Trey Novosad

1. TCEQ ISSUES Valuation of Industrial Properties For Ad Valorem Tax Seminar February 8th – 10th San Antonio, TX Trey Novosad

2. Legislative History • 1993 voters approved Proposition 2 • § 1-1 added to Article VIII of the Constitution • 73rdLegislature passed HB 1920 • Added § 11.31 to tax code • 77th Legislature passed HB 3121 • Established an appeals process 11.31(e) • Granted the commission authority adopt implementation rules 11.31(g) • Commission established rules; Title 30 TAC §17 • 80th Legislature passed HB 3732 • Added CO2 to qualifying list 11.31(b) • Created nonexclusive list of 18 items 11.31(k) • Nonexclusive list must be reviewed every three years 11.31(l) • 30 days to make determination for section (k) applications 11.31(m) • 81st Legislature passed HB 3206 & 3544 • Rules for making determination apply to all applications 11.31(g-1) • Established a permanent advisory committee 11.31(n)

3. History of the Commission • Gary McArthur Office of the Chief Engineer retired • Glenn Shankle, Executive Director retired • Replaced by Mark Vickory June 2008 • Three New Commissioners Appointed • Buddy Garcia appointed January 2007 • Carlos Rubinstein appointed August 2009 • Bryan Shaw, Ph.D. appointed September 2007; current chairman

4. Issues • Heat Recovery Steam Generators “HRSG” • Low sulfur gas and diesel hydrotreaters • Brine storage pits • Advisory Committee

5. Heat Recovery Steam Generator “HRSG”

6. Heat Recovery Steam Generator “HRSG”

7. HRSG Applications • Listed on nonexclusive list 11.31(k) • $2.6B total cost on applications • HRSG and Enhanced Steam Turbines included • Requested partial percentages on initial applications ranged from 13% to 100%

8. HRSG Industry Points • “It’s on the list” • Not required to use Tier III calculation • Reduces lbs NOx/MWh • Applicants submitted multiple calculations • Theory of substitution; compared cost to simple cycle with SCR • 15 to 25 percent exemption requested • Efficiency-based output • 35 to 65 percent exemption requested • Output-based emissions • 100 percent exemption requested

10. Application Issues • Executive Director “ED” responded uniformly • Issued 100% positive use determinations on 26 HRSG units • Issued negative use determinations on 26 Enhanced Steam Turbine applications • Stated that it did not use any of the applicant’s proposed calculations to arrive at its conclusion • Appraisal districts filed appeals on 6 use determinations • HRSG units produce a product; steam • Steam turbines produce a product; electricity • HRSG and steam turbines would be built without NOx regulation • If HRSG qualifies, what about wind, nuclear • TCEQ put all pending and new applications on hold

11. HRSG Application Status • Four Categories • Granted, not appealed by CAD • Granted, appealed by CAD • On hold at staff level • Pre/Post January 2009 & 11.31(g-1) • Appraisal district appeals expected to go to hearing in Spring 2010

12. Refinery Hydrotreaters

13. Hydrotreater Background • New EPA rules required significant reductions in sulfur contained in the domestic fuel supply • Refiners installed hydrotreaters to meet new low sulfur specifications

14. Hydrotreater Applications • January 2007, Valero filed 10 Tier II applications • April 2007, ED issued notices of deficiency • April 2007, ED issued negative use determinations • May 2007, Valero appealed ED’s determinations • January 2010, appeal goes before Commission

15. HydrotreatersCommissioner’s Hearing • Are the hydrotreaters required by law? • Is Valero a producer of pollution control equipment? • Are hydrotreaters production equipment? • Do the hydrotreaters provide a “benefit at the site”

16. HydrotreatersCommissioner’s Order • Portions of hydrotreaters were installed to meet E.P.A. low sulfur requirements • Hydrotreaters may provide a partial environmental benefit at the site in satisfaction with the requirement found in the Commission’s rules • Set aside the ED’s Negative Use Determinations and remand the applications to the ED for new use determinations consistent with the Commission’s statements and rules

17. Brine Storage Pond

18. Brine Storage Pond

19. Brine Pit Background • Mount Belvieu Caverns, LLC “MBC” (Enterprise Products) operates storage caverns in Chambers County • Brine water is used to operate the storage facility • 2007 MBC built a storage pond to store brine water

20. Brine Pit Applications • 2008 MBC filed Tier I application for $23M • Included pond, lining, instrumentation, transfer pump, piping • May 2008 ED issued Negative Use Determination • MBC appealed • December 2008 Commissioners heard appeal

21. Brine Storage PondCommissioner’s Hearing • Are the Brine Pits on the ECL Part “A” list? • Was the equipment installed to meet or exceed an environmental rule and/or law? • Is the application being treated equitably? • Does the equipment provide an environmental “benefit at the site”’?

22. Brine Storage PondCommissioner’s Order • Uphold ED’s Negative Use Determination • MBC filed suit in Travis County District Court • Only 2nd case to challenge Commission • What will be the Standard of Review?

23. 4 Big Issues • Heat Recovery Steam Generators “HRSG” • CAD administrative appeal scheduled for Spring 2010 • Low sulfur gas and diesel hydrotreaters • Remanded to ED for further review • Brine storage pits • Pending in Travis County District Court • Advisory Committee • 1st scheduled meeting February 25th • Review ECL list and propose rule changes

24. References & Resources Application instructions “RG 461” including ECL (Effective Sept 2009) http://www.tceq.state.tx.us/assets/public/implementation/tax_relief/rg461_program_guidelines.pdf HRSG TCEQ applications http://www.texas.sierraclub.org/temp/Tier4/tier4.htm Mont Belvieu Caverns Brine Pit Documents http://www7.tceq.state.tx.us/uploads/eagendas/Agendas/2008/12-10-2008/Belvieu.pdf Valero Refining Hydrotreater Documents http://www7.tceq.state.tx.us/uploads/eagendas/Agendas/2010/1-13-2010/valero0724&0740.pdf 2010 advisory committee information http://www.tceq.state.tx.us/implementation/air/taxrelief/advisory_group.html Ronald Hatlett. TCEQ Tax Relief Program. 512-239-6348. txrelief@tceq.state.tx.us Rick Fine. Managing Director. Duff and Phelps. 512-671-5500. rick.fine@duffandphelps.com Edward Kliewer III. Sr. Counsel. Fulbright & Jaworski.. 210-224-5575. ekliewer@fulbright.com Gregory Kort. Director. Popp, Gray, and Hutcheson LLP. 512-473-2661. greg@property-tax.com Gregory Maxim. Director. Duff and Phelps. 512-671-5500. gregory.maxim@duffandphelps.com Parker Wilson. Managing Counsel. Valero Energy. 210-345-5894. parker.wilson@valero.com

25. Bonus – Wells Fargo/TCAD • ED issued positive use determination on parcels not covered by apartment complex • TCAD appraised exempt parcels at discounted value • WFC filed suit in District Court challenging the application of the exemption • Trial court issues order for TCAD to apply TCEQ determination • TCAD does not appeal court order • WFC files MSJ claiming TCAD did not follow order • Ask for sanctions and attorney’s fees • Trial court grants MSJ in favor of WFC • Grants sanctions equal to total tax for entire property plus fees • Issue with order being ambiguous and could exempt entire property • TCAD appealed SJ • Appellate court upheld order based on fact that TCAD had not appealed the original order