Environmental Regulations - Impacts on Industrial Property

IPT Property Tax Symposium November 4 - 7, 2007

Institute for Professionals in Taxation

Environmental Regulations – Impacts on Industrial Property Value©

Gregory W. Kort, CMI, P.E., ASA, Director, Complex Property Appraisals, Popp, Gray & Hutcheson, LLP, Austin, TX

(512) 473-2661, [email protected]

Thomas N. Novosad, III, Executive Director, Ad Valorem Tax, Valero Energy Corporation, San Antonio, TX (210) 345-4170, [email protected]

Government mandated control of greenhouse gases, nitrous oxides, sulfur dioxide, and other emissions impact a company’s bottom line by requiring capital expenditures on no-return compliance projects. Industry is required to comply with these no-return compliance projects by installing additional control technology and equipment. The capital required for the additional controls and equipment represents a form of economic obsolescence that must be accounted for in determining the ad valorem tax value of industrial properties.

This paper will provide a general overview of the current and future mandatory environmental, health, and safety regulations imposed on U.S. industrial facilities and the effect these regulations will have on the ad valorem tax valuations of these properties. The paper will also discuss appropriate treatment of compliance driven projects in traditional ad valorem tax appraisals as well as a general overview of tax incentive programs available to help minimize the tax burden associated with these projects.

Current Environmental Regulations

The principal current environmental regulations associated with industrial properties regulate emissions into the air and releases into the soil, surface water, or groundwater. This paper will focus primarily on emission into the air.

The combustion of fossil fuels generates emissions of nitrous oxides (NOx) and sulfur dioxide (SO2), and other emissions which contribute to poor air quality if not controlled. Currently, emissions of nitrous oxides and sulfur dioxide, and other select emissions are regulated under the 1990 amendments to the Clean Air Act. The Clean Air Act is regulated and enforced by the U.S. Environmental Protection Agency (EPA). The following are examples of current environmental regulations that impact industrial properties in the U.S.

Ground Level Ozone1

On September 24, 1998, the EPA finalized a rule known as the NOx SIP (State Implementation Plan) Call which requires 22 states and the District of Columbia to submit state implementation plans addressing the regional transport of ground level ozone. By improving air quality and reducing emissions of NOx (a precursor to ozone formation), the actions directed by these plans will decrease the transport of ozone across state boundaries in the eastern half of the United States. Under the NOx SIP Call program, the eight-hour standard for ozone was set at 0.08 ppm and the one-hour standard was set at 0.12 ppm. Areas that do not meet these standards are designated as “non-attainment” regions. Over the past couple of years, emission reduction controls for NOx were installed at many industrial locations to comply with this program.

Recently, EPA has proposed tightening national ambient air quality for the one-hour standard for ozone from 0.12 ppm to 0.07 ppm. In addition, EPA is also considering changing the eight-hour standard for ozone from 0.08 ppm to 0.06 ppm. EPA must make a final decision on the new standard by February 2008. This updated standard will come immediately after industry has completed many of the NOx SIP Call projects as it related to the previous standards. Non-attainment areas must comply with these new standards beginning in 2013. EPA has estimated the updated standard would cost a staggering $100 billion to implement.

1 2007 Proposed Revisions to Ground-Level Ozone Standards, U.S. Environmental Protection Agency. August 2007, <http://www.epa.gov/air/ozonepollution/pdfs/20070620_fs.pdf>.

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Low Sulfur Fuels2

Recently, EPA's Tier II Rules reduced the sulfur content of gasoline from 500 ppm to 30 ppm in 2004 and reduced the sulfur content of on-road diesel fuel from 500 ppm to 15 ppm in 2006. The phase-in of these standards was completed in 2006 for most refineries and importers. In addition, in 2007 refiners had to meet a 500 ppm sulfur cap on all off-road diesel produced. A deadline for all highway and some off-road diesel to be at the 15 ppm Ultra Low Sulfur Diesel (ULSD) level is set for 2010. The total capital expenditure for compliance with EPA Tier II Rules is expected to reach $20 billion by 2010, according to the American Petroleum Institute (API).

Clean Air Interstate Rule3

In March 2005, EPA issued the Clean Air Interstate Rule (CAIR) to limit formation of fine particles and ozone from power plants in non-attainment areas. CAIR will cap emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) in the eastern U.S. When fully implemented, CAIR will reduce from 2003 levels SO2 emissions in these states by over 70 percent and NOx emissions by over 60 percent. States can achieve mandated emission reductions in two ways: (1) by requiring power plants to participate in the EPA’s national cap and trade program or (2) by requiring plants to meet state specific emission goals as chosen by the state. Emission compliance obligations apply during the ozone season extending from May through September. EPA estimates the cost of meeting the CAIR standards to be around $40 billion.

Clean Air Mercury Rule4

The Clean Air Mercury Rule (CAMR) is the first ever regulatory action to reduce mercury emissions from coal-fired power plants and includes a “cap-and-trade” approach to achieve nearly 70% reductions in mercury emissions from 2003 levels. Power producers are projected to retrofit coal-fired capacity with carbon injection technology to remove mercury emissions. In addition, mercury emission controls are expected to help coal-fired power plants reduce SO2 and NOx emissions. EPA estimates the cost of meeting the CAMR standards to be around $5 billion.

Clean Air Fine Particle Implementation Rule5

In March 2007, EPA issued the Clean Air Fine Particle Implementation Rule defining requirements for state plans to clean the air in areas with levels of fine particle pollution that do not meet national air quality standards. EPA first established air quality standards for fine particles (PM 2.5 – particles 2.5 micrometers in diameter and smaller) in 1997 and designated areas as “attainment” or “non-attainment” for the PM 2.5 standards. These 1997 designations became effective in April 2005. For the 1997 fine particle standards, state plans are due in April 2008. States must meet the 1997 PM 2.5 standard by 2010 and the 2007 PM 2.5 standard by 2020. EPA estimates the cost of meeting the 1997 standards at $7 billion and estimates an additional cost in 2020 of meeting the revised 24-hour PM 2.5 standards at $5.4 billion. This estimate includes the costs of purchasing and installing controls for reducing pollution to meet the standard. Last year the National Petrochemical and Refiners Association sued EPA, claiming that EPA failed to devise attainable dates for simply meeting the 1997 PM 2.5 standards.

Future Environmental Regulations

Greenhouse Gas Regulations

“One of the most controversial and complex environmental policy challenges facing the U.S. – and the world – is the long-term issue of climate change. This potential problem spans both generations and

2 Industry Surveys – Oil & Gas: Production & Marketing. Standard & Poor’s, June 1, 2006. 3 Clean Air Interstate Rule, U.S. Environmental Protection Agency. August 2007, <http://www.epa.gov/interstateairquality/>. 4 Clean Air Mercury Rule, U.S. Environmental Protection Agency. August 2007, <http://www.epa.gov/oar/mercuryrule/>. 5 Clean Air Fine Particle Implementation Rule, U.S. Environmental Protection Agency. August 2007, <http://www.epa.gov/oar/particlepollution/pdfs/fs20061006.pdf>.

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countries, implicating simultaneously the environment, on the one hand, and the world’s fundamental economic reliance on fossils fuels – a key source of climate change risk – on the other” (2002 Economic Report of the President of the United States).

Fossil fuel combustion also generates emissions of carbon dioxide and other greenhouse gases (GHG), which contribute to the warming of the Earth’s surface. When sunlight strikes the earth’s surface, some of it is reflected back towards space as infrared radiation. GHGs absorb this infrared radiation and trap the heat in the earth’s atmosphere.

According to estimates by the Department of Energy’s – Energy Information Administration (EIA), levels of greenhouse gases have increased about 25% since the industrial era began about 150 years ago. During the past 20 years, about 75% of the man-made GHG emissions were from fossil fuels. U.S. GHG emissions totaled 7,147 million metric tons in 2005. According to EIA projections for 2005, GHG emissions will rise roughly 1.2% per year to 8,649 million tons in 2020.6

In 2007, the U.S. Supreme Court ruled EPA has authority to regulate greenhouse gases under the 1990 Clean Air Act Amendments (Massachusetts vs. US Environmental Protection Agency Case 05-1120). The ramifications of this ruling will impact the ad valorem tax value of industrial properties for years to come.

United States

Although there are no federal laws regulating GHG emissions in the United States, there has been increased attention to climate change. Several bills to regulate GHG emissions have been introduced in the U.S. House of Representatives and Senate making climate change initiatives a priority on the environmental, legislative, and regulatory front. Although standards have not been developed at the national level, several state and regional organizations are developing, or already have developed, state-specific legislative initiatives to reduce GHG emissions through mandatory programs. The two most advanced programs related to climate change regulation are in California and New Jersey. Obviously, passage of these regulations will have an impact on industrial properties in such states.

California has already passed legislation mandating emission caps on GHG emissions on industry for the first time in history. AB 32: Global Warming Solutions Act and SB 1368: Greenhouse Gas Emissions Performance Standard for Major Power Plant Investments was signed into law in September 2006. AB 32 creates a statewide cap on GHG emissions and requires that the state return to 1990 emission levels by 2020; implementation is slated to begin by January 1, 2010. SB 1368 requires GHG emissions performance standard for base-load generation that would not exceed the emissions of a new combined-cycle natural gas power plant.

Recently, New Jersey’s governor signed the Global Warming Response Act, which mandates a 16% reduction in GHG emissions from 2006 levels by 2020, and an 80% reduction by 2050. This law is similar to California bill AB32, but is stricter because its 2050 reduction is a mandate, rather than a target.

Worldwide

The Kyoto Protocol, which became a legally binding treaty in 2005, requires participating countries to collectively reduce their GHG emissions to an average of about 5% below 1990 levels between 2008 and 2012. The United States is not a participating country having withdrawn from the treaty in 2001. The United States stance in not participating is that the treaty focuses on dramatic short-term reductions and does not balance the need for mitigation through energy efficiency and the need for economic growth.

In June 2007, the world's eight leading industrialized nations—Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States—agreed to set a global goal for reducing GHG emissions. The leaders will "consider seriously" the commitment by the European Union, Canada, and Japan to cut global GHG emissions in half by 2050. This new agreement would include all major GHG emitters and would take effect after 2012, when the Kyoto Protocol expires.

6 Industry Surveys – Oil & Gas: Production & Marketing. Standard & Poor’s, June 1, 2006.

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Greenhouse Gas Emissions – U.S. Industry Impacts

“U.S. manufacturing is challenged as never before. Fierce global competition prevents manufacturers from raising prices, but costs continue to rise, often because of government policies. These costs threaten the viability of manufacturing in America” (John Engler, President, National Association of Manufactures).

Because of the uncertainty surrounding GHG emission legislation, acquisition and operation of US industrial facilities have increased risks. Legislation providing a limit on U.S. GHG emissions would probably install a “cap and trade” system under which the federal government would issue permits to companies giving each the right to emit a certain amount of GHG emissions annually. Unused amounts of GHG emissions would be traded allowing more energy efficient companies to sell their GHG emission credits to companies that exceed their allocated levels.

Oil refineries, chemical plants, steel mills, coal-fired power generation plants, paper mills, and cement plants will face the most impact from potential GHG emission legislation. How GHG emission legislation is currently impacting the coal fired power generating industry is discussed below.

Coal Fired Power Generating Industry7

“Efforts to build coal-fired generating capacity in the United States have been halted by paralysis and indecision in part because of the uncertain potential limits on carbon emissions” (David Crane, President of NRG Energy).

Coal is currently the world’s leading fuel for electricity generation, and its use is projected to double by 2030. Within the United States, coal now fuels more than half of the electricity generation. Additionally, coal is the source of over 50% of greenhouse gases for the United States. There is little doubt coal plants will dominate new base-load generation for many years to come. Climate change and other energy concerns have created a pressing need to move coal-to-energy technologies onto a development pathway toward near-zero emissions.

The Electric Power Research Institute (EPRI) contends big cuts in emissions linked to global warming from coal fired power plants could come at a considerable cost to the U.S. economy. The current estimate is that it would cost between $400 billion and $1.8 trillion over the next four decades. The EPRI cost estimate is based on a 50% economy-wide cut in carbon emissions from 2010 levels by 2050. 8

The process of capturing carbon dioxide and storing it is very complex and costly. Integrated gasification combined cycle (IGCC) power plants that convert coal to gas for generating electricity, with the ability to capture the generated CO2 and transport it to an underground injection site for permanent storage, are currently being developed by industry and the U.S. Government. For coal-fired power plants currently in operation, changes in plant design are required in order to be able to capture carbon dioxide from flue gases and locations must also be identified to store or use the carbon dioxide. Then there remains the question of who holds title to the carbon dioxide, industry or the U.S. Government.

In 2006, TXU Corporation announced plans to invest $10 billion in building eleven new coal-fired power generation plants to be in operation by 2010. The planned investment also included up to $2 billion for installation of emission control technology to minimize emissions of nitrous oxides, sulfur dioxide, and mercury at the 11 expansion units. Hedging its bets, TXU stated the design of these new plants will include ductwork to provide ample access for the addition of future systems to capture carbon dioxide. However, in 2007, after a merger announcement with Kohlberg Kravis Roberts & Company and Texas Pacific Group, TXU reduced the number of new coal-fired power generating plants it planned to build to three as result of GHG emission legislation momentum. TXU has since announced plans to build two new nuclear reactors as a GHG emission-free way to generate electricity.

7 FutureGen Alliance Inc., August 2007, <http://www.futuregenalliance.org/>. 8 Electric Power Research Institute (2007). Global Climate Change, <http://www.epri.com/>.

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Health and Safety Regulations

Other no-return compliance regulations focus on health and safety issues. In the aftermath of September 11, 2001 and BP’s Texas City refinery explosion in 2004, health and safety compliance projects have come to the forefront of industry. The cost of these health and safety compliance projects represents a stay in business cost for companies. The following are examples of current health and safety regulations that impact industrial properties in the U.S.

American Petroleum Institute – Recommended Practices 752 & 7539

API – Recommended Practices 752 - Management of Hazards Associated with Location of Process Plant Buildings and 753 - Management of Hazards Associated with Location of Process Plant Portable Buildings provide guidance to owners and operators of processing facilities regarding building sitting. These API standards are considered a recognized industry standard. API RP-752 and RP-753 recommended practices ensure:

• Protect occupants from accident hazards such as heat, blast overpressure, and projectiles,

• Establish minimum safe distances for building structures away from hazardous areas

• Evaluate the location of trailers

While the Texas City disaster was a refinery incident, its effects have everyone concerned in process industry operations. Companies are dedicated to meeting these API recommendations. Occupied structures located in blast zones or hazardous areas may need to be structurally reinforced or relocated to other areas in the plant. The burden of relocating building infrastructure away from hazardous areas is both costly and interruptive to operations. In some instances the cost to comply with these recommended practices could range in the millions.

Department of Homeland Security – Site Security10

The Department of Homeland Security as outlined in the National Infrastructure Protection Plan has established requirements for critical infrastructure that includes petrochemical facilities, commercial facilities, dams, nuclear power plants, and nuclear fuel processing facilities. The ability to protect the critical infrastructure and key resources of the United States is vital to national security, public health and safety, and economic vitality. Attacks on critical infrastructure could significantly disrupt the functioning of government and business in addition to producing cascading effects far beyond the targeted sector and physical location of the incident.

The Department of Homeland Security and various state agencies review critical infrastructure facilities to determine what level of security is needed at each particular site. Depending upon this review, an industrial facility may be faced with the task of adding extra fencing, entrance barriers, card-lock readers, and extra security monitors. In some instances the cost to comply with these site security requirements could range in the millions.

Effects on Ad Valorem Tax Appraisals for Industrial Properties

The above discussed environmental regulations and no-return compliance projects are the result of current and future government regulations that require compliance by industry in order to stay in business. These no-return compliance projects result in an economic reduction in the enterprise value both in the near and long term due to the added investment required and/or the increased operating costs, with no offsetting revenue or income benefits. Property tax authorities often refuse to make deductions for either environmental regulations or health and safety no-return compliance expenditures. This economic reduction in value is a form of economic obsolescence that must be accounted for in all three approaches to value.

The American Society of Appraisers describes economic obsolescence as the loss in value caused by conditions external to the asset. Economic obsolescence can be defined as a form of depreciation, or an incurable loss of value, caused by any combination of unfavorable conditions external to the property such as the local economy, economics of the industry, availability of financing, encroachment of objectionable enterprises, loss of material

9 American Petroleum Institute (2007). Recommended Practice 752 and Recommend Practice 753 (draft). Washington, DC 10 U.S. Department of Homeland Security (2007). National Infrastructure Protection Plan, Washington, DC

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and labor sources, shifting of business centers, passage of new legislation, adverse impact of governmental regulations and restrictions, or other similar characteristics.11

The following sections address how economic obsolescence from environmental regulations and no-return compliance (together referred to as Environmental, Health & Safety or “EH&S”) projects effect the three approaches to value.

Cost Approach

In the cost approach, the cost new must be reduced to reflect physical deterioration, functional obsolescence, and economic obsolescence attributable to the subject property. All components of depreciation and obsolescence must be quantified to result in the cost indicator of value. EH&S compliance projects increase the amount of economic obsolescence by requiring industrial properties to install control technology and equipment as required by government or other agency’s.

Income Approach

When applicable, the income approach estimates future revenues, operating expenses, capital requirements and working capital changes. The resulting net cash flow is then discounted to present value to determine the value of the business enterprise. EH&S compliance projects impact the income approach to value the following ways:

• Requiring additional capital expenditures for control technology and equipment;

• Increasing raw material cost due to change in manufacturing process;

• Decreasing revenues by having restrictions on operating rates; and

• Increasing operating expenses due to extra labor requirements, maintenance, and consumable materials.

Sales Comparison Approach

The sales comparison approach is used to establish value through an analysis of recent transactions of comparable properties. Actual sales are analyzed and adjusted to reflect differences in size or capacity, market conditions, age, condition of improvements and location between the subject and the market comparables. To recognize differences in EH&S regulatory liability, adjustments must be made to market comparables to compare EH&S regulatory liabilities to those of the subject property. Therefore, a knowledgeable buyer will require a discount in purchase price to take into consideration the costs of compliance for EH&S regulatory liabilities of the subject property.

Documentation Support

In order to effectively support deductions for economic obsolescence from EH&S compliance projects, proper documentation is required. A person should speak to knowledgeable managers and engineers at the subject industrial property to find out what EH&S issues impact the subject currently and in the future. Specific items to request for EH&S compliance projects at the subject property include:

Environmental Regulation Compliance Projects

• Forecast of future budgeted capital expenditures outlining projected environmental pollution control requirements, particularly those specifically required by government and/or agencies or court orders.

• Approved plans for expenditures for major pollution control projects which provide a summary description of the project, cost of the project, how the project will impact revenues and expenses, and time of completion.

11 Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets (2005). American Society of Appraisers, Washington, DC.

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• Documents or press releases showing commitment to the compliance project.

• Governmental or agency publications outlining the regulation.

• Articles on how the subject industry will be impacted by current and future environmental regulations.

Health & Safety Compliance Projects

• Forecast of future budgeted capital expenditures outlining projected health and safety requirements, particularly those specifically required by government and/or agencies or court orders.

• Approved plans for expenditures for major health and safety projects which provide a summary description of the project, cost of the project, how the project will impact revenues and expenses, and time of completion.

• Surveys or drawing which detail areas impacted by the health and safety project.

• Documents or press releases showing commitment to the compliance project.

• Government or agency publications outlining the regulation.

Pollution Control Property Tax Exemptions

Pollution control exemptions are very effective tools to help mitigate property taxes associated with environmentally mandated projects. Such exemptions can result in millions of dollars of property tax savings over the life of a unit. Pollution control exemptions are usually granted based on the function of the control, device, or facility in question and its use in controlling or preventing pollution. The type and availability of this type of exemption varies widely from state to state.

Texas and New Jersey are two examples of states that allow up to a 100% lifetime exemption for property that is added to control air, water, or land pollution. Each state has very specific requirements which include the timely filing of an application with each state’s respective environmental control agency and the local assessor’s office. In most cases, once the state agency has determined the property is pollution control equipment, the exemption is set and there is no requirement to continue to file for the exemption.

Some states do not specifically allow for pollution control exemptions, but they do offer other general exemptions that should be utilized to minimize the tax burden of pollution control equipment. For example, Louisiana does not have a specific pollution control exemption, but it does allow ten-year Industrial Exemptions for new property built in the state. Similarly, Oklahoma does not have a specific pollution control exemption, but it does offer a five-year Manufacturer’s Exemption for new property built in the state. These types of exemptions usually call for a minimum investment and have payroll or job creation requirements associated with them.

The best place to search for beneficial exemptions or programs that may help reduce property taxes on pollution control equipment is the internet. Start by searching the state agency that regulates pollution in the state of interest. If the state has a true pollution control exemption, it is usually administered by the environmental agency located in that state. Next, search the state’s economic development division’s web site. This is the group charged with bringing new industry to the state. This group will usually list all of the tax incentives available in the state. Last, but not least, check with the local assessor to see what information or help they may be able to provide.

Keys to filling successful pollution control exemptions are:

• Work closely with plant contacts that can provide the necessary data to support the application.

• When handling consent decree projects, review the application with counsel.

• Obtain approved plans for expenditures for major pollution control projects which provide a summary description of the project and cost information.

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• Review the project. Does the equipment or project qualify?

• Remember to fill in each exemption carefully and submit documents on time.

Summary

Understanding and being able to explain how EH&S compliance projects impact the value on industrial property is a key component of a lower property tax value. A successful valuation will have the EH&S compliance projects quantified and deducted from the ad valorem tax value of the property each year until the expenditure is made. Finally, once an environmental project is installed, it is critical that the associated tax burden be minimized through local and state tax exemption programs.

GREGORY W. KORT, CMI, P.E., ASA, is the Director of Complex Property Appraisals for Popp, Gray & Hutcheson, LLP in Austin, Texas. He has over nine years of valuation experience in ad valorem tax, purchase price allocations, and studies for fair market value in continued use and in exchange. Properties he has appraised include petroleum refineries, chemical plants, electric power generation facilities, pipelines, and business personal property. Prior to joining Popp, Gray & Hutcheson, LLP, Mr. Kort was a Director for American Appraisal Associates. Mr. Kort is a Certified Member of the Institute for Professionals in Taxation (CMI), certified in Wisconsin as a Professional Engineer (P.E.), licensed as a Certified General Appraiser in Texas and Wisconsin, and an is an Accredited Senior Appraiser (ASA) of the American Society of Appraisers. Mr. Kort graduated from Michigan Technological University in 1994, earning a Bachelor of Science in Chemical Engineering and received his MBA from DeVry University in 2002.

THOMAS (TREY) N. NOVOSAD, III is the Executive Director of the Ad Valorem Tax Department at Valero Energy Corporation in San Antonio, Texas, and has been with Valero since 2002. Mr. Novosad is directly or indirectly responsible for the property tax function associated with Valero’s assets which includes refineries, retail centers, inventory, pipelines, and terminals located across the United States, Canada, and the Caribbean. Previous to his employment at Valero, Mr. Novosad worked as a valuation engineer for Capitol Appraisal Group Inc. In this position, Mr. Novosad was responsible for annually appraising complex and industrial properties that had a cumulative market value of over $20 billion dollars. These properties included over 60% of the refining capacity in the State of Texas and 25% of the ethylene capacity in the United States. Mr. Novosad received his Bachelor of Science degree in Chemical Engineering in 1998 from Texas A&M University. Mr. Novosad is a registered Engineer in Training with the State of Texas, an applicant member of the American Society of Appraisers, and a member of the American Institute of Chemical Engineers.

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Slide 1

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Environmental Regulations Impacts on Industrial Property Value

2007 Property Tax SymposiumHyatt Grand Champions - Indian Wells, California

November 6, 2007

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“According to the UN, livestock is more responsible for global warming than all the cars in the world combined. Methane gas from cows cause 20 times more global warming than carbon dioxide. That’s why my next cow is going to be a hybrid.”

- Jay Leno, “The Tonight Show” (NBC)

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Slide 3

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Health & Safety Regulations


Pollution Control Exemptions

Agenda

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Ground Level Ozone - NOx SIP Call Programs

Clean Fuels - EPA Tier II and MSAT Phase II

Clean Air Interstate Rule Clean Air Mercury Rule

Clean Air Fine Particulate Implementation Rule

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Ground Level Ozone

In 1998, EPA finalized the NOx SIP Call program for Ozone- Improve air quality by reducing NOx emissions- 8-hour standard for ozone was set at 0.08 ppm- Designated areas as “attainment” or “non-attainment”- EPA designated 104 areas as not meeting the 8-hour standards- Areas must meet 1998 regulations by 2010

Recently, EPA issued revised standards for Ozone- Considering changing the 8-hour standard for ozone 0.07 ppm- EPA designated 533 areas as not meeting the revised standards- Non-attainment area must comply beginning in 2013- Cost to meet revised standards is estimated at $100 billion- Final decision due by February 2008

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Current 8-Hour Ozone Standard

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Proposed 8-Hour Ozone Standard

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Clean Air Act – Clean FuelsTier II, III, & IV Low Sulfur Fuels

Low Sulfur Gasoline- 30 ppm in 2004- Cost to meet standard $8 billion

Ultra Low Sulfur Diesel- On-road 80% @ 15 ppm 2007; 100% in 2010- Off-road to 500 ppm 2007; 15 ppm in 2010- Rail and Marine to 500 ppm 2007; 15 ppm in 2012- Cost to meet standard $12 billion

Mobile Source Air Toxics II (MSAT)Benzene

- Reduce Benzene in gasoline by 37% to <0.62% by Volume- Compliance by January 1, 2011- Refiners may average, trade or bank credits (early compliance)- Cost to meet standard estimated at $1.1 billion

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Clean Air Act – Clean Fuels

Source: Chevron Texaco

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Clean Air Interstate Rule (CAIR)

CAIR issued to limit particles and ozone emissions from power plants

- Reduce 2003 levels of SO2 emissions by 70% in 2020

- Reduce 2003 levels of NOx emissions by 60% in 2020

- Includes a “cap-and-trade” approach

- Cost to meet standard is estimated at $40 billion

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CAIR – Emissions Reduction Plan

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Clean Air Mercury Rule (CAMR)

CAMR first ever regulatory action to reduce mercury emissions- Targets mercury emissions for coal-fired power plants - Coal-fired power plants represent 8% of U.S. mercury emissions- Retrofit existing plants with activated carbon injection systems- Includes “cap-and-trade” approach- 70% reduction in mercury emissions from 2003 levels by 2020- Cost to meet standard is estimated at $5 billion

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CAMR – Mercury Reduction Plan

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Clean Air Fine Particle Implementation Rule

In 1997, EPA established annual and 24-hour NAAQS for PM2.5 - Designated areas as “attainment” or “non-attainment”- EPA designated 39 areas as not meeting the standards- Areas must meet 1997 regulations by 2010- Cost to meet 1997 standards is estimated at $7 billion

March 2007, EPA issued revised NAAQS for PM2.5- EPA designated 143 areas as not meeting the revised standards- 2007 PM2.5 standard must be meet by 2020- Cost to meet 2007 standards is estimated at $5.4 billion

NPRA sued EPA over the PM2.5 revised standards

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Current PM2.5 Standard

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Revised PM2.5 Standard

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Agenda

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“One of the most controversial and complex environmental policy challenges facing the U.S. – and the world – is the long-term issue of climate change. This potential problem spans both generations and countries, implicating simultaneously the environment, on the one hand, and the world’s fundamental economic reliance on fossils fuels – a key source of climate change risk – on the other”

- 2002 Economic Report of the President of the United States

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Greenhouse Gas RegulationsBackground- Fossil fuel combustion generates emissions of carbon dioxide and

other greenhouse gases (GHG)- Fossil fuels are the single biggest source of human-generated GHG

emissions- GHG emissions contribute to the warming of the Earth’s surface

Worldwide- Kyoto Protocol became legally binding in 2005- U.S. not a participating county - Participating countries collectively agreed to reduce GHG emissions

to an average of 5% below 1990 levels by 2012 - In June 2007, G8 set a global goal for reducing GHG emissions in

half by 2050

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Greenhouse Gas Regulations

United States

- Currently no federal laws regulating GHG emissions in the U.S

- 2007 - U.S. Supreme Court ruled EPA has authority to regulate GHG emissions under the 1990 Clear Air Act Amendments

- Climate change legislation a priority for Congress

California

- AB 32: Global Warming Solutions Act

- SB 1368: Greenhouse Gas Emissions Performance Standard for Major Power Plant Investments

New Jersey

- Global Warming Response Act

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Agenda







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U.S. Manufacturing Challenged

“U.S. manufacturing is challenged as never before. Fierce globalcompetition prevents manufacturers from raising prices, but costs continue to rise, often because of government policies. These costs threaten the viability of manufacturing in America”

- John Engler, President, National Association of Manufactures

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Growing Problem – GHG Emissions

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U.S. Industry Impacts

General

- Legislation would probably install “cap and trade” system

- Increased risk in acquisition and operation of industrial facilities

- Capital intensive industries to face the most impact

Coal-fired Power Generation

- Coal is world’s leading fuel for electricity generation

- Process of capturing and storing CO2 is complex and costly

- Cost to reduce GHG emissions estimated at $1.8 trillion based on Electric Power Research Institute study

- TXU investment in coal-fired plants impacted

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Agenda

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American Petroleum Institute (API) - API RP 752 & RP 753- Establishes minimum safe distances for structures away from hazardous

areas- Intended to help protect occupants from heat, blast, and projectiles- Compliance cost can be in the millions for each facility

Department of Homeland Security - National Infrastructure Protection Plan- Critical Infrastructure Designation- Sets minimum perimeter security standards- Compliance involves capital spending as well as additional on-going

monitoring expenses

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Occupational Safety and Health Administration (OSHA)- Created in 1970 under the Nixon Administration- Enforces rules for workplace safety- Statutory authority extends to most non-governmental workplaces

Chemical Safety Board (CSB)- Authorized under Clean Air Act 1990 amendment- Perform root-cause investigations of accidents- Completely independent of EPA and OSHA

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Agenda

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Effects on Ad Valorem Tax Appraisals

Economic Obsolescence- Loss in value caused by conditions external to the asset - EH&S projects require compliance just to stay in business

Cost Approach- Cost of EH&S projects present valued and deducted from cost indicator of value

Sales Comparison Approach- Adjust comparable sales to reflect EH&S compliance issues- Knowledgeable buyer will discount the purchase price of an asset to take into

consideration the costs of compliance for EH&S liabilitiesIncome Approach- EH&S projects require additional capital expenditures- Increase raw material costs due to changes in processes - Decrease revenues due to restriction on operating rates- Increase operating expenses due to extra labor, maintenance and materials

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Documentation Support

Speak to knowledgeable managers and engineers to find out what EH&S issues impact the subject industrial property

Forecast of future budgeted capital expenditures

Summary description of major EH&S projects

Documents or press releases describing the project

Government or agency publications outlining the regulation

Articles on how the industry will be impacted by current and future regulations

- What are the costs to industry?

- Will some plants/businesses shutdown, rather than make the investments?

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Agenda

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Potential Tax Relief Strategies


- Usually administered via state’s environmental agency

- Provides life time exemption for qualified equipment

Manufacture Exemptions & Abatements

- State incentive to stimulate local economies

- May be used in states without PC exemptions (LA,OK)

- Only provides exemption for a limited number of years

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Keys to Filing an Exemption

Check state & local laws and rules related to PC exemptions

Identify potential PC equipment by auditing CapEx budgets annually

Review potential projects with plant engineers

Carefully fill out exemption application paying close attention to application deadlines, fees, and submission requirements

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Thank You

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