRATIVE LAW § 237. Instead, “[a]n administrative agency is said to act

arbitrarily or capriciously where, among other things, it fails to consider a factor the Legislature

has directed it to consider, considers an irrelevant factor, or considered relevant factors but still

reaches a completely unreasonable result.” City of Waco v. Texas Comm’n on Envtl. Quality, 346
S.W.3d 781, 819 (Tex.App.-Austin 2011, pet. denied).

        “Ultimately, we are concerned not with the correctness of the Commission’s decision, but

its reasonableness.”    Employees Retirement Sys. of Tex. v. Garcia, 454 S.W.3d 121, 132

(Tex.App.--Austin 2014, pet. denied). In determining reasonableness, we give agencies broad

leeway. “The test is not whether the agency made the correct conclusion in our view, but whether

some reasonable basis exists in the record for the agency’s action.” [Internal citation omitted]. Id.

“Our review of the administrator’s decision is not complex or technical; we must assure the

decision falls somewhere on a continuum of reasonableness—even if on the low end.” [Internal

citation and alterations omitted]. Phillips v. Metro. Life Ins. Co., 405 S.W.3d 880, 891 (Tex.App.-

-Dallas 2013, no pet.)(defining arbitrary and capricious standard of review in ERISA context). We

take an administrator’s stated reasons for a decision at face-value and “must judge the validity of

the decision according to the basis upon which it purports to rest.” Smith v. Hous. Chem. Srvs.,

Inc., 872 S.W.2d 252, 267 (Tex.App.--Austin 1994, writ denied). “The [subjective] thought

                                                 46
processes or motivations of an administrator are irrelevant in the judicial determination whether

the agency order is reasonably sustained by appropriate findings and conclusions that have support

in the evidence.” [Internal citation and alterations omitted]. Id.

        We only “remand for arbitrariness if we conclude that the agency has not genuinely

engaged in reasoned decision-making.” [Internal quotations omitted]. CPS Energy v. Pub. Util.

Comm’n, -- S.W.3d --, No. 03-14-00340-CV, 2017 WL 744694, *6 (Tex.App.--Austin Feb. 24,

2017, no pet.h.). If the agency did not act in an arbitrary or capricious manner, we must affirm the

agency decision. Tex. Health Facilities Comm’n, 665 S.W.2d at 452.

        “In tax-exemption cases, the claimant . . . bears the burden of ‘clearly showing’ that it falls

within the statutory exemption.” Tex. Student Housing Authority v. Brazos Cty. Appraisal Dist.,

460 S.W.3d 137, 140-41 (Tex. 2015). Tax exemptions may not “be raised by implication, but

must affirmatively appear, and all doubts are resolved in favor of taxing authority and against the

claimant.” Id. at 141.

                                                  B,

                                               Analysis

        A large part of Brazos Electric’s argument in Issue Three finds its footing in the premise

that the statute constrains the Executive Director’s discretion in making use determinations for k-

list properties.   We dispelled that argument in our resolution of Issue One. The only issue

remaining whether the Executive Director’s decision was so unreasonable as to be arbitrary and

capricious. The briefing on this issue is sparse, but still sufficient to warrant our review under the

Rules of Appellate Procedure. We will do our best to analyze the reasonableness of the Executive

Director’s decision in light of the points Brazos Electric raised in its brief.

        Throughout the application process, Brazos Electric ultimately submitted a total of five

                                                  47
different proposed calculations of its tax break rate to TCEQ. Two of those, submitted in the

Johnson County application under Tier IV review, did not apply the CAP. Brazos Electric has

abandoned those non-CAP applications on appeal.22 Instead, Brazos Electric argues before this

Court that TCEQ improperly rejected the company’s proposed CAP variables which would have

resulted in the following partial use determinations:

        •    For both Johnson and Jack County facilities, a 100% use determination (using
             $0 as the value for Capital Cost Old and the NPVMP production variable);

        •    For its Johnson and Jack County facilities, use determinations of +64.29% and
             +74.66% respectively (using $0 as the Capital Cost Old value, and applying a
             non-zero NPVMP production value); and

        •    For its Johnson and Jack County facilities, use determination of +63.76% and
             +74.52% respectively (using the cost of a spooling device as the Capital Cost
             Old value).

        We find that TCEQ did not act arbitrarily or capriciously in rejecting these proposed

formulations of the CAP.

                                                  1.
                      Administrative Rules for Determining CAP Variable Values

        Recall that the CAP formula applies as follow:

22
  As we noted previously, the Johnson County application, while filed under ad hoc Tier IV review, was subject to
having Subsection (g-1)’s uniformity-of-decision requirement imposed on it retroactively, meaning that TCEQ had to
use the same method of decision it applied to other applicants (i.e. the CAP formula) for k-list applicants. See
TEX.TAX CODE ANN. § 11.31(g-1)(standards of decision adopted by TCEQ must be applied to all classes of applicants,
including k-list applicants); Act of May 25, 2009, 81st Leg., R.S., ch. 962, § 3, 2009 TEX.GEN.LAWS 2556, 2557-58
(Subsection (g-1) applies to all applications filed after January 1, 2009, that were not yet final as of September 1,
2009).

                                                        48
             ( x1 – x2 ) - y
        _____________________
                                                        ·     100        =            z%
                            x1

       x1 : Capital cost of the actual equipment at issue, with pollution control feature
       (Capital Cost New)
       x2 : Capital cost of comparable equipment without pollution control feature
       (Capital Cost Old)
       y : Net value of any marketable material generated by equipment over lifetime
       (NPVMP)
       · : Multiplication sign
       z : Percentage of equipment’s capital cost attributable to pollution control/tax
       break percentage
                                             Table 2.1

       TCEQ’s administrative rules set definitions for Capital Cost New (x1), Capital Cost Old

(x2), and NPVMP (y). “Capital Cost New is the estimated total capital cost of the new equipment

or process.” 30 TEX.ADMIN.CODE § 17.17(c)(1) fig., n. 2. “Capital Cost Old is the cost of

comparable equipment or process without the pollution control.” Id. at n.3. Section 17.17(c)(1)

recognize four alternate standards for calculating the Capital Cost Old (CCO) variable:
       3.1
             If comparable equipment without the pollution control feature is on the market
             in the United States, then an average market price of the most recent generation
             of technology must be used.
       3.2
             If the conditions in variable 3.1 do not apply and the company is replacing an
             existing unit that already has received a positive use determination, the company
             shall use the CCO from the application for the previous use determination.
       3.3
             If the conditions in variable 3.1 and 3.2 do not apply and the company is
             replacing an existing unit, then the company shall convert the original cost of the
             unit to today’s dollars by using a published industry specific standard.

                                          .         .          .
       3.4
             If the conditions in variable 3.1, 3.2 and 3.3 do not apply, and the company can
             obtain an estimate of the cost to manufacture the alternative equipment without
             the pollution control feature, then an average estimated cost to manufacture the

                                                   49
             unit must be used. The comparable unit must be the most recent generation of
             technology. A copy of the estimate must be provided with the worksheet
             including the specific source of the information.

Id.

          The NPVMP is defined as:

          The net present value of the marketable product recovered for the expected lifetime
          of the property . . . Typically, the most recent three-year average price of the
          material as sold on the open market should be used in the calculation. . . .23

Id.

          Again, we note that Brazos Electric has not challenged any of these definitions or rules of

decision as being substantively or procedurally defective. As such, these rules and definitions bind

us in deciding whether the agency acted arbitrarily or capriciously.

          We interpret administrative regulations and rules as questions of law, using the same

principles of textual construction as with statutes. TG S-NOPEC Geophysical Co., 340 S.W.3d at

438. “In construing a Commission rule, our primary objective is to give effect to the Commission’s

intent.” Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999). Undefined terms

are “typically given their ordinary meaning” unless “a different or more precise definition is

23
   On appeal, neither side argues that the NPVMP was calculated incorrectly. Nevertheless, as background
information, the NPVMP under the administrative rules is calculated using the following formula:

                n
                    (Marketable Product Value - Production Cost)
NPVMP  
               f 1              (1  Interest Rate)

      •   n = Estimated useful life of equipment in years
      •   Marketable Productive Value = (1) the retail value of the product produced by the equipment for one year
          periods (typically the most recent three-year average price of the material as sold on the open market), or (2)
          value assigned to material for internal accounting purposes, if material is used as an intermediate material in
          a production process.
      •   Production Cost = costs directly attributed to the production of the product, including raw materials, storage,
          transportation, and personnel, but excluding non-cash costs, such as overhead and depreciation.
      •   Interest Rate = 10%

See 30 TEX.ADMIN.CODE § 17.17(c)(2).

                                                           50
apparent from the term’s use” in context. TG S-NOPEC Geophysical Co., 340 S.W.3d at 439.

                                                 2.

   TCEQ Could Rationally Reject Brazos Electric’s Use of “$0” as the Capital Cost Old and
 Production Variables in Johnson County Application, Resulting in a 100% Use Determination;
   Brazos Concedes that HRSGs Have Productive Value, and Under Mont Belvieu Caverns,
  Equipment With Productive Value Cannot Receive a 100% Use Determination as a Matter of
                                           Law

       We deal first a proposed 100 percent use determination application that Brazos Electric

submitted for its Johnson County facility. We find that TCEQ did not act arbitrarily or capriciously

by rejecting this particular formulation.

       In response to a notice of technical deficiency issued by the Executive Director in its

Johnson County application, Brazos Electric submitted a proposed recalculation of the CAP using

a $0 value for Capital Cost Old and a $0 value for the NPVMP production factor, resulting in a

100 percent use determination. Brazos Electric explains that it selected $0 as the Capital Cost Old

factor because there is no comparable technology to a HRSG, and it selected $0 as the output value

because without attaching the HRSG to a steam turbine, the steam is useless and of no value.

Therefore, the productive equipment is not the HRSG, it is the steam turbine.

        As TCEQ correctly says in its brief, this formulation is unreasonable out of hand because

it would require TCEQ to grant a 100 percent use determination when at maximum, Brazos Electric

can only qualify for a partial use determination. We agree that this issue is governed squarely by

Mont Belvieu Caverns.

       In Mont Belvieu Caverns, a Section 11.31 tax break applicant stored natural gas liquids in

underground salt dome caverns. To retrieve the natural gas liquids from the caverns, the applicant

would pump brine into the caverns, which would displace the natural gas. The brine was kept in

large surface ponds. The applicant sought a 100 percent positive use determination for the ponds

                                                51
and related equipment, arguing that the brine ponds allowed the company to re-use brine rather

than disposing of it in injection wells and then using fresh water to create new brine. 382 S.W.3d

at 480. On appeal, the applicant conceded that “its brine-pond system is part of the process by

which it produces its gas-storage services for customers,” but the applicant nevertheless urged a

100 percent use determination. Id. at 488. The Third Court disagreed, holding that “property

cannot qualify as 100% pollution-control property if any portion of its value is attributable to its

capacity to produce goods and services.” Id. at 489.

         Here, Brazos Electric proposed an application of the CAP formula that resulted in a 100

percent positive use determination, despite the fact that it has conceded that the HRSG serves a

production purpose—it produces steam that is in turn used to power a steam turbine. A 100 percent

positive use determination would be prohibited in this situation under Mont Belvieu Caverns. As

such, TCEQ did not act arbitrarily or capriciously by rejecting this application of the CAP formula.

                                                 3.

   TCEQ Could Rationally Reject Brazos Electric’s Remaining Two CAP Formulations That
  Resulted in Partial Use-Determinations, and Instead Select a Boiler as the Capital Cost Old
                       Factor, Resulting in a Negative Use Determination

         We will address Brazos Electric’s remaining two CAP formulations together, as they both

apply the NPVMP production variable and result in potentially permissible partial use

determinations. For these two formulations, TCEQ rejected Brazos Electric’s proposed Capital

Cost Old variable inputs and instead sua sponte elected to apply its own Capital Cost Old variable

input.

         TCEQ is correct that Brazos Electric bears the burden of establishing the tax break, and

that we should focus our attention on the Capital Cost Old inputs that Brazos Electric actually

submitted. See Tex. Student Housing Authority, 460 S.W.3d at 141. TCEQ urges us to affirm the

                                                52
agency’s decision to reject both the spooling device and “$0” as Capital Cost Old variable without

regard to whether TCEQ’s alternate selection of the boiler as the Capital Cost Old variable was

reasonable. While we believe TCEQ’s approach is consistent with the burden of proof in tax cases,

out of an abundance of caution, we will address the reasonableness of the Capital Cost Old

variables selected by both Brazos Electric and TCEQ. In any event, whether we address the

proposed variable in isolation or in relation to one another, the result remains the same. TCEQ

ultimately had three reasonable options in front of it. Its selection of one reasonable option and its

rejection of the two others was not arbitrary or capricious and is not subject to our potential

revision.

                                                  i.

   TCEQ Could Rationally Reject Brazos Electric’s Use of the Spooling Device/Piping As An
       Analogue Technology to HRSGs; Spooling Devices Have No Productive Value

       Brazos Electric’s first potentially permissible partial use CAP application applied the value

of a spooling device as the Capital Cost Old variable, resulting in use determination of +63.76%

for the Johnson County facility and +74.52% for the Jack County facility. TCEQ rejected Brazos

Electric’s use of the spooling device, finding that the spooling device was not equipment

comparable to a HRSG, but that a boiler was. Brazos Electric challenges TCEQ’s decision that

spooling devices and HRSGs are not comparable analogues as being arbitrary and capricious,

wholly outside the zone of reasonable disagreement. We cannot say that TCEQ was wholly

irrational in rejecting Brazos Electric’s use of the spooling device as a comparable analogue device

for purposes of the Capital Cost Old factor.

       Brazos Electric’s rationale for using the spooling device as being comparable equipment is

based primarily on the schematic layout of its facilities. In a single-cycle plant without a HRSG,

                                                 53
the spooling device vents heat from the natural gas generator into an exhaust tower, where it is

released into the atmosphere. A combined-cycle power plant replaces the spooling device with a

HRSG, which recaptures the heat and diverts it to power a second (steam) generator. Without a

HRSG, Brazos Electric’s plants would have be to replumbed with a spooling device to allow the

heat to pass through to an exhaust stack to the atmosphere. Because HRSGs and spooling devices

both funnel heat away from the natural gas turbine, and because they occupy the same position in

the facility schematics, Brazos Electric insists that HRSGs and spooling devices are comparable

technologies, and that no reasonable person could find otherwise.

       But just because the empty space at Brazos Electric’s power plants would be filled with

spooling devices instead of HRSGs does not make it reasonable to assume the two pieces of

equipment are analogues. A spooling device connects to an exhaust stack and vents heat off as a

waste product; it does not convert heat into steam that can then be used to power a generator. By

contrast, a HRSG takes wasted heat from a gas engine and uses it to create steam, which is then

used to power a steam generator. While HRSGs and spooling devices occupy the same place in a

factory schematic, a HRSG serves an additional function that a spooling device does not—it

converts wasted heat into more electricity. That is a distinction with a significant difference. The

TCEQ recognized as much when it denied the use of a spooling device as a comparable analogue

technology for the Capital Cost Old variable.

       “Comparable equipment” is undefined in the regulations, which means we must take the

word “comparable” in its common usage. Again, under the arbitrary and capricious standard, the

question is not whether we, sitting in the Executive Director’s chair, would find that the HRSG

and the spooling device are comparable. Recognizing the deference we must give to the Executive

Director’s decision under the principles of administrative law, the real question is whether it would

                                                 54
be reasonable for a person to see a HRSG and a spooling device as not being comparable to one

another. We can overturn TCEQ’s decision only if no reasonable person could reject Brazos

Electric’s comparison of the HRSG and the spooling device as being sufficiently similar. Here,

we uphold the Executive Director’s decision to reject the spooling device as the Capital Cost Old

variable because a reasonable person could believe that a HRSG and a spooling device do not serve

the save function in a power plant, and are thus not comparable to one another. The Executive

Director decision was not arbitrary or capricious.

                                                 ii.

  TCEQ Could Rationally Reject Brazos Electric’s Use of $0 as the Capital Cost Old Variable,
 Even When the NPVMP Variable Was Also Applied to Recapture Productive Value; TCEQ’s
 Finding That a HRSG and a Boiler Serve the Same Function in a Power Plant Was Reasonable

       Finally, we deal with the Executive Director’s decision to reject a $0 value as the Capital

Cost Old variable, even when coupled with a positive NPVMP variable, in favor of the boiler. The

Executive Director’s rationale for comparing boilers and HRSGs is simple: both create steam that

can be used to power a steam engine, rendering their functions similar. On appeal, TCEQ also

points out that many combined-cycle power plants use boilers as a back-up redundancy measure

to keep the steam engine running in the event the HRSG stops functioning.

       We find, based on the record and arguments presented, that the Executive Director’s

selection of the boiler as the Capital Cost Old variable was not arbitrary or capricious.

        Brazos Electric never directly disputes the assertion that a HRSG and the boiler are

functionally comparable, but instead, the company makes much of the fact that the value of the

Capital Cost Old factor TCEQ has selected is disproportionate as compared to the price of the

HRSGs. Brazos Electric complains that the technology is not “comparable” because the old

technology is more expensive than the new technology, meaning that it cannot possibly establish

                                                 55
eligibility for a tax break. But the flaw that Brazos Electric complains about is actually a key

aspect of the CAP formula. The Section 11.31 tax break is limited to those situations in which

compliance with environmental regulation would be economically irrational.           Mont Belvieu

Caverns, 382 S.W.3d at 489. The CAP accounts for economic rationality by producing negative

values when new technology costs less than older comparable technology, with the rationale being

that if new technology is cheaper than old technology, tax incentives are unnecessary because

compliance with green regulations is economically rational. To the extent that Brazos Electric is

reiterating its no less-than-zero result argument, we disregard it. Nothing in the statute or rules

prevents the Executive Director from finding that comparable old technology is actually more

expensive than new technology and applying those factors accordingly in the CAP. Nothing in

administrative rules prevents the Executive Director from selecting the boiler as the Capital Cost

Old factor.

       Brazos Electric also argues that it was reasonable for the company to submit a $0 value as

the Capital Cost Old variable because the HRSGs’ productive value would be recaptured anyway

by the NPVMP variable. Barring the fact that this approach would essentially strike out the use

of a Capital Cost Old variable completely in contravention to the text of the administrative rule,

the question is not whether Brazos Electric’s proposed methodology was reasonable. The question

is whether the approach the Executive Director employed was wholly unreasonable. We cannot

say here that it was. The rule requires the use of a Capital Cost Old factor to account for marginal

costs, and the Executive Director explained his reasons why he selected the boiler as an analogue

for a HRSG—both produce steam that can be converted into energy.

       Our review on appeal does not permit us to consider whether we, sitting in the TCEQ

Executive Director’s chair, would have chosen a different analogue technology, or even whether

                                                56
some other even better analogue technology exists. Instead, the narrow question we must answer

under the standard of review is whether the Executive Director acted arbitrarily or capriciously in

selecting the boiler as a comparable analogue because he viewed the steam-making functions of a

HRSG as being similar to the steam-making functions of a boiler. The Executive Director has

stated his reasons for making his selection. In light of the stated reasons for selecting the boiler as

an analogue, we cannot say the Executive Director acted arbitrarily and capriciously by selecting

a technology that had a similar function.        His decision fell within the zone of reasonable

disagreement.

       Brazos Electric strongly insinuates that the Executive Director’s stated reasons do not

represent his true views but are simply a pretextual veil he hides behind in imposing his own biases

against HRSG applicants; in the company’s view, the Executive Director’s selection of the boiler

was actually a cynical move calculated to force a negative use determination after the TCEQ

Commissioner’s struck down the Executive Director’s original findings on appeal. We empathize

with the company’s frustrations in dealing with this administrative process, particularly given that

especially with the Johnson County facility, litigation seems to have dragged on for years. That

being said, “[t]he thought processes or motivations of an administrator are irrelevant in the judicial

determination whether the agency order is reasonably sustained by appropriate findings and

conclusions that have support in the evidence.” Smith, 872 S.W.2d at 266. We cannot go behind

the Executive Director’s stated reasons and question his motives in arriving at his decision. “We

must judge the validity of the decision according to the basis upon which it purports to rest.” Id.

at 267. We take his decision as-is and decide only if the administrator acted within the scope of

his power. The Executive Director acted reasonably within the bounds of his discretionary

authority in selecting the boiler as a Capital Cost Old analogue to a HRSG.

                                                  57
       Our opinion should not be read as foreclosing the possibility that future HRSG applicants

may come up with a better comparable alternative to a boiler, one that would render TCEQ’s use

of the boiler wholly unreasonable by comparison. Our opinion also does not foreclose future

legislative intervention or more nuanced rulemaking from TCEQ to clarify what seems to be an

increasingly Kafkaesque corner of environmental law. Instead, we simply state that based on the

record presented and the arguments as teed up in the parties’ briefs in this specific case, we cannot

overturn the Executive Director’s decision here.

                                             5.
                              CAP Formula Application Conclusion

       TCEQ acted within the bounds of its discretion by rejecting Brazos Electric’s proposed

formulations of the CAP: the first formulation provides a 100 percent use determination when once

has not been earned, and the other two formulations failed to use an analogue device that has

comparable productive aspects and failed to offset potential return on investment against cost as

required by the CAP. TCEQ also acted within the bounds of its discretion by selecting and

applying a boiler as a comparable Capital Cost Old factor because both served a steam-making

function.

       Issue Three is overruled.

                                                IV.
                                               Coda

       It may be that companies like Brazos Electric should be entitled to tax breaks for adopting

clean technologies like HRSGs, even if the company does receive an incidental benefit from going

green and that tax money would otherwise go to this state’s government, education system, and

infrastructure. That policy question is beyond our purview. We are tasked solely with deciding

how much leeway TCEQ had in administering the tax break set by the Legislature. Based on our

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read of the statutes, TCEQ had the power to deny the tax break here, even in light of the positive

environmental effects HRSGs have, because the free market worked, clean technology made a

power plant more productive, and the interests of a corporation and environmentalists aligned,

rendering the tax incentive unnecessary. TCEQ acted within the proper bounds of the discretionary

authority given to it by the Legislature.

        To the extent the law as it exists now may create unforeseen tax consequences or undercut

the purpose of the incentives, the fixes to these thorny issues are legislative or administrative, not

judicial.

                                            CONCLUSION

        None of the appellate points raised by Brazos Electric constitute reversible error. The

judgment of the trial court is affirmed.

September 15, 2017
                                               YVONNE T. RODRIGUEZ, Justice

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

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