TCEQ Issues Favorable “Prop 2” Determination


The Texas Commission on Environmental Quality (TCEQ) recently denied 21 long-pending applications for “Prop 2” pollution control property tax exemptions for Heat Recovery Steam Generators (HRSG).

The “Prop 2” exemption, named after the constitutional amendment that made it possible, is a property tax exemption that allows an industry to exempt from property taxation certain equipment that reduces pollution at an industrial facility, if the exemption is approved by the TCEQ.   Local governments have struggled with industry groups over the years to reach a balance regarding the implementation of Prop 2.  The local government goal is to allow mandated equipment to receive the tax exemption without exempting entire processes, facilities, or end products simply because technological progress renders industries more environment-friendly over time.

A HRSG is essentially a boiler.  It captures exhaust heat from a gas turbine generator and uses it to preheat steam used to drive a steam generator. Industry has argued that installation of a HRSG results in a reduction of emissions (as opposed to installing a new gas turbine), while appraisal districts and taxing entities counter that a HRSG actually results in an increase in generating capacity (i.e., production).

Under TCEQ’s “Prop 2” pollution control rules, an owner is not entitled to a tax exemption for the productive value of equipment.  In the past, HRSGs were pre-determined by TCEQ to be 100 percent production equipment, meaning that they were ineligible for a pollution control exemption determination.  However, legislation passed in 2007 mandated that TCEQ review their eligibility.

Following the passage of the 2007 legislation, TCEQ reversed itself and created a 100 percent pollution control exemption for 35 applicants.   That would have reduced appraisal values in the affected areas by an estimated $1.5 billion. The local appraisal districts successfully appealed the 100 percent exemption, but TCEQ later issued a new determination that HRSGs were eligible for a 61 percent exemption. The appraisal districts again appealed, arguing that the new determination ignored the additional production benefit of adding a HRSG to a generation facility.

In response, TCEQ issued its most recent determination returning to its original view that HRSGs are production equipment and are not installed for pollution control.  Thus, HRSGs do not merit any ad valorem tax exemption.

The property owners have 20 days to appeal the TCEQ executive director’s determination to the TCEQ commissioners. If appealed, a final determination would take an additional 3-6 months.  The League, which has a seat on the Prop 2 Advisory Council at TCEQ, will continue to monitor and report on the issue as necessary.

 

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