[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
SECOND IN SERIES ON EFFECT OF FEDERAL TAX LAWS ON THE PRODUCTION,
SUPPLY, AND CONSERVATION OF ENERGY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JUNE 12, 2001
__________
Serial No. 107-27
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
74-228 WASHINGTON : 2001
----------------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone (202) 512�091800 Fax: (202) 512�092250
Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Select Revenue Measures
JIM McCRERY, Louisiana, Chairman
J.D. HAYWORTH, Arizona MICHAEL R. McNULTY, New York
JERRY WELLER, Illinois RICHARD E. NEAL, Massachusetts
RON LEWIS, Kentucky WILLIAM J. JEFFERSON, Louisiana
MARK FOLEY, Florida JOHN S. TANNER, Tennessee
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of June 5, 2001, announcing the hearing................. 2
WITNESSES
Camp, Hon. Dave, a Representative in Congress from the State of
Michigan....................................................... 10
Capito, Hon. Shelley Moore, a Representative in Congress from the
State of West Virginia......................................... 72
Collins, Hon. Mac, a Representative in Congress from the State of
Georgia........................................................ 28
Cunningham, Hon. Randy ``Duke,'' a Representative in Congress
from the State of California................................... 18
Dunn, Hon. Jennifer, a Representative in Congress from the State
of Washington.................................................. 24
Engel, Hon. Eliot L., a Representative in Congress from the State
of New York.................................................... 67
Filner, Hon. Bob, a Representative in Congress from the State of
California..................................................... 49
Gephardt, Hon. Richard A., a Representative in Congress from the
State of Missouri, and House Democratic Leader................. 36
Inslee, Hon. Jay, a Representative in Congress from the State of
Washington..................................................... 60
Issa, Hon. Darrell E., a Representative in Congress from the
State of California............................................ 76
Johnson, Hon. Nancy L. Johnson, a Representative in Congress from
the State of Connecticut....................................... 7
Lewis, Hon. Ron, a Representative in Congress from the State of
Kentucky....................................................... 33
Markey, Hon. Edward J., a Representative in Congress from the
State of Massachusetts......................................... 22
McDermott, Hon. Jim, a Representative in Congress from the State
of Washington.................................................. 76
Moore, Hon. Dennis, a Representative in Congress from the State
of Kansas...................................................... 64
Nussle, Hon. Jim, a Representative in Congress from the State of
Iowa........................................................... 13
Sandlin, Hon. Max, a Representative in Congress from the State of
Texas.......................................................... 52
Stenholm, Hon. Charles W., a Representative in Congress from the
State of Texas................................................. 40
Terry, Hon. Lee, a Representative in Congress from the State of
Nebraska....................................................... 70
Weller, Hon. Jerry, a Representative in Congress from the State
of Illinois.................................................... 31
SUBMISSIONS FOR THE RECORD
U.S. Department of the Treasury, Office of Tax Policy, statement
and attachments................................................ 88
______
American Soybean Association, statement.......................... 102
Davis, Hon. Susan A., a Representative in Congress from the State
of California, statement....................................... 103
Frost, Hon. Martin, a Representative in Congress from the State
of Texas, statement............................................ 107
Herger, Hon. Wally, a Representative in Congress from the State
of California, statements...................................... 108
Itron Inc., Spokane, WA, LeRoy Nosbaum, letter and atttachment... 112
Langevin, Hon. James R., a Representative in Congress from the
State of Rhode Island, statement............................... 120
McInnis, Hon. Scott, a Representative in Congress from the State
of Colorado, statement......................................... 121
Udall, Hon. Mark, a Representative in Congress from the State of
Colorado, statement............................................ 122
Watkins, Hon. Wes, a Representative in Congress from the State of
Oklahoma, statement............................................ 123
Whitfield, Hon. Ed, a Representative in Congress from the State
of Kentucky, statement......................................... 124
SECOND IN SERIES ON EFFECT OF FEDERAL TAX LAWS ON THE PRODUCTION,
SUPPLY, AND CONSERVATION OF ENERGY
----------
TUESDAY, JUNE 12, 2001
House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:06 p.m., in
room 1100 Longworth House Office Building, Hon. Jim McCrery,
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
Subcommittee on Select Revenue Measures
FOR IMMEDIATE RELEASE
CONTACT: (202) 226-5911
June 5, 2001
No. SRM-2
McCrery Announces Second in a Series of Hearings on the Effect of
Federal Tax Laws on the Production, Supply and Conservation of Energy
Congressman Jim McCrery (R-LA), Chairman, Subcommittee on Select
Revenue Measures of the Committee on Ways and Means, today announced
that the Subcommittee will hold a second hearing on the effect of
Federal tax laws on the production, supply and conservation of energy.
The hearing will take place on Tuesday, June 12, 2001, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 2:00 p.m.
Oral testimony at this hearing will be from Members of Congress
only. However, any individual or organization not scheduled for an oral
appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
The Internal Revenue Code provides several incentives for the
domestic production of oil and gas including: (1) expensing of certain
exploration and development costs, (2) depletion rules, and (3) a tax
credit for enhanced oil recovery costs. The tax code provides
incentives for the production of electricity from certain renewable
resources, including wind and closed-loop biomass facilities, and the
acquisition of equipment that uses solar or geothermal energy. The tax
code also encourages energy conservation by allowing taxpayers to
exclude from income the value of certain energy conservation measures
provided by a utility company to consumers and by providing a credit
for qualified electric vehicles.
In announcing the hearing, Chairman McCrery stated: ``With
Americans facing rising energy costs, it is important for Congress to
examine new ways to increase domestic energy production and to promote
conservation. Over 30 energy related tax bills have been introduced in
the 107th Congress, and I am pleased to offer this venue for
Members of Congress to testify about their proposals.''
FOCUS OF THE HEARING:
The hearing will focus on Member proposals to increase domestic
production of traditional and renewable energy resources, to facilitate
the distribution of energy resources, and to promote conservation
measures.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect or MS Word format, with their name, address,
and hearing date noted on a label, by the close of business, Tuesday,
June 19, 2001 to Allison Giles, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Select Revenue Measures office, room
1135 Longworth House Office Building, by close of business the day
before the hearing.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or
MS Word format, typed in single space and may not exceed a total of 10
pages including attachments. Witnesses are advised that the Committee
will rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at ``http://waysandmeans.house.gov.''
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman McCrery. The hearing will come to order. Good
afternoon, everyone. This hearing continues the Select Revenue
Measures Subcommittee's inquiry into ways the Tax Code can
promote a stable and secure supply of energy. Our first hearing
last month examined proposals in the President's budget as well
as expiring provisions in the Tax Code, such as section 29 tax
credits for producing fuel from unconventional sources and the
section 45, credit for renewable energy.
Tomorrow our third hearing will involve testimony from
interest groups and business groups on other proposals. Today's
hearing will give the panel an opportunity to hear from nearly
two dozen of our colleagues on the House of Representatives.
The fact that so many of our colleagues from across the
political spectrum have taken the time to be with us today
demonstrates the importance of developing a comprehensive
national energy policy. I am particularly pleased so many of
our colleagues from the west, particularly California, will
share their experiences and perspectives.
While consumers across the country are fighting higher
energy prices, especially at the gas pump, Californians
continue to be at risk for rolling blackouts, and the situation
may get worse as we head into the hot summer months and energy
consumption spikes upward. Several of the witnesses will
discuss policies included in the recommendations of the
National Energy Policy Development Group, which was chaired by
Vice President Cheney. I look forward to this testimony to
better understand proposals relating to issues such as clean
cars and landfill gases.
It is impossible to overstate the complexities of energy
production and distribution. The members testifying before us
today will provide a wealth of ideas and experiences as to how
the Tax Code can help us better meet our energy needs. As the
Committee contemplates elements of an energy tax bill, their
perspectives will be particularly helpful. As we review the
testimony and consider which proposals represent good tax
policy and should be included in any energy package considered
by the Committee, I believe we must keep four principles in
mind.
First, an imbalanced approach will not help us secure a
stable supply of energy. Recognizing patterns of human
behavior, no known technology or inducements will allow us to
conserve our way out of this problem. That is especially true
of proposals which cap prices and therefore insulate consumers
from the true costs of greater consumption. Likewise, despite
the vast untapped oil and gas reserves, increased production
alone won't insure supply keeps up with demand. Alternative and
renewable fuels can help close the gap, but alone are not
enough.
Simply put, conservation, production and renewable and
alternative fuels must all be part of our efforts to reduce our
dependency on foreign oil. Second, we must address bottlenecks
in the distribution chain. An adequate supply is only valuable
if it can be efficiently distributed to where it is needed when
it is needed.
Third, the free market still works best. government
intervention frequently misses the mark. For example, it seems
clear that the Midwest is experiencing spikes in motor fuel
prices because of the myriad of special blend fuels which must
be refined. Regulation of the market should be the last resort,
not our first option. And fourth, we must balance any enhanced
production with environmental concerns. If we are to explore
and produce in new areas, we should do so in a manner which is
sensitive to the surroundings. Now, these principles are
flexible, because I believe meeting our energy needs in the
long term require ideology to yield to pragmatism.
Nevertheless, I believe these four principles will serve us as
useful guideposts as we examine the proposals offered by our
colleagues today and by other interested parties in our hearing
tomorrow.
[The opening statement of Chairman McCrery follows:]
Opening Statement of the Hon. Jim McCrery, a Representative in Congress
from the State of Louisiana, and Chairman, Subcommittee on Select
Revenue Measures
The hearing will come to order. I ask our guests to please be
seated.
Good afternoon. This hearing continues the Select Revenue Measures
Subcommittee's inquiry into ways the tax code can promote a stable and
secure supply of energy.
Our first hearing last month examined proposals in the President's
budget as well as expiring provisions of the tax code, such as Section
29 tax credits for producing fuel from unconventional sources and the
Section 45 credit for renewable energy.
Tomorrow, our third hearing will involve testimony from interest
groups and businesses on other proposals.
Today's hearing will give the panel an opportunity to hear from
nearly two dozen of our colleagues in the House of Representatives.
The fact so many of our colleagues from across the political
spectrum have taken the time to be with us today demonstrates the
importance of developing a comprehensive national energy policy.
I am particularly pleased so many of our colleagues from the west,
particularly California, will share their experiences and perspectives.
While consumers across the country are fighting higher energy prices,
especially at the gas pump, Californians continue to be at risk for
rolling black-outs, and the situation is expected to worsen as we head
into the hot summer months and energy consumption spikes upward.
Several of the witnesses will discuss policies included in the
recommendations of the National Energy Policy Development Group, which
was Chaired by Vice President Cheney. I look forward to this testimony
to better understand proposals relating to issues such as clean cars
and landfill gases.
It is impossible to overstate the complexities of energy production
and distribution. The Members testifying before us today will provide a
wealth of ideas and experiences as to how the tax code can help us
better meet our energy needs. As the Committee contemplates elements of
an energy tax bill, their perspectives will be particularly helpful.
And as we review the testimony and consider which proposals
represent good tax policy and should be included in any energy package
considered by the Committee, I believe we must keep four principles in
mind:
First, an imbalanced approach will not help us secure a stable
supply of energy. Recognizing patterns of human behavior, no known
technology or inducements will allow us to conserve our way out of this
problem. That is especially true of proposals which cap prices and
therefore insulate consumers from the true costs of greater
consumption. Likewise, despite the vast untapped oil and gas reserves,
increased production alone won't ensure supply keeps up with demand.
Alternative and renewable fuels can help close the gap, but are alone
not enough. Simply put, conservation, production, and renewable and
alternative fuels must all be part of our efforts to reduce our
dependency on foreign oil.
Second, we must address bottlenecks in the distribution chain. An
adequate supply is only valuable if it can be efficiently distributed
to where it is needed, when it is needed.
Third, the free market still works best. Government intervention
frequently misses the mark. For example, it seems clear that the
Midwest is experiencing spikes in motor fuel prices because of the
myriad of special blend fuels which must be refined. Regulation of the
markets should be the last resort, not our first option.
And fourth, we must balance any enhanced production with
environmental concerns. If we are to explore and produce in new areas,
we should do so in a manner which is sensitive to the surroundings.
These principles are flexible, because I believe meeting our energy
needs in the long-term require ideology to yield to pragmatism.
Nevertheless, I believe these four principles will serve as useful
guideposts as we examine the proposals offered by our colleagues today
and by other interested parties in our hearing tomorrow.
We have a long and distinguished list of Members, and I welcome
them all. Before introducing our first witnesses, let me yield to my
friend from New York for any opening statement he may have.
Chairman McCrery. We have a long and distinguished list of
Members, and I welcome them all. Before introducing our first
witnesses, let me yield to my friend from New York, for any
opening statement he may have. Mr. McNulty.
Mr. McNulty. Thank you, Mr. Chairman. I am pleased to join
with you and the other Committee Members today and our programs
to discuss tax incentives for the production, supply and
conservation of energy in our country. Since the beginning of
the 107th Congress, there have been over 30 energy-related tax
bills introduced and referred to the Committee on Ways and
Means. These bills would provide tax incentives for increased
production of oil and gas, to encourage energy efficiency and
conservation measures, to improve the electricity
infrastructure, to facilitate the developmental of alternative
fuel sources, to expand the use of solar, wind, biomass and
fuel cell technology, and to prevent excess profits by
electricity-generating facilities.
As we proceed with the Subcommittee's hearings and markup
of energy tax legislation later this month, it is important
that consideration be given to how best to pay for additional
tax relief. With the short-term surpluses already used up and
the unclear budget situation in the longer term, it is critical
that this Committee not take action which would invade the
Social Security and Medicare trust funds. To the extent needed,
I would suggest that we work together to develop revenue
offsets to pay for energy tax reform bills adopted by the
Committee in order to enact fiscally responsible reforms.
The testimony we will receive today from our distinguished
colleagues will be most valuable in analyzing pending energy
tax legislation. I look forward to this testimony and welcome
each of you. I am especially interested in the discussion of
H.R. 1275, the bill I have joined Congresswoman Johnson in
sponsoring to provide tax inventories for the use of fuel cells
in creating electricity. Our legislation would encourage clean
and chemical-free technology on the commercial market by
providing a $1,000 per kilowatt tax credit to a purchaser of a
stationary fuel cell system. A fuel cell provides electricity
and heat to a non-combustion electrochemical process, thereby
making it the cleanest of any electricity-generating device.
The bill applies to residential and commercial consumers and
allows for a variety of input, fuels applications and system
sizes. The credit would be available for 5 years, at which
point fuel cell manufacturers should be able to produce a
product at market entry costs.
This bipartisan bill would provide a great step forward
from an energy policy standpoint and a low-cost, meaningful,
short-term tax incentive for new space-age industry.
Mr. Chairman, thank you for including H.R. 1275 within the
scope of today's hearing. I look forward to further bipartisan
discussions on how we might proceed in enacting energy tax
legislation--legislative reforms. Thank you, Mr. Chairman.
[The opening statement of Mr. McNulty follows:]
Opening Statement of the Hon. Michael R. McNulty, a Representative in
Congress from the State of New York
Mr. Chairman, I am pleased to join with you today to discuss tax
incentives for the production, supply and conservation of energy in our
country.
Since the beginning of the 107th Congress, there have been over 30
energy-related tax bills introduced and referred to the Ways and Means
Committee. These bills would provide tax incentives for the increased
production of oil and gas, to encourage energy efficiency and
conservation measures, to improve the electricity infrastructure, to
facilitate the development of alternative fuel sources, to expand the
use of solar, wind, biomass, and fuel-cell technology, and to prevent
excess profits by electricity generating facilities.
As we proceed with the Subcommittee's hearings and markup of
energy-tax legislation later this month, it is important that
consideration be given to how best to pay for additional tax relief.
With the short-term surpluses already used up and the unclear budget
situation in the longer term, it is critical that this Committee not
take action which would invade the Social Security and Medicare Trust
Funds. To the extent needed, I would suggest that we work together to
develop revenue offsets to pay for energy-tax reform bills adopted by
the Committee in order to enact fiscally-responsible reforms.
The testimony we will receive today from our distinguished
colleagues will be most valuable in analyzing pending energy tax
legislation. I look forward to this testimony and welcome each of you.
I am particularly interested in the discussion of H.R.1275, the
bill I have joined Congresswoman Johnson in sponsoring, to provide tax
incentives for the use of fuel cells in creating electricity. Our
legislation would encourage clean and chemical-free technology on the
commercial market by providing a $1,000 per kilowatt tax credit to a
purchaser of a stationary fuel cell system. A fuel cell provides
electricity and heat through a noncombustion, electrochemical process,
thereby making it the cleanest of any electricity generation device.
The bill applies to residential and commercial customers and allows for
a variety of input fuels, applications and system sizes. The credit
would be available for five years, at which point fuel cell
manufacturers should be able to produce a product at market-entry
costs. This bi-partisan bill would provide a great step forward from an
energy-policy standpoint and a low-cost, meaningful short-term tax
incentive for this new, ``space-age'' industry.
Mr. Chairman, thank you for including H.R. 1275 within the scope of
today's hearing. I look forward to further bipartisan discussions on
how we might proceed in enacting energy tax legislative reforms.
Chairman McCrery. Thank you, Mr. McNulty. And now, our
first panel is already seated. There is a fourth member of the
panel who is not here yet, but if Mr. McDermott shows up, staff
will put him at the stand. We will hear from him----
Mr. McNulty. Mr. Chairman, I have been advised that Jim has
been delayed, and he will be here around 4:00. So if I could
ask permission if he would be included in one of the other
panels, I would appreciate that.
Chairman McCrery. Sure. That would be fine. So we will
proceed with the first panel, and first, to address the
Subcommittee is the chairwoman of the Health Subcommittee and a
welcome guest before this Subcommittee. Mrs. Nancy Johnson from
Connecticut, Mrs. Johnson.
STATEMENT OF THE HON. NANCY L. JOHNSON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CONNECTICUT
Mrs. Johnson. Thank you very much, Mr. Chairman. It is
indeed a pleasure to be before you and Mr. McNulty on this
Subcommittee on such an extremely important matter. I think we
are all conscious, those of us on the Ways and Means Committee,
that the Tax Code presently is a significant component of what
national energy policy we have, and so it is very important to
review what it does and what it might do in the future. And I
am pleased that you are undertaking that task, and I encourage
you to look not only at how it can increase the supply of
energy in our Nation, but how it can diversify that supply and
also how it can encourage conservation as well. I am skipping
through my testimony. So sorry I stumbled there. But it is just
such a powerful factor in steering development, that we can
ill-afford to not use it correctly at this particular time.
So in an effort to promote clean and efficient alternative
energy sources, I have joined with Mr. McNulty, as he
mentioned, introducing legislation to promote the use of fuel
cells, which remove the hydrogen from fossil fuels to create
energy with virtually no pollutants. They function like a
battery, fuse battery, except fuel cells do not require
recharging and are far more efficient than a combustion engine
or power plant. The President's national critical technology
panel included fuel cells as one of the 22 technologies
essential for the United States to develop and achieve economic
progress and maintain national security.
Our legislation, H.R. 1275, proposes a fuel cell tax credit
for 5 years to create a market incentive for this revolutionary
technology, which is reliable, will provide economic and
environmental advantages to traditional fuel sources. The bill
will accelerate commercialization of this technology by
providing $1,000-per-kilowatt credit for efficient stationary
fuel cell systems. Stationary fuel cell systems are capable of
running 24 hours a day, 7 days a week for 5 years, with only
routine maintenance. And they are currently in operation today.
As a distributed generation technology, fuel cells address the
immediate source for secure, efficient clean energy supplies,
while reducing grid demand and increasing grid flexibility.
First used by NASA in the space program--and I might say
they were, early in their lives, developed through Federal
grants for research, so they are a technology that has long
been looked favorably on by the Federal Government, and Federal
dollar had a real place in their development. They are now in
hospitals, schools, military installations and manufacturing
facilities and may be available for homeowners by the end of
the year. Although these early products have proven energy
efficient and environmentally advantageous, help at
accelerating their volume production is essential in realizing
low--the low prices they need to be able to be sold at for
consumers to realize their full benefits.
So this is really about marketizing a technology that is
already well developed that needs to go into higher volume
production so the individual units will cost more and also so
that the resources will be there to apply this to ever smaller
technologies. There are cars in the market now that get 50
miles to the gallon, because they are a combination of fuel
cells and electricity. The President has recommended tax
incentives for that kind of automobile.
There are also--as we speak, there is one producer who is
working on a car that is just a fuel cell that will get 500
miles to the gallon. So there has to be a way of driving this
market more aggressively in order to allow the volume
production that will bring prices down, make these stable
producers and provide the revenue for further research.
So I just urge you to take full cognizance of the promise
of this technology as you move forward. I also want to mention
that I am a strong supporter of H.R. 1863 introduced by my
colleague, Dave Camp, but will not go through that portion of
my testimony, since he will speak to this bill more eloquently
than could I. But I believe what he is trying to do in that
bill, to reuse resources that we are producing day in and day
out at every landfill in New England--and of course, New
England has very dense landfill problems--is something we need
not only to do from the point of view of energy production, but
the--from the point of view of conservation and developing a
reuse mentality that in the long run will be very fruitful for
America's economy, as well as for our way of life. Thank you.
[The prepared statement of Mrs. Johnson follows:]
Statement of the Hon. Nancy L. Johnson, a Representative in Congress
from the State of Connecticut
Mr. Chairman and Members of the Subcommittee, thank you for holding
this important energy hearing. I firmly believe that a national energy
policy must include promotion of alternatives to traditional energy
sources. Doing so will reduce our reliance on imported oil, give
consumers greater choice, stabilize energy prices, and benefit the
environment at the same time.
Last year, we saw fuel prices go through the roof. This winter we
saw excessively high oil and natural gas prices and this summer's gas
prices are near record highs. Plain and simple, the reason our
constituents find themselves faced with out-of-control heating oil and
fuel prices is because our nation has no long-term energy policy.
In an effort to promote clean and efficient alternative energy
sources, I have joined with Ranking Member McNulty in introducing
legislation to promote the use of fuel cells which remove the hydrogen
from fossil fuels to create energy with virtually no pollutants. They
function much like a battery except fuel cells do not require
recharging and are far more efficient than a combustion engine or power
plant. The President's National Critical Technology Panel included fuel
cells as one of the 22 technologies essential for the U.S. to develop
to achieve economic progress and maintain national security.
Our legislation, H.R. 1275, proposes a fuel cell tax credit for
five years to create a market incentive for this revolutionary
technology, which is reliable and will provide economic and
environmental advantages to traditional fuel sources. The bill will
accelerate commercialization of this technology by providing a $1,000
per kilowatt credit for efficient, stationary fuel cell systems.
Stationary fuel cells capable of running 24 hours a day, seven days
a week for five years with only routine maintenance are currently in
operation today. As a distributed generation technology, fuel cells
address the immediate need for secure, efficient, clean energy
supplies, while reducing grid demand and increasing grid flexibility.
First used by NASA in the space program, they are now in hospitals,
schools, military installations, and manufacturing facilities and may
be available for homeowners by the end of this year. Although these
early products have proven energy efficiency and environmental
advantages, help in accelerating volume production is essential in
realizing lower prices for consumers and the full benefits of fuel
cells.
I am also a strong supporter and cosponsor of H.R. 1863, introduced
by our committee colleague Dave Camp to encourage the development of
projects that capture landfill gas (LFG) and use it as an alternative
energy source. LFG is produced as waste decomposes in landfills that
serve our communities. LFG projects capture and use the gas to generate
electricity or directly as an alternative fuel.
Through Section 29 of the tax code, approximately 300 landfill gas-
to-energy projects nationwide were developed. Unfortunately, this
``nonconventional fuel production'' credit became unavailable after
June 30, 1998 and, since then, no new LFG projects have been planned or
constructed.
Mr. Camp's legislation would extend the Section 45 tax credit for
wind energy, closed-loop biomass, and poultry waste to LFG projects. It
is estimated that an additional 700 landfill gas-to-energy projects
could be made economically feasible with such an incentive. Helping to
bring these projects online would help the nation save more than 40
million barrels of oil annually. With that kind of potential, we must
ensure that we are tapping into LFG, which is available in nearly every
community in America.
I was pleased that the President's proposal calls for tax credits
for fuel cell vehicles and hybrid vehicles which run on gas and
electricity and a tax incentive for LFG projects. I urge the Members of
the Subcommittee to also support a tax incentive for stationary fuel
cells as you consider the use of the tax code to stimulate more rapid
development of a comprehensive energy policy. It is technologies like
fuel cells that will help us decrease our dependence on foreign oil,
conserve existing oil supplies, and reduce air pollution.
Chairman McCrery. Thank you, Mrs. Johnson. And second,
another member of the Ways and Means Committee, Dave Camp from
Michigan. Mr. Camp.
STATEMENT OF THE HON. DAVE CAMP, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MICHIGAN
Mr. Camp. Well, thank you, Mr. Chairman. I appreciate the
opportunity to be here and to testify about two legislative
proposals that I have introduced, one referred to by Chairman
Johnson is H.R. 1863, and also H.R. 1864. Both are initiatives
that have been highlighted in President Bush's energy
recommendations. My first proposal would encourage the
collection and utilization of landfill gas as an energy
resource. Landfill gas is naturally produced as garbage
decomposes and, importantly, is 50 percent methane, a valuable
fuel.
This legislation makes a tax credit under section 45 of the
Tax Code available to new projects that use gas to generate
electricity or to supplement local natural gas supplies. A
typical medium-sized landfill can generate enough methane to
produce 3 megawatts of electric power, which is enough to serve
the electricity of 3,000 homes. The Nation's largest project of
this kind is currently generating 50 megawatts of power.
Typically these projects are located in urban areas, providing
additional benefits as, quote, distributed power sources that
help improve the reliability of a regional power supply.
Methane gas could also be used directly as a supplement to
natural gas for commercial and residential heating and as an
industrial boiler fuel. There are currently 300 landfill gas
energy projects nationwide which were made economically
feasible by the non-conventional fuel production tax credit in
section 29. As you know, Mr. Chairman, section 29 became
unavailable after June 30th of 1998, and since that cutoff
date, no new landfill gas projects have been planned or
constructed in our country.
However, the Environmental Protection Agency (EPA) and the
landfill gas industry have identified an additional 700
potential new sites where these projects could be constructed,
and it is the crux of these potential new landfill projects
that I hope this legislation will encourage.
My second proposal is H.R. 1864, the CLEAR Act, which
stands for Clean Efficient Automobiles Resulting from Advanced
Car Technologies Act. This legislation would provide consumers
a tax incentive for purchasing advanced technology and
alternative fuel vehicles. These incentives are one of the most
positive steps that can be taken today to promote the increase
in the fuel economy of new vehicles. With growing concerns
about our energy supplies and prices in the United States, we
should move quickly to accelerate the introduction of these
alternative fuels and advanced technologies into the
marketplace. All the major auto makers that sell in the U.S.
market have either introduced or have announced plans to
introduce vehicles that promise to provide advantages of one
type or the other compared to conventional technologies. These
new products may have better emissions characteristics, use
alternative fuels or may provide significant increases in miles
per gallon. These new and emerging technologies at the present
time are more expensive than conventional vehicles, and they
must compete with them.
As these technologies gain consumer acceptance and
production increases, the cost differential between these
vehicles, conventional vehicles, will be reduced or eliminated.
Mr. Chairman, the CLEAR Act would provide tax incentives to
help offset the higher cost of these vehicles so that consumers
can--the cost to consumers can be held at a competitive level.
This legislation provides incentives for a broad spectrum of
vehicle and fuel technologies, and that is important, because
the choice of the right vehicle and its attributes is best left
to the consumer, not to the government decisions or
limitations.
This legislation would develop a wide range of advanced
technology and alternative fuel, such as fuel cells, hybrids,
dedicated alternative fuels and battery and electric--battery
electric. The CLEAR Act provides a tax credit of 50 cents per
gallon of gasoline, the equivalent for the purchase of
alternative fuel at retail. It would also give customers better
access to alternative fuel by giving--extending a deduction for
the capital costs of installing alternative fueling stations.
Finally, this bill provides tax credits to consumers to
purchase alternative fuel in advanced technology vehicles, and
to make certain that the tax benefit we provide translates into
a corresponding benefit to the environment, we split the tax
credit into one part provides a based tax credit for the
purchase of vehicles dedicated to the use of alternative fuel
or vehicles using advanced technologies. The other part offers
a bonus credit based on the vehicle's efficiency and reduction
in emissions. These tax credits would sunset within 6 years.
There has been companion legislation introduced in the
Senate by Senator Hatch, and I would urge my colleagues on the
Subcommittee to take a close look at this proposal. I think it
has merit, and, again, Mr. Chairman, I thank you for allowing
me the opportunity to testify about these proposals before you.
Thank you.
[The prepared statement of Mr. Camp follows:]
Statement of the Hon. Dave Camp, a Representative in Congress from the
State of Michigan
Mr. Chairman, I appreciate the opportunity to be able to testify
before this subcommittee today about two important legislative
proposals that I have recently re-introduced. As you know, President
Bush recently outlined a comprehensive energy strategy for our nation.
The legislation that I have introduced H.R. 1863 and H.R. 1864, the
CLEAR Act, are among the initiatives that are highlighted in his
recommendations.
My first proposal, HR 1863, would encourage collection and
utilization of landfill gas as an energy resource. Landfill gas is
naturally produced as garbage decomposes and, importantly, is 50%
methane, a valuable fuel. This legislation would make the tax credit
under Section 45 of the tax code available to new projects that use the
gas to generate electricity or to supplement local natural gas
supplies.
A typical medium sized landfill can generate enough methane to
produce 3.0 megawatts of electric power, enough to serve the annual
electricity needs of 3,000 homes. The nation's largest project of this
kind is currently generating 50 megawatts of power. Typically, these
landfill gas-to-electricity projects are located in urban areas
providing an additional benefit as ``distributed'' power sources that
help improve the reliability of the regional power supply.
The methane gas could also be used directly as a supplement to
natural gas supplies for commercial and residential heating and as an
industrial boiler fuel. More and more of these ``direct-use'' projects
process the landfill gas so it can be used as a clean alternative
vehicle fuel.
There are currently, 300 landfill gas-to-energy projects nationwide
which were made economically feasible by the ``nonconventional fuel
production'' tax credit of Section 29. As you know, Mr. Chairman, the
Section 29 tax credit became unavailable after June 30, 1998, to
encourage construction of new projects. Since that cut-off date, no new
landfill gas projects have been planned or constructed in our country.
However, the EPA and the landfill gas industry have identified an
additional 700 potential new sites where these projects could be
constructed.
It is the construction of these potential new landfill gas projects
that I hope my legislation will encourage. I believe, our nation should
harness the energy resource that are sitting in the backyards of most
of our communities rather than allow it to be wasted. These projects
can help bring our nation closer to energy self-sufficiency and I would
urge the members of this subcommittee to support the provisions of HR
1863.
My second proposal is H.R. 1864, the CLEAR Act which stands for the
``Clean Efficient Automobiles Resulting from Advanced Car Technologies
Act''. This legislation would provide consumers tax incentives for
purchasing advanced technology and alternative fuel vehicles. These
incentives are one of the most positive steps that can be taken today
to promote increases in the fuel economy of new vehicles. With growing
concerns about our energy supplies and prices in the U.S., we should
move quickly to accelerate the introduction of these alternative fuels
and advanced technologies into the marketplace.
All of the major automakers that sell in the U.S. market have
either introduced or have announced plans to introduce vehicles that
promise to provide advantages of one type or another compared to
conventional, internal combustion engine technologies. Compared to
conventional vehicles, these new products may have better emissions
characteristics, use alternative fuels or may provide significant
increases in the mileage achieved on a gallon of gasoline. Regardless,
they utilize new and emerging technologies that--at the present time--
are much more expensive than conventional vehicles with which they must
compete. As these vehicle technologies gain consumer acceptance and
production volumes increase, the cost differential between these
vehicles and conventional vehicles will be reduced or eliminated.
So what do we need to do to put consumers in the drivers seat and
provide them the ability to choose--and accelerate the demand for--
these new technologies? Well, Mr. Chairman, the CLEAR Act would provide
tax incentives to help offset the higher costs of these vehicles, so
that the cost to consumers can be held at a competitive level. This
legislation provides incentives for a broad spectrum of vehicle and
fuel technologies. This broad coverage is very important because the
choice of the right vehicle and its attributes is best left to the
consumer and the marketplace, not government decisions or limitations.
Specifically, my legislation will develop market acceptance of a
wide range of advanced technology and alternative fuel vehicles
including: Fuel Cells, Hybrids, Dedicated Alternative Fuels and Battery
Electric.
The CLEAR Act provides a tax credit of 50 cents per gasoline-gallon
equivalent for the purchase of alternative fuel at retail. To give
customers better access to alternative fuel, we extend an existing
deduction for the capital costs of installing alternative fueling
stations. We also provide a 50 percent credit for the installation
costs of retail and residential refueling stations.
Finally, we provide tax credits to consumers to purchase
alternative fuel and advanced technology vehicles. To make certain that
the tax benefit we provide translates into a corresponding benefit to
the environment, we split the vehicle tax credit in two. One part
provides a base tax credit for the purchase of vehicles dedicated to
the use of alternative fuel or vehicles using advanced technologies.
The other part offers a bonus credit based on the vehicle's efficiency
and reduction in emissions.
Tax incentives will sunset within 6 years for all applications with
the exception of fuel cell vehicles which are extended to 10 years.
With minimum development cycles of 2-4 years for new vehicles,
incentives are needed now to move existing designs to the market so
they can accelerate the process for customer acceptance.
President Bush's energy report includes recommendations in a number
of areas to help address the U.S. energy concerns. Among the
recommendations in the transportation sector is the provision of funds
for consumer tax incentives for hybrid and fuel cell vehicles. It also
highlights the benefits of alternative fuel and battery electric
vehicles. I support these recommendations by the president. And my bill
goes even further--to provide incentives for other types of new
technology now available and under development that might otherwise not
get an opportunity to effectively compete. So I urge that we include
early in this process an appropriate provision to move such incentives
along.
The CLEAR Act was introduced in the Senate by Senator Orrin Hatch
and enjoys broad support from automobile manufacturers, the
environmental community and alternative fuel groups. I urge my
colleagues on this subcommittee to look seriously at this proposal and
initiate this important step toward greater vehicle and fleet fuel
economy. America will be the winner for having provided this
opportunity to pull these exciting new technologies into the
marketplace more quickly than they might arrive on their own merit.
These consumer based tax incentives will put American vehicle owners in
the drivers seat by giving them the opportunity to purchase these new
advanced technology products.
Again, Mr. Chairman, thank you for allowing me the opportunity to
testify today about these proposals. At this time, I would welcome any
questions that members of this subcommittee may have.
[The attachments are being retained in the committee
files.]
Chairman McCrery. Thank you, Mr. Camp. And next we have
another Member of the Ways and Means Committee, who we loaned
to the Budget Committee to be chairman, and we are honored to
have him with us today, Mr. Nussle from Iowa.
STATEMENT OF THE HON. JIM NUSSLE, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF IOWA
Mr. Nussle. Thank you, Mr. Chairman. First, my colleagues
that are on the panel with me, I got some pretty good ideas
just from listening to their testimony, and I appreciate your
leadership in giving us all the opportunity to bring some of
these ideas to your attention and to the attention of the rest
of the panel. I think it is good to get ideas from a cross-
section of the Congress when it comes to solving an issue as
important as long-term energy situation facing our country. I
would like to amplify in two different areas that I think
needamplification within the President's plan and with our concern
overall. One is in the area of conservation. I think we can do more in
that area. We could strive to do more in the area of conservation.
The second is in the area of renewables. I have three
bills--three ideas that I want to bring to your attention. The
first one is one that gets the lonely Maytag repairmen that all
of us are very familiar with from television commercials. He is
pretty lonely. He wants to get into the business of helping us
solve the long-term energy crisis that faces us, and I am going
to try and help him do that by creating an incentive
manufacturers to develop appliances that exceed the current
U.S. Department of Energy (DOE) standards. We have introduced a
bill which provides a modest, but I believe effective tax
credit to appliance manufacturers who are able to produce high
efficiency refrigerators and clothes washers that significantly
exceed the current DOE standards. The purpose of this tax
credit is to accelerate the production of market penetration of
leading-edge appliance technologies.
Also it provides that no company can earn more than $60
million of these tax credits over the 5-year period of the
bill. It is tied to the Energy Star Program that the President
has already indicated he wants to strengthen. We believe this
is a way to strengthen that program. It is also structured so
that manufacturers of super-energy efficient clothes washers
would be eligible for a $50 tax credit for each unit they
produce that uses 35 percent less energy than this current DOE
standard and $100 tax credit maximum for units that use 42
percent less energy than the DOE standards. This is what we are
trying to do.
You know, the bill has the potential to provide enormous
energy and water benefits to the Nation, as well as economic
benefits to consumers over the life cycle of a super-efficient
appliance. Let me give you an example of what this does. It is
estimated that expanding the use of these appliances could save
as much as 200 trillion BTUs, which would be the equivalent of
taking 2.3 million cars off the road or shutting down six coal-
fired plants for just a year. This is not an insignificant
amount of energy that we are talking about here.
The amount of water necessary to meet the needs of
households that could be saved here would be the equivalent of
2 years for every household in Phoenix or every household for
the State of Louisiana for 4 years. I pick that one out of a
hat, Mr. Chairman.
Some have advocated that this tax credit should go to
consumers, and while that may, on its face, appear to be a good
idea, let me give you three reasons why I think it is better to
provide this for the manufacturer. One is that you limit the
cost of the proposal. It is 2-1/2 times more expensive from a
cost standpoint. Mr. McNulty was suggesting we have some
concerns about the budget. I am concerned about that as well.
This is a way to hold down the cost of a tax credit such as
this.
Second, the efficiency converts the incentive into the
purchased product so that the incentive is to manufacture more
of these, not just on the end that--on the purchase end. And
finally, it does simplify the administration of the tax credit.
It has bipartisan support in the House. It also has the support
of the Alliance for Resource Efficient Appliances. Their
Members include the Natural Resources Defense Council, Alliance
to Save Energy, the American Council for Efficient Energy
Economy, the California Energy Commission, Northwest Power
Planning Council. There are many who have been part of the
development of this piece of legislation, and I would--I would
offer it to you for your--for your opportunity.
The last two involve agricultural products. One goes hand
in hand with what both my colleague just suggested, Renewable
Energy From Agricultural Products Act. It creates incentives to
produce energy from biodiesel, methane has been discussed, for
manure waste product collection, allows for soy diesel and for
switch grass use from CRP lands. So that is one I would suggest
you should take a look at. It is good not only for the
environment and for ag products, but it is good for energy.
And then finally, it wouldn't be--my testimony wouldn't be
complete if I also didn't provide you with some good ideas with
regard to ethanol use. I have what is called the Ethanol Energy
Promotion Act, which provides some assistance to small ethanol
cooperatives, and, you know, it is not just an Iowa issue
anymore.
In fact, we did some research. We discovered that there are
some plants that are looking into using and producing ethanol
in California and in Louisiana, using rice as an example, and
other by-products. So we have the opportunity to provide some
incentives here to help encourage an industry that needs some
encouragement right now if we are going to help not only deal
with the long-term energy situation, but if we are going to do
it in a way that doesn't sacrifice the quality of water and the
quality of air in this country.
So I offer those three ideas to you, and I really do
commend you for having a hearing such as this to gather ideas
from a cross section of the Congress.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Nussle follows:]
Statement of the Hon. Jim Nussle, a Representative in Congress from the
State of Iowa
Chairman McCrery, Ranking Member McNulty, and Members of the
Subcommittee:
I am pleased to be here today and appreciate the opportunity to
testify before the subcommittee about the effects of federal tax laws
on the production, supply and conservation of energy. This issue is
extremely important in light of our current national energy situation.
As you may know, I have drafted and supported several pieces of
legislation that I believe will help America meet its long-term energy
goals.
Increasing energy efficiency is a key provision in the President's
proposed National Energy Policy. Refrigerators and clothes washers, for
example, both of which are manufactured in my state, account for
approximately 15 percent of all household energy consumed in the United
States, and consumers spend approximately $21 billion annually to
operate these appliances. Consumers could save substantial amounts of
energy and money each month, and our national economic security and
environment would be enhanced, by simply replacing older inefficient
appliances with newer high efficiency products.
I would like to bring to your attention a bill that a member of the
Subcommittee, Representative John Tanner, and I, along with others from
both sides of the aisle, introduced on March 29. H.R. 1316, the
Resource Efficient Appliance Incentives Act, would provide a modest but
effective tax credit to appliance manufacturers who are able to produce
high efficiency refrigerators and clothes washers that significantly
exceed DOE standards. Currently we have 26 cosponsors including
Representative Dave Camp, Representative John Lewis, and Representative
Karen Thurman, all members of the full Committee. You may also be
interested to know, Mr. Chairman, that a companion bi-partisan bill has
been introduced in the Senate.
The purpose of this tax credit is to accelerate the production and
market penetration of leading-edge appliance technologies while
creating significant environmental benefits. The more rapidly these
high efficiency appliances appear in the market place, the quicker the
energy savings will occur.
H.R. 1316 has been drafted to be very defined and manageable. For
example, no company can earn more than $60 million dollars in tax
credits over the five-year period of this bill. Further, it is tied to
the Energy Star program that the President indicated he wants to
strengthen.
H.R. 1316 is structured so that manufacturers of super energy
efficient clothes washers would be eligible for a $50 tax credit for
each unit they produce that uses 35% less energy than the current
Department of Energy standard, and a $100 tax credit for units that use
42% less energy than DOE's standard. Manufacturers of super energy
efficient refrigerators would be eligible for a $50 tax credit for
units that are 10% more efficient than the today's DOE standard, and
$100 for units that are 15% more efficient than the DOE standard.
I believe this bill has the potential to provide enormous energy
and water benefits to the nation, as well as economic benefits to
consumers over the life cycle of the super efficient appliance. In
fact, it is estimated that expanding the use of these super energy-
efficient appliances would save over 200 trillion Btus. This would be
equivalent to taking 2.3 million cars off of the road, or shutting down
6 coal-fired power plants for a year. In addition, the super efficient
clothes washers would reduce the amount of water necessary to wash
clothes by 870 billion gallons of water. That is approximately the
amount of water necessary to meet the needs of every household for two
years in a city the size of Phoenix, Arizona or every household in the
state of Louisiana for four years. The net benefits to consumers from
operational savings would be approximately $1 billion.
Some have advocated that such a tax credit ought to go directly to
the consumer. I believe it is preferable to give the tax credit to
manufacturers for several reasons. First, the ability to limit the cost
of the proposal by capping the benefits is retained. It is estimated
that if the credit were to be given to the consumer the cost would be
at least $700 million, or 2\1/2\ times more than the cost of H.R. 1316.
Second, is the flexibility to direct the capital to the area of the
appliance manufacturers' business that can most effectively convert the
incentive into a purchased product. Some manufacturers might need to
spend the money on re-tooling or purchasing equipment for their
facilities. Others will chose to increase their research and
development programs that would help develop technology needed to
spread efficiency throughout their entire product line. Some may choose
to increase sales force, educational or incentive programs on energy
efficiency or create a rebate for consumers.
Lastly, it simplifies the administration of the tax credit and
maximizes its benefit. A consumer tax credit could only be collected
when a taxpayer files his tax return for the year in which the
appliance was purchased. The passage of time between the actual
purchase of the super efficient appliance and the filing of a tax
return could be lengthy so there would be less incentive to purchase
the high efficiency appliance. By letting the manufacturer receive the
credit there is no question that the credit will be effectively
leveraged.
Not only does H.R. 1316 have bi-partisan support in the House, but
the Alliance for Resource Efficient Appliances (AREA) also supports
this bill. AREA members include energy and environmental groups like
the Natural Resources Defense Council, Alliance to Save Energy, and the
American Council for Energy Efficient Economy, as well as the
California Energy Commission and the Northwest Power Planning Council.
H.R. 1316 is the product of the combined efforts of industry,
environment, and government interests and should serve as a model for
future energy legislation.
Mr. Chairman, I ask that the Subcommittee consider H.R. 1316 as you
move forward in crafting an energy tax package. H.R. 1316 can play a
significant role in our National Energy Policy by increasing the number
and type of energy-efficient appliances in the market place, which in
turn will create substantial savings for consumers and the environment.
This bill will be the catalyst for a market transformation in which the
long term cost savings of increased energy efficiency will lead to many
new products in the market place and a significant change in the
consumers purchasing decisions. Once manufacturers develop these new
products, retailers and consumers will insist they stay available even
after the credit program is over.
In addition, I would like to share with the committee a couple
other ideas I have concerning federal tax laws and energy production
and supply which have been developed through meetings with Iowans to
make sure renewable energy becomes an integral part of our nation's
long-term energy policy. In response to President Bush's energy
proposal, I have introduced two comprehensive pieces of legislation to
advance renewable energy use and research.
The Ethanol Energy Promotion Act of 2001 (H.R. 1999) takes a number
of specific steps to increase the use of ethanol. First, the bill
promotes the development of small ethanol cooperatives. A new tax
credit will be of great benefit to the many farmer groups in Iowa
currently developing plans to start their own cooperatives. The bill
also protects the environment and strengthens the ethanol market by
immediately banning the use of MTBE as a fuel additive. Finally, this
legislation creates a huge ethanol consumer by requiring the federal
government to use ethanol-blended gasoline in its vehicles.
My second bill, the Renewable Energy from Agricultural Products
(REAP) Act (H.R. 2000), creates incentives to produce energy from
products once thought to have no use; methane, manure, and other forms
of animal waste products. The REAP Act also increases demand for
another farm product while promoting conservation by allowing
switchgrass grown on land in the Conservation Reserve Program (CRP) to
be used as an energy additive without affecting the program's payment
schedule. Additionally, the REAP Act expands uses for soybeans by
allowing diesel fuel blended with 2% soy-based biodiesel to receive a 3
cent/gallon exemption from the diesel fuel excise tax.
In my opinion, ethanol and biodiesel both have unlimited untapped
potential. While providing a solution to our energy needs, they can
also provide income to farm families. This Congress is all too aware of
the prices our farmers have faced over the last few years, and I
believe we could kill two birds with one stone by expanding our use of
these two fuels.
My colleagues on this panel know that I support alternative fuels,
and they also know that I represent farm country. Every member of this
Congress tries to promote industries that are vital to their districts,
and rightly so. However, I would just like to point out to this panel
that research has demonstrated that ethanol and biodiesel can be made
from materials other than corn or soybeans. Though I would prefer that
everyone buy Iowa corn and beans, ethanol and biodiesel could
potentially be produced in your own districts from your own farm
products. Companies are looking into producing ethanol in Gridley,
California, using rice waste and in Lafayette, Louisiana, using organic
waste.
Mr. Chairman, I appreciate the President's leadership in crafting a
national energy policy. I urge you to give consideration to his aims of
promoting conservation and renewable fuels. Thank you for the
opportunity to participate in this important hearing. I would be happy
to answer any questions on the proposals I have outlined today.
Chairman McCrery. Thank you, Mr. Chairman. And thank all of
our first panel of witnesses for your excellent testimony. Does
any Member of the Subcommittee have a question for any of the
Members of the first panel? Mr. McNulty?
Mr. McNulty. Mr. Chairman, I don't have a question. I just
wanted to thank all of the Members for their testimony and say
that it has been a pleasure working with Congresswoman Johnson
on the fuel cell issue, and we both think that this is
visionary and will, as her testimony pointed out, decrease our
dependence on foreign oil, conserve existing oil supplies and
reduce air pollution, and I think those are three goals that we
all share. So I thank all of the Members for their testimony.
Mrs. Johnson. I would just comment that I think--I would
just like to comment that I think the Committee can't be too
aggressive in this area. We are 60 percent dependent on foreign
oil. It is truly a national security issue. Seventy percent of
our oil is used in transportation. I mean, we can do better
than this. So there are a lot of ways that we can use this
crisis to create not only a national energy policy, but also to
look at these distribution issues, because one of the things
about fuel cells is it is going to be very helpful in remote
areas, because the bigger packs are long-term, clean supply,
and it does raise the fundamental issue of whether the public
should be responsible for peak load or for normal load. And
whether businesses shouldn't be responsible for peak loads,
because they can use fuel cells to combine with current
resources to manage peak loads.
So it should involve a whole rethinking of not only grid
issues, but what is the public responsibility in the energy
arena, and so it is an exciting time to talk with you and I
appreciate the seriousness of this Subcommittee and look
forward to your product.
Chairman McCrery. Thank you. Any other Member of the
Subcommittee wish to inquire of this panel?
In that case, thank you very much. Our next panel is
composed of Jennifer Dunn, Mac Collins, Jerry Weller, Ron
Lewis, and with the Subcommittee's indulgence, I will add Mr.
Cunningham to the second panel since he has an engagement that
he must get to quickly.
So, Mr. Cunningham, if you will come up and join the
esteemed Members of the Ways and Means Committee, we will let
you be an interloper here. We will even allow you to go first,
Mr. Cunningham, since you have got an important engagement that
you need to get to off campus.
I would remind all the Members that your written testimony
that you submitted will be included in the record, and your
oral testimony, of course, is also in the record, and it is
just meant to summarize your written testimony. Mr. Cunningham?
Mr. McNulty. Mr. Chairman, could I just ask one favor,
also, because Mr. Markey has been working with Mr. Cunningham
on some legislation, and he is also here at the present time.
If he could join on the panel with Mr. Cunningham.
Chairman McCrery. If he desires.
Mr. McNulty. I thank the Chair.
Chairman McCrery. Sure. Mr. Markey, do you and Mr.
Cunningham have a tag team planned here for testimony?
Mr. Markey. We don't have it planned. That is obvious.
Chairman McCrery. You are testifying on the same subject
matter?
Mr. Markey. Same subject. I am just going to be ditto marks
after his testimony.
Chairman McCrery. Mr. Cunningham, please proceed.
STATEMENT OF THE HON. RANDY ``DUKE'' CUNNINGHAM, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Cunningham. Thank you, and I appreciate my colleagues
letting me especially go first. I have got a meeting with Mr.
Cheney in just a minute.
Mr. Chairman, I would like to submit the full text. I would
also like to submit common questions with answers that have
been scientifically based and their rationale for those
questions on this legislation.
Chairman McCrery. Without objection.
Mr. Cunningham. And I would as like to submit a list of all
of the supporters, both business, environmental and community
groups, that support this legislation.
Chairman McCrery. Without objection.
Mr. Cunningham. I would like to thank Mr. Markey, who is
doing the lion's share on this particular bill, and I would
like to commend Mrs. Johnson and Mr. Camp for their testimony.
Mr. Nussle testified his bill is to let the panel know that it
is a little competing. Ours is more consumer-based. His goes
more to business, and I would tell you that if you have a tax
incentive, if business builds it, there will be a ready supply
if it is a good product. Build it and they will come, like the
Field of Dreams. The difference is that we feel the consumers
would benefit in a given incentive. Why does a man or woman go
to Sears or Wards or something on the holidays? Because they
have an incentive, and that is called the sale. If you offer
incentives for these different things, the consumer will
benefit, and that is the direction of our particular
legislation.
The other legislation that was talked about is primarily on
developing means for energy. Ours is more on saving those
energies that are produced in an efficient way.
California has become the poster child for energy problems
over the past few years. A combination of failed regulation,
lack of interstate generation and rolling blackouts, and with
this summer coming, you can imagine the problems that we are
going to have. We must have a policy that looks at supply side,
new avenues of production, as well as a demand side. But what
this H.R. 778 goes into, it is actually on the savings of
energy within buildings themselves. This building, construction
buildings, business buildings, we feel that it could be up to
80 percent more efficient and give revenue not only back to the
individuals to the businesses, to the consumers, but provide
more energy efficiency for this Nation across the board.
It covers heat, cooling, water heating equipment, solar
problems, and that is exactly why I think Mrs. Johnson's
legislation and Mr. Camp's legislation fits right hand in hand
with this. And it will reduce energy demand, bring quick relief
to the power grid, but the legislation also has significant
environmental benefits to the Nation. It will reduce America's
greenhouse gas pollution emissions. I know there has been a lot
of talk about that in the media--by at least 3 percent by 2010.
And, again, to give you a few of those groups, the Sierra
Club, National Wildlife Federation--this may be a negative, but
Friends of the Earth--Global Green, and this whole page is
environmental groups that do support this legislation. And I
would yield, you know, the time to my colleague who, as I say,
is doing the lion's share on this legislation, Mr. Markey.
[The prepared statement of Mr. Cunningham follows:]
Statement of the Hon. Randy ``Duke'' Cunningham, a Representative in
Congress from the State of California
Subcommittee Chairman McCrery, Ranking Member McNulty, and Members
of the Subcommittee, I appreciate the Committee inviting me here today
to speak in support of an important component of any National Energy
Strategy, specifically the Energy Efficient Buildings Incentives Act
(H.R. 778).
Mr. Chairman, California, specifically San Diego County has become
the poster child for energy problems in America. Over the last year, we
were hit by a combination of a failed regulation proposal and lack of
instate generation. This combination created shortages and extreme
price fluctuations.
This winter was tragic and included rolling blackouts. All of you
are familiar with this ongoing problem. Many regions across the country
face severe challenges to their electric grid, with California being
the extreme example. In addition, this situation is likely to get worse
before it gets better.
New York may have serious disruptions in electricity distribution
this summer and the Central U.S. may again experience similar problems
to those of last year. More troubling, this summer California may have
more than simply a price problem. We may actually be unable to get
enough power at any price.
The problem is the result of a serious instate imbalance between
supply and demand, which has driven up the price of electricity
several-fold compared to last year. This has resulted in drastically
increased prices for consumers, and compromised the financial stability
of utilities and businesses all across California.
America is in desperate need of a comprehensive energy policy. We
must have a policy that looks at the supply side, including new avenues
of production and generation. But we must also address as well as the
demand side, considering innovative conservation alternatives. These
policies should consider the costs and risks to consumers and
businesses. They should also provide incentives for economic growth and
environmental protection.
I have no illusions that developing a national consensus on a
comprehensive energy policy will be easy. But, I am fairly confident
that we can pass bi-partisan legislation which will meet our growing
need for energy.
I believe an important piece of a comprehensive energy policy will
be an expanded effort to increase energy efficiency. Energy efficiency
was an important part of President Bush's energy strategy of 1991 and
has been the cornerstone of a number of state efforts.
To this end, Mr. Markey of Massachusetts and I have introduced the
Energy Efficient Buildings Incentives Act (H.R. 778). This is a
companion to Sen. Bob Smith's S. 207 in the Senate. This legislation is
designed to give new impetus to energy efficiency in buildings. This
process shows tremendous short-term as well as long-term promise.
Increasing energy efficiency is one of the few policy tools that
can make an immediate difference. Within a matter of months after
passage of this legislation, manufacturers and building designers will
be able to provide significantly increased energy efficient technology
to families and businesses.
These new technologies will help in two ways: first, consumers who
utilize them will immediately see lower energy bills. Second, as homes
and businesses become more efficient, we will see reduced demand for
fuels, and prices will come down.
The sooner we can introduce energy efficiency into the marketplace,
the sooner consumers and businesses will start to see solutions to
their energy problems.
Congress has passed several important pieces of bipartisan energy
legislation over the past 15 years. These laws provide for more
competitive and open energy markets; federal standards on the
efficiency of appliances and equipment; assistance to states
considering building efficiency standards; and tax incentives on the
production side of the energy equation.
Utilities have also learned over the past 20 years how to develop
incentives that can encourage energy efficiency. Utilities have been
very successful in promoting improvements in energy efficiency.
However, there are two powerful difficulties when it comes to
encouraging state-of-the-art improvements in energy efficiency, and
that is why we need to work through the tax code.
The first problem is that energy-consuming devices are produced for
national markets, but utilities only serve a single region.
Even if a utility offers attractive incentives for, say, an
advanced new air conditioner, manufacturers will not be inclined to
produce the product because their production has to be geared to
national or even global demands, not those of a single region. National
incentives will solve this problem.
The second difficulty is timing. A major commercial building often
takes over 2 years to construct. If the architect learns that the
utility is offering an incentive for energy efficiency, the first
question he or she will ask is: will the incentive still be available
in 30 months when my building is finished?
Most utilities will have to answer that they cannot ensure that
this is the case. Therefore, the architect will refrain from making the
commitment to energy efficiency.
H.R. 778 addresses both of these problems and sets the stage for
unleashing a wave of new technology that can provide major advances in
energy efficiency in the easiest manner.
H.R. 778 provides incentives for enhanced energy efficiency in
buildings, because buildings account for over $300 billion a year in
energy costs and account for over a third of pollution emissions in the
United States.
There are opportunities for new technology to save from 30% to 50%,
and maybe even more of energy costs, while enhancing the productivity
of workers in the buildings and increasing the comfort of families at
home.
H.R. 778 targets the entire set of building-related energy systems,
for non-residential buildings, commercial buildings such as offices,
stores, warehouses, greenhouses, etc., as well as public buildings such
as schools, hospitals, and local government buildings.
It also targets homes, including single-family, multi-family, and
manufactured homes. It includes heating, cooling, and water heating
equipment systems; and solar photovoltaic and water heating equipment.
It provides incentives based on energy performance, not on cost.
This structure is different from the energy efficiency tax
incentives of the 1970's, which were based on cost and are perceived by
many to have failed. These targets are ambitious but realistic.
If they were less ambitious, there would be a risk of paying for
energy efficiency investments that would have happened anyway. If they
are too ambitious, no one would claim the tax incentive, which would
fail to accomplish the purpose of the energy policy.
The bill provides tax incentives for a fixed time period which are
intended to be temporary through the end of taxable year 2007. Six
years should be sufficient to provide financial reasons for
manufacturers to invest in plants producing efficient equipment.
This should be enough time for designers and contractors to get
additional education and training in energy efficient design,
construction practices, and to establish competitive markets for more
efficient buildings and equipment.
At the end of 6 years, I anticipate that the markets for energy
efficiency will be strong enough that these tax incentives will no
longer be needed. I believe that these incentives can transform the
markets for energy efficient buildings over these 6 years, as several
utility-sponsored programs have done in the past.
This is because they rely on market forces, and establish a level
playing field for competition between different industries and
different companies.
H.R. 778 will reduce energy demand and bring quick relief to the
power grid, which will help alleviate electric supply problems. That is
why H.R. 778 is so broadly endorsed by utilities, including all of
California's major electric utilities and many national power
generators as well.
But the legislation also has significant environmental benefits to
the nation. It will reduce America's greenhousegas pollution emissions,
as well as air pollution emissions, by 3% by the year 2010.
That is why this bill is endorsed by the nation's major
environmental organizations. We have worked hard to deliver a bill that
has both bipartisan support in the congress and support from the
business and environmental community. I have attached a list of
supporters along with my statement.
Although the primary motivations for this bill are to help solve
America's energy policy problems and reduce emissions, there are also
large economic benefits of the bill.
By reducing energy costs for businesses, which are tax-deductible,
we believe it will actually increase revenues to the Treasury over a 5-
year period. Energy efficiency can be an excellent investment, with
returns of 25% per year and better. By stimulating such investment,
this bill will save businesses and families over $40 billion on net by
2010.
The benefits of this bill grow over time, as more and more energy-
efficient buildings are constructed and the technologies for efficiency
get cheaper and better due to competition.
I want to close by saying that the solution to California and
America's energy problems is not found on the supply side alone. We
must address demand, and our bill will do that.
I want to thank you for the opportunity to come before the
Committee today. With swift enactment, we can all enjoy lower energy
bills and a better environment.
Supporters of S. 207 / H.R. 778
Smith-Feinstein / Cunningham-Markey
Energy Efficiency Legislation
The Real Estate Roundtable New England Council
National Assoc of State Energy
Officials California Building Industry Assoc.
Insulation Contractors Association
of America Florida Solar Energy Center
Home Builders Association of
Central Vermont, Inc. National Association of Counties
California Association of Building
Energy Consultants California Air Resources Board
National Council of the Housing
Industry National Insulation Association
Florida Solar Energy Industries
Association California Energy Commission
Building Owners and Managers
Association Indiana Builders Association
ENRON American Public Power Association
Pacific Gas and Electric Company Southern California Edison
Sacramento Municipal Utility
District Montana Power
PacificCorp California ISO
Northern California Power Agency Sempra Energy
CA Municipal Utilities Association City of Los Angeles
Northeastern Public Power
Association Los Angeles Water & Power
NorthEast Utilities National Grid USA
Narragansett Electric Company Granite State Electric Company
Massachusetts Electric
Natural Resources Defense Council Sierra Club
League of Conservation Voters National Wildlife Federation
Environmental Defense Consumer's Choice Council
U.S. PIRG The Wilderness Society
World Wildlife Federation National Environmental Trust
Defenders of Wildlife Physicians for Social
Responsibility
American Oceans Campaign Global Green USA
Environmental and Energy Study
Institute Friends of the Earth
Legal Environmental Assistance
Foundation, Inc Union of Concerned Scientists
Michigan Environmental Council World Wildlife Fund
Minnesotans for an Energy Efficient
Economy Consumer's Choice Council
American Rivers National Environmental Trust
Izaak Walton League of America National Audubon Society
North American Insulation
Manufacturers Association Trane
Air Conditioning Contractors of
America Siemens Solar Industries
Foamed Polystyrene Alliance Climatic-Solar Corp
American Portland Cement Alliance Energy Partners
Polyisocyanurate Insulation
Manufacturers Association Solar Systems of Florida
American Energy Technologies AllSolar Service Company Inc.
American Solar Energy Solar-Fit
Energy Conservation Services of
North Florida Solar Source
05/08/01
(THESE ARE SOME OF THE BUSINESSES WHICH THE TRADE ASSOCIATIONS
REPRESENT BUT HAVE NOT NECESSARILY SPECIFICALLY SIGNED ON)
Honeywell, Inc. Vulcan Materials
Evanite Fiber Corp Certain Teed Corp
Fibrex Insulations, Inc. Isolatik International
Johns Manville Corp Knauf Fiber Glass
MFS, Inc. Owens Corning
OCHT Rock Wool Manufacturing Co.
Roxul, Inc. Sloss Industries Corp
Thermafiber LLC USG Interiors, Inc.
Western Fiberglass Group Air Products & Chemicals, Inc.
Akzo Nobel Atlas Roofing Corp
BASF Corp Bayer
C.K. Witco Corp Carlisle Syntec, Inc.
Dow Chemical USA Elf Atochem North America, Inc.
Exxon Chemical Co. Firestone Building Products Co.
Goldschmidt Chemical Co. Honeywell International
Hunter Panels Huntsman Corp
Huntsman Polyurethane IKO Industries, Ltd
Johns Manville Corp KoSa
Laroche Industries, Inc. OAF
Old American Products Petrocel S.A.
Phillips 66 Co. Rmax, Inc.
Solvay Fluorides, Inc. Stepan Co.
STATEMENT OF THE HON. EDWARD J. MARKEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MASSACHUSETTS
Mr. Markey. I thank the gentleman very much, and this is a
true partnership, in fact. Duke and I on any ADA scale would
definitely average 50. I would have 100 and Duke would not. So
obviously what we are trying to do is define common sense
solutions to the problem.
The United States only has 3 percent of the world's oil
reserves. The Organization of Petroleum Exporting Countries
(OPEC) nations have 75 percent. Obviously we are never going to
be able to fully win any race against OPEC in oil production.
What is our advantage? Our advantage is technology. We are the
technological giant in the world, and as my mother used to say,
if you work smarter, not harder, you can get to the correct
result much more quickly. So in summary, how does the taxpayer
qualify for the tax incentive? Well, a homeowner would have to
increase the overall efficiency of their home by 30 to 50
percent. A business would have to increase by 50 percent, above
already-existing minimal standards. They would have to go above
that.
How much incentives do taxpayers get? Well, a homeowner
would get $2,000 if they could--a tax credit up to $2,000 if
they could improve the efficiency by 30 to 50 percent. A
businessperson would get $2.25 per square foot of commercial
building space if they could increase their overall efficiency
by 50 percent.
How does it benefit the country? In sum, it reduces
consumer energy cost, if this is fully implemented, by $10
billion. It produces economic activity, because 440,000 new
jobs would have to be created in order to implement this kind
of a national tax credit-driven policy. It is the equivalent in
air pollutants of taking 20 percent of all of the automobiles
in the United States off the road.
So, in other words, it is greenhouse-gas friendly, because
it definitely deals with those issues. And it improves the
electric reliability of our Nation by reducing the need for
30,000 megawatts of electricity having to be produced in our
country.
So in other words, it is just looking at the existing
homes, commercial residences, giving a tax incentive. Aslong as
there is substantial improvement, they qualify. And Duke and I really
do believe that this is a common sense, bipartisan, non-ideological way
in which we can use the market in order to drive solutions. And I thank
you for giving me the opportunity of testifying.
Mr. Cunningham. If I may also say, this is also supported
in the Senate by Mr. Smith and Ms. Feinstein, S. 207, which is
a very strong bipartisan bill already moving forward. Thank
you.
[The prepared statement of Mr. Markey follows:]
Statement of the Hon. Edward J. Markey, a Representative in Congress
from the State of Massachusetts
Mr. Chairman, thank you for allowing me the opportunity to testify
before the Subcommittee this afternoon.
I am pleased to join with the gentleman from California (Mr.
Cunningham) and a bipartisan coalition of 43 other Democrats and
Republicans in sponsoring the ``Energy Efficient Buildings Incentives
Act.''
Energy use in buildings in this country accounts for approximately
35% of polluting air emissions nationwide about twice as much as the
pollution from cars. It costs the average American $1500 to heat and
cool their homes every year, which amounts to an annual cost of $150
billion nationwide. Commercial buildings and schools incur $100 billion
in annual utility bills. And yet, the tax code fails to provide
sufficient incentives to reduce wasteful and unnecessary energy use.
This is bad policy, and it must be changed. In these times of rolling
blackouts in California and rising electricity prices throughout many
regions of the country, we can and should be looking for ways to ensure
that energy is never wasted. Instead, we should ensure that
technologies that can enable us to become more efficient in our use of
energy and deployed as widely as possible.
That is why the Gentleman from California (Mr. Cunningham) and I
have introduced the ``Energy Efficient Buildings Incentives Act.'' Our
bill would spur use of energy efficient technologies, such as super-
efficient air conditioning units, which could result in a substantial
drop in peak electricity demand of at least 20,000 megawatts--the
equivalent of the output of 40 large power plants. At a time when many
communities are currently facing electricity supply shortages, and the
local political issues involved with siting and building new power
plants are difficult and contentious, our bill provides a way to reduce
pressures on the nation's electricity grid. Specifically, our bill
provides tax incentives for:
This bill provides tax incentives for:
Efficient residential buildings, including
manufactured housing, that saves 30% or 50% of energy cost to
the homeowner compared to national model codes, with a higher
incentive for the higher savings;
Efficient heating, cooling, and water heating
equipment that reduces consumer energy costs, and, for air
conditioners, reduces peak electric power demand, by about 20%
(lower incentives) and 30%-50% (higher incentives) compared to
national standards;
New and existing commercial buildings, including
rental housing and schools, with 50% reductions in energy costs
to the owner or tenant; and,
Solar hot water and photovoltaic systems.
The incentives are based on performance, not costs, in order to
foster competition between suppliers of different technologies that can
meet the proposed targets. In the case of buildings and equipment,
there are one or two tiers of energy cost reduction targets that
qualify the taxpayer for a fixed incentive per appliance, per home, or
per square foot of non-residential building. For solar systems, the
incentives are based on energy production, on a sliding scale. The
incentives are provided for a 6-year period, taxable years 2002 through
2007, after which they sunset.
The incentives are provided to the taxpayer with only one
exception. For non-residential buildings, the incentives are in the
form of a fixed dollar amount deduction to the business entity that
pays for the construction. However, if the business entity is a
municipality, such as a school district (which is tax-exempt), the
deduction is assignable by the owner to the architect with primary
responsibility for the design. This is designed to assure that there
are incentives for incorporating energy efficiency into the design of
schools and other public buildings.
For residential buildings, the incentive is in the form of a tax
credit that goes to the individual homeowner or the individual who
purchases qualifying homes or equipment. In the case of condominiums or
co-operatives, the owners get the credit on a pro-rated basis. In the
case of rental housing, the incentive is a deduction to the building
owner.
If only 50% of new buildings reach the energy efficiency goals of
this legislation, it has been estimated that air pollution emissions in
this country could be reduced by over 3% in the next decade, and
decrease even more dramatically over time. In that same ten-year
period, this legislation could result in direct economic savings of $40
billion to consumers and businesses. For example, a family that
installs an energy efficient water heater can get $250 to $500 back
from the tax code changes and an additional $50 to $200 every year in
reduced utility bills. Or a family that purchases a new home that meets
the standards in this bill can get as much as $2,000 returned to them
by the tax incentives, in addition to the $300 or more in continuing
energy savings.
I urge the Subcommittee to include this proposal in any energy tax
legislation it takes up. This bill is both good tax policy and good
energy policy. It will help save American consumers money, improve the
air we breathe and the water we drink, increase the competitiveness of
American industries, and reduce the energy consumption of our
commercial and residential buildings.
Thanks again, for allowing me to testify. I look forward to working
with you and other Members of the Subcommittee on this and other energy
tax-related measures.
Chairman McCrery. Thank you, Mr. Markey. Thank you, Mr.
Cunningham. Ms. Dunn?
STATEMENT OF THE HON. JENNIFER DUNN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WASHINGTON
Ms. Dunn. Thank you very much, Mr. Chairman. We now face a
problem that requires all of us in livings rooms, kitchens all
over America to take note. As little children, we were tucked
in by our parents and assured that the bogeyman did not come
out from underneath the bed when the lights went out. We were
told that there was no reason to be afraid of the dark. But
today adults across the Pacific Northwest particularly have
every reason to fear the darkness that could blanket our
Region. Thankfully, for the first time in a decade, a President
and Congress are seriously considering a national energy policy
that is designed to help bring together business, government,
local communities and citizens to promote dependable,
affordable and environmentally friendly energy for the future.
I am very happy that the administration's policy promotes
energy conservation and efficiency. These elements are crucial,
especially in my home State of Washington. Across the Pacific
Northwest, energy demand is outpacing supply, because of a
record low water supply year and a high-priced west coast power
market. This deficit is driving up monthly electric bills and
making it very difficult for families in my area to make ends
meet.
I believe that conservation is an important part of this
solution in easing our energy problems, and I think it is up to
us to provide the tools to empower families and businesses all
over America so that they can better manage their energy use.
We can encourage conservation with tools like smart meters, and
that is what I would like to dedicate my next couple of minutes
to telling you about. These are real-time metering devices that
look just like the water meters that you have on the side of
your house right now that tell consumers the cheapest and best
time to flip on their hot tub switch and run their washer and
drier. Currently utility bills give us no indication of when
power is cheap and when it is expensive. For example, consumers
who are washing laundry between 5:00 and 9:00 in the evening
will pay up to 25 percent more in their electric bill. They
don't know this. But if they waited until after 9:00, the costs
would go way down.
In a monthly energy bill when consumers peak costs are
averaged with off-peak costs in that utility bill, the higher
costs of peak electricity supplies is covered up and masked so
that they don't know. As a result, consumers may not recognize
the benefits of changing their energy habits. And this bill
that I am proposing would do just that. It would give consumers
the information so that they could change their behavior,
thereby using less energy and paying less for it.
It is our responsibility as public servants to propose
thoughtful and sensible solutions to this energy quagmire. And
that is why I have introduced the Energy Efficiency and
Conservation Incentives Act of 2001, providing tax incentives
designed to promote energy management conservation and
efficiency through real-time metering.
Thanks to innovative technology, we can now make better
choices regarding our power usage. Electric and national gas
meters can--and natural gas meters can be fitted with smart
meters so that consumers can receive current pricing
information and adjust their air-conditioners down during the
peak usage periods, turn them back up later in the day when
usage drops and prices also are lower.
These new high-tech devices allow us to monitor our daily
use of electricity and provide us information on how to save
money and energy. With this device, consumers can easily
conserve the electricity they use on a daily basis.
Specifically, my legislation provides two tax incentives to
encourage the use of smart meters. First, utilities will
receive a $30 deduction per meter, just about the cost of the
meter, not the cost of installation. They install with this new
technology. Second, it would allow these devices to be
depreciable over 3 years. Utility companies will be able to
take the tax deduction from their corporate taxable income. The
amount of the one-time deduction roughly equal to the cost of
the device. Existing meters that are retrofitted would also be
eligible for this same deduction.
The benefits of information as it relates to conservation
can't be overstated. In my home district, for example, if just
half the customers did their laundry in off-peak hours rather
than during on-peak hours, it would free up enough power to
serve nearly a quarter of a million households. As we move
forward and continue to grapple with our energy problems, we
have got to embrace market-based solutions to conservation. My
legislation is an innovative way to employ new technologies, to
prompt changes in consumer behavior. Conservation doesn't have
to be dictated. It can be learned, and with the right
motivation and structure, it can work.
This device and other reasonable conservation measures will
help us squeeze out more efficiency from the existing system. I
think it would be a shame for us to surrender to misleading and
divisive rhetoric or quick-fix solutions like price caps when
we have before us something that has not yet been tried.
More importantly, let us not pass up this opportunity to
propose thoughtful and responsible conservation solutions.
Thank you very much, Mr. Chairman, for the opportunity to
testify, and I would be happy to answer any questions.
[The prepared statement of Ms. Dunn follows:]
Statement of the Hon. Jennifer Dunn, a Representative in Congress from
the State of Washington
We now face a problem that requires all of us in living rooms and
kitchens across America to take note. As children, we were tucked in by
our parents and assured the boogeyman did not come out of from
underneath our bed the minute the lights went off. We were told there
is no reason to be afraid of the dark. But today, adults across the
Pacific Northwest have every reason to fear the darkness that could
blanket our region.
Thankfully, for the first time in a decade, a President and
Congress are seriously considering a national energy policy designed to
help bring together business, government, local communities, and
citizens to promote dependable, affordable, and environmentally
friendly energy for the future.
I am pleased that the administration's policy promotes energy
conservation and efficiency. These elements are crucial, especially in
my home state of Washington. Across the Pacific Northwest, energy
demand is outpacing supply because of a record low water year and a
high priced West Coast power market. This deficit is driving up monthly
electric bills, and making it difficult for families to make ends meet.
Conservation is an important piece of the solution in easing our
energy problems. We must provide the tools to empower families and
businesses across America so they can better manage their energy use.
We can encourage conservation with tools like ``smart meters,''
real-time metering devices that tell consumers the cheapest and best
time to flip on the switch, and run the washer and dryer. Currently,
utility bills give no indication of when power is cheap and when it is
expensive. For example, consumers washing laundry between five and nine
o'clock in the evening will pay up to 25% more in their electric bill
than they will if they wait until after nine.
When consumers' peak costs are averaged with off-peak costs in
their utility bill, the higher cost of peak electricity supplies is
masked. As a result, consumers may not recognize the benefits of
changing their energy habits.
Because it is our responsibility as public servants to propose
thoughtful and sensible solutions to this energy quagmire, I have
introduced the Energy Efficiency and Conservation Incentives Act of
2001, providing tax incentives designed to promote energy management,
conservation, and efficiency through real-time metering.
Thanks to innovative technology, we can now make better choices
regarding our power usage. Electric and natural gas meters can be
fitted with smart meters so consumers can receive current pricing
information and adjust their air conditioners down during peak usage
periods and turn them back up later in the day, when usage drops and
prices are lower.
These new hi-tech devices allow us to monitor our daily use of
electricity and provide us information on how to save money and energy.
With this device, consumers can easily conserve the electricity they
use on a daily basis.
Specifically, my legislation provides two tax incentives to
encourage the use of smart meters:
First, utilities will receive a $30 deduction per
smart meter they install with this new technology.
Second, it would allow these devices to be depreciable
over three years.
Utility companies will be able to take the tax deduction from their
corporate taxable income. The amount of the one-time deduction is
roughly equal to the cost of the device. Existing meters that are
retrofitted are also eligible for the deduction.
The benefits of information as it relates to conservation cannot be
overstated. In my home district, for example, if just half the
customers did their laundry in off-peak hours rather than during on-
peak hours, it would free up enough power to serve nearly a quarter of
a million households.
As we move forward and continue to grapple with our national energy
problems, we must embrace market-based solutions to conservation. My
legislation is an innovative way to employ new technologies to prompt
changes in consumer behavior. Conservation does not have to be dictated
by the federal government. But rather it can be learned, and with the
right motivation and structure, conservation can work.
This device and other reasonable conservation measures will help us
squeeze more efficiency out of our existing system. Let's not surrender
to misleading and divisive rhetoric or to quick fix solutions like
price caps. More importantly, let us not pass up this opportunity to
propose thoughtful and responsible conservation solutions.
In addition to conservation, a sound national energy policy should
encourage a clean and diverse range of domestic energy supplies. Such
diversity helps to ensure that future generations of Americans will
have access to the energy they need. Renewable energy can help provide
for our future needs by harnessing abundant, naturally occurring
sources of energy.
Hydropower is the nation's leading renewable resource. Overall,
roughly 98,000 megawatts of clean and efficient power is produced from
hydro facilities--enough electricity for 98 million homes. According to
the Department of Energy, approximately 4,300 megawatts of additional
power could be developed from existing hydroelectric facilities in the
near term--none of this development would require new dam construction.
Bringing new hydro generation on-line, however, is increasingly
difficult and expensive.
That is why I have introduced H.R. 1677, the Hydropower Capacity
Improvement Act. My bill provides a tax credit for incremental
hydropower for ten years. This tax credit will encourage hydro owners
to modernize equipment and become more efficient in their energy
production. As we face rising energy prices and increasing levels of
pollution, it is clear that we must do as much as we can to promote
clean, reliable and domestic resources like hydropower. Today more than
ever, there is a need to provide incentives to encourage the
development of incremental hydropower.
In addition to hydropower, we must also address the current laws
governing the use of biomass material. This committee has previously
heard testimony from witnesses stating that the biomass provisions
under Section 45 are not applicable to most taxpayers since they are
defined as ``closed loop'' credits. Currently, only agricultural
products grown exclusively for combustion in a power plant are eligible
for the credit. We should amend Section 45 from ``closed loop'' to
``open loop'' so that a broader cross section of taxpayers can take
advantage of the credit.
The forest products industry, for example, generates a substantial
portion of its onsite electricity from renewable resources. Although
the industry is 60% percent self-sufficient using biomass, they are
forced to turn to other sources to meet the balance of their energy
needs. High oil and gas prices--coupled with energy shortages--threaten
the financial well being of the industry and its employees. Converting
the biomass credit from ``closed'' to ``open loop'' will help alleviate
the strain the industry faces.
Thank you for the opportunity to testify and I would be happy to
answer any questions.
Chairman McCrery. Thank you, Ms. Dunn. And now another
Member of the Ways and Means Committee, Mr. Mac Collins from
Georgia, Mr. Collins.
STATEMENT OF THE HON. MAC COLLINS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF GEORGIA
Mr. Collins. Thank you, Mr. Chairman. Thank you for the
opportunity to testify before this Subcommittee this afternoon.
I have three separate recommendations relevant to the
Subcommittee's review of energy policy. The first issue is
municipal utility natural gas supply for H.R. 1986, legislation
that would permit municipal gas systems to continue to use
their tax-exempt bond authority to purchase natural gas on a
long-term basis. Twenty-two additional members of the House
have also cosponsored this legislation, including seven members
of the Ways and Means Committee, and there is a companion bill
that has been introduced in the Senate by Senator Breaux.
There are approximately 1,000 publicly owned gas
distribution systems in the U.S., primarily located in small
towns and rural communities. Deregulation of the natural gas
industry in the early nineties made it more difficult for small
municipal gas systems to locate gas suppliers, arrange
transportation and maintain an assured supply of natural gas
for their customers.
In response, many formed joint action agencies to acquire
and manage the delivery of gas. Sixty-four towns in my home
State contract with the Municipal Gas Authority of Georgia for
their natural gas supply. The Georgia Authority buys gas on the
long-term basis to obtain the most reliable, reasonably priced
product for their customers. Obtaining the best price is
important, but another priority is ensuring a dependable
supply, not only for residential customers, but also for
industrial operations so that they will know that locating in a
small rural community will not mean a greater threat of supply
disruptions.
Until August 1999, joint action agencies issued tax-exempt
bonds to finance long-term, prepaid supply contracts with gas
suppliers, usually for a 10-year period. However, in 1999, the
IRS issued a request for public comment on whether funding
these contracts with bonds proceeds violates the tax exempt
bond arbitrage rules. Since that time, the IRS has failed to
issue any regulation, revenue ruling or general guidance.
With the simple comment request created uncertainty,
essentially denying municipal gas systems the ability to most
effectively fund the long-term purchase of gas. Today, natural
gas prices have reached record levels. Shortages have
developed, and the markets are experiencing disruption. The
inability to use tax-exempt bond authority to finance long-term
prepaid contracts further undermines access to an assured
supply of reasonably priced natural gas.
Current law is clear. Arbitrage rules do not permit tax
exempt bonds to be used to raise proceeds that are then used to
acquire, and I quote ``investment-type property,'' which has a
higher yield in bonds. However, treasury regulations provide
that a prepayment does not give rise to investment-type
property if the prepayment, one, is made for a substantial
business purpose other than investment return, and, two, the
insurer has no commercially reasonable alternative to the
prepayment.
Municipal gas systems clearly have a substantial business
purpose for entering into prepayment transactions and no
commercially reasonable alternative. H.R. 1986 would clarify
the law and remove the confusion created by the IRS. It would
ensure that a long-term prepaid contract for natural gas used
by public utilities do not violate the arbitrage rules. And it
is my hope that we can address this problem as part of the
comprehensive energy legislation.
The second issue is tax incentives for electric vehicles.
We introduced this legislation last year. It would provide a
$4,000 tax credit for the--for those who purchase electric
vehicles. Especially in areas like Atlanta where youhave a lot
of commuters, it would be very helpful. That is part of a legislation
that Representative Camp has introduced and also which I support.
The third is the Generator Tariff Elimination Act. I
introduced this in the last Congress, and while it is--and,
again, this year. While this is actually a tariff issue rather
than a tax concern, I believe it is relevant to today's
discussion about energy costs imposed by the Federal
Government. This measure would repeal the duty on the
importation of replacement steam generators used in nuclear
power plants. Steam generators are necessary for the operation
of nuclear power facilities. Despite the fact that there is no
domestic manufacturer of these generators, a tariff is imposed
on their importation.
Prior to the conclusion of last year's Congress, a
reduction in this tariff was included in the Miscellaneous
Tariff And Technical Corrections Act, H.R. 4868. However, the
tariff should be fully repealed. This is an indirect tax on
energy that is passed onto the ratepayers, directly and
indirectly.
Mr. Chairman, I appreciate the opportunity to bring these
issues before you and the Subcommittee, and hopefully we can
have assistance in seeing that they become reality. Thank you.
[The prepared statement of Mr. Collins follows:]
Statement of the Hon. Mac Collins, a Representative in Congress from
the State of Georgia
THE MUNICIPAL UTILITY NATURAL GAS SUPPLY ACT (H.R. 1986)
The first issue is the Municipal Utility Natural Gas Supply Act
(H.R. 1986)--legislation I have introduced along with Representative
John Lewis. This bill would permit municipal gas systems to continue to
use their tax exempt bond authority to purchase natural gas, on a long
term basis, for their customers. Twenty-one additional Members of the
House have cosponsored this legislation, including seven Members of the
Committee on Ways and Means. [A companion bill has been introduced in
the Senate by John Breaux and six of his colleagues].
There are approximately 1,000 publicly owned gas distribution
systems in the United States--primarily located in small towns and
rural communities. Deregulation of the natural gas industry in the
early 1990s made it more difficult for small municipal gas systems to
locate gas suppliers, arrange transportation and maintain an assured
supply of natural gas for their residents and businesses. In response,
many formed joint action agencies to acquire and manage the delivery of
gas.
Sixty four towns in my home state contract with the Municipal Gas
Authority of Georgia for their natural gas supply. The Georgia
authority buys gas on a long term basis to obtain the most reliable,
reasonably priced product for their customers. Obtaining the best price
is an important consideration. But even more important is ensuring a
dependable supply, not only for residential customers, but also so
industrial operations know that their location in a small, rural
community will not mean a greater threat of supply disruptions.
In today's energy markets, the most reliable means of obtaining
natural gas is through long-term prepaid supply arrangements. Until
August of 1999, joint action agencies issued tax-exempt bonds to
finance prepayment supply contracts with gas suppliers to obtain a
long-term supply of gas (usually ten years).
However, in 1999, the IRS issued a request for public comment on
whether the use of tax-exempt bonds to fund long term prepaid natural
gas supply contracts violates the tax exempt bond arbitrage rules.
Since that time, the IRS has failed to act on the request for comment.
No regulation, revenue ruling or any other guidance has been issued.
But the simple request for comment created uncertainty and killed the
market, denying municipal gas systems the ability to most effectively
fund long term purchases of gas.
Today, natural gas prices have reached record levels, shortages
have developed, and the markets are experiencing disruption. The
inability to use tax-exempt bond authority to finance long term prepaid
contracts further undermines access to an assured supply of reasonably
priced natural gas for consumers.
Current law is clear. Arbitrage rules do not permit tax-exempt
bonds to be used to raise proceeds that are then used to acquire
``investment-type property'' which has a higher yield than the bonds.
However, Treasury regulations provide that a prepayment does not give
rise to investment-type property if the prepayment is made for a
substantial business purpose other than investment return and the
issuer has no commercially reasonable alternative to the prepayment.
The municipal gas systems clearly have a ``substantial business
purpose'' for entering into prepayment transactions and ``no
commercially reasonable alternative.''
The legislation I have introduced simply clarifies the law to
remove the confusion created by the IRS by providing that long term
prepaid contracts for natural gas used by public utilities do not
violate the tax-exempt bond arbitrage rules. It is my hope that we can
address this problem as part of comprehensive energy legislation.
ELECTRIC VEHICLE TAX INCENTIVES
Purchase Incentives
The second issue is tax incentives for electric vehicles. Through
the Energy Policy Act, Congress enacted expiring tax incentives aimed
at reducing the costs and expanding access to pollution-free electric
vehicles. The technology is here. But the cost to consumers remains
high.
Legislation I have previously introduced would extend and modify
the current-law provision which provides a tax credit of 10%, up to
$4,000, toward the purchase cost of an electric vehicle. In large
commuter cities such as Atlanta, electric vehicles are increasingly
becoming a viable mode of pollution-free transportation. Companies such
as Georgia Power are implementing creative electric vehicle incentive
programs for employees that are being fully utilized--in fact demand
for electric vehicles outpaces the supply. I support legislation which
would extend the expiring tax credit through 2008 (which currently
expires 2004) and convert the credit to a flat $4000 amount.
Infrastructure Incentives
Additionally, the committee should consider other tax-based
incentives which would offset the costs of electric vehicle
infrastructure. Under current law, businesses are provided a $100,000
deduction for the purchase of clean vehicle fueling property (batteries
for electrics, hydrogen stations for fuel cells). This provision
expires in 2004 and should also be extended. There are several other
incentives which have been included in the Clean Efficient Automobiles
Resulting From Advanced Car Technologies (CLEAR ACT) Act (H.R. 1864),
introduced by Representative Dave Camp. Among those are additional
infrastructure incentives including a $30,000 credit against the cost
of the construction and installation of either public or private
recharging stations.
GENERATOR TARIFF ELIMINATION ACT (H.R. 1141)
Lastly, I have introduced the Generator Tariff Elimination Act
(H.R. 1141). While this is actually a tariff issue, rather than a tax
issue, I believe it is relevant to today's discussions about energy
costs imposed by the Federal Government. This measure would repeal the
duty on the importation of replacement steam generators used in nuclear
power plants. Steam generators are necessary for the operation of
nuclear power facilities. Despite the fact that there is neither a
current nor any reasonable likelihood of future domestic manufacturing
capability of these generators, a tariff is imposed on these imports.
Prior to the conclusion of last year's Congress, a reduction in this
tariff was included in the Miscellaneous Trade and Technical
Corrections Act (H.R. 4868).
However, this tariff should be fully repealed. While providing no
benefit to any domestic manufacturer, this indirect ``tax'' on energy
is passed on to the ratepayer directly and entirely through the state
public utility commissions in ratemaking proceedings. This tariff
repeal legislation enjoys bipartisan support in both the House of
Representatives and the Senate. I hope it can be considered as a part
of any energy-related bill that the committee reports.
Thank you for the opportunity to testify on these issues.
Chairman McCrery. Thank you, Mr. Collins. And now another
Member of the Committee, Jerry Weller from Illinois, Mr.
Weller.
STATEMENT OF THE HON. JERRY WELLER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Weller. Thank you, Mr. Chairman, Mr. McNulty and my
fellow Members of the Subcommittee. I appreciate very much the
opportunity to appear before this Subcommittee, and with your
permission, Mr. Chairman, I would prefer to summarize my
testimony rather than read it in its entirety. But I do want to
commend you for your leadership on conducting these hearings as
we move forward to develop a bipartisan national energy policy.
As President Bush noted, we are now paying the price of the
failure for our country to have a national energy policy over
the past decade.
Of course, we have seen that with higher gasoline prices in
Chicago last summer, higher gasoline prices in Chicago this
summer, higher home heating costs in Chicago this past winter.
And I would like to present to the Subcommittee today two
initiatives which I would like to offer to help address our
concerns with rising natural energy prices and our need to
reduce our dependence on imported sources of energy.
Two initiatives today I wish to discuss with the
Subcommittee. One addressed the tax treatment and nuclear
decommissioning funds as we look at electricity restructuring
around the country, and also legislation which I will be
introducing tomorrow, providing tax incentives to create an
energy-efficient home, as well as improvements, as well as new
construction.
Nuclear power, of course, is a major part of electricity
production in the United States. It has demonstrated the
ability to be safe, and also when you are concerned about clean
air, a way of providing safe energy without having an impact on
air quality.
I would note that across this country, we have seen more
and more States that have moved forward in electricity
restructuring. As a result of that, you are now seeing
utilities that are decidedly in different portions of the
business, but as a result of that, you are seeing nuclear power
plants change hands, one company buying from another. As a
result of that, we need to modernize the tax treatment. The
nuclear decommissioning funds that these funds are in place
when the time comes to decommission these plants. I believe as
we develop tax provisions to address the need to reduce our
energy dependence on overseas sources, as well as to find safe
and environmentally safe uses of generating electricity, that
we need to address this important issue involving the
decommissioning of nuclear power plants by modernizing the tax
treatment.
I also believe, Mr. Chairman, that we need to find ways to
encourage investments by consumers, as well as home builders,
in development of energy efficient homes. Tomorrow, I will be
introducing legislation along with a number of my colleagues,
providing up to a 20 percent tax credit, up to $2,000 which can
be used either by the consumer, by the homeowner or by the home
builder for making at least a 30 percent improvement in
theenergy efficiency of new and existing homes. And this would--this
tax incentive would be available for installing new windows,
installation, energy efficient air-conditioners, water heaters and home
heating appliances.
Mr. Chairman, we are looking for ways to reduce our
dependence on imported sources of energy, and I believe by
encouraging the development and improvements to homes, creating
energy efficient homes, we can move toward that goal. By
helping reduce the demand on the Nation's power grid and lower
cost for consumers, it is estimated in 1998 that there was an
estimated 74 million single family homes, 6 million multi-
family homes, and 6 million manufactured housing units in the
United States, which accounted for 92 percent of total
household energy consumption.
In 1998, these homes accounted for nearly 20 percent, one-
fifth of all energy consumed in our country. By making changes
in the energy efficiency of our homes, consumers can save real
money. It is estimated that consumers can save 10 percent or
more on energy bills by simply reducing the number of air leaks
in their home. Double-pane windows with low emission coating
can reduce heating bills by 34 percent in climates such as we
have in my home area in Chicago.
If all households upgraded their insulation to meet the
International Energy Conservation Code Level, which is a
private sector energy code used in the United States, this
Nation would experience a permanent reduction of annual
electricity consumption totaling 7 percent of current total
electricity consumed. That is real savings, Mr. Chairman, and I
believe by providing tax incentives, not only that I am
suggesting, but others have suggested, that we can move toward
this goal.
Bottom line is, it will reduce our dependence on imported
sources of energy, it will help the environment, and of course
it will help our economy. So, Mr. Chairman, I thank you for the
opportunity to be--sit before you today and present a couple of
ideas that I have. I look forward to working with you, and I
hope that we can work together to develop bipartisan energy
policy for the good of our Nation. Thank you, Mr. Chairman.
[The prepared statement of Mr. Weller follows:]
Statement of the Hon. Jerry Weller, a Representative in Congress from
the State of Illinois
Mr. Chairman, thank you for the opportunity to testify before the
Subcommittee on two energy issues that are important to my constituents
in Illinois, as well as consumers across the country. As you may be
aware, the Chicago region is currently faced with some of the highest
energy costs in the nation. This is costing real people real money.
Did you know that the average household in America spends nearly
$1,300 per year on home energy costs? This is an average of more than
$100 per month. Again, this is real money for real people.
I would like to address two issues today (1) the need to address
the tax treatment of nuclear decommissioning funds, and (2) a bill I am
introducing later today to allow for a tax credit for making energy
efficient home improvements to a newly constructed or existing home.
As you may know, I have more nuclear power plants in my district
than any other Congressional district in the United States. This
industry is important to my constituents because it provides electric
power and jobs for thousands of people. For the past two years, I have
been the lead sponsor of legislation to make ensure that, in a
competitive electricity market, funds continue to be available to pay
for safe and timely decommissioning of nuclear power plants. I believe
that this is a public policy we want to encourage.
The tax rules governing these funds are out of date because of
electric utility restructuring. Adjustments to the tax code need to be
made to ensure that policies are kept in place which ensure that
nuclear power plants are decommissioned as they should be. To this end,
during the 106th Congress and again this year, Congressman
Cardin and I have introduced legislation to modernize the tax
provisions related to decommissioning nuclear power plants. Last
Congress, portions of this legislation were included in a large tax
bill which passed the House and Senate and was sent to President
Clinton and ultimately vetoed. I am pleased that this year, President
Bush has included provisions related to decommissioning nuclear power
plants into his budget. Our legislation adapts the tax code to reflect
the competitive utility market that exists today. It helps facilitate
the transfer and sale of nuclear power plants. I believe that ensuring
that nuclear power plants are decommissioned safely is a policy we
should all support. I encourage my colleagues to join me in doing so.
While I strongly believe that enacting this legislation to
encourage proper decommissioning of nuclear power plants is the right
thing to do, I also believe that given the skyrocketing energy costs
consumers are facing, we should also look for ways to conserve energy
and slow the rising demand which is driving up costs. To this end, I
will be introducing legislation later today which will provide a 20%
tax credit, up to $2,000, to individuals and homebuilders for making at
least 30% in improvements to the energy efficiency of new and existing
homes. This includes installing new windows, insulation, energy
efficient air conditioners, water heaters and home heating appliances.
This tax credit will significantly reduce the demand on the
nation's power grid and lower costs for consumers. In 1998, there were
an estimated 74 million single family homes, 6 million multi-family
homes and 6 million manufactured housing units in the United States
which accounted for nearly 92% of total household energy consumption.
Additionally, in 1998, homes accounted for nearly 20% of all of the
energy consumed in the United States.
By simply making changes in energy efficiency to their homes,
consumers can save real money. Consumers can save 10% or more on energy
bills by simply reducing the number of air leaks in their home. Double
pane windows with low emissivity coating can reduce heating bills by
34% in cold climates like Chicago.
If all households upgraded their insulation to meet the
International Energy Conservation Code level, which is a private sector
energy code used in the United States, the nation would experience a
permanent reduction of annual electric consumption totaling 7% of the
total consumed. This is a real savings.
This proposal doesn't only benefit individuals, but it benefits the
environment and the entire economy. Reduced energy consumption reduces
our reliance on imported oil. By increasing energy efficiency in homes,
the emission of greenhouse gasses is significantly reduced. At the same
time, construction and improvements made to homes will create new jobs.
Mr. Chairman, I encourage my colleagues to join me in supporting
this common-sense, long-term energy efficiency measure. I believe that
it is in the best interests of our country to reduce our reliance on
foreign energy sources by supporting and encouraging proper use and
decommissioning of nuclear power plants, as well as conservation of
energy by encouraging consumers to make energy efficient home
improvements.
I appreciate the opportunity to testify before the Subcommittee
regarding these important issues and I would be pleased to answer any
questions.
Chairman McCrery. Thank you, Mr. Weller. And now another
Member of the Ways and Means Committee, the gentleman from
Kentucky, Ron Lewis, Mr. Lewis.
STATEMENT OF THE HON. RON LEWIS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF KENTUCKY
Mr. Lewis. Mr. Chairman, and Members of the Subcommittee, I
thank you for the opportunity to testify today about my
legislation to help increase the use of biofuels. Biofuels,
such as ethanol and biodiesel, are renewable sources of fuel,
that I believe can play a large role in our future energy
security. Our vehicles and economy have become increasingly
energy efficient and much friendlier to our environment. The
demand for fuel will continue to increase. While biofuels are
not able to replace gasoline or diesel fuel yet, additional tax
incentives for fuel retailers, consumers and businesses can
help promote their use.
Our farmers currently produce a surplus of corn and
soybeans and could meet the demands of higher biofuel use.
Every gallon of these fuels used means fewer barrels of foreign
oil we have to buy.
Ethanol tax laws already on the books have made ethanol
more price competitive, improved its quality as a fuel and
encouraged its production. In 1999, the United States consumed
1.4 billion gallons of ethanol, both blended and unblended.
That may sound like a lot, but it makes up only 1.2 percent of
the nearly 125 billion gallons of gasoline used this same year.
When it comes to the more pure forms of ethanol used, just more
than 3 million gallons were consumed in the past year.
Biodiesel use has expanded to about 60 billion gallons per
year. Manufacturers are making more flex-fuel vehicles for
ethanol that cost basically the same as vehicles that run only
on conventional gasoline. Biodiesel, a newer alternative, has
the advantage of compatibility with conventional diesel
engines, eliminating the cost of new vehicles or engines. These
are just two factors that make biofuels attractive choices for
renewable fuels.
Tax incentives, rather than mandates on fuel content or
vehicle use, are a better means of encouraging private-sector
consumers to choose biofuels. We have invested in research and
provided fuel tax exemptions for refiners and marketers and
received support from interests in agriculture and the
environment. Retailers and consumers, however, need to be a
large part of that incentive package.
Fueling infrastructure has not expanded rapidly because
retailers don't feel there is enough demand. Consumers, on the
other hand, are not demanding these fuels or vehicles that use
them because of the lack of fueling infrastructure.
My legislation will add and expand tax benefits for sale
and use of biofuels for retailers and consumers. First, this
bill will expand and improve tax credits available for the
purchase and installation of infrastructure for the sale or
personal use of pure forms of biofuels. It is expensive for
retailers or businesses and farmers with their own refueling
equipment to add new tanks or pumps for these fuels. Using tax
credits for refueling property and adding a credit for
installation costs help retailers, individuals and businesses
offer these fuels.
Second, I propose that retailers receive credit for the
sale of pure forms of biofuels so that they have an additional
reason to promote and sell these to consumers. Savings due to
these income tax credits for retailers could also be passed on
to consumers in the form of fuel cost reduction, encouraging
their use of biofuels.
My legislation also provides businesses with more tax
incentives rather than Federal mandates to use ethanol or
biodiesel in their vehicles, whether they operate a single
delivery van or fleet of trucks.
Finally, this legislation includes provisions to expand the
small producers' tax credit for ethanol so that farm
cooperatives can receive equitable tax treatment for their role
in ethanol sales and production.
I look forward to working with the Ways and Means Committee
on these and other tax incentives we can offer to increase the
sale and use of renewable biofuels. While they alone will not
solve all of our energy problems, Istrongly support the
promotion and use of biofuels in order to reduce our dependence on
foreign oil, increased fuel supply, provide air quality benefits and
improve the livelihood of our farmers.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Lewis follows:]
Statement of the Hon. Ron Lewis, a Representative in Congress from the
State of Kentucky
Chairman McCrery and members of the subcommittee, thank you for the
opportunity to testify today. I believe our nation has an energy supply
problem and faces even greater problems in the years to come if we
continue to only rely on conventional fuel sources. Consumer demand for
fuels continues to increase, even while our vehicles and economy have
become increasingly energy efficient and much friendlier to our
environment.
One way we can meet increased fuel demand is to encourage use of
more renewable fuels, particularly biofuels such as ethanol or
biodiesel. Our farmers currently produce a surplus of corn and soybeans
and could meet the demands of higher biofuel use. Every gallon of these
fuels used, even when used as blends, displaces a gallon of
conventional gasoline or diesel fuel. The excise tax exemption and
research have made ethanol more price competitive and have encouraged
its production.
In 1999, the United States consumed 1.4 billion gallons of ethanol,
mostly in the form of a 10 percent blend with gasoline. That may sound
like a lot, but it makes up only 1.2 percent of the nearly 125 billion
gallons of gasoline used in the same year. When it comes to the more
pure forms of ethanol used in flexible fuel or alternative fuel
vehicles, just more than 3 million gallons were consumed in the past
year. Biodiesel use has expanded to about 60 million gallons per year.
Manufacturers are making more flex-fuel vehicles that cost
basically the same as vehicles that run only on conventional gasoline.
Biodiesel, a newer alternative, has the advantage of compatibility with
conventional diesel engines, eliminating the cost of different vehicles
and other infrastructure. These are two factors that make biofuels
attractive choices for renewable fuels.
Tax incentives, rather than mandates on fuel content or vehicle
use, are a more preferable means of encouraging use of biofuels in the
private sector. With the research investments, tax treatment and
support from a variety of interests, these fuels still have not reached
the use level we all would hope for. Fueling infrastructure has not
expanded rapidly because retailers and others do not see the consumer
demand. Consumers, on the other hand, may not be drawn to these fuels
because of the lack of fueling infrastructure.
I am working on legislation to add and expand tax benefits for sale
and use of biofuels. We need to expand and improve tax credits
available for the purchase and installation of infrastructure for the
sale and personal use of the more pure forms of biofuels. These credits
would go to retailers, individuals or businesses. The addition of a
sales tax credit for retailers would also provide incentive to promote
and sell ethanol and biodiesel. Some of these savings would be passed
on to consumers, encouraging their use of biofuels. I also believe we
should provide businesses with more tax incentives, rather than federal
mandates, to use biofuels in their vehicles, whether they operate a
single delivery van or a fleet of trucks. Finally, I support expanding
the small producers tax credit for ethanol so that farm cooperatives
can receive equitable tax treatment for their role in ethanol sales and
production.
I look forward to working with the Ways and Means committee on
these and other tax incentives we can offer to increase the sale and
use of renewable biofuels. While they alone will not solve all of our
energy problems, I strongly support the promotion and use of biofuels
in order to reduce our dependence on foreign oil, increase fuel supply,
provide environmental benefits and improve the livelihood of our
farmers.
Chairman McCrery. Thank you, Mr. Lewis, and thank all the
Members of the panel for your testimony. Does any Member of the
Subcommittee wish to inquire of these panelists?
Thank you very much, gentlemen and lady. We look forward to
working with you to bring some of your suggestions to fruition.
No questions, Mr. Collins. If you have questions of us, you are
free to ask.
[Laughter.]
Our next panel would please come forward, Mr. Gephardt, Mr.
Stenholm, Mr. Filner, Mr. Sandlin. Welcome, gentlemen, and to
introduce our first witness on this panel, I defer to my
colleague from New York, Mr. McNulty.
Mr. McNulty. Thank you, Mr. Chairman.
I am pleased to welcome before the Subcommittee someone who
has served as a Member of the House of Representatives for a
quarter of a century. He has been a leader on energy and tax
issues, among others. He has risen through the ranks to become
the Democratic leader in the House of Representatives, but Mr.
Chairman, most important of all, he is a former Member of the
Ways and Means Committee.
So we all want to welcome back the distinguished gentleman
from Missouri, Mr. Gephardt.
Chairman McCrery. The gentleman from Missouri may proceed
STATEMENT OF THE HON. RICHARD A. GEPHARDT, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MISSOURI, AND HOUSE DEMOCRATIC
LEADER
Mr. Gephardt. Thank you, Mr. Chairman.
Members of the Committee, thank you to my friend from New
York for that generous introduction. Clearly my service on this
Committee in years past is the highlight of my career in the
House, so I am always happy to come back here. And I commend
all of you, because I know how important the work is that you
do on a daily basis in so many different, important areas.
I am really pleased to be part of this hearing today. I
want to thank the Subcommittee for inviting us to testify on
this important subject. To put it in a word, energy is a huge
issue for all of us as Americans, and Missouri people, for two
summers in a row, have watched gas prices spike up to $2 a
gallon.
I have been in California twice in the last 3 months. I
have seen firsthand how the energy crisis is impacting people's
lives. One survey of small business people in San Diego found
that two out of three could go under if energy prices stay as
high as they have been in the last year.
People are paying astronomical electric rates at home. Some
people have a residential bill of $1,250 a month. Consumers and
small businesses can't afford these high prices at the pump or
in the home. Families are canceling vacations. West Coasters
cannot continue to live under the threat of rolling blackouts.
A couple of weeks ago I was at an energy forum in Oakland.
We heard how it is affecting the disabled senior citizens and
others. And the fact is, in California thousands of people are
on some kind of life support machinery; when blackouts strike,
their lives are at risk.
So this problem is huge and it is national. The current
crisis I think should give all of us pause.
We must move ahead with a policy that helps consumers now.
That is why we have fought so hard for temporary price caps on
wholesale energy prices, especially in the West.
But we also have got to have a long-term policy. I believe
we have to set idealogy aside and approach this issue in the
pragmatic, common-sense way that I think most Americans do.
This is no time for a one-sided or narrow approach. We need to
find ways to increase production, bring new plants online, and
we must make efficiency a major part of any strategy.
There are many ways to get at this. I have always been for
incentives rather than penalties. I think the positive is
always better than the negative. We need to figure out how to
give real incentives for efficient buildings, increased
production in renewable energy and for the hybrid automobiles
which can help solve our energy problems.
One of my concerns about the tax bill the President, just
signed, is that it does not leave enough room for action on
energy. We should be promoting immediate relief for consumers
and helping to develop new technologies to promote energy
efficiencies in renewable sources. Unfortunately, with the
surplus diminished, our options are limited.
We have many of these new technologies in front of us right
now. You can buy cars right now; for little more than $20,000
you can buy a hybrid car. If we put a real tax incentive behind
it, we might really get scale of production for the producers
and begin to make a real difference in the emissions and
efficiencies of cars.
Fuel cells are right behind.
If we invest wisely in research and tax incentives, the
return would be terrific. In fact, I am told that there are now
available kits that could convert internal combustion engines
to run on hydrogen fuels right now. It seems to me we should
look at incentives for those kinds of technologies.
I saw a tag line on an ad for the biotech field the other
day; it said, ``We will never know how far we can go''; the tag
line should be, ``unless we try.'' We can do a lot on global
warming. We can do a lot on energy and the environment, but we
have got to try.
A good energy policy, in my view, should do two things.
First, it should produce reliable and affordable energy;
second, it should sustain the environment. That is what the
American people want, and that is what we deserve. It can be
done with tax incentives and research playing a vital role in
promoting innovation, inefficiency and production. We will
never be able to pump more oil than OPEC, but we win every
single time when we use technology and innovation to solve our
problems.
My colleagues and I on the Democratic side recently put
forward our principles for sound energy policy. We hope this
Committee will give consideration to the ideas in that report.
We won broad support from conservative to progressive Members.
We found agreement on production and efficiency incentives that
are together the most cost-effective way to balance supply and
demand.
Many of the principles we supported are already represented
in bipartisan bills before the House. For example, small
independent energy companies produce 50 percent of the
petroleum and 65 percent of the natural gas in the lower 48. We
have proposed tax incentives to help keep marginal wells in
production and to encourage increased production by these
small, but crucial, energy companies.
I think these ideas have support of both Republicans and
Democrats. Ed Markey and Duke Cunningham have legislation that
would dramatically increase energy savings in commercial
buildings and new housing. It uses existing technology, but
would stimulate the market for new ideas. Experts at the
Department of Energy have predicted that energy efficiency
measures like Markey-Cunningham can produce energy savings
equal to 600 300-megawatt power plants over the next 20 years.
That is over 40 percent of the number of new plants the
President has suggested that we build. So I hope that we will
look at that legislation.
For anyone who still questions the importance of having a
balanced energy policy, I want to point out one fact. From 1973
to the present, Americans have saved between $150 and $200
billion by improving energy efficiency.
Another promising idea is hydrogen-run fuel cell cars and
other hybrid engine technologies. The Democratic energy plans
in both the Clinton and Bush administrations propose incentives
for these and similar kinds of cars. If we structure sensible
local and Federal tax credits, we can help make these cars a
success. Also, hydrogen fuel cell technology holds great
promise not just for powering cars, but also for electrifying
buildings in a more efficient, environmentally sensitive
manner.
What we lack is leadership in public policy that will lead
us in that direction.
The same applies to renewable sources like solar and wind.
For instance, presently wind power produces only 1.3 percent of
yearly capacity in California. According to the American Wind
Energy Association, the wind potential of California is 30
percent of California's total energy demand. There are several
bills with Republican and Democratic sponsors that give strong
support to developing cost-effective renewable energy.
Finally, one of our greatest failures is not sustaining a
consistent, long-term energy policy. We put money in research
and tax incentives for efficiency and renewables when the price
of gasoline, oil and natural gas goes up; and when the price
goes down, we cut out these same programs. We must adopt new
thinking and new ideas so the American people have the
opportunity to reach for their twin goals of plentiful energy
and protecting our environment at the same time.
The problems are real, the solutions are real. There are
hybrid cars on the market today that get 70 miles per gallon
that have much less emission than present cars. Who would have
believed that that could be true 25 years ago, the last time we
faced an energy crisis? We have to find ways to release the
full creativity and ingenuity of the American people in
resolving these problems.
I am convinced if together, in a bipartisan way, we sustain
a long-term energy policy in this country, we can solve these
problems both in terms of energy and the environment and we can
make a better America.
Thank you very much.
[The prepared statement of Mr. Gephardt follows:]
Statement of the Hon. Richard A. Gephardt, a Representative in Congress
from the State of Missouri, and House Democratic Leader
``Thank you Chairman McCrery and Ranking Member McNulty for
inviting me to testify about one of the biggest issues of the day.
``Energy is a huge issue for all Americans. In Missouri, people for
two summers in a row have watched gas prices spike up to $2 per gallon.
I've been to California twice in the last three months. I've seen
first-hand how the energy crisis is impacting people's lives. One
survey of small businesses in San Diego found that two out of three
could go under if energy prices stay as high as they've been in the
past year. People are paying astronomical electricity rates, and I've
even heard of one family paying as much as $1,250 each month in their
home energy bills.
``Consumers and small businesses simply can't afford to pay such
high prices at the pump or in the home. Families have been canceling
vacations because they can't afford the price of gas. Meanwhile,
Californians, Oregonians, Washingtonians can not continue to live under
the threat of rolling blackouts which hit without notice, and with
devastating impact. Just a couple of weeks ago, I was at an energy
forum in Oakland. I sat with other members of Congress and listened to
people testify about how this crisis is affecting their lives. I found
one fact particularly striking. The fact was this: in California,
thousands of people are on some kind of life support machine. When
blackouts strike, their lives are at risk. For them, the energy issue
is not just about economics, it's a matter of life and death.
``So this is a huge immediate problem, and it's a long-term
national energy challenge. The current crisis should give all of us
pause. We must move ahead with an energy policy that helps consumers in
the here and now and creates a stable, sustainable energy supply over
the long-term. And whatever we do, we must not roll back our hard-won
progress on the environment. As difficult as this crisis is for many
Americans, I also see it as a golden opportunity for the future of our
country. Working together, we can address our short- and long-term
national energy needs.
``To do this, I believe we must set ideology aside and approach the
issue in a pragmatic way that makes sense for all Americans. This is no
time for a one-sided or narrow policy. It's no time to let theories
that are set in stone dictate or narrow our choices in energy policy.
We need to find ways to increase production and bring new plants on
line, and make efficiency a major part of any national energy strategy.
``There are many ways to get at this. I've always been for
incentives rather than penalties. I think the positive is always better
than the negative. We need to figure out how to give real incentives
for efficient buildings, increased production and renewable energy, and
for the hybrid automobiles which can help solve our energy problems.
One of my concerns about the large tax cut which the President just
signed is that it leaves little room for action on energy. We could be
promoting immediate relief for consumers, and helping to develop new
technologies to promote energy efficiencies and renewable sources.
Unfortunately, with our surplus diminished, our options are also
diminished.
``We've got many of these technologies in front of us right now;
this is not pie in the sky stuff. You can go buy these cars right now;
for a little more than $20,000 you can buy a hybrid car. If we put a
real tax incentive behind it we might really get it out there--get
scale of production for the producers and really begin making a
difference in the emissions of cars. Fuel cells should be right behind
it. If we invest wisely in research and tax incentives, the return
would be terrific. I saw kind of a tag line on an ad the other day that
said ``we'll never know how far we can go,'' and the tag to that should
be, ``unless we try.'' We can do a lot on global warming, we can do a
lot a lot on energy and the environment, but we must try. We must have
a policy and we have to stick with it.
``A good energy policy should do two things. First, it should
produce reliable and affordable energy. And second, it should improve
the environment. That is what the American people want, and that is
what they deserve. And it can be done, with tax incentives playing a
vital role in promoting innovation in energy efficiency and energy
production.
``We will never be able to pump more oil than OPEC, but Americans
will win every single time when we use technology and innovation to
solve our problems.
``My colleagues and I recently put forward Democratic principles
for sound energy policy. I believe this Committee should give
consideration to the ideas in our report. We won broad support from
conservative to progressive members. When we found agreement on
production and efficiency incentives that are together the most cost-
effective way to balance supply and demand.
``Many of the principles we supported are already represented by
bi-partisan bills in the House. For example, small, independent energy
companies produce 50% of the petroleum and 65% of the natural gas in
the lower 48 states. We have proposed tax incentives to help keep
marginal wells in production and to encourage increased production by
these small, but crucial energy companies. These ideas have the support
of Democrats and Republicans.
``Ed Markey and Duke Cunningham have legislation that would
dramatically increase energy savings in commercial buildings and new
housing. It uses existing technologies, but also helps to stimulate the
market for new ideas in energy efficiency. Experts at the U.S.
Department of Energy have predicted that energy efficiency measures,
like Markey-Cunningham, can produce energy savings equal to 600 300
mega-watt power plants over the next 20 years. That is over 40% of the
number of new plants President Bush wants to build. Our approach means
more power, lower energy bills, and billions saved from not having to
build 600 power plants.
``For anyone who still questions the importance of having a
balanced energy policy--one that includes both production and energy
efficiency--I point out one fact. From 1973 to the present, Americans
have saved between 150 and 200 billion dollars by improving energy
efficiency.
``One very promising idea is hydrogen-run, fuel cell cars and,
other hybrid engine technologies. The Democratic energy plan--and both
the Clinton and Bush Administrations--proposed incentives for these and
similar kinds of cars. If we structure sensible local and federal tax
credits, we can help make these cars a success.
``Hydrogen-fuel cell technology holds great promise for powering
autos and electrifying buildings in a much more efficient,
environmentally sensitive manner. What we lack is the public leadership
and public policy to lead us in that direction. The same applies to
renewable sources of energy like solar and wind. For instance,
presently wind power produces only 1.3% of yearly capacity in
California. According to the American Wind Energy Association, the wind
potential of California is 30% of California's total energy demand.
``There are several bills, with Republican and Democratic co-
sponsors, that give strong support to developing cost-effective
renewable energy.
``One of our great failures is not sustaining a consistent, long
term federal energy policy. First, we put money in research and tax
incentives for efficiency and renewables and then later we cut these
same programs. We must adopt new thinking and new ideas so the American
people have the opportunity to reach for their twin goals of plentiful
energy and protecting our environment at the same time.
``The problems are real. The solutions are real. There are hybrid
cars on the market today that get 70 miles per gallon. Who would have
believed that could be true 25 years ago, the last time we faced an
energy crisis? We must find ways to release the full creativity and
ingenuity of the American people in resolving this problem. We must
move forward in a pragmatic way that taps into our capacity for
innovation and new ideas, which Americans have in abundance, and which
I believe is the key to meeting the challenges I've just outlined
above.''
Chairman McCrery. Thank you, Mr. Gephardt. Mr. Stenholm.
STATEMENT OF THE HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Stenholm. Thank you, Mr. Chairman, Members of the
Committee; thank you for your foresight in holding these
hearings.
As a Member who has been here for 22 years, I will say that
at no time since the Carter administration has any
administration provided leadership for a national energy
policy, as I believe we are facing today and we are hearing
today; and also I am very glad to see this Committee giving
serious thought to a national energy policy as evident by the
hearings you are holding today and the activities that you, as
Members of this Committee, are in fact carrying on. And I thank
you for the privilege of participating.
I commend my colleague from Texas, Mr. Thornberry, for
introducing H.R. 805, the Independent Energy Production Act, of
which I am an original cosponsor. This bill is designed to
preserve the marginal properties and capital of independent oil
and gas producers, thus protecting this important, yet high-
risk, sector of our economy from volatile world price
fluctuations.
Marginal wells remain a huge source of oil and gas, yet
their profitability is questionable during periods of low
prices. Rather than merely capping these wells and creating
problems for States and Federal lands, a counter-cyclical tax
credit would keep these wells pumping, something that we failed
to do 2 years ago when we had the opposite of pricing that we
have today.
Moreover, I would encourage the Committee to create a plow-
back incentive, a 10 percent tax credit that would apply to
expenditures for domestic oil and gas exploration and
production. I also would ask you to look at the bill introduced
by Mr. Moore of Kansas to stimulate production of
unconventional gas by extending the section 29 tax credit for
unconventional gas production.
Unfortunately, despite the wide-ranging bipartisan support
for incentives to improve the domestic oil and gas industry, we
have been unable to enact these simple provisions that would
deter wild price swings that hurt American families. In a
letter I recently received from the Texas Alliance of Energy
Producers, the lack of support for independent producers was
noted with disappointment. The letter specifically states the
Alliance believes ``that price volatility is an issue that must
be addressed in the debate about a national energy policy.''
``The Democratic proposal does a much better job of using
the Tax Code to encourage exploration and development of
reserves. The President's plan does not have any tax provisions
for small independent producers.'' I submit their letter for
the record with my testimony.
We also have a growing demand for electricity and coal
which plays an important role in producing over half of our
electricity needs. In that light, it is important that we
provide incentives for reducing pollution from existing coal-
fired power plants. The Blue Dog energy plan, which Mr. Sandlin
will talk more about, proposes a 10 percent tax credit for
qualified expenses toward the construction of new power plants
using advanced clean-coal technology or the retrofitting and
repowering of existing conventional power plants with new
advanced clean-coal technology; and I would ask you to look at
that as you continue your deliberations.
Refining capacity, it is no secret that domestic refining
has actually fallen over the last decade even as demand for
refined petroleum has increased. As one who represents--at one
time, represented two refineries in my District--one is no
longer operating; it was closed because of its judgment that it
could not meet the standards that were implied. Another has had
terrific problems in dealing with the standards that we through
Congress and congressional activity have placed upon them. I
think we need to take a good, hard look at that.
By reclassifying petroleum refineries as eligible for the
7-year depreciation, the industry can retain capital for
essential investments in infrastructure, and I would ask you to
look at that.
Likewise, construction should begin as soon as possible to
bring North Slope natural gas to the United Statesmarkets. It
is crucial that Congress support a production tax credit to promote the
development of a new trans-Alaskan natural gas pipeline to bring
natural gas on Alaska's North Slope to the continental United States.
Regarding electricity transmission, as we have seen over
the course of the last 9 months, restructured electric markets
recently have come under stress as increased demand creates
supply bottlenecks, exposing the limitations of the delivery
system and causing regional electricity disruptions.
Transmission constraints in the patchwork of split
responsibility between States and the Federal government is no
longer adequate, and new mechanisms should be considered to
address regional needs and circumstances.
I encourage my colleagues on the Committee to support the
transmission industry agreement between independent operating
utilities, municipals and rural electric cooperatives,
modifying the Federal Tax Code to facilitate the transmission
and distribution of electricity.
Also, as you have heard, alternative and renewable energy
sources need to be looked at in their entirety: wind, solar,
hydroelectric, other renewable energy resources such as
ethanol, biomass, biodiesel, as well as alternative sources
such as nuclear energy. We need to look at all of them.
I commend Mr. Foley, a Member of this Committee, for his
bill, H.R. 876, providing for a 5-year extension of the
production tax credit regarding wind energy and renewable
energy, and I think that is headed in the right direction.
Additionally, Congress should consider increasing the
existing investment credit for renewable energy infrastructure
to 20 percent for solar and geothermal, as well as increasing
the current tax credit for producing electricity to 2 cents per
kilowatt hour for electricity produced from wind and biomass
and extend the credit to solar and to geothermal.
I also come to you today as the Ranking Member of the House
Agriculture Committee, and you will hear, as you heard from the
previous witnesses, agriculture has got a role to play and vice
versa. I have observed you cannot produce food and fiber
without oil and gas. You cannot produce oil and gas without
food and fiber. There is a natural partnership to be designed
here, and it is this that I have been working on, since I
represent the oil patch as well as the cotton patch.
We have been working to see what we can do to work
together. And there are many things that can be done, not the
least of which is providing the research and development funds
to answer those questions where there are legitimate concerns
about the efficiency of those actions today, but also to
continue to move forward in the development of alternative
sources of energy.
We must become more self-dependent upon our own energy,
rather than dependent upon foreign sources. The only way I know
to do that is to produce more energy, and all of these
alternative sources offer tremendous potential that I believe
can be developed at economically sound price levels if we will
address those in a sound research and development process.
Finally, on consumer needs, it is no secret today that
consumers all over the United States are having terrific
problems regarding their bills today, as they see them. And I
think we must recognize, particularly, those who are unable to
pay for their bills. We must look at ways in which we can be of
help to those who, through no fault of their own, find
themselves in an economic situation in which they cannot pay
their electric bills.
But I would hope that, in doing so, we would also look at
long-term needs, we would look at making certain that we would
have the energy available and the incentives to produce those
efficient vehicles, efficient homes and other home improvements
through the Tax Code.
And here I will conclude my remarks to you in saying that I
hope the Committee will be innovative and creative as you shape
our country's next energy program. We no longer can rely on the
same old policies. America needs a balanced, forward-looking
energy policy which will infuse our energy sector with both
efficiency and competition, seeking to protect America against
emergencies in the energy market. However, we must take care to
ensure that our energy policy fits within the context of a
fiscally responsible budget framework.
I was extremely disappointed that the tax incentives that I
have mentioned today--and there were many--were not even
considered within the context of the budget process that we
have just gone through. The recently passed $1.35 trillion tax
cut signed into law has consumed virtually all of the available
surplus and left us with very little room to make changes in
the Tax Code as part of an energy policy without dipping into
the Social Security and Medicare trust funds. I do not see how
this Congress will be able to set in place a national energy
policy that is more than skeletal.
The challenge this Committee faces is not only to identify
changes in tax policy that can contribute to a national energy
policy, but also to figure out how to pay for these policies
without dipping into the trust fund. I know you share this
desire.
This Congress could have taken time to look at using the
Tax Code to accomplish some of the much-needed improvements in
our energy policy. Regrettably, we have made it virtually
impossible to provide for the needed spending in the area of
energy. I say ``virtually'' because I hope that in your wisdom,
as you look at this, you will find ways that we can do so, and
I look forward to working with you as you attempt to do just
that.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Stenholm follows:]
Statement of the Hon. Charles W. Stenholm, a Representative in Congress
from the State of Texas
Thank you Mr. Chairman, and I thank the members of the committee
for allowing me to come and be here today. I commend you for holding
this hearing today on the development of a national energy policy. I
have become increasingly concerned about this country's lack of a
national energy policy and what impact that failure has on both
producers and consumers. The state of our energy industry has far
reaching economic, geographic and political ramifications and we ignore
it at our own peril. My hope is that this hearing can begin a process
of developing a comprehensive national policy for this vital industry.
Oil Production
Oil prices, on a long slide, dipped to $10 and under in late 1998
and early 1999. The average dip in oil prices lasts about six months,
and this recent one lasted three times as long. The price collapse
forced many oil and gas companies to sell equipment, layoff employees,
and shelve exploration and production plans. A number of energy
companies went out of business as a result.
In my District, the 17th District of Texas, which also
is known as the ``oil patch,'' claims for unemployment from the oil and
gas industry quadrupled from 1,171 to 4,730 between December 1997 and
1998. During this time, the lost oil wellhead value dropped $5.79
million and the value of oil to the Texas economy dropped almost $1
billion.
The number of producing wells declined by 2,855 during this time as
well. In my home county of Jones, oil production in December 1997 was
83,706 barrels, in December 1998 it was 69,966 barrels, and in December
1999 it had declined to 58,534 barrels. That's a decline of 25,172
barrels from December 1997 to December 1999, or a decline of 30%.
Oil production in the United States is on the decline as we are
operating from a mature resource base that makes the cost of production
high. Total domestic crude oil production has declined from 8.7 million
barrels per day in 1986--the first oil price collapse--to 5.9 million
barrels per day in 1999. We must recognize that a healthy domestic oil
production industry is also essential for a healthy domestic natural
gas industry, because they are inherently intertwined.
Gas Production
Much of the nation's natural gas comes from oil wells. Many of the
nation's independent producers, particularly hard hit by the industry
down turn, focused on finding natural gas. When prices are below the
cost of exploring and producing crude, these small independent
producers cannot stay in business, causing a ripple effect throughout
local communities as schools and hospitals in Texas rely on a strong
oil and gas industry for revenues. Over the past several years, we
warned that critically low prices have the potential to turn into a
price shock. Unfortunately, this is a lesson that we should have
learned many times over in the last two decades. Production of both oil
and gas declined in 1999 and, despite high prices paid to producers
now, has not climbed to pre-collapse levels.
Oil and natural gas producers are responding. In April of 1999,
only 126 rigs were drilling for oil and 362 rigs were drilling for
natural gas, nationwide. By January 2001, rigs drilling for natural gas
more than doubled with 878 rigs in production and the rig count for
crude oil doubled as well (240 rigs in production). However, wells
generally take three months to a year to come on line, so, with
temperatures lower than normal nationwide, prices likely will not go
down significantly for several months.
Despite a doubling of rigs in production, demand for natural gas is
far out-weighing supply. According to a study conducted by the National
Petroleum Council, the natural gas demand will increase by slightly
more than 30% over the next decade. The U.S natural gas demand has
grown from 19 Thousand Cubic Feet (TCF) in 1990 to approximately 22 TCF
in 1998, or about 2% per year, and has continued to represent about one
quarter of the nation's fuel needs.
Looking Forward
If ever there was a time of dramatic demonstration, the compacted
experience of the last three years with its highs and lows illustrates
the need for our Nation to take responsibility of its energy future. We
do need a free market for the production of energy, but it cannot be a
``free'' market dominated by foreign producing countries that do not
necessarily have our best interests at heart. Former Senator Lloyd
Bentsen of Texas once said that when America imported more than half of
its crude and petroleum products, it would have reached a peril point.
We are now there!
In formulating a national energy policy, it must be in the context
of a continuously improved understanding of how energy demands of the
21st Century challenge the energy infrastructures of the
20th Century, of how the new economy is affecting the
competition for the capital needed to improve and upgrade our energy
infrastructures, and of how the government's incentive structure and
statutory frameworks should evolve to meet emerging energy needs. As
policymakers, we can focus on the role of oil and gas in power
production, producer incentives--including making access to capital
using tax incentives more available--and conservation measures.
Fossil Fuel Production Incentives
I commend my colleague from Texas, Mr. Thornberry for introducing
H.R. 805, the Independent Energy Production Act of 2001, of which I am
an original co-sponsor. H.R. 805 is designed to preserve the marginal
properties and capital of independent oil and gas producers thus
protecting this important yet high-risk sector of our economy from
volatile world price fluctuations. Specifically, H.R. 805 establishes a
series of targeted tax incentives for the domestic production of crude
oil and natural gas, including:
Tax credit for marginal domestic oil and natural gas
well production;
Election to expense geological and geophysical
expenditures and delay rental payments;
Five-year net operating loss carryback for losses
attributable to operating mineral interests of independent oil
and gas producers;
Temporary suspension of limitation based on 65% of
taxable income and extension of suspension of taxable income
limit with respect to marginal production; and
Modification of the definition of ``small refiner''
for purposes of the exception to oil depletion deduction.
Marginal wells remain a huge source of oil and gas, yet their
profitability is questionable during periods of low prices. Rather than
merely capping these wells and creating problems for states and federal
lands, a counter-cyclical tax credit would keep these wells pumping.
Additionally, these exclusive tax deductions are designed to preserve
the capital of independent producers and small refiners amidst some of
the unique challenges facing the industry. They would also assist
producers during times of low oil price shocks, often the result of
international events.
I would encourage the Committee to also create a ``plowback''
incentive (10% tax credit) that would apply to expenditures for
domestic oil and natural gas exploration and production.
Unfortunately, despite the wide ranging, bi-partisan support for
incentives to improve the domestic oil and gas industry, the current
Administration has chosen to ignore these simple provisions that would
deter wild price swings that hurt American families. In a letter I
recently received from the Texas Alliance of Energy Producers, the lack
of support for independent producers was noted in disappointment. The
letter specifically states, ``The Alliance believes that price
volatility is an issue that must be addressed in the debate about a
national energy policy. The Democratic proposal does a much better job
of using the tax code to encourage the exploration and development of
reserves. The President's plan does not have any tax provisions for
small, independent producers.'' I submit this letter for the record
with my testimony.
Furthermore, the Committee also should consider legislation re-
introduced by my colleague, Mr. Moore of Kansas, to stimulate
production of unconventional gas by extending the ``Section 29'' tax
credit for unconventional gas production will provide the energy sector
with a necessary incentive to produce gas that is both difficult and
costly to obtain. By extending the credit's availability through 2012
and also allowing it to be taken by taxpayers who are assessed under
the Alternative Minimum Tax (AMT) schedule, I believe this legislation
will encourage additional future gas production.
From 1970 to 1998, the U.S. Population grew by 32%, and total
consumption of electricity increased 133%. Coal is a source for over
50% of America's electricity generation and with over 250 years of coal
reserves, America's most readily available fuel stock. We have a
growing demand for electricity and coal plays an important role in
producing over half of our electricity needs. In that light, it is
important that we provide incentives for reducing pollution from
existing coal-fired power plants. The Blue Dog Energy Plan proposes a
10% tax credit for qualified expenses toward the construction of new
power plants using advanced clean coal technology, or the retrofitting
and re-powering of existing conventional power plants with new advanced
clean coal technology.
Pipeline Construction Incentives
Likewise, construction should begin as soon as possible to bring
North Slope gas to United States markets. The industry has wisely
conserved natural gas as it produced the oil over the last twenty
years, and the natural gas can now be transported to the Lower 48
States. It is crucial that Congress support a production tax credit to
promote the development of a new Trans-Alaskan natural gas pipeline to
bring natural gas on Alaska's North Slope to the continental United
States.
Improving Refinery Capacity
In addition to each of the incentives highlighted above, the Blue
Dog Energy Plan that will be released later this month recognizes that
additional regulatory controls combined with low rates of return on
capital act as a disincentive to expanding the additional refinery
capacity necessary to meet our energy needs. Addressing our energy
problems requires a substantial commitment to improving the energy
infrastructure within the United States. Domestic refining has actually
fallen over the last decade, even as demand for refined petroleum has
increased. The slack has been taken up by a dramatic increase in
imports, which contributes to our international balance of payments
problems. Even with demand at an all-time high, small refineries may
still go out of business due to prohibitive costs of the installation
of equipment to remove sulfur from the products and other costly
modifications required to reduce air emissions. By reclassifying
petroleum refineries as eligible for 7-year depreciation, the industry
can retain capital for essential investments in infrastructure.
Electricity Transmission
As we have seen over the course of the last 9 months, restructured
electricity markets have recently come under stress as increased demand
creates supply bottlenecks, exposing the limitations of the delivery
system and causing regional electricity disruptions. Transmission
constraints and the patchwork of split responsibility between states
and the federal government is no longer adequate and new mechanisms
should be considered to address regional needs and circumstances. I
encourage my colleagues on the Committee to support the transmission
industry agreement between Independent Operating Utilities, Municipals,
and Rural Cooperatives modifying the federal tax code to facilitate the
transmission and distribution of electricity.
Alternative and Renewable Energy Sources
As part of a national energy policy, we also need to further
improve and expand other avenues of energy, including wind, solar,
hydroelectric, and other renewable energy resources such as ethanol,
biomass, and bio-diesel as well as alternative sources such as nuclear
energy. If we are to achieve energy independence, we must research and
develop all sources of energy and provide access to capital to bring
these sources into our national energy supply.
For example, the U.S. wind industry has successfully financed and
built wind plants capable of generating 1700 Mega Watts of power. These
plants now produce more than 3.1 billion kilowatts per hour per year.
Based on this performance, the industry is developing a corporate
structure that has increasing access to some of the same capital
markets as electric utilities. Many rural communities, including some
in the 17th District of Texas, are taking advantage of the
wind's clean energy to provide their electrical needs or for pumping
water when they are unable to be tied to a utility grid, lack
conventional resources, or simply want to be independent of utility
bills. This demand for wind energy is helping expand the industry as
well as helping provide a cleaner environment while operating in
harmony with farming, ranching, forestry, and other open space
operations. Research and development play a key role in advancing wind
technology. These organizations include national laboratories and
facilities for testing new hardware.
Since the 1980s, wind energy production has increased its
efficiency by a remarkable 80%--from 25 cent per kilowatt-hour to 4.5
cents per kilowatt-hour. Through expected equipment and manufacturing
efficiencies, the industry anticipates the cost of wind energy will
fall to 3 cents per kilowatt-hour or less in the next few years. It is
important that we continue to support the wind energy production tax
credit for this environmentally friendly form of renewable energy that
produces no greenhouse emissions. I encourage the committee to follow
the lead of my colleague Mr. Foley, who introduced H.R. 876 providing
for a 5-year extension of the production tax credit. I also support
expansion of the Renewable Resource Credit (Section 45 Credit) to
include Alternative Energy Sources and any qualifying energy produced
from renewable sources.
Additionally, Congress should consider increasing the existing
investment credit for renewable energy infrastructure to 20% for solar
and geothermal as well as increasing the current tax credit for
producing electricity to 2 cents per kilowatt hour for electricity
produced from wind and biomass, and extend the credit to solar and
geothermal.
The Role of Agriculture
I also come before you today as the Ranking Democrat on the House
Agriculture Committee. I want to share with you not only the impact
that energy price and availability have on agriculture, but also how
America's farmers and ranchers can play a role in meeting our energy
needs.
For 2001, cash production expenses are forecast to increase $1.5
billion to a record level of $179.5 billion for the sector. Fuel prices
are expected to remain close to last year's level, however, the recent
spikes in natural gas prices have led to much higher fertilizer prices,
which will have a major impact on producers' bottom lines and even what
they plant this year.
The recent spikes in natural gas prices have wreaked havoc in the
domestic fertilizer industry. While natural gas prices appear to have
moderated, albeit at a higher price, and the availability of fertilizer
for spring pre-planting application is less in question, there is no
doubt that farmers will be paying much higher prices for nitrogen
fertilizers this spring. As an example, anhydrous ammonia prices went
from an average price of $200 per ton in 2000 to $334 per ton at the
beginning of January.
Agricultural producers cannot pass along higher costs. An increase
in energy and energy-related input costs not only increases farmers'
direct out of pocket expenses, but also results in lower prices from
the market as the purchasers of their commodities try to recoup the
higher costs they are paying for transportation, processing and
marketing.
As Congress has had to pump billions of dollars into the farm
economy to prevent disaster, there is no doubt that the picture is not
improving in the short term, especially with agriculture's reliance on
energy in various forms and the impact that higher energy prices will
continue to have on agriculture's bottom line.
However, American agriculture can provide a ready source of raw
materials to help meet our domestic energy needs. Over the last 20
years, we have made great progress in promoting the use of ethanol at
both the state and federal level. I believe the time is right to also
promote the use of biodiesel. It is a fuel that can be made from
vegetable oils (which we currently have a surplus of) as well as
recycled oils and animal fats. The fuel has passed vigorous
environmental, health and engine testing. Soybean growers have spent
over $25 million of their own money, with little government assistance,
to successfully commercialize this fuel.
It is imperative that the tax situation with ethanol be addressed
the Ways and Means Committee. Currently those states, mainly in the
Midwest, which utilize ethanol the most are penalized in the amounts
they receive for highway improvements and construction from the
Transportation Efficiency Act for the 21st Century or TEA-21
bill passed by Congress in 1998. I do not believe that we should be
penalizing these states for using a homegrown product, corn, to meet
their energy needs.
Our energy policies should be comprehensive and framed to encourage
the development and use of many viable fuels. The answers to our energy
dependence and power generation problems can best be met by broadening
our base of energy resources. I personally feel strongly that fuels
like biodiesel and ethanol can be and should be apart of a national
energy program.
Consumer Needs
We need to consider measures to help restore market stability with
domestic crude oil and natural gas prices maintaining a level where
domestic producers can compete in a global market. At the same time,
our national energy policy must recognize both producer and consumer
issues. We need to consider the use of incentives to encourage
consumers to make energy efficient improvements to their homes and
purchase energy efficient automobiles.
Americans already are making lifestyle-changes because of high
energy prices, and as most of the country is at the start of air
conditioning seasons and summer vacation, many families will have to
curtail the use of appliances or change their vacation plans in order
to be able to pay their energy bills. There are a host of innovative
technologies that could significantly reduce the energy use of heating
and cooling appliances used in residential and commercial buildings.
For example, super-efficient electric air conditioners, refrigerators
and clothes washers use 25-50% less energy than typical new models sold
today. However, purchasing costs are a major barrier preventing more
widespread production, marketing, and sale. Financial incentives can
spur the purchase of these products and overcome the initial high cost
barrier and be mass-produced.
Innovative tax incentives for gains in energy conservation and
efficiency could provide help to families and businesses to maximize
energy efficiency and conservation without having to make large and
painful lifestyle changes. Flexible, non-refundable, tax credits for
high efficiency vehicles, purchase of energy efficient homes, or
defined home improvements that reduce energy costs have been proposed
by the House Democratic Caucus Energy Task Force and are likely to be a
part of the Blue Dog Energy Plan as well.
Concluding Remarks
I hope the Committee will be innovative and creative as you shape
our country's next energy program. We can no longer rely on the same
old policies. We must look for additional sources and resources to
complement our traditional sources of energy. America needs a balanced-
forward-looking energy policy based on the proposals that have been put
before this Congress. We need a responsible approach that will infuse
our energy sector with both efficiency and competition, seeking to
protect America against emergencies in the energy market.
However, we must take care to ensure that our energy policy fit
within the context of a fiscally responsible budget framework. I was
extremely disappointed that these tax incentives to boost domestic
production of all forms of energy and provide consumers and businesses
with the means to better utilize current technology that improves
energy efficiency were not considered within the context of the budget
process. The recently passed $1.35 trillion dollar tax cut signed into
law has consumed virtually all of the available surplus and left us
with very little room to make changes in the tax code as part of an
energy policy without dipping into the Social Security and Medicare
trust fund. I do not see how this Congress will be able to set in place
a national energy policy that is more than skeletal. The challenge this
Committee faces is not only to identify changes in tax policy that can
contribute to a national energy policy, but also to figure out how to
pay for these policies without dipping into trust fund surpluses that
we have voted to protect.
This Congress could have taken time to look at using the Tax Code
to accomplish some much-needed improvements in our energy policy.
Furthermore, it is imperative that we enact environmental and
production incentives as well as many of the other provisions that I
have cited in this testimony that we clearly need to do for the benefit
of this country. Regrettably, we have made it virtually impossible to
provide for the needed spending in the area of energy as well as other
top priority issues that are facing this country. Notwithstanding the
fact that I would have far preferred to be in a more hospitable
budgetary environment for enacting some of the necessary reforms I have
just mentioned, I still strongly encourage this committee to press
forward as far as possible in outlining a workable national energy
policy. Thank you for your consideration and attentiveness this
afternoon.
[GRAPHIC] [TIFF OMITTED] T4228A.001
Chairman McCrery. Thank you, Mr. Stenholm. Mr. Filner from
California.
STATEMENT OF THE HON. BOB FILNER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
Mr. Filner. Thank you, Mr. Chairman, and I thank the
Committee for these hearings and for giving your colleagues not
on the Committee a chance to share our experiences with you.
I am going to speak as a Congressman from San Diego, where
the electricity crisis really started, to speak solely on
electricity although I think what I say has to do with other
forms of energy, whether it is natural gas or gasoline. And I
want to talk specifically about some short-term steps that need
to be taken because we are in incredible crisis in California.
The economy is teetering. The economy is being bled dry.
The taxpayers of our State, because the utilities have gone
bankrupt, are paying over $3 million an hour for electricity--
$70 million, sometimes $100 million a day, $3 billion a month.
Our economy and, therefore, the Nation's economy cannot sustain
this kind of bleeding, and we need your help.
Obviously, the answers that you come up with for solutions,
both long-range and short-range, depend upon your understanding
of what caused the problem. San Diegans believe, and I think I
speak for virtually everyone, Republican and Democrat, in San
Diego believes that when our prices doubled and tripled within
60 days of deregulation, it was a result of market
manipulation. And I am talking about full deregulation, Mr.
Chairman, deregulation of both wholesale and retail prices.
We knew this was not a supply-and-demand problem or a cost-
of-production problem. The summer was no warmer than it was the
summer before. Demand was almost the same, maybe even less.
Cost of production had not increased. This was a result, and
virtually everyone in San Diego will agree with me, of a
manipulated market brought about by--a not-very-well-crafted
deregulation plan for the State of California. The market was
manipulated by outside energy wholesalers, and we are being
bled dry by that.
This is not fundamentally a problem of supply and demand.
We have tight supplies. And the Governor of California is doing
everything he can to increase those supplies. We have a dozen
plants online that will be available for production within 2 to
3 years, and he is doing everything he can to spur
conservation. We reached a goal last month, we surpassed his
goal of 10 percent with 11 percent conservation. We were
already the second most conserving State per capita in this
Nation.
The problem is the price!
Now, it would be simple for our Federal Energy Regulatory
Commission (FERC) to impose cost-based rates for the Western
grid in this Nation. In fact, when San Diego's prices went up
two and three times, when small businesses by the scores went
out of business, Mr. Chairman--and as the Democratic leader
said, a recent report showed 65 percent of San Diego small
business faced bankruptcy this year. When 65 percent of our
small businesses almost going out of business, we have a
problem.
When the evidence of market manipulation was presented to
the Federal Energy Regulatory Commission, they agreed in a
November report of last year, Mr. Chairman, that, yes, the
market was manipulated, these were unjust and unreasonable
prices, they were illegal prices. Yet they did absolutely
nothing. They had the power right then to say prices ought to
be reduced. They did nothing, and they signaled the energy
cartel that they could rob our State blind and rob the rest of
the West blind; and that is exactly what they are doing.
The FERC found these prices to be illegal. They could
impose cost-based rates. Cost-based rates provided morethan a
reasonable profit for decades and decades in this country. That is
going back to the regulated rate, and in fact, they ought to refund the
criminal overcharges that my constituents have been paying since last
June.
So if the problem is prices, then cost-based rates ought to
be imposed. If they don't act, the Congress can act to do that.
This Congress can also send signals to all cartels, whether it
is natural gas or gasoline or electricity.
I have a bill, H.R. 443, which is a windfall profits tax
which imposes a 100 percent tax on windfall profits, which can
be defined as a term of art. These companies are entitled to a
reasonable profit; that is what the regulation said for 100
years in this country. They are not entitled to gouge in a
criminal way the consumers of California or Oregon or
Washington or Montana or New Mexico or Wyoming or New York.
So you have windfall profit tax bills for your
consideration.
I know Mr. Foley has put in tax incentives for wind power.
I have a bill, H.R. 269, which I hope you will look at, Mr.
Foley, also, because I worked it out with the top windmill
manufacturer in the United States who is in San Diego. And they
have thrived, and this country can thrive on wind power.
As Mr. Gephardt suggested, a 30 percent goal for
electricity is reasonable. I just got back from Denmark where
their national goal is 20 percent, and they are going to
achieve that, so we ought to be looking at these.
But I will tell you in conclusion, in the short run, in
electricity, this economy is being threatened by the prices in
California and in the Western grid. This Congress, this Nation,
this President have got to bring down those prices. We need a
2-to-3-year breathing period before the new supply is online,
before the conservation effects have taken full root. We need
your help in doing that and I will tell you, the economy is
threatened if we don't.
I thank the Chairman.
[The prepared statement of Mr. Filner follows:]
Statement of the Hon. Bob Filner, a Representative in Congress from the
State of California
Mr. Chairman, thank you for scheduling this hearing to examine the
effects of federal tax laws on the production, supply and conservation
of energy in the United States. It is critical that we act now to
provide immediate relief for the American people from a growing energy
crisis that threatens to disrupt the country. At the same time, we must
also make greater strides in addressing the nation's long-term needs by
implementing realistic and effective proposals.
It's no secret that there is an energy crisis in California. San
Diego was ground zero in this crisis. Our county became the first area
in California where full electricity deregulation occurred in both
retail and wholesale prices. My constituents were paying market-based
electricity rates last summer which has resulted in triple-digit
utility bills ever since.
The impact does not stop with the individual consumer--our whole
Nation bears the consequences. A surge in the price of energy can
derail the economic expansion that we have worked so hard to achieve
and maintain.
California consumers have been gouged throughout the last year.
Small businesses have been forced to close their doors. The utilities
in our State have been brought to their knees. Yet quarterly reports
show increased profits by nearly 1,000 percent for electricity
wholesalers.
To address this problem, I urge Congress to immediately pass my
legislation, H.R. 443, the Public Oversight of Wholesale Electric Rates
Act or POWER Act which would impose a windfall profit tax on wholesale
power sold throughout the western U.S. Anything over a ``just and
reasonable'' amount of profit would be taxed 100%.
California is just part of a regional electricity grid. The obscene
prices have spread to Oregon and Washington. Idaho and New Mexico are
next, and the rest of the West will soon follow. It is time for
Congress to act. We must hold this cartel accountable and provide the
relief that Californians and all Americans so desperately need and
deserve.
We must also take lessons from the current crisis that we face and
act to make certain that we do not have recurring and long-term
problems. In an effort to help address this need, I have sponsored H.R.
269, the WIND for Electricity Act.
We have failed to support the development of alternative energy
resources. In terms of domestic resource potential, wind energy is the
most overlooked fuel source in this Nation. Wind is available just
about anywhere, and can be utilized for electric generation more
quickly than any other energy resource.
Compared with the tax incentives for conventional nuclear energy,
Federal tax support for renewable energy resources, such as wind, is
relatively small. Aside from accelerated depreciation, which is shared
by other fast-evolving technologies, wind facilities now qualify only
for a temporary Federal production tax credit.
This credit helps provide a price floor, but if the price of wind-
generated electricity rises above a certain benchmark, the tax credit
phases out and this credit took effect in 1994. It was originally
decided to sunset this credit in June of 1999. But several years after
the credit was enacted, Congress considered repealing it when energy
prices were at an all-time low.
Fortunately, Congress retained the credit and later extended it
until 2002. Despite wavering congressional policy, the credit has
promoted use of domestic wind energy resources and has promoted
technological development. An uncertain credit and a temporary
extension, however, does not support long-term planning, development
and construction of electric generation projects.
To spur this effort, I ask for your support of the WIND for
Electricity Act to specifically promote the development of wind energy
resources in the U.S. I know that San Diego is looking to this Congress
for short-term relief from the high prices of electricity and for long-
term alternative energy resources. I thank you for your support.
Chairman McCrery. Thank you, Mr. Filner. And next Mr.
Sandlin from Texas.
STATEMENT OF THE HON. MAX SANDLIN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF TEXAS
Mr. Sandlin. Thank you, Mr. Chairman. It is good to be
here, and I too appreciate the work of the Committee today in
calling attention to this important problem. We certainly
appreciate your focus and look forward to working with the
Committee and other Members of Congress in addressing this
problem.
I have long been concerned that our country lacks a
comprehensive energy plan that links the balances between
supply and demand to Federal environmental regulatory and tax
policies. A patchwork of local and national rules and laws
sends mixed cues to the energy industry, stifling expansions in
capacity and advances in technology.
The Federal Tax Code in particular plays a crucial role in
shaping industry behavior. I am here today to highlight what I
believe are ways we can modify the Tax Code to maximize capital
formation within the energy sector, promote stability in the
energy markets and, thus, lower the cost of energy paid by
consumers; and I will try to limit remarks to things that have
not been talked about in detail by my colleagues.
The exploration and production of energy resources is very
capital-incentive, as you know. Those who explore and produce
energy must leverage large amounts of capital throughout the
process of identifying and recovering energy supplies. In many
respects, this process is not that different from other sectors
of the economy. The energy industry relies on the use of
cutting-edge technologies and the large capital investments in
equipment common to other industries.
However, unlike the high-tech companies of Silicon Valley
that, until recently, seemed to reap huge profits for
investors, the domestic oil and gas industry is just now
recovering from the record low prices and abysmal earnings of
1998 and 1999. The energy sector's traditional cyclical
fluctuations present hurdles to attracting a consistent stream
of capital for investment. Try attracting investment when
natural gas is 98 cents an MCF, as it was in 1999, and you
begin to understand why dozens of independent oil and gas
producers went out of business, curtailing the production of
natural gas, an increasingly important fuel stock for
electricity generation.
Modifying the Federal Tax Code will allow producers to
retain the necessary capital crucial to expanding capacity and
spurring production in this country. Providing access to
capital is linked to securing market stability, which benefits
both the consumers and the energy producers.
The domestic oil and gas industry, particularly the
independent petroleum and gas producers are just now recovering
from losses caused by the low prices in 1998 and 1999. The
failure to recognize the need to respond to those low prices
resulted in a 10-percent loss in domestic production, most of
which has been made up by imports of gas and oil from Canada
and OPEC.
Easing this feast-or-famine swing of the oil and gas
markets must be a key priority to a comprehensive energy
policy. Congress should modify the Federal Tax Code by
providing the proper cues and incentives to maintain adequate
levels of production during times of low and high prices. A
basket of targeted tax incentives can help maintain and
increase domestic production deterring wild price swings that
hurt American families and produce uncertainty within the
industry.
A bipartisan coalition of Congress recognizes the need to
secure our energy future. Numerous bills have been introduced
in the House and the Senate, with substantial cosponsorship,
during the 106th Congress and now the 107th Congress. I am
pleased to join as a cosponsor and speak in support of two of
those bills today, H.R. 805 and H.R. 876, which, if enacted,
will encourage the production and development of energy
sources.
H.R. 805, the Independent Energy Production Act of 2001, is
designed to preserve the marginal properties and capital of
independent oil and gas producers and to protect this
important, yet high-risk, sector of our economy from volatile
world price fluctuations. Many of the provisions contained in
H.R. 805 encourage independent gas and oil producers to
reinvest capital in capacity and production, which will smooth
out the supply and demand chain. I would like to briefly
outline a few of the measures in that bill.
The marginal well production tax credit: This credit will
allow a $3 per barrel tax credit for the first three barrels of
daily production from an existing marginal oil well and a 50
cent per MCF tax credit for the first 18 MCF of daily natural
gas production from a marginal well. This credit could cost the
Treasury as little as $20 million a year, but according to the
Department of Energy, could prevent the loss of 140,000 barrels
per day if fully employed during times of low prices like 1998
and 1999.
Geological and geophysical costs: Geological and
geophysical costs, or G&G surveys, are used to locate
andidentify properties with the potential to produce oil and natural
gas, as well as to determine the optimal location for developing a
well. An example of G&G expense is the use of 3-D technology, which
utilizes state-of-the-art computer models to provide more detailed and,
thus, reliable predictions of possible resources. By allowing current
expensing of geological and geophysical costs incurred domestically,
domestic producers can benefit from the same tax incentives for
research and development that we provide to other industries; and as
you know, it is now capitalized.
H.R. 876, Mr. Foley's bill: I would like to shift gears for
a moment and focus on that. The U.S. wind industry has
successfully financed and built wind plants capable of
generating 1,700 megawatts of power. These plants now produce
more than 3.1 billion kilowatts per hour per year. Based on
this performance, the industry is developing a corporate
structure that has increasing access to some of the same
capital markets as electric utilities.
Recently I met with a Texas-based wind generating company
that is preparing to undertake a significant expansion of its
infrastructure that will provide power to tens of thousands of
Texans. To promote the continued development of wind energy
production in the United States and to encourage projects such
as the one I described, it is imperative that Congress act to
extend the wind energy production tax credit. The construction
of wind power generating facilities is capital-intensive with
projects often competing against fossil fuel-generated power.
Extending the wind tax credit will provide developers with
certainty and stability to undertake the massive projects
unleashed.
In closing, Mr. Chairman, I am hopeful that Congress will
take up these progrowth tax reform proposals in the 107th
Congress. We all recognize the importance of promoting a wide
range of energy supplies. We must advance an energy plan that
utilizes the Tax Code to encourage domestic energy production
and development.
Let me comment that the Blue Dog Democrats are currently
working on an outline of a comprehensive, forward-looking
market-based and balanced national energy strategy.
In past administrations, Democratic and Republican, various
public officials have taken an ad hoc pledge to pursue energy
independence for the Nation, but this commitment quickly fades
into complacency once the crisis of the moment begins to
subside. We must not allow this to happen again. Although the
energy recommendations set forth by the current administration
omit several of the provisions outlined in my testimony and the
testimony of others here today, Congress should not be deterred
from leading on energy by passing these good bills.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Sandlin follows:]
Statement of the Hon. Max Sandlin, a Representative in Congress from
the State of Texas
Mr. Sandlin. Thank you Mr. Chairman for calling this important
hearing and allowing me an opportunity to testify before the
Subcommittee today. I have long been concerned that our country lacks a
comprehensive energy plan that links the balances between supply and
demand to federal environmental, regulatory, and tax policies. A
patchwork of local and national rules and laws sends mixed cues to the
energy industry, stifling expansions in capacity and advances in
technology. The federal tax code in particular plays a crucial role
shaping industry behavior. I am here today to highlight what I believe
are ways we can modify the tax code to maximize capital formation
within the energy sector, promote stability in energy markets, and thus
lower the cost of energy paid by consumers.
The exploration and production of energy resources is capital
intensive. Those who explore and produce energy must leverage large
amounts of capital throughout the process of identifying and recovering
energy supplies. In many respects, this process is not that different
from other sectors of the economy. The energy industry relies on the
use of cutting edge technologies and the large capital investments in
equipment common to other industries. However, unlike the high-tech
companies of Silicon Valley, that until recently seemed to only reap
huge profits for investors, the domestic oil and gas industry is just
now recovering from the record-low prices and abysmal earnings of 1998
and 1999. The energy sector's traditional cyclical fluctuations present
hurdles to attracting a consistent stream of capital for investment.
Try attracting investment when natural gas is 98 cents tcf--as it was
in 1999--and you begin to understand why dozens of independent oil and
gas producers went out of business, curtailing the production of
natural gas, an increasingly critical fuel stock for electricity
generation. Modifying the federal tax code will allow producers to
retain the necessary capital crucial to expanding capacity and spurring
production.
Providing access to capital is linked to securing market stability,
which benefits both consumers and energy producers. The domestic oil
and gas industry--particularly the independent petroleum and gas
producers--is just now recovering from losses caused by low prices in
1998 and 1999. The failure to recognize the need to respond to those
low prices resulted in a 10% loss in domestic production--most of which
has been made up by imports of gas and oil from Canada and OPEC. Easing
the feast or famine swings of the oil and gas markets must be a key
priority to a comprehensive energy policy. Congress should modify the
federal tax code by providing the proper cues and incentives to
maintain adequate levels of production during times of low and high
prices. A basket of targeted tax incentives can help maintain and
increase domestic production, deterring wild price swings that hurt
American families and produce uncertainty within the industry.
A bipartisan coalition of Congress recognizes the need to secure
our energy future. Numerous bills have been introduced in the House and
Senate with substantial co-sponsorship during the 106th Congress and
now in the 107th Congress. I am pleased to join as a cosponsor and
speak in support of two bills--H.R. 805 and H.R. 876--which, if
enacted, will encourage the production and development of energy
resources.
H.R. 805--Independent Energy Production Act of 2001
H.R. 805, the Independent Energy Production Act of 2001, is
designed to preserve the marginal properties and capital of independent
oil and gas producers and to protect this important yet high-risk
sector of our economy from volatile world price fluctuations. Many of
the provisions contained in H.R. 805 encourage independent gas and oil
producers to reinvest capital in capacity and production, which will
smooth out the supply and demand chain. I would like to briefly outline
a few of the measures in the bill.
Marginal Well Production Tax Credit: This credit will
allow a $3 per barrel tax credit for the first 3 barrels of
daily production from an existing marginal oil well and a $.50
per Mcf tax credit for the first 18Mcf of daily natural gas
production from a marginal well. This credit could cost the
Treasury as little as $20 million a year, but according to the
Department of Energy could prevent the loss of 140,000 bpd if
fully employed during times of low oil prices like 1998 and
1999.
Geological and Geophysical Costs: Geological and
geophysical (G&G) surveys are used to locate and identify
properties with the potential to produce oil and natural gas,
as well as to determine the optimal location for developing a
well. An example of a G&G expense is the use of 3-D technology,
which utilize state-of-the-art computer models to provide more
detailed and thus reliable predictions of possible resources.
By allowing current expensing of geological and geophysical
costs incurred domestically, domestic producers can benefit
from the same tax incentives for research and development that
we provide to other industries.
H.R. 876, Wind Energy Production Tax Credit
I would like to shift gears for a moment and focus on incentives
for the production of electricity from renewable resources.
The U.S. wind industry has successfully financed and built wind
plants capable of generating 1700 Mega Watts of power. These plants now
produce more than 3.1 billion kilowatts per hour per year. Based on
this performance, the industry is developing a corporate structure that
has increasing access to some of the same capital markets as electric
utilities.
Recently, I met with a Texas-based wind generating company that is
preparing to undertake a significant expansion of their infrastructure
that will provide power to tens of thousands of Texans. To promote the
continued development of wind energy production in the United States,
and to encourage projects such as the one I described, it is imperative
that Congress act to extend the wind energy production tax credit. The
construction of wind power generating facilities is capital intensive
with projects often competing against fossil fuel generated power.
Extending the wind tax credit will provide developers with certainty
and stability to undertake the massive projects ready to be unleashed.
In closing Mr. Chairman, I am hopeful that Congress will take up
these pro-growth tax reform proposals in the 107th Congress. Democrats
recognize the importance of promoting a wide range of energy supplies.
The Democratic Caucus energy plan utilizes the tax code to encourage
domestic energy production and development. Additionally, the Blue Dog
Democrats are working to outline a comprehensive, forward-looking,
market-based, and balanced national energy strategy.
In past Administrations, Democratic and Republican, various public
officials have taken an ad hoc pledge to pursue energy independence for
the nation, but this commitment quickly fades into complacency once the
crisis-of-the-moment begins to subside. We must not allow this to
happen again. Although the energy recommendations set forth by the
current Administration omit several of the provisions outlined in my
testimony, Congress should not be deterred from leading on energy by
passing these good bills.
Thank you, Mr. Chairman.
Chairman McCrery. Thank you, Mr. Sandlin. I thank all the
Members of the panel for your testimony. Does any Member of the
Subcommittee wish to inquire?
Mr. Foley. Thank you, Mr. Chairman.
Chairman McCrery. Mr. Foley.
Mr. Foley. Thank you all very, very much and particularly
for your comments on wind energy. They certainly are
appreciated by this Member, and I would hope we can continue to
work on those.
Mr. Gephardt, the Democrats seem to have made quite an
issue of President Bush and Mr. Cheney's discussions, at least
in formation on drilling, and particularly in Arctic National
Wildlife Refuge (ANWR), more recently in the Gulf of Mexico.
The discussions pretty much have both focused on, that is not
the sensible way to go, as well as kind of a political wedge
they are creating between the Governor and his brother, the
President.
What is the Democratic Caucus's position on offshore
drilling off of Florida? Do you have a formulated policy?
Mr. Gephardt. As you know, Representative, we are a widely
based party, and we have many differentviews on energy. I would
never tell you that we have one view on drilling rights offshore or in
ANWR.
We have a lot of Members who feel that drilling in
environmentally sensitive areas should be put to a later point
in our energy policy, if at all, and we ought to be emphasizing
the kinds of things that all of us have talked about here.
Bringing more production out of marginal existing wells,
natural gas pipelines from existing fields in Alaska, we think,
is a very exciting and sensible idea.
Developing more wind energy, solar energy and fuel cells
and hydrogen fuel cells for both stationary electricity and for
automobiles, I think you would get a strong consensus in the
Democratic Caucus and, I will bet, in the Republican Conference
for all of those ideas; and we believe that those should be
pursued intensely and actively and over a long period before we
go into drilling in environmentally sensitive areas.
Mr. Foley. That is why I need your help as the most
powerful Democrat here on Capitol Hill. Today's Associated
Press reports, ``Democrat control of Senate may not help stop
Florida drilling.'' It goes on to say, ``Democratic control of
the U.S. Senate has turned out to be no windfall for Florida
politicians trying to block oil and natural gas drilling off
the State's shores. The change from Republican control made a
drilling advocate, Senator Jeff Bingaman, chairman of the
Senate Energy and Natural Resources Committee. Senator Bingaman
is sponsoring a broad energy bill that would permit leasing 5.9
million acres for drilling in the Gulf of Mexico, about 100
miles south of Florida's panhandle.''
Now, obviously that is a great concern to me, and I agree
that what we are doing here today is very, very important. You
cannot underestimate our Nation's lack of resolve in this
particular arena. Democrats and Republicans have failed
miserably at adopting an energy policy that meets the test of
time. We have fallen asleep since Jimmy Carter's day, and we
remain asleep today; and we seem to think the only way is to
stick a pipe in the ground and drill for fossil fuels, and that
is our answer.
And that is why I am excited about the bipartisanship, but
at the same time, I am troubled when the attacks go on when Mr.
Bush and Cheney haven't even brought their report forward, and
a Senator in your party is the prime sponsor of the effort to
drill.
We have to find some common ground here, and every Senator
and every House Member has the privilege and honor in this
process of being able to pursue their best thought strategy. I
criticize no one other than if we are going to have a concerted
effort on environmental policies, we must obviously try and
speak at least in one voice and correct those who may be
wayward in their own party at times.
And I am certainly sending a message to Mr. Cheney and Mr.
Bush on my desires not to have offshore drilling in Florida,
but I would also encourage you to maybe have a conversation
with Mr. Daschle, Mr. Bingaman, so that if those are the
proposals that they are going to bring forward as the first
offers as chairmen of those committees that we also focus on
these much more important strategies.
You all mentioned the tax cut, and I think, yes, we can
disagree on that as well; but my hope is that when those $300
and $600 checks go out that at least minimally they may help
fill the SUVs of the soccer moms. They may allow businesses to
at least get over that little bit of a hump that the energy
prices have brought forward.
And the one final question, if you will, Mr. Gephardt, you
mentioned price controls, where were you speaking of those
price controls? Were those at the pump? Were they at the
producer levels because of California's problem? Where do those
controls come into play?
Mr. Gephardt. Well, first, the bill that I am interested in
is the Waxman bill that would apply to wholesale electric
prices on the West Coast. We see that as a temporary relief
solution. We believe that California has four electric plants
coming online this summer and 19 that have been permitted. We
think there is a long-term solution here, but we think
temporarily there is a crisis and this is the best way to deal
with it.
On the tax bill, I understand what you are saying. My
concern there is twofold. One, I would have hoped we could have
gotten some of these energy incentives we have been talking
about today into that tax bill. Now that has gone past us. It
is going to be harder in our view to get this done in the
budget, but we are committed to work with you to find ways to
get it into the budget.
The other thing on the rebates is that about a fourth of
the people in the country won't get a rebate because they don't
pay that much income tax. But they do pay payroll tax, and they
have cars, too, and we would have hoped we could have figured
out a way to help them.
Finally, let me agree with you that we need to work
together in a bipartisan way to get this policy put together.
It is the only way it is going to work.
I think there is a bipartisan agreement in both Houses that
would put drilling in places like off Florida and even in ANWR
way back in the solution, if at all, and a bipartisan agreement
to do the incentives for marginal wells, to do the wind, to do
the solar, to do the fuel cells, to do the hybrid cars, to do a
lot, to do the natural gas pipeline from Alaska, that would
give us a lot of answers.
Our biggest problem is the one you identified. The minute
the price of oil and natural gas goes down, we forget all this
stuff; we throw it out and we forget about it. It is kind of
like after World War II we thought we didn't need much of a
national defense infrastructure, then we figured out that here
comes Korea, here comes Vietnam, here come all these
skirmishes, and we need a good defense.
We need a long-term energy policy that provides security
for the American people--and only we can provide it--and stay
with it in thick and thin and see it through to 50 years from
now when it is really going to be needed.
Mr. Foley. Would the chairman indulge one moment?
Chairman McCrery. If the gentleman will restrict his
further questions to the jurisdiction of this Subcommittee, I
will indulge him.
Mr. Foley. The only thing I was going to say is, these
conversations are extremely cooperative, and I always enjoy
them in this process; and I just hope, as we go back to our
respective caucuses, the dialogue continues as positively as it
has today, rather than, as we see, the attack modes from both
sides. It is regrettable.
But if we focus, as we have done today, I just see so many
good things coming out of the process. I thank the chairman for
giving me the opportunity.
Chairman McCrery. Yes, sir. Mr. Brady.
Mr. Brady. Yes, sir. I agree with my colleagues here today.
It is refreshing we are discussing this issue.
Even though President Bush inherited the problem, I am
thrilled he is shooting straight with America about what it is
going to take to produce reliable, affordable, environmentally
clean energy. We do have responsibility, Republican and
Democrat alike, to meet more of our energy needs. It will take
a balanced game plan based on conservation, innovation and new
supply, and we all agree on that; and we can't rely any more on
obsolete networks to deliver energy when and where it is needed
around the United States.
The good news is that if we do work together, we can
achieve energy independence; and I don't know about the
panelists, but for me, this issue is more than just economics.
It is a matter of national security. As long as America relies
on foreign countries for more than half of our daily energy, we
are vulnerable; and there is no reason why the most prosperous
Nation in the world continues to allow itself to be held
economically or politically hostage to any country, as we do.
And as we talk about solving this problem, let's talk about
what we don't want to export, especially from California. Let's
not export California's irresponsibility. Let's not export its
feel-good Band-Aids of price controls and windfall profit taxes
that won't produce even one more watt of electricity for
Californians who need it this summer.
And let's especially not export their blame game. I think
people are tired of politicians promising to fix this problem
and then engaging in nothing but a blame game. People are tired
of that. They want the long-term, high-tech, common-sense
solutions we are capable of as a country.
And I know, too, that as we address this problem, we will
be asking questions of ourselves such as why is Dennis Rodman
in California paying less for his electricity than Mr.
Gephardt's mom in Missouri? You have got to ask why one of the
richest areas in the region, California, doesn't have people
flocking to sell them energy. You have to wonder why we have
blackouts in the winter and the spring when there is no reason
anywhere in America to be having these blackouts, especially in
the mild, moderate climate of California.
We have got some real key issues to deal with. We have got
to avoid the blame game. We have got to avoid the Band-Aids. We
have got to work together.
Mr. Chairman, I yield the balance of my time.
Chairman McCrery. Thank you, Mr. Brady. Mr. McNulty.
Mr. McNulty. I don't have any questions, Mr. Chairman. I
just want to thank all of the Members for their testimony,
especially Leader Gephardt for his emphasis on the fuel cell
technology which Congresswoman Johnson and I have been
promoting. I thank all the Members.
Chairman McCrery. I, too, would like to thank all the
Members of this panel, especially the Minority Leader for
spending so much time with us today, and also for his
suggestion--at least as I heard it, correct me if I am wrong--
that this Committee put together items that have bipartisan
support and package it in a tax bill that we can move within
the budget constraints; and let's get it done and not worry
about the things we can't agree on, whether it is ANWR or
drilling off of Florida or price controls in California, stuff
not within the jurisdiction of this Committee.
I think that is a sensible suggestion. I think it can be
done. We do have common ground that we can work with. So I am
of a mind to do just that, and I appreciate the Minority
Leader's suggestion that we pursue that course.
I appreciate Mr. Stenholm's suggestion that we do it in the
constraints of the budget, which I think is reasonable; and I
am hopeful and I am optimistic that we can do that.
So I appreciate very much your testimony and your
constructive suggestions today for this Committee. Thank you.
Mr. Gephardt. Thank you, Chairman
Chairman McCrery. And now our last panel, Mr. Inslee, Mr.
Moore, Mr. Engel, Mr. Terry, Ms. Capito, Ms. Davis, and Mr.
Issa.
Thank you all for coming this afternoon. Mr. Inslee, we
will begin with your testimony. Your written testimony will be
submitted for the record, and we would ask that you summarize
your written testimony orally in a 5-minute time limit. Thank
you.
STATEMENT OF THE HON. JAY INSLEE, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF WASHINGTON
Mr. Inslee. Mr. Chairman and Members, I really appreciate
your holding this hearing.
This is just the perfect moment for a hearing of this
nature, because we are at the starting line of a two heat race.
The first heat involves a national race to decide who is going
to be the dominant player in the new technologies that are
going to handle the next century of our energy needs that are
not necessarily just carbon-based fuels. And I think there is,
hopefully, bipartisan agreement that the world is going to need
a new generation of industrial base to provide these new, clean
technologies and conservation-based technologies. And there is
a question right now on who is going to be the dominant player
on that, whether it is Japan or France or Germany or the United
States.
And I am very happy you are holding this hearing because we
ought to be fast out of the blocks. And, frankly, we are not
quite there yet. There is no reason that the Danes and others
in Europe should be leading in wind technology right now. There
is no reason for us to be behind except perhaps a lack of
vision. There is no reason that we shouldn't be first forever
in fuel cells as perhaps we are at the moment.
So we are in that race. That is the first heat.
The second heat is the race that is driven by the global
climate change challenge. As you know, the National Academy of
Sciences just came back with a report that is rather conclusive
to the effect that, in fact, we are increasing carbon dioxide
and other climate-change gases, that the planet is warming up,
and that human activity is a source of that phenomenon and that
it will lead to unpredictable results.
And it is my belief that while the President is over
engaging some of our allies in a discussion internationally
about this, there is no reason for us to have to wait for an
international agreement for us to act with new clean sources
that are nonclimate-changing sources of energy.
We need not, we should not, and we cannot wait for other
countries to act. We don't have to fail to act, and the reason
is if you look at our leadership in the past, we didn't wait
for international agreement to pass the Clean Air Act. We
didn't wait for an international agreement to pass the Clean
Water Act. We acted.
And that is why I am so encouraged that this Committee is
considering measures to deal with clean new technologies, and I
will be promoting the Clean Energy Incentives Act, which is a
comprehensive package of incentives for a large number of new
technologies; and you have heard several of those addressed
today, whether it be wind, fuel cell, solar, geothermal,
increased hydropower efficiencies and the like.
And what I have been working to do is to develop a package
of those incentives that are not directed to any one single
bullet, because I don't think there is a single bullet here of
new technologies. There are a whole host of new candidates for
those that--we ought to, in Congress, give an incentive and let
the technology and the market decide who are going to be the
winners.
For that reason, I have been working for the last several
months to put together a package with a whole variety of
industries from the insulation manufacturers to the appliance
makers, to the automobile makers, to the wind power folks, to
the solar, to the geothermal, to the hydropower, all of those,
to come up with a package of incentives that those industries
also believe are, number one, effective for their industry and,
number two, are fair relative to the other new technologies
that are coming on line. And I think that is an important fact,
while we move forward, to realize there is going to have to be
some fairness, if you will, between these new technologies; and
I will present to you a package in the next several weeks that
I believe will do just that.
Just briefly, it sort of has four provisions. One is to
deal with the renewable and alternative energy electric
production tax credits besides extension of wind, geothermal,
solar and the like.
Second is an alternative fuels vehicle package which is
very similar to Senator Hatch's proposal in the Senate.
Third is energy efficiency and conservation, which is a
whole host--it is again a package of incentives for higher
insulation in homes, better appliances and the like.
And fourth, new incentives for demand management and
distribution generation to essentially try to have more
effective management of our electricity uses.
Mr. Chairman, as you move for this, I will just ask you for
this consideration. I hope in the next several weeks to present
to you a comprehensive package in this regard, and I will look
forward to working with you on a bipartisan basis. I have been
working with Members across the aisle in this regard. This
ought to be our shining moment, working together on this, and I
think this package will help you along.
Thank you very much.
[The prepared statement of Mr. Inslee follows:]
Statement of the Hon. Jay Inslee, a Representative in Congress from the
State of Washington
First, I would like to thank the Chair and the Committee for
holding this hearing. This is a perfect moment for the Congress to
focus on how tax policy can be used to advance our national energy
policy for two reasons. First, our current short-term energy crisis
makes it obvious that we need conservation and efficient technology and
new sources of generating capacity. Secondly, and just as importantly,
the challenge of global climate change drives our need for conservation
and new clean generating technologies just as powerfully as our raw
shortage of kilowatts. This much is certain--we must develop new
industrial bases for cleaner generating systems as well as achieving
new efficiencies, or we run the risk of unintended and unpredictable
climate change.
President Bush is in Europe today discussing climate change and
prospective international tactics to address it. We need not, we should
not, and we cannot wait for other nations to act. We need to act now,
with an American policy of American innovation. We did not have to wait
for other nations when we passed the Clean Air Act, the Clean Water
Act, or National Environmental Policy Act. We should not wait now.
Fortunately, we are a nation uniquely talented when it comes to
acquiring the need for new technology. It ought to be our national goal
to lead the world in these new technologies, not just for environmental
reasons but for economic ones as well.
To that end, I have been working with Members of both parties, and
a wide gamut of people leading in these new technologies, to develop a
comprehensive package of tax policies that can spur innovation in this
direction. The product we have produced represents a broad-based and
well-balanced package of measures to encourage the use of new
technologies. Rather than focusing on one technology, our bill
addresses a number of new fronts so that Congress does not put itself
in the position of ``picking a winner.''
I can also say that this package is one with broad-based support
throughout the world of new technologies. As such, it represents the
culmination of a process of consensus in that community, rather than a
request by just one player.
The following is a summary of this legislation:
TITLE I--RENEWABLE AND ALTERNATIVE ELECTRIC ENERGY PRODUCTION
Tax incentives for the production of electricity by the use of
renewable fuel sources.
Section 101 Expansion of Renewable Resource Credit to Include
Alternative Resources
One and a half cents/kWh production tax credit for
solar, open loop biomass, hydropower efficiency, incremental
geothermal, and landfill gas.
One cent/kWh for biomass portion of co-firing with
coal. Allows credit for co-production of electricity with heat,
mechanical power, or minerals.
Section 102 Additional Modifications of Renewable Resource Credit
Allows transfer or offset of credit for public
utilities. Applies minimum tax provision to be reduced by the
credit allowed for renewable production.
Extends existing wind, closed loop biomass, and
poultry litter production tax credits.
TITLE II--ALTERNATIVE FUEL VEHICLES
Tax incentives to encourage the use of motor vehicles powered by
fuel cells, hybrid technologies, battery electric technology, and
alternative fuels. (Sections 201-204: Hatch--S. 760 with slight
changes)
Section 201 Alternative Motor Vehicle Credit and Modification of Credit
for Qualified Electric Vehicles
Provides tax credits to consumers to purchase
alternative fuel and advanced technology vehicles (fuel cell
vehicles, hybrid vehicles, dedicated alternative fuel vehicles
and battery electric vehicles). Divides the vehicle tax credit
in two parts--one part to provide a base tax credit for the
purchase of vehicles dedicated to the use of alternative fuel
or vehicles using advanced technologies, the other part to be
used as a bonus credit based on the vehicle's efficiency and
reduction in emissions.
Performance criteria and emission backstops have been
established in order for a vehicle to receive the tax credits.
There is a minimum level of tax credits for
introducing the technologies into the marketplace.
Performance incentives are based on fuel economy
improvements over 2000 Model Year levels for ``like vehicle''
categories.
A sliding scale ranging from 125% to 300% over current
city mileage levels is included to reward fuel economy
improvements proportionately.
Emission backstops are included to ensure that
incentives apply only to vehicles whose emissions meet or beat
the average applicable standards.
Incentives are provided for the full range of
transportation categories including light, medium and heavy
duty applications.
Section 202 Credit for Retail Sale of Alternative Fuels as Motor
Vehicle Fuels
Provides a tax credit of 50 cents per gasoline-gallon
equivalent for the purchase of alternative fuel at retail.
Section 203 Extension of Deduction of Certain Refueling Property
Extends the existing deduction for the capital costs
of installing alternative fueling stations.
Section 204 Credit for Installation of Alternative Fueling Stations
Provides a 50 percent credit for the installation
costs of retail and residential refueling stations.
Section 205 Credit for Investment in Property to Convert Waste to Fuel
Fifteen percent investment tax credit for equipment
used to convert plastic waste and biomass into a usable fuel
source. $10,000 limitation.
TITLE III--ENERGY EFFICIENCY AND CONSERVATION
Tax incentives to promote energy efficient and conservation
technologies for certain commercial and industrial property, new homes,
existing homes, and appliances.
Section 301 Energy Efficient Commercial Building Property Deduction
Investment tax credit of 20% for purchases of electric
heat pumps, hot water heaters, and natural gas heat pumps.
(Section 102 of Bingaman--S. 596)
Section 302 Credit for Construction of New Energy-Efficient Homes
(Cunningham/Markey--H.R. 778 with increased credit amount, the
credit going to the builder instead of the purchaser, and the
Photovoltaic provision removed)
Tax credit up to $1,500 for homes with annual heating
and cooling energy consumption 30% less than the national model
standard in accordance with the International Energy
Conservation Code of annual heating and cooling energy.
Tax credit up to $2,500 for homes with annual heating
and cooling energy consumption 50% less than the standard
reference model. In general, credits equal the aggregate
adjusted bases of all energy-efficient property installed in a
qualified new energy-efficient home during construction.
Section 303 Credit for Energy Efficiency Improvements to Existing Homes
Up to 20% tax credit for qualified energy efficiency
improvements to an existing home. In order to qualify, property
must meet or exceed standards set by the 2000 International
Energy Conservation Code or achieve at least a 30% reduction in
heating and cooling energy usage. $2000 limitation.
Section 304 Credit for Energy Efficient Appliances
(Rep. Nussle--H.R. 1316)
Production tax credit of $50 for clothes washers
manufactured with a 1.26 Modified Energy Factor (MEF) and
refrigerators that consume 10% less kWh per year than the
energy conservation standards promulgated by the DOE for 2001
Production tax credit of $100 for clothes washers
manufactured with a 1.42 MEF and refrigerators that consume 15%
less kWh per year than such energy conservation standards.
Section 305 Credit for Adjustable Speed Drives
10% investment tax credit for adjustable speed drives
of fifty horsepower or more that achieves at least 20% energy
savings. $10,000 limitation.
TITLE IV--DEMAND MANAGEMENT AND DISTRIBUTIVE ENERGY GENERATION
Tax incentives for utilities to purchase demand management
technologies, and tax incentives to encourage investment in
distributive energy generation powered by renewable fuels and fuel
cells.
Section 401 Credit for Distributive Energy Generation and Demand
Management
Property Used in Business
(Section 101 of Bingaman--S. 596 with changes)
This section provides a tax credit to the purchaser of business
property including certain solar, geothermal, energy efficiency
building equipment, combined heat and power systems, anaerobic digester
and low core distribution transformer property. The credit amount
varies.
Section 402 Credit for Residential Solar and Fuel Cell Energy Property
(Includes Johnson--H.R. 1275 and Hayworth--H.R. 2076)
Tax credit of 15% investment tax credits for solar
thermal & solar electric systems.
Tax Credit of $1000 per kilowatt for purchasers of all
types and sizes of permanently installed stationary fuel cell
systems. The credit does not specify input fuels, applications
or system sizes so a diverse group of customers can take short-
term advantage of the credit to deploy a wide range of fuel
cell equipment.
Section 403 Credit for Qualified Energy Demand Management Devices
Tax credit of 20% for utilities to purchase equipment
which will allow consumers to monitor their energy usage on a
real-time basis, and to adjust their consumption to respond to
price and usage signals, thereby enabling individuals and small
businesses to adjust their energy consumption to reduce their
electricity bills while helping to ``flatten'' the energy
demand curve.
Section 405 Incentive of Distributive Wind Generation
Thirty percent tax credit for consumers purchasing
wind energy generation units of 75 kilowatts or less. $5,000
limitation.
Section 406 Credit for the Purchase of Flywheel Energy Storage Devices
Ten percent consumer tax credit for the purchase of
flywheel energy storage device. $2,000 limitation.
Chairman McCrery. Thank you, Mr. Inslee. Mr. Moore.
STATEMENT OF THE HON. DENNIS MOORE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF KANSAS
Mr. Moore. Thank you, Mr. Chairman. I appreciate the
opportunity to be here as well.
I want to talk to you very briefly today about the
importance of extending the section 29 tax credit for the
production of unconventional fuels. For those of you unfamiliar
with the section 29 tax credit, Congress created this tax
credit in 1980 to encourage domestic production of
unconventional fuels from the processes that are difficult and
expensive to produce. These fuels include such fuels as coalbed
methane, tight gas sands, and gas produced from Devonian shale.
They would make it very difficult and costly to recover these
fuels without a tax credit, and I think that that would not be
the exploration that we have seen without this tax credit.
The section 29 fuel exists in all regions of the country,
including Kentucky, northwestern Louisiana, and make up a
significant portion of our Nation's natural gas resource base.
Currently, the section 29 credit is scheduled to expire in
December of 2002 for all qualifying fuels.
I have introduced H.R. 794, the Energy Security for
American Consumers Act, which would extend the section 29
credit to 2016 with the value of the credit gradually declining
between 2012 and 2016. This bipartisan legislation would
encourage new drilling by applying the credit to wells drilled
between the date of enactment and 2010.
During the last Congress, Senator Murkowski introduced a
companion bill in the Senate that was cosponsored by Members
across the aisle, including Senator John Breaux. A section 29
credit is also included in the Blue Dog proposal.
According to the Congressional Research Service, the
section 29 credit has significantly reduced the cost and
stimulated the supply of unconventional gases in this country;
and the Gas Technology Institute, GTI, and Energy and
Environmental Analysis, Inc., EEA, basically--I have attached a
copy of the summary of the EEA that talks about unconventional
fuel, such as section 29. This study demonstrates that an
extension of section 29 could have a significant impact on
prices for the consumer by increasing the aggregate supply of
natural gas.
According to the study, natural gas currently provides
approximately 23 percent of our Nation's energy needs. The
study predicts that demand for natural gas in our country will
grow to approximately 30 trillion cubic feet per year in the
next 15 years. Electricity generation will account for a great
deal of that demand for gas.
According to the study, section 29 has been successful in
boosting unconventional gas production in the past, and the
section 29 tax credit extension will provide additional
unconventional gas production to meet our Nation's growing
demand for gas.
As the study indicates, from 1986 to 1996, 70 percent of
the increase in the lower 48 gas production came from
unconventional sources. Currently, unconventional gas
represents 30 percent of well production in the lower 48
States.
These next two things, I think, are extremely important.
Extension of section 29 to wells drilled through 2010 could
increase U.S. gas supply by approximately 2 trillion cubic feet
per year. This would be additional gas production that likely
would not occur without the section 29 credit.
The study further predicts that increased supply of gas
stimulated by production of section 29 fuels would translate
into lower natural gas prices and estimated total savings to
consumers of over $100 billion through 2015.
Mr. Chairman I have heard from both producers and consumers
in my district, and both stand to benefit greatly from
extension of this section 29 credit. The section 29 credit can
play a vital role in increasing and stabilizing the domestic
supply of natural gas at a time when our Nation is looking for
additional supplies.
The study that I have mentioned, that is attached to my
statement, suggests that while the extension of the credit may
not solve--will not solve our Nation's energy problems by
itself, the section 29 tax credit has the potential, I think,
based upon past performance and future projections, to play an
instrumental role in increasing our supply of energy.
Mr. Moore. I think that is what we have to look at. This is
one small piece of the overall comprehensivepolicy that we have
talked about that we need to develop on a bipartisan basis in this
Congress.
This came to my attention last June. Very briefly--and I
will finish here. When a friend of mine and a constituent back
home contacted me last June, a year ago, he said at the time,
Congressman, have you seen what has happened, the supply of--
the cost of natural gas in our country? I said, I really
haven't paid attention. He said, well, it has doubled since the
first of the year. I expect it to double again by the end of
the year. He said, if you think consumers are upset now about
the price of gasoline at the pumps, wait till they get their
heating bills this last winter.
And he was exactly right. It happened. I said, what can be
done? He was in the business--he had formerly owned a medical
lab, sold it and made some money. He went out and started
drilling natural gas wells, and he found substantial natural
gas wells, coalbed methane in Kansas. He said, what can be done
is to extend this credit which will be expiring and encourage
other people to increase the supply of natural gas and
hopefully drive the cost down.
I talked to several people in the industry and others
around who know something about this, and they shared the same
view, and that was the basis for my section 29 tax bill. I hope
this Committee will take a look at it and recommend this be
included in the bill; and I very much appreciate the
opportunity to testify here, Mr. Chairman.
[The prepared statement of Mr. Moore follows:]
Statement of the Hon. Dennis Moore, a Representative in Congress from
the State of Kansas
Mr. Chairman and Members of the Subcommittee, I appreciate the
opportunity to appear before you today to talk about the importance of
extending the section 29 tax credit for the production of
unconventional fuels.
For those of you who are unfamiliar with the section 29 credit, I
would like to provide you with some brief background information.
Congress created the section 29 credit in 1980 to encourage domestic
production of unconventional fuels from deposits that are inordinately
difficult and expensive to produce. These fuels, such as coalbed
methane, tight gas sands, gas produced from Devonian shale and oil
produced from shale or tar sands, would not be economically recoverable
for producers in most areas of the nation without a federal tax
incentive. Section 29 fuels exist in all regions of the country,
including Kentucky and northwestern Louisiana, and make up a
significant portion of our nation's natural gas resource base.
Currently, the section 29 credit, which is equivalent to $.50 cents
per thousand cubic feet (Mcf) for gaseous fuels and $3.00 per barrel of
oil for liquid fuels, is scheduled to expire on December 31, 2002, for
all qualifying fuels except biogas and synfuels. For biogas and
synfuels, the credit will expire on December 31, 2007.
I have introduced H.R. 794, the Energy Security for American
Consumers Act, which would extend the section 29 credit to 2016, with
the value of the credit gradually declining between 2012 and 2016.
Additionally, this bipartisan legislation, which I originally
introduced during the 106th Congress, would encourage new
drilling by applying the credit to wells drilled between the date of
enactment and 2010. During the last Congress, Senator Frank Murkowski
introduced a companion bill in the Senate that was cosponsored by
members from both sides of the aisle, including Senator John Breaux.
Further, Senator Murkowski included section 29 extension in his
comprehensive energy tax legislation that he introduced in February, S.
389.
According to the Congressional Research Service, the section 29
credit ``has significantly reduced the cost and stimulated the supply
of unconventional gases . . .'' This assertion is closely mirrored in a
recent analysis of section 29 by the Gas Technology Institute (GTI),
which has been analyzing unconventional fuels production for 20 years,
and Energy and Environmental Analysis, Inc. (EEA), which, as many of
you know, was the lead contractor in the landmark 1999 study of natural
gas supply undertaken by the National Petroleum Council. The EEA's 1999
study is the current industry standard reference for gas market
projections and policy analysis. Please find a summary of the GTI/EEA
study attached to my remarks.
This study demonstrates that an extension of section 29 could have
a significant impact on prices for the consumer by increasing the
aggregate supply of natural gas.
According to the GTI/EEA study [referred to hereafter
as ``the study''], natural gas currently provides approximately
23% of our nation's energy needs. The study predicts that
demand for natural gas in the United States will grow to
approximately 30 trillion cubic feet (Tcf) per year in the next
15 years. Electricity generation will account for much of this
increased demand for gas, as nearly all new generation
facilities are now powered by natural gas. In order to meet
this growing demand, we must focus on ways in which we can
increase our total supply of natural gas.
According to the study, ``section 29 has been
successful in boosting unconventional gas production'' in the
past, and ``a section 29 tax credit extension will provide
additional unconventional gas production'' to meet our nation's
growing demand for gas. Total unconventional gas production
doubled during the 1990s from 2 trillion cubic feet in 1990 to
4.8 trillion cubic feet by 1999, and coalbed methane production
alone increased from zero production in 1990 to over 1.1
trillion cubic feet per year by the end of the last decade. As
the study demonstrates, ``from 1986 to 1996, 70% of the
increase in lower-48 gas production came from unconventional
sources.'' Currently, unconventional gas represents 30% of well
production in the lower 48 states.
Extension of section 29 to wells drilled through 2010
could increase U.S. gas supply by approximately 2 trillion
cubic feet (Tcf) per year, adding a cumulative volume of over
15 trillion cubic feet of additional unconventional gas by
2015. I would like to reiterate that this would be additional
gas production that likely would not occur without the section
29 credit. Production from new wells would also likely extend
beyond 2015, and consumers will continue to benefit from both
expanded supply and new technological innovations even after
the term projected by the study.
The study further predicts that increased supply of
gas stimulated by production of section 29 fuels would
translate into lower natural gas prices and estimated total
savings to consumers of over $100 billion through 2015. This
estimate is based upon analysis of similar model runs completed
for the 1999 National Petroleum Council study.
Mr. Chairman, I have heard from both producers and consumers in my
district, and both stand to benefit greatly from extension of this
credit. Producers and investors need stability in order to make the
long-term investments necessary to extract and produce gas from
difficult sources. Additionally, section 29 can play a vital role in
increasing and stabilizing the domestic supply of natural gas at a time
when our nation is consuming more natural gas than ever before.
The statistics contained in the GTI/EEA study suggest that, while
extension of the section 29 credit may not solve our nation's energy
problems by itself, section 29 has the potential, based on past
performance and future projections, to play an instrumental role in
increasing our supply of energy. It is my hope that extension of
section 29 will exert downward pressure on the exorbitant prices
consumers and businesses have recently been forced to pay for natural
gas.
I appreciate the opportunity to testify before the Subcommittee
today, and I urge you to include extension of the section 29 tax credit
in either a future tax extenders measure or comprehensive energy tax
policy legislation.
Attachment:
Rationale for Section 29 Non-Conventional Gas Tax Credit Extension,
prepared by the Gas Technology Institute and Energy & Environmental
Analysis, Inc., March, 2001.
[The attachment is being retained in the committee files.]
Chairman McCrery. Thank you, Mr. Moore. Mr. Engel.
STATEMENT OF THE HON. ELIOT L. ENGEL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK
Mr. Engel. Well, thank you, Mr. Chairman and Mr. Ranking
Member, for holding this hearing today to allow Members to
discuss proposals on tax credits for energy-saving measures.
Let me say, on a personal note, it is nice to see people
from the class of 1988 in such high places.
As you know, New York City was initially expected to be hit
by a California-type energy crisis this summer with an
increased load and a lack of generation within the city,
coupled with a lack of transmission lines into the city. There
is a growing disparity between the supply and demand. Although
I am told that there will be enough supply for this summer, it
is still expected to be a tight crunch. The country is in the
current energy situation because our economy and energy use
have grown in tandem over the past 10 years, while energy
infrastructure has not improved or expanded. As a result, we
are stuck with generation and transmission bottlenecks and
outdated, inefficient infrastructure which artificially drives
up demand.
My colleague on my left, although not politically, Mr.
Terry and I have been working to develop bipartisan legislation
that would address the conservation side of a national energy
plan. We have been working on various ideas, including tax
credits for replacing boilers, heating and cooling systems and
windows with Energy Star ratings, which Mr. Terry will focus on
his testimony.
In addition, we are proposing legislation which will offer
tax credits for homeowners and businesses to change their
blacktop roofs to cool roofing material and to buy and use
renewable sources of energy, including solar panels and wind
turbines.
Finally, the legislation includes a provision on net
metering to allow owners of renewable sources of energy to
remain connected to the grid and to get credit for putting any
excess electricity they generate on the grid.
I represent an urban district with a significant amount of
residential and high-rise housing. Many of the apartment
buildings were built before the energy crises of the seventies
and therefore do not have many of the energy efficient
equipment included in new homes. They have blacktop roofs that
create heat traps on the top floor to the buildings and, like
most communities across the country, do not have the incentive
to invest in energy conservation, equipment and materials.
Black surfaces in the sun can become up to 70 degrees
Fahrenheit hotter than the most reflective white surfaces. On
those dark surfaces or roofs, some of the heat collected by the
roof is transferred inside. Staying comfortable under a dark
shingle roof often means more air-conditioning and higher
utility bills. These roofs also heat the air around them.
Conversely, cool roofs can save energy. In a study founded
by the U.S. EPA, the Heat Island Group carried out a detailed
analysis of energy-saving potentials of light-colored roofs in
11 U.S. metropolitan areas. About 10 residential and commercial
building prototypes in each area were simulated. Considering
both the savings in cooling and penalties in heating, they
estimated saving potentials of about $175 million per year for
the 11 cities. Extrapolated national energy savings were about
$750 million per year.
The legislation we are proposing offers a 30 percent tax
credit to homeowners and businesses who want to change their
blacktop roofs to cool roofing materials, defined as having a
solar reflectance index of 65 percent or greater.
Tax credits for renewables are not new. In fact, the Energy
Tax Act 1978 created residential solar credits and residential
and business credits for wind energy installations.
Unfortunately, the legislation expired in 1985; and while the
business credits were extended indefinitely by the Energy
Policy Act of 1992, the residential credits were not.
Our proposed legislation would offer 25 percent credit to
residential users and expand the business tax credit to 25
percent for buying and installing solar panels, wind turbines,
geothermal pumps and other alternative energy generation
equipment. The short-term costs of the renewables equipment is
still high, but the savings are immeasurable and permanent. Not
only are electricity bills reduced, but long-term positive
benefits of turning to renewables and reducing emissions
include cleaner air, cleaner water, and a reduction in the
demand on the electricity grid.
Incidences of childhood asthma are a serious problem in my
district. The mercury poisoning in fish and the effects of
global warming will all likely be reduced by investing in
renewable sources of energy.
Finally, the provision on net metering would allow
homeowners and businesses who generate their own electricity
with renewable sources of energy to put any excess power
generated onto the grid. In turn, their electric meters would
turn backward so that they would receive credits for producing
excess energy. They would receive a credit against the next
month's bill for any excess generation and a refund at retail
price if they generate more than they use in a calendar year.
I thank you for your consideration of our legislation, and
we look forward to working with you in a bipartisan spirit as
legislation on energy tax credits progresses.
[The prepared statement of Mr. Engel follows:]
Statement of the Hon. Eliot L. Engel, a Representative in Congress from
the State of New York
Thank you Chairman McCrery and Ranking Member McNulty for holding
this hearing today to allow Members to discuss proposals on tax credits
for energy-saving measures.
As you know, New York City was expected to be hit by a California-
like energy crisis this summer. With an increased load and a lack of
generation within the City coupled with a lack of transmission lines
into the City, there is a growing disparity between supply and demand.
Although I am told that there will be enough supply for this summer, it
is still expected to be a tight crunch. The country is in the current
energy situation because our economy and energy use have grown in
tandem over the past ten years while energy infrastructure has not
improved or expanded. As a result, we are stuck with generation and
transmission bottlenecks and an outdated, inefficient infrastructure
which artificially drives up demand.
My colleague, Mr. Terry, and I have been working to develop
bipartisan legislation that would address the conservation side of a
national energy plan. We have been working on various ideas, including
tax credits for replacing boilers, heating and cooling systems, and
windows with Energy Star-ratings, which Mr. Terry will focus on his
testimony. In addition, we are proposing legislation which will offer
tax credits for homeowners and businesses to change their black top
roofs to cool roofing material and to buy and use renewable sources of
energy, including solar panels and wind turbines. Finally, the
legislation includes a provision on net-metering to allow owners of
renewable sources of energy to remain connected to the grid and to get
credit for putting any excess electricity they generate on the grid.
I represent an urban district with a significant amount of
residential and high-rise housing. Many of the apartment buildings were
built before the energy crisis of the 1970s and therefore do not have
many of the energy efficient equipment included in new homes. They have
black top roofs that create ``heat traps'' on the top floors of the
buildings, and like most communities across the country, do not have
the incentive to invest in energy conservation equipment and materials.
Black surfaces in the sun can become up to 70 deg.F (40 deg.C) hotter
than the most reflective white surfaces. If those dark surfaces are
roofs, some of the heat collected by the roof is transferred inside.
Staying comfortable under a dark shingle roof often means more air
conditioning and higher utility bills. These roofs also heat the air
around them. Conversely, cool roofs can save energy. In a study funded
by the U.S. EPA, the Heat Island Group carried out a detailed analysis
of energy-saving potentials of light-colored roofs in 11 U.S.
metropolitan areas. About ten residential and commercial building
prototypes in each area were simulated. Considering both the savings in
cooling and penalties in heating, they estimated saving potentials of
about $175 million per year for the 11 cities. Extrapolated national
energy savings were about $750 million per year. The legislation we are
proposing offers a 30% tax credit to homeowners and businesses who want
to change their black top roofs to cool roofing materials, defined as
having a solar reflectance index (as determined by the Lawrence
Berkeley National Laboratory) of 65 percent or greater.
Tax credits for renewables are not new-in fact, the Energy Tax Act
of 1978 created residential solar credits and residential and business
credits for wind energy installations. Unfortunately, the legislation
expired on December 31, 1985. While the businesses credits were
extended indefinitely by the Energy Policy Act of 1992, the residential
credits were not. Our proposed legislation would offer a 25% credit to
residential users and expand the business tax credit to 25% for buying
and installing solar panels, wind turbines, geothermal pumps, and other
alternative energy generation equipment. The short-term cost of the
renewables equipment is still high, but the savings are immeasurable
and permanent. Not only are electricity bills reduced, the long-term
positive benefits of turning to renewables and reducing emissions
include cleaner air, cleaner water, and a reduction in the demand on
the electricity grid. Incidences of childhood asthma, a serious problem
in my district, mercury poisoning in fish, and the effects of global
warming will all likely be reduced by investing in renewable sources of
energy.
Finally, the provision on net-metering would allow homeowners and
businesses who generate their own electricity with renewable sources of
energy to put any excess power generated onto the grid. In turn, their
electric meters would turn backwards so that they receive credits for
producing excess energy. They would receive a credit against the next
months bill for any excess generation and a refund at retail price if
they generate more than they use in a calendar year.
Thank you for your consideration of our legislation. We look
forward to working with you in a bipartisan spirit as legislation on
energy tax credits progresses.
Chairman McCrery. Thank you, Mr. Engel. Mr. Terry.
STATEMENT OF THE HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEBRASKA
Mr. Terry. Mr. Chairman, thank you for holding this
hearing, as we discuss a national energy policy and focus on
the issue of supply and demand. Of course, when we talk about
demand-side or lowering demand and creating efficiencies in
energy, it is going to take incentives to accomplish those
goals and, hence, tax credits.
Well, I am here to ask for the same thing, a bill that I
have worked on with Representative Engel, and it has been a
pleasurable experience in trying to develop policies to make
our country more energy efficient.
One of those ways of accomplishing that goal is the Energy
Star program, which was referenced also in the President's
National Energy Policy. This program began in 1992 as a
voluntary labeling program designed to identify and promote
energy efficient products. The goal is to reduce carbon dioxide
emissions. In 1996, the EPA partnered with the Department of
Energy to promote this Energy Star label. Now, the Energy Star
covers many categories of energy-saving products, such as
windows, residential heating and cooling equipment, major
appliances, lighting, consumer electronics and many others.
Congressman Engel and I are here before you to talk about
this bill that we will be introducing within a few days. It is
the Energy Efficiency Investment Act of 2001. It is designed to
encourage both homeowners and businessowners to replace their
old energy inefficient windows, heating and cooling systems and
boilers with Energy Star certified products of the same
criteria. Our legislation will provide a 25 percent tax credit
to either the homeowner or businessowner if they install the
Energy Star products into an existing structure.
To demonstrate how much of an impact this legislation can
have, I want to mention some statistics from California and the
kind of benefits this legislation could have to the citizens in
that State. It could be translated to every other State as
well. Currently, there is over 12 million homes in the Golden
State that could benefit from the installation of new energy
efficient windows. In these homes, over 40 percent of the
annual energy budget is used on heating and cooling. By
installing these energy efficient windows, the homeowners could
reduce their energy bills by 15 percent.
Another example I would like to mention also comes from the
same State. According to the California Energy Commission,
during the hot summer afternoons, air-conditioning can consume
over 16,000 of the available 34,000 megawatts of electricity. A
new central air conditioning system with a Federal Energy Star
design could use half of the energy of a 20-year-old unit.
Individuals who purchase a unit under this program can save 20
to 40 percent on their overall energy bills to help reduce the
need for electricity.
As a personal note, we just had to replace our air
conditioner. We looked for the energy efficient model. It ran
over a third more than the basic unit that you would--a lot of
families can't make that stretch. We, of course, did.
The last example comes from my colleague's home State of
New York, in the Bronx where there are more apartments and
condominiums than freestanding homes. If the owner of these
buildings were to take advantage of our legislation, the energy
savings would be significant. In fact, we all know that the
power supply in New York may be tight this summer. This could
certainly help.
The Energy Star program is something that needs to be
included in this discussion. The Department of Energy estimates
that if all households and businesses in the United States
bought only Energy Star-labeled windows instead of standard
products for the next 15 years, the reduction in carbon dioxide
emissions would be equivalent to reducing gasoline consumption
by 120 billion gallons.
Mr. Chairman, this bill is not trying to reinvent the
wheel. We are using something that is already put in place by
both the EPA and the Department of Energy. Our bill simply
takes the Energy Star program and encourages the homeowner and
businessowner to invest in exchange for a 25 percent tax
credit. We believe that this legislation needs to be part of
the overall policy for energy efficiency and conservation
discussion.
Thank you.
[The prepared statement of Mr. Terry follows:]
Statement of the Hon. Lee Terry, a Representative in Congress from the
State of Nebraska
Mr. Chairman, I want to thank you for holding this important
hearing. It is important because we need to discuss the variety of
energy saving legislation that has been and will be introduced this
Congress, so we can decide what elements should be included in the
energy policy that will soon be on the House floor. As the debate
continues, we must make sure that the decisions we make are both
balanced and are based on reducing our demand for energy.
In May, the Energy Star program was referenced by the President in
his National Energy Policy as something that needs to be promoted and
expanded beyond its current level. This program began in 1992 as a
voluntary labeling program designed to identify and promote energy-
efficient products. The goal was to reduce carbon dioxide emissions. In
1996, the Environmental Protection Agency (EPA) partnered with the
Department of Energy (DOE) to promote the Energy Star label. Now,
Energy Star covers many categories of energy saving products, such as:
windows, residential heating and cooling equipment, major appliances,
lighting, consumer electronics and many others.
Congressman Engel and I are here before you to talk about a bill
that we will be introducing shortly. The Energy Efficiency Investment
Act of 2001 is designed to encourage both homeowners and business
owners to replace their old energy inefficient windows, heating and
cooling systems, and boilers with Energy Star certified products of the
same criteria. Our legislation will provide a 25% tax credit to either
the homeowner or business owner, if they install the Energy Star
products into an existing structure.
To demonstrate how much of an impact this legislation can have, I
want to mention some statistics from California and the kind of
benefits this legislation could have to its citizens suffering one of
the worst energy problems the state has ever seen. Currently, there are
over 12 million homes in the Golden State that could benefit from the
installation of new energy efficient windows. In these homes, over 40%
of the annual budget is used on heating and cooling. By installing
these energy efficient windows, these homeowners could reduce their
energy bills by up to 15%.
Another example I would like to mention also comes from California.
According to the California Energy Commission, during a hot summer
afternoon, air conditioning can consume over 16,000 of the available
34,000 megawatts of precious electricity the state needs. A new central
air conditioning system with a federal Energy Star designation could
use half the energy of a 20-year old model. Individuals who purchase a
unit under this program can save 20% to 40% on their overall energy
bills, help to reduce California's need for precious electricity and
qualify for our energy tax credit. In some cases, this credit is
necessary, because a new central air system, which often requires a new
heating system as well, is an investment that could cost thousands of
dollars to replace.
The last example comes from New York. My colleague represents an
area of the Bronx where there are more apartments and condominiums than
free standing homes. If the owners of these buildings were to take
advantage of our legislation, the energy savings would not be
insignificant. In fact, we all know that the power supply in the New
York area will be tight this summer. Our bill will help to lessen this
problem.
The Energy Star program is something that needs to be included in
this discussion, as well as be expanded. The Department of Energy
estimates that if all households and businesses in the United States
bought only Energy Star labeled windows instead of standard products
for the next 15 years, the reduction in carbon dioxide emissions would
be equivalent to reducing gasoline consumption by 120 billion gallons.
Mr. Chairman, this bill is not trying to reinvent the wheel. We are
using something already put in place by both the Environmental
Protection Agency (EPA) and the Department of Energy (DOE). Our bill
simply takes Energy Star program and encourages the homeowner and
business owner to invest in exchange for a 25% tax credit. We believe
that this legislation needs to be part of the energy efficiency and
conservation discussion.
Thank you.
Chairman McCrery. Thank you, Mr. Terry. Mrs. Capito.
STATEMENT OF THE HON. SHELLY MOORE CAPITO, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WEST VIRGINIA
Mrs. Capito. Yes. Thank you, Mr. Chairman. I thank you for
letting me come here today to testify on the importance of tax
credits for energy production and investment.
I take pride in representing the coal-rich State of West
Virginia. For generations, coal has played an integral part in
the lives and livelihoods of West Virginians, and coal is an
integral part of any solution to our country's energy
predicament.
Coal accounts for more than one half of the electricity
generated in the country. It is our most abundant domestic
energy resource, and one quarter of the entire world's known
coal supplies are found within the United States.
In terms of energy value, coal constitutes approximately 95
percent of the United States fossil energy reserves. Our
Nation's recoverable coal has the energy equivalent of about 1
trillion barrels of crude oil--comparable in energy content to
the entire world's known oil reserves. At present consumption
rate, U.S. coal reserves are expected to last at least 275
years.
Using coal to generate electricity has been problematic in
light of requirements of the Clean Air Act. In response, the
Department of Energy has invested substantially in developing
and testing clean coal technology, and the President's budget
seeks to invest $2 billion in clean coal technology, including
coal gasification over the next 10 years. According to the
Department of Energy, coal gasification is one of the most
promising clean coal technologies.
Briefly, a coal gasification system turns coal into gas,
which can be cleaned of its impurities, virtually to the same
levels as natural gas. The gas is then burned in a turbine to
generate one source of electricity. Exhaust from the gas
turbine is hot enough to boil water, creating steam to drive a
steam turbine, generating a second source of electricity.
Initial gasification-based plants could boost power plant
efficiencies by as much as 20 percent.
The Department of Energy reports that gasification combined
cycle technologies are among the cleanest way to generate
electricity from coal. As much as 95 to 99 percent of the
sulfur and nitrogen impurities in coal gas can be removed
through the coal gasification process.
In the early nineties, the Department of Energy recognized
that investing in coal gasification technology will be the
first step into the next millennium of clean, high efficiency
electricity from coal. There are now three coal gasification
combined cycle power plants in the United States. They are
among the cleanest fossil fuel power plants in the world. Each
previous coal gasification plant, however, has relied on
substantial direct government subsidies and has been
constructed by rate-regulated utilities with a pool of captive
ratepayers to absorb cost overruns and the risk of failure.
There has been no test, however, of a coal gasification
plant in two ways: in the present energy environment, and one
that does not rely on substantial direct infusions of Federal
dollars--typically 50 percent of project costs. It is critical
that Congress support the demonstration of the commercial
viability of a coal gasification plant that would be funded by
traditional sources of private debt and equity.
Establishing that coal gasification plants can be built
with private capital is not an attempt simply to save scarce
Federal resources. It is an essential step in the transition
that this country is taking in the deregulation of the
generation and distribution of energy. The only plants that
will survive are those that produce electricity at a
competitive kilowatt-per-hour cost. Coal gasification
technology is exciting and promising. However, until the
modalities of making it commercially viable in a deregulated
environment are determined, it cannot be used.
Private equity and commercial financial institutions are
going to need some encouragement. Senate bill 389, Senate bill
60, and Senate bill 596 create a 10 percent tax credit for
investments in advanced clean coal technology and a per-
kilowatt-hour production tax credit for each kilowatt hour
produced at a facility which is implementing advanced clean
coal technology. I am proposing that these same tax credits be
granted for investments in coal gasification facilities and the
production of energy at these facilities.
Production and investment tax credits for coal gasification
are similar to energy credits currently in the Internal Revenue
Code.
On the investment side, a 10 percent investment tax credit
is currently available for energy property which includes solar
energy and geothermal energy production. Clearly, energy tax
credits have been historically used to encourage a broad range
of energy investment.
Investment and production tax credits for coal gasification
are good for the country and consistent with current tax
policy. At the very least, Mr. Chairman, investment and
production tax credits for coal gasification should be
available for a demonstration project to test the commercial
viability of a coal gasification plant.
Some say that tax credits distort the market by ``picking
winners.'' This criticism is inapt in the case of coal. Mother
Nature has picked coal to be America's principal fossil energy
resource. Given this geological fact and given that reducing
reliance on foreign energy sources is in the national interest
and the increased sensitivity to the impact of energy
production on the environment, coal gasification is a logical
solution. As such, tax measures supporting clean coal
technology like coal gasification are worthy of support.
I look forward to the opportunity to work with you on these
important matters. Thank you.
[The prepared statement of Mrs. Capito follows:]
Statement of the Hon. Shelley Moore Capito, a Representative in
Congress from the State of West Virginia
Thank you, Mr. Chairman,
I thank the members of the Committee for having me here today to
testify on the importance of tax credits for energy production and
investment. Specifically, I would like to discuss the importance of tax
credits for cleancoal technology projects like coal gasification.
I take pride in representing the coal rich State of West Virginia.
For generations coal has played an integral part in the lives and
livelihoods of West Virginians. Clean coal technology projects like
coal gasification power plants offer West Virginia the opportunity to
play a critical role in the delivery of the energy while preserving the
environment.
Coal is an integral part of any solution to our country's energy
predicament. Coal accounts for more than half of the electricity
generated in the country. It is our most abundant domestic energy
resource. One quarter of the entire world's known coal supplies are
found within the United States. In terms of energy value (Btus), coal
constitutes approximately 95 percent of the United States fossil energy
reserves. Our nation's recoverable coal has the energy equivalent of
about one trillion barrels of crude oil--comparable in energy content
to the entire world's known oil reserves. At present consumption rates,
U.S. coal reserves are expected to last at least 275 years.
At a recent House Commerce subcommittee hearing on energy policy,
Chairman Barton (R-TX) appropriately called the United States ``[t]he
Saudi Arabia of Coal.'' He also stated that ``[t]his strategic resource
will not and should not be ignored or neglected.''
If the United States is to reduce its dependence on foreign sources
of energy, the enhanced use of coal is essential.
Using coal to generate electricity has been problematic in light of
the requirements of the Clean Air Act. In response, the Department of
Energy has invested substantially in developing and testing clean coal
technology, and the President's budget seeks to invest $2 billion in
clean coal technologies, including coal gasification, over the next ten
years. According to the Department of Energy, coal gasification is one
of the most promising clean coal technologies.
A coal gasification system turns coal into gas which can be cleaned
of its impurities, virtually to the same levels as natural gas. The gas
is then burned in a turbine to generate one source of electricity.
Exhaust from the gas turbine is hot enough to boil water, creating
steam to drive a steam turbine generating a second source of
electricity. Initial gasification based plants could boost power plant
efficiencies by as much as 20% over conventional coal burning power
plants.
The Department of Energy reports that gasification combined cycle
technologies are among the cleanest ways to generate electricity from
coal. As much as 95 to 99% of the sulfur and nitrogen impurities in
coal gas can be removed through the coal gasification process. Vice
President Cheney's National Energy Policy Development Group also
reported in May of 2001 that ``[t]echnologies like . . . integrated
gasification combined cycle have been developed that further reduce
emissions.''
In the early 1990s, the Department of Energy recognized that
investing in coal gasification technology would be the first step into
the next millennium of clean, high efficiency electricity from coal.
There are now three coal gasification combined cycle power plants in
the United States. They are among the cleanest fossil fuel power plants
in the world.
We now know that coal gasification technology works--coal can be
processed into a gas and burned in this latter state in a manner that
satisfies clean air standards. Each previous coal-gasification plant,
however, has relied on substantial direct government subsidies and has
been constructed by rate-regulated utilities with a pool of captive
rate-payers to absorb cost overruns and the risk of failure.
There has been no test, however, of a coal gasification plant: (1)
in the newly deregulated energy environment, and (2) that does not rely
on substantial direct infusions of federal dollars (typically 50% of
project costs). It is critical that Congress support the demonstration
of the commercial viability of a coal-gasification plant that would be
funded by traditional sources of private debt and equity.
Establishing that coal gasification plants can be built with
private capital is not simply an attempt to save scarce federal
resources; it is an essential step in the transition that this country
is taking in the deregulation of the generation and distribution of
energy. In the new deregulated environment, the only plants that will
survive are those that produce electricity at a competitive kilowatt
per hour cost. Coal-gasification technology is exciting and promising;
the consumer will not benefit from it, however, until the modalities of
making it commercially viable in a deregulated environment are
determined.
Private equity and commercial financial institutions are going to
need some encouragement to realize that these projects are worthy of
support. Senate bills S 389, S 60, and S 596 create both a 10% tax
credit for investments in advanced clean coal technology and a per
kilowatt hour production tax credit for each kilowatt hour produced at
a facility which has implemented advanced clean coal technology. I am
proposing that these same tax credits be granted for investments in
coal gasification facilities and the production of energy at such clean
coal facilities.
Production and investment tax credits for coal gasification are
similar to energy credits currently found in the Internal Revenue Code.
For example, a production tax credit of 1.25 cents per kilowatt-hour
for energy produced by a coal gasification plant would be similar to
Internal Revenue Code Sec. 45 that currently provides a 1.50 credit per
kilowatt hour for energy produced from certain renewable resources. In
addition, coal gasification would qualify for the Nonconventional Fuels
Production Credit under Internal Revenue Code Sec. 29 if the gas
produced were sold instead of used in energy production.
On the investment side, a 10% investment tax credit is currently
available under Internal Revenue Code Sec. 48 for energy property which
includes solar energy and geothermal energy production. Clearly, energy
tax credits have been historically used to encourage a broad range of
energy investment.
I believe that investment and production tax credits for coal
gasification are good for the country and consistent with current tax
policy. At the very least, Mr. Chairman, investment and production tax
credits for coal gasification should be available for a demonstration
project to test the commercial viability of a coal gasification plant.
Some say that tax credits distort the market by ``picking
winners.'' This criticism is inapt in the case of coal: Mother Nature
has picked coal to be America's principle fossil energy resource. Given
this geological fact, and given that reducing reliance on foreign
energy sources is in the national interest, and given the increased
sensitivity to the impact of energy production on the environment, coal
gasification is the logical solution. As such, tax measures supporting
clean coal technology, like coal gasification, are worthy of support
from all possible perspectives.
I look forward to the opportunity to work with Members of the
Committee on these important issues.
Thank you.
Chairman McCrery. Thank you, Mrs. Capito. Mr. Issa.
STATEMENT OF THE HON. DARRELL E. ISSA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Issa. Thank you, Mr. Chairman. I would ask that my
official statement be entered into the record.
Chairman McCrery. Without objection.
Mr. Issa. Thank you, Mr. Chairman.
The last time that I was here was 1993 as a private citizen
lobbying on behalf of North American Free Trade Agreement
(NAFTA). At that time, my testimony centered on the benefit of
a free and fair trade and that I felt that our relations
between California, my home State, and Mexico were at stake if
we didn't engage.
Oddly enough, I am here today to a certain extent to talk
about something that has a tax ramification, but for the same
reason, that our--the best interest of my State, a State that
right now has a terrible problem with getting electricity to
where it is needed in a timely fashion and in a reliable
fashion. As a result, I am here to talk about a bill that
Heather Wilson is the author of and I cosponsored; and it is
H.R. 1045.
You know, many of us have all come the same way. We seem to
be all talking about how tax credits will, in fact, do good
things for our country.
Distributed power does something that all the tax credits--
and they are all valuable and they all make a lot of sense--
can't do. It has--strategic interest is served by distributed
power. There is no question that right now the problem in
California can be linked to an absence of an ability to get
sufficient competitors onto the grid, feeding into California.
Cogeneration, or its many other--distributed power and many
other names, does something more importantly. It puts the power
into the grid under our bill, and it puts it in a way in which
there is no critical path any longer.
For too long we have been dependent upon just about four
major ways of bringing power into California, but the entire
country is set up that way. Our bill in distributing power,
asking for a credit, has the benefit to America that if at some
time in the future any part of the feed into the grid were to
go down, if we don't in fact distribute much finer, we could
find ourselves in any part of the country with an inability to
deliver power when it is needed most.
I am not saying that somebody is going to sabotage the grid
today, but I was in a meeting--an international relations
meeting, and it was oil producers, and every one of them was
interested in our infrastructure and how vulnerable it was and
what would happen if exactly that were to occur.
I believe that distributed power benefits us, because in
fact it forces the end to what we call in California NIMBYism.
Nobody wants something in their backyard, but only if--the only
reason they don't want it in their backyard is it is not in
their backyard to their benefit. With cogeneration, what ends
up happening is the benefit is in the same backyard, or in the
case of photovoltaic, probably on your roof.
This bill does not pick winners or losers as to how you do
the generation, whether it is natural gas, flex fuel, or any
other type of distributed power. What it does say is that if
you are willing to produce this power in your own backyard, you
should have access to the grid; and, in fact, the conversion to
this type of power should enjoy a Federal preference, if you
will.
I believe that when we consider ending the single-point or
few-point source of electricity and giving this Nation tens of
thousands of new and reliable energy sources is weighed against
the alternative of endlessly building up the grid to large
nuclear or coal facilities located further and further away
from metropolitan areas, you will see that this should in fact
be a major component.
I would urge you to look at this as an umbrella bill that
benefits many of the other technologies talked about here
today. Because without distributed power, doing photovoltaic or
any other one technology doesn't get on the grid, especially in
some of the States like California where the energy suppliers
have chosen, unless mandated, to simply ignore the small
producer, exactly the producer we wish we had more of today. So
both for my home State and for strategic reasons of the United
States, I would ask that you seriously consider endorsing the
10 percent credit on bill H.R. 1045, and thank you for this
opportunity.
[The prepared statement of Mr. Issa follows:]
Statement of the Hon. Darrell E. Issa, a Representative in Congress
from the State of California
Thank you, Mr. Chairman for holding this important hearing on
energy policy--specifically, on revenue measures to create incentives
to increase supply, reduce demand and encourage alternative
technologies and energy efficiencies.
I would like to take this opportunity to share with the
Subcommittee an important provision in my bill, H.R. 1045, which would
provide a 10% tax credit for the purchase of distributed generation
units.
Energy self-sufficiency is an integral part of the solution to the
current energy problems in the West and should be the guiding principal
of our national energy policy. By using distributed generation
technology, we can empower individuals and companies to take control
and meet their own power needs.
Distributed generation, also known as on-site generation or micro-
generation or co-generation, is technology that has been used in
various forms since Thomas Alva Edison's Pearl Street Station in New
York City. Distributed generation allows individual sites, or in some
cases whole sections of the grid, to remain in service during storms,
high winds and other natural disasters. Distributed generation can also
be used to provide backup service or peaking power during times of high
demand. It is currently helping to solve transmission capacity problems
in California.
Distributed generation is an affordable, reliable, clean and stable
power option than can help solve the problems energy customers are
currently experiencing and will continue to experience across the
country. These technologies include microturbine generators, fuel
cells, solar energy, wind turbines, reciprocating engines and storage
technology.
H.R. 1045 has several vital components. It establishes the right to
interconnect to the grid, establishes a uniform technology standard to
interconnect to the grid, authorizes R&D programs for alternative
technology at the Department of Energy, and finally, provides a 10% tax
credit for the installation of distributed energy generation
technologies.
A tax credit will provide a valuable incentive to encourage self-
sufficiency for consumers and encourage the development of new clean
technologies for consumer use by making individuals part of the
solution to our energy problems.
Again, thank you, Mr. Chairman, for giving me the opportunity to
share with you and the other Subcommittee members the benefits of
distributed generation and hope the Subcommittee will be able to
support the provisions in H.R. 1045.
Chairman McCrery. Thank you, Mr. Issa. Finally, we have
with us a Member of the Ways and Means Committee, Mr.
McDermott.
Thank you for joining us; and I would tell you, having
looked over your testimony just briefly, Mr. Filner has already
said it. So proceed as you wish.
STATEMENT OF THE HON. JIM McDERMOTT, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WASHINGTON
Mr. McDermott. Thank you for that warm invitation for my
testimony.
I actually--as I sat down, I want to thank you, Mr.
Chairman, for having this hearing and for making it last long,
for some of us on the West Coast to make it in from the
airport.
As I sat down, Mr. Inslee whispered a secret in my ear. He
said, everything has been said. Well, unfortunately, I am here
to say mine.
It feels a little like deja vu all over again, to quote
that eminent philosopher Yogi Berra. We said in this Committee
in 1993, 1994 when Danny Rostenkowski was the chairman and put
together the Green amendments, which we adopted in that session
of Congress--there has really been nothing since, and I really
commend you for going through this exercise.
I know that you have heard all about all the problems and
who did what to whom. So I really want to focus on the things
that I think ought to be considered, at least a couple of
things that ought to be considered in the process of dealing
with this crisis.
It really is brought together by a combination not only of
the energy crisis in the United States but the whole question
of global warming. Those two issues are really what are
bringing us to the table on these issues. And despite the fact
that the Vice President has said that alternative fuels are way
down the road, I think it is time to really look at the clean,
renewable energy sources, including wind, solar, geothermal and
so forth, that do not pollute our air and that are renewable.
Renewable energy development continues to rise, while the
costs continue to decline. The market for solar power alone is
growing by 30 percent each year in the United States, while
generating 17 percent of the world's power last year.
Widespread use of solar and other renewable energy sources
could bring costs down, and I think that that is really what we
have to think about.
It is with that in mind that I introduced a bill, H.R.
1969. It is called the Residential Solar Energy Act of 2001.
Under the provisions of that bill, electric utilities would be
authorized to issue a new type of tax credit bonds. The tax
credit bond provisions are modeled on the provisions currently
in effect on a limited basis under the Qualified Zone Academy
Bond Program, with certain technical changes that we have made.
The utility would be required to use the proceeds of the tax
credit bonds to make loans to residential customers to cover
the cost of installing photovoltaic cells on the customers'
homes.
The loan would be without interest cost to the homeowner.
The homeowner would be required to repay the loan in equal
installments over a specified period of time.
One might ask why you choose that as the first thing you
put forward. One fact makes it real clear. Every day in
California, seven times the energy that is used in California
falls from the sky in the form of solar energy. We have not
capitalized on that. We have not captivated it and turned it
into energy, but it is possible. It is going on out there.
Much of this information I have about solar energy came
from my son who lives out there and watches what is going on.
And there is clearly a movement in California--if you want to
know what is going to happen in the world, always look to
California first. Whatever is going on there is going to be
going on everywhere in the word within 3 years, and I think
that the solar energy issue is one to which we should be very
attentive.
Now, there is another problem that I--in looking at this
whole issue I thought needed to be dealt with, and I have
offered these amendments in the Committee before, but I will
offer them again here, and I am sure they will be among your
favorites to consider as we move toward a final bill.
H.R. 2079 is a windfall profits tax on electric generating
facilities having excess profits. Under this bill, wholesalers
would have to pay one dollar in tax for every dollar in profit
they reaped over a pretax rate of return that exceeds 15
percent. A sense of Congress is expressed that this revenue
should be used to moderate the impact of high prices on low-
income individuals and small businesses, as well as to
encourage the development of alternative energy sources through
tax credits that others have talked about.
H.R. 2080 denies the benefits of accelerated depreciation
for property. If you don't like the first way to go at it,
there is another way to go at it. Just don't give them the
depreciation for property used to generate electricity where
there are excess profits, again defined by the 15 percent rate
of return.
Accelerated depreciation is a benefit designed by the
Congress to provide incentives for investment in business
assets. The bill is based on the premise that businesses do not
need tax incentives when they are enjoying excess profits. Why
should you continue to give them a tax credit when they are
getting 400 percent profit? If a generating facility has excess
profits for any year, the taxpayer is denied accelerated
depreciation for that year.
Fifteen percent for excess profits was chosen because it is
close to the rates of return that have been used by many
jurisdictions before electricity deregulation took hold. Both
windfall profit bills do not apply to facilities that rely on
renewable energy sources.
Finally, and in conclusion, it is unfortunate, in my view--
and I hope that we will have more hearings on this--that my
request to have the Consumer Federation testify at tomorrow's
hearing was not granted. This organization believes that
gasoline and electric shortages are the result of price
manipulations and price gouging and that a windfall profits tax
is a reasonable approach to dealing with this problem and
protecting consumers. Accordingly, I would ask unanimous
consent to include as a part of my statement the joint
statement of the Consumer Federation and the Consumers Union.
Chairman McCrery. Without objection.
Mr. McDermott. Thank you.
[The prepared statement of Mr. McDermott, and the Consumer
Federation and Consumers Union statement follow:]
Statement of the Hon. Jim McDermott, a Representative in Congress from
the State of Washington
I am very concerned about the current energy crisis we are now
facing.
A tight energy market has created a situation, which is allowing a
few number of energy marketers to over-charge for wholesale
electricity. Wholesale electricity prices that cost $23 a megawatt last
year now cost from $200 to $300 a megawatt and have been as high as
$1,000. FERC has declared the rates, ``unjust and unreasonable,'' but
the current Administration has failed to act.
We must hold the wholesalers accountable. Why should we allow these
big corporations in Texas to make huge rates of return? These
corporations reportedly have seen revenues climb by 400 percent in the
past two years while local utilities have spiraled into debt.
Additionally, we need to generate policies that focus on the
development of clean, efficient, and renewable energy sources. Despite
our Vice President's assertion that alternative fuels are still ``years
down the road,'' I say the wave of the future is here today.
Clean, renewable energy sources--including wind, solar and
geothermal power--do not pollute our air or our water and will never
run out, unlike coal, natural gas and other fossil fuels. Renewable
energy development continues to rise while its costs continue to
decline. The market for solar power alone is growing by 30 percent each
year in the U.S., while generating 17 percent of the world's power last
year. Widespread use of solar and other renewable power sources will
bring costs down, making clean energy even more attractive than fossil
fuels.
I have recently introduced three energy bills:
``Residential Solar Energy Act of 2001'' (HR 1969):
Under the provisions of the bill, electric utilities would be
authorized to issue a new type of tax credit bonds. The tax credit bond
provisions are modeled on the provisions currently in effect on a
limited basis under the Qualified Zone Academy Bond Program, with
certain technical improvements.
The utility would be required to use the proceeds of the tax credit
bonds to make loans to residential customers to cover the cost of
installing photovoltaic cells on the customers' homes.
The loan would be without interest cost to the homeowner. The
homeowner would be required to repay the loan in equal installments
over a specified period of time.
Two Windfall Profits bills:
HR 2079 is a windfall profits tax on electric generating facilities
having excess profits. Under this bill, wholesalers would have to pay
one dollar in tax for every one dollar in profit they reaped over a
pre-tax rate-of-return that exceeds 15 percent. A sense of Congress is
expressed that this revenue should be used to: moderate the impact of
high prices on low-income individuals and small business, as well as to
encourage the development of alternative energy sources through tax
credits for research in renewable energy.
HR 2080 denies the benefits of accelerated depreciation for
property used to generate electricity when there are excess profits,
(again defined by exceeding fifteen percent of the rate-of-return.)
Accelerated depreciation is a benefit designed by the Congress to
provide incentives for investment in business assets. The bill is based
on the premise that businesses do not need tax incentives when they are
enjoying excess profits. If a generating facility has excess profits
for any year, the taxpayer is denied accelerated depreciation for that
year.
Fifteen percent for excess profits was chosen because it is close
to the rates of return that had been used by many jurisdictions before
electricity deregulation took hold. Both windfall profits bills do not
apply to facilities that rely on renewable energy sources, such as
wind, sun, or water.
In conclusion, it is unfortunate that my request to have the
Consumer Federation testify at tomorrow's hearing was denied. This
organization, along with the Consumers Union, believes that gasoline
and electricity shortages are the result of price manipulations and
price gouging, and that a windfall profits tax is a reasonable approach
to dealing with this problem and protecting consumers. Accordingly, the
conclusions and analysis of the Consumer Federation and Consumer Union
follow:
Consumer Federation and Consumer Union Statement
(An Analysis of Economic Justifications and Implications of Taxing
Windfall Profits in the California Wholesale Electricity Market)
INTRODUCTION
It has been two decades since this country has had a vigorous
debate about windfall profits taxes on energy. The reason is clear, no
series of events has called out for a careful consideration of a
windfall profits tax than the complete breakdown of the wholesale
electricity market and natural gas markets in California and throughout
the Western United States. The magnitude of the economic shock created
by the unprecedented increase in electricity prices in California
exceeds the impact of the second oil price shock.
In nominal dollars, the increase in the amount paid for electricity
at wholesale in California between the end of October 2000 and April
2001 was larger than the increase in the total national oil import bill
in the entire year after the fall of the Shah of Iran, which is widely
recognized as the largest energy price shock in the history of the
nation. Expressed as a percentage of gross domestic product, the price
increase suffered by California in electricity costs is about twice as
large as the increase suffered by the nation in 1980 in its oil import
bill. The impacts on electricity prices throughout the West would make
these numbers even larger.
The problem is certainly large. But, is it a federal problem that
merits the imposition of a windfall profits tax? The following
observations suggest that it is.
1. Fundamental demand and supply conditions in the California
electricity market make it vulnerable to the abuse of market
power by energy producers.
2. The remarkable run up in prices is attributable in
significant part to the premature and unjustified deregulation
by the Federal Energy Regulatory Commission (FERC) of the
wholesale electricity and natural gas markets in California and
FERC's subsequent failure to discipline pricing abuse in those
and other markets.
3. Prices have been driven up by the strategic behavior of
merchant generators who have subsequently profited from those
increases.
4. The profits are excessive by any reasonable measure.
5. Taxing away windfalls such as this will not detract from
the incentive to build generating capacity to meet demand at a
reasonable profit. To the contrary, removing the fun and profit
from market manipulation will cause the supply-side of the
market to function more efficiently.
In making these points, we do not mean to suggest that California
policymakers and California utilities bear no responsibility for a
dysfunctional market or none of the blame. They certainly do, but
federal policymakers made a substantial contribution to the problem and
they have yet to make up for their mistakes or play a substantial part
in finding a solution. The need for Congress to consider this type of
policy stems, in part, from the fact that the FERC has demonstrated its
inability to ensure that energy markets function properly. If the FERC
cannot be counted on to enforce laws that require just and reasonable
rates, consumers be charged rates that are just and reasonable, then
other federal actions must be taken to provide a back stop to policies
to back stop to an agency that has been derelict in its duty are
needed. A windfall profits tax would be one such policy.
FUNDAMENTAL DEMAND AND SUPPLY CONDITIONS MAKE ELECTRICITY A VULNERABLE
MARKET
In the list of culprits identified above (FERC, merchant
generators, California regulators and California utilities), we do not
include California consumers. They are the victims in this drama, not
the villains.
California is among the most electricity efficient states in the
nation. It consumes less than 50 percent as much electricity as the
rest of the country per dollar of state output. On a heating and
cooling degree day basis, it consumes considerably less electricity
than the rest of the nation. California consumers now pay the highest
prices in the country for electricity. If the rest of the country were
as electricity efficient as California, we would only need the
equivalent of 500 new power plants, instead of the 1300 that Vice
President Cheney has discussed, talked about.
Those who suggest that California consumers do not pay enough for
electricity have not looked at the facts of the situation. Electricity
is a necessity that has no substitute on the demand side in the short-
term. At the start of the twenty-first century, electricity is like
oxygen--a basic necessity to daily life.
Necessities like electricity have a low elasticity of demand. By
this term, economists mean that as prices increase (or decrease) demand
does not decrease (or increase) very much. The elasticity of demand is
measured in terms of percentage changes. For example, if a ten percent
increase in price results in a 20 percent decrease in demand, the
elasticity of demand is said to equal 2 (20%/10%). When the elasticity
is greater than 1, demand is said to be elastic. Alternatively, if a 10
percent increase in price results in a 2 percent decrease in demand,
the elasticity of demand is said to be .2, and this is considered
inelastic. The empirical evidence demonstrates that this is the
situation in electricity markets. The best evidence from California is
that the short run elasticity of demand is considerably less than 1. In
fact, the short term elasticity of demand is less than 1. Even in the
long term, it is considerably less than 1.
The empirical evidence in California is that supply is also very
inelastic in the short term. The supply curve is very steep, (see
Exhibit 1). The best evidence from California is that the short run
supply elasticity is considerably less than 1. In fact the supply
elasticity is probably less than .2 on the basis of 1999 prices. This
is probably a higher price elasticity than observed in 2000-2001, which
suggests a supply elasticity considerably less than 1 for the peak of
2000 (demand of 35000 MW to 45000 MW) and in the range of .1 to .15 for
shoulder periods (demand between 25000 MW and 35000 MW).
When demand and supply elasticities are this low, the potential for
the abuse of market power is substantial. Market power is the ability
of suppliers to raise prices and earn excess profits. In simple terms,
when we talk about market forces, we mean the ability of consumers to
cut back or shift their demand and the ability of producers to increase
their output in response to price increases--we mean supply and demand
elasticities. If these elasticities are too small, market forces are
weak and the exercise of market power will take place. Under these
circumstances, firms with relatively small market shares can increase
profits by withholding supplies. The evidence in California clearly
suggests that they have been the victims of a monumental market
failure.
FEDERAL REGULATORY RESPONSIBILITY FOR THE PROBLEM
The Federal Energy Regulatory Commission bears a substantial part
of the blame for the problem in California because it deregulated
prices in a market which was vulnerable to abuse and failed to police
that abuse once it began. FERC prematurely deregulated price over the
objection of many in California. In fact, FERC fought California
authorities to assert control over the Independent System Operator
(ISO) and then deregulated the price of energy in the California
wholesale market, even though its market analysis was fundamentally
flawed. This enabled private interests to take advantage of the bad
situation that they had helped to create.
FERC failed to reasonably analyze the market before it deregulated.
It treated the state as one big market, when it is evident that there
are distinct and separate north-south markets because of a capacity
constraint. It failed to identify load pockets that would be
constrained at peak times. It deregulated ancillary services, even
though it was told market power existed in these markets and accepted
on faith that ``must run'' plants would mitigate market power, without
any concrete plan to do so.
FERC refuses to responsibly police the markets it has irresponsibly
deregulated. It has defended the secrecy of spot market bidding, which
appears to have the effect of allowing tight oligopolies of bidders to
play their games behind closed doors. It refused to requisition and
study bidding records for abusive patterns after the first price spikes
in 1998, and the second price spikes in 1999, which emboldened
strategic bidders for the really big killing of 2000. It failed to
analyze the data once it was collected and has taken over a year to
begin to address the problems in the natural gas market. After finding
rates were unjust and unreasonable, it failed to adopt mitigation
measures that could discipline the market.
FERC approves rates without subjecting them to refund, so that
market manipulators know they will never have to disgorge their ill-
gotten gains. It even rushed in to allow a hasty reorganization of one
of the California utilities to shield its assets from its creditors. As
the only dissenting Commissioner put it, if the FERC had exercised more
responsibility earlier, ``capping spot market prices at variable
operating costs plus a capacity adder * * * there is reason to believe
that applicants would not be in such dire straits now.''
EXPLOITATION IN A DYSFUNCTIONAL MARKET
Premature deregulation led to profit maximization that tightened
electricity markets by reducing supplies, limiting reserves,
eliminating back up requirements, undercutting conservation programs,
and preventing facilities from being built. The small number of
suppliers and the tendency for electricity product and geographic
markets to be highly restricted in time and space make the exercise of
market power and the implementation of gaming strategies that drive
prices up easy to execute. Price spikes produce such huge windfalls
that suppliers exhibit an OPEC-like (backward bending) supply curve, in
which supplies are reduced, not increased, as prices rise.
On any given day during the recent price spikes fossil fuel plants
owned or controlled by merchants were producing between 2000 and 6000
megawatts less than their historic average. The same independent
generators also opposed long-term contracts, which would have kept
utilities out of the volatile spot market. The disappearance of these
assets is part of a pattern of resource denial that has the effect of
driving up the price of electricity. Whether it is purely strategic, or
illegally manipulative, or even collusive, remains to be seen, but
there is no doubt that the pursuit of private interests has denied the
electricity market in California substantial resources. This profit
driven denial of resources equal to between 10 and 20 percent of peak
demand had a substantial impact on price and performance.
The CAL-ISO, the sole entity to produce a detailed analysis of
bidding behavior, estimated that approximately half of the price
increase through November 2000 is attributable to price gouging
(offering prices far above costs) or capacity hoarding (physical
withholding of supply). This detailed study of actual bidding behavior
by every major player in the California market, charged that there had
been either price gouging or physical withholding in virtually every
hour between May and November (a total of 25,000 bid/hours). Daisy
chains of transactions have been developed to avoid regulatory
scrutiny. In the colorful language of a new game of consumer abuse we
have hockey stick bidding and megawatt laundering, but they all mean
the same thing, consumers are being ripped off.
The inevitable result of greed, irresponsibility and mismanagement
in a volatile market for a vulnerable commodity is a massive,
inefficient and unjustified transfer of wealth from consumers to
producers. Worse still this analysis does not even deal with the period
after November 2000, when the excessive pricing became vastly more
abusive.
The CAL-ISO has asked for refunds of over $6 billion, but the CAL-
ISO analysis does not include the results of any investigation into
natural gas prices in the California market and is based on a
methodology distorted by a series of erroneous assumptions dictated by
the FERC. A detailed and direct comparison of actual costs incurred and
prices charged on a plant-by-plant basis, which is the methodology used
to order the wholesale electricity market for six decades prior to the
deregulation experiments of the 1990s, would inevitably reveal that the
abuses are much larger than $6 billion.
EXCESS PROFITS
For the purposes of empirically demonstrating excess profits (and
the flaw in FERC's recent failed attempts to impose discipline on a
dysfunctional market), we analyze evidence in the record for January
2001 (See Exhibit 2). Assuming a least efficient generator using the
most expensive inputs for January 2001, FERC's methodology establishes
a ceiling price (or market clearing price) of $273/MWh. Since all
generators are allowed to charge up to that level without scrutiny, it
appears they fully exploited the artificially high benchmark in
determining what to charge in California's dysfunctional market. The
average wholesale price in January 2001 was $307.
However, 99 percent of the generators did not incur costs at that
level, since they are much more efficient than that. Consequently, and
inevitably the prices they receive are far above their costs. At the
average level of efficiency known to exist in California, the actual
costs incurred, even assuming the high cost inputs, would have been
half the ceiling level. In other words, not only are virtually all
generators more efficient than FERC's benchmark, but also the average
generator is twice as efficient. While the FERC methodology would allow
them to charge $273/MWh without any scrutiny, the actual costs would be
about $150/MWh. The difference, equal to about $120/MWh, constitutes a
huge windfall and unreasonable level of profit.
The CAL-ISO has estimated that a new generation unit being brought
on line with heavy capital costs would be paid off in less than two
years. The implicit return on equity would be approximately 85%.
Similarly, the County of San Diego calculated a cost of $120/MWh for a
new generation plant. At the FERC authorized ceiling prices, which are
not subject to scrutiny, the plant would be paid off in one year. Such
rates of return are historically unprecedented and patently
unreasonable.
The above analyses still assume that all producers pay the high,
spot price for natural gas and air emission credits. In fact, there are
many longer-term contracts for gas at much lower prices and the typical
generator in California does not require emissions credits. This
creates an even larger gap between actual costs and the FERC's ceiling
price benchmark (as shown in Exhibit 2). Using an average cost of gas
(assume $6.25 per MCF [thousand cubic feet]) and assuming the average
generator does not pay emissions credits would increase the estimate of
overcharges and windfalls by about one third.
The patently unreasonable rates are not simply a one-month
aberration. The CAL-ISO analysis shows that by February 2001, even
assuming the spot market price of gas and NOX credits, the
costs of a new plant brought on line when the restructured market
commenced in May 1998 in California would have been fully recovered in
just three years. The implicit return on equity would be in the range
of 30 to 60 percent
More to the point, perhaps, the total estimated revenues above
costs, even using spot prices for gas and NONOX costs, for
Non-Utility Distribution Company generators subject to FERC
jurisdiction since the start of restructuring in May 1998, is
approximately $3.1 billion. This is approximately equal to the total
capital paid by merchant generators to acquire the fossil plants of the
utilities. In other words, by abusing their market power, these
entities have, at a minimum, recovered all of their capital in
approximately three years. If actual input costs were used, the full
cost recovery would have occurred even earlier. The return on equity
based on actual costs would fall in the range of 40 to 80 percent.
These direct estimates of price cost margins are confirmed by the
bottom line profit figures of the power generators who are selling into
California. Comparing the first quarter of 2001 to the first quarter of
2000, just prior to the meltdown of the California market began; we
observe a tripling of operating profits for the largest fossil fuel
generators and marketers, as the first quarter financial results,
focusing on wholesale or trading business segments and operating
results, shows.
PROFITS IN MILLIONS OF DOLLARS
------------------------------------------------------------------------
1Q2001 1Q2000
------------------------------------------------------------------------
Enron: Wholesale Services (IBIT)........................ $755 $429
Duke: Energy Services (EBIT)............................ 428 139
MIR: With California contingency (NI)................... 420 95
REI: Wholesale, (operating income)...................... 216 (22)
Dynegy: Marketing & Trade (NI).......................... 100 50
Williams: Marketing and Trading (NI).................... 485 78
---------------
TOTAL................................................... 2404 769
------------------------------------------------------------------------
Sources: Quarterly reports and Wall Street briefings.
Although the companies do not break their profits down by state,
there is no doubt that California and the western United States are
primarily where the profits accrued.
TAXING AWAY WINDFALL PROFITS AND MONOPOLY RENTS DOES NOT HARM ECONOMIC
EFFICIENCY
California has paid a heavy price in economic rents--scarcity rents
and monopoly rents. An economic rent is ``a payment to a factor in
excess of what is necessary to keep it at its present occupation.''
More importantly, ``in perfect competition, no rents are made by any
factor, because changes in supply bid prices of inputs and labor down
to the level just necessary to keep them employed.''
It is well established in the economic literature that scarcity
rents can be taxed away without harming economic efficiency (see
Exhibit 3). Since supply of a fixed asset does not respond to price
changes, there is little or no dead weight loss. As Taylor, puts it,
Economic rent is the price of anything that has a fixed
supply. Economic rent is also sometimes called pure rent.
Economic rent is a significant concept in economics precisely
because the quantity supplied does not depend on the price.
Thus, a tax on economic rents would not change the amount
supplied; it would not affect economic efficiency or cause a
deadweight loss.
Monopoly rents should be eliminated to promote economic efficiency.
In fact, producers do not even have an interest in delivering existing
capacity. Indeed, when windfalls become as massive as they have been in
California, they distort economic incentives. Producers make more by
withholding supplies than by increasing output. Having learned how to
manipulate the market, the primary interest of producers is to keep it
tight. Exorbitant prices do not elicit efficient supply responses, they
reward and create an incentive for more effective gaming. There is a
formal theory of this in economics. It is called a backward bending
supply curve. It has been extensively applied to labor markets and, not
surprisingly, to the OPEC cartel.
To state the concept in layman's terms, you make so much money by
running the price up that you are much better off by cutting back
production than by increasing output, which would lower the price. You
can only get away with this when demand is inelastic (since that
creates huge economic rents) and the supply beyond your control cannot
be easily expanded in the short-term (since competition would dissipate
the rents).
Claims that the market needs electricity priced in the hundreds of
dollars per MWh to elicit efficient supply-sided responses are absurd
on their face. Neither empirical reality nor economic theory supports
this claim. Hundreds of power plants were financed and placed under
construction across the country and including California long before
anyone dreamed that prices would rise so high. Payback periods of a
couple of years for facilities with useful lives that are decades long
are unprecedented and unnecessary in a workably competitive market to
create adequate supply.
Given the situation in the California electricity market, a
windfall profits tax would play the useful role of taking the fun and
profit out of market manipulation. It corrects part of the market
failure (as described in Exhibit 3), although it does not fully
accomplish the same outcome as cost-based rates.
EXHIBIT 1
SUMMER 2000 SUPPLY CURVE
[GRAPHIC] [TIFF OMITTED] T4228A.002
EXHIBIT 2
ABUSIVE PRICING OF ELECTRICITY IN CALIFORNIA
APPROVED BY THE FEDERAL ENERGY REGULATORY COMMISSION
(Based on January 2001 ``Caps'')
[GRAPHIC] [TIFF OMITTED] T4228A.003
SOURCE: Request for Rehearing on Behalf of The County of San Diego,
Comment of the California Independent System Operator Corporation on
Staff's Recommendation on Perspective Market Monitoring and Mitigation
for the California Wholesale Electric Power Market, San Diego Gas &
Electric Company v. Seller of Energy and Ancillary Service Into Markets
Operated by the California Independent System Operator and the
California Power Exchange, Docket No. EL00-95-017, March 22, 2001.
EXHIBIT 3
SCARCITY RENTS MONOPOLY PROFITS GENERATED BY WITHHOLDING
AND WINDFALL PROFITS TAXES COMPARED TO COST BASED RATES
[GRAPHIC] [TIFF OMITTED] T4228A.004
Scarcity rents and taxation of windfalls adapted from Rutherford,
Donald, Dictionary of Economics (Routledge: London, 1992), p. 138 and
Taylor, John, B., Economics (Houghton Mifflin, Boston, 1998), p. 350).
Chairman McCrery. Thank you, Mr. McDermott, and thank all
the Members of the panel for your testimony.
With respect to the gentleman's request for the Consumers
Union to testify, the request did come rather late. Weplanned
this hearing for some time, and we had our witness panels set, and had
we had time to get somebody to respond specifically to those assertions
by the Consumers Union, we would have gladly heard from them.
We do have some panelists that will probably hit on some of
the same themes, so I don't think the gentleman will be totally
disappointed in the array of witnesses that we have. Plus the
fact that some of the assertions that are made are not really
within the jurisdiction of this Committee, although the one
solution offered by the gentleman from Washington certainly
would be, the windfall profits tax or the cancelation of the
depreciation.
And, as I said to the Minority Leader, who was here before
you arrived, Mr. McDermott, we heard a lot of testimony today
from Republicans and Democrats that gives me hope that there is
much more common ground on the issue of energy policy in this
country than there is disagreement. So I am hopeful that we
will be able to come up with a tax bill that can include and
will include those areas of common ground. I am not sure that
the windfall profits tax rises to that status just yet, but the
gentleman can certainly keep working on it with some members of
the Committee. But I think there is a lot of common ground.
I appreciate very much the testimony of all of you. You
have brought up some very interesting approaches to energy
policy, and we look forward to working with you to craft those
in the form of legislation to help give this country a sensible
energy policy. Mr. McNulty.
Mr. McNulty. Thank you, Mr. Chairman. I thank you for
holding these hearings, and I agree with your assessment of
them.
I think that the Democratic leader struck a very positive
note today, and I think he was correct in pointing out all of
the common ground that exists on many of these issues. Matter
of fact, there is an old song that many people in this room are
too young to remember, but it is ``accentuate the positive,
eliminate the negative.'' There are a lot of things that we
don't agree on, and I think we ought to put them in the
background, as Mr. Gephardt suggested, and work on the things
that we agree on. And there are many of those things that we
agree on that can result in the development of a very positive
energy policy for the future of this country, and I am
committed to doing that. I know the chairman is.
I thank all of the Members for their very positive input.
Chairman McCrery. I thank my Ranking Member for
participating in today's hearing and helping us put together
the panel for tomorrow's hearing.
Once again, thank all of you. We look forward to working
with you to craft a sensible energy policy for the United
States. Thank you.
[Whereupon, at 4:32 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of the U.S. Department of the Treasury, Office of Tax Policy
Mr. Chairman, Mr. McNulty, and Members of the Subcommittee:
It is the goal of this Administration to pursue an energy policy
that protects America's economic, security, and environmental
interests. As you know, in May the President's National Energy Policy
Development (NEPD) Group released its report entitled ``Reliable,
Affordable, and Environmentally Sound Energy for America's Future.''
The report sets forth three basic features of a National Energy Policy:
The Policy is a long-term, comprehensive strategy. Our energy
crisis has been years in the making, and will take years to put
fully behind us.
The Policy will advance new, environmentally friendly
technologies to increase energy supplies and encourage cleaner,
more efficient energy use.
The Policy seeks to raise the living standards of the
American people, recognizing that to do so our country must
fully integrate its energy, environmental, and economic
policies.
In that context, the Office of Tax Policy appreciates the
opportunity to present testimony on tax incentives to promote energy
conservation and increase domestic production of oil and gas.
Energy Efficiency and Alternative Energy Sources
Incentives for energy efficiency and alternative energy sources are
essential elements of national energy policy. The continuing strength
of our economy over the past two years, despite oil price rises,
underscores the dramatic improvements in energy efficiency we have
achieved over the past quarter century, as well as the changing
economy. While past oil shortages have taken a significant toll on the
U.S. economy, the recent increases in oil prices have not affected the
economy much. Increased energy efficiency in cars, homes, and
manufacturing has helped insulate the economy from these short-term
market fluctuations. In 1974, we consumed 15 barrels of oil for every
$10,000 of gross domestic product. Today we consume only 8 barrels of
oil for the same amount (in constant dollars) of economic output.
Current law tax incentives for energy efficiency and alternative fuels
Tax incentives currently provide an important element of support
for energy-efficiency improvements and increased use of renewable and
alternative fuels. Current incentives are estimated to total $1.2
billion for fiscal years 2002 through 2006. They include a tax credit
for electric vehicles and expensing for clean-fuel vehicles ($20
million), a tax credit for the production of electricity from wind or
biomass and a tax credit for certain solar energy property ($590
million), and an exclusion from gross income for certain energy
conservation subsidies provided by public utilities to their customers
($580 million).\1\
---------------------------------------------------------------------------
\1\ Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2002, U.S. Government Printing Office,
Washington, DC, 2001, p. 63.
---------------------------------------------------------------------------
Electric and clean-fuel vehicles and clean-fuel vehicle refueling
property
A 10-percent tax credit is provided for the cost of a qualified
electric vehicle, up to a maximum credit of $4,000. A qualified
electric vehicle is a motor vehicle that is powered primarily by an
electric motor drawing current from rechargeable batteries, fuel cells,
or other portable sources of electric current, the original use of
which commences with the taxpayer, and that is acquired for use by the
taxpayer and not for resale. The full amount of the credit is available
for purchases prior to 2002. The credit begins to phase down in 2002
and does not apply to vehicles placed in service after 2004.
Certain costs of qualified clean-fuel vehicles and clean-fuel
vehicle refueling property may be deducted when such property is placed
in service. Qualified electric vehicles do not qualify for the clean-
fuel vehicle deduction. The deduction begins to phase down in 2002 and
does not apply to property placed in service after 2004.
Energy from wind or biomass
A 1.5-cent-per-kilowatt-hour tax credit is provided for electricity
produced from wind, ``closed-loop'' biomass (organic material from a
plant that is planted exclusively for purposes of being used at a
qualified facility to produce electricity), and poultry waste. The
electricity must be sold to an unrelated person and the credit is
limited to the first 10 years of production. The credit applies only to
facilities placed in service before January 1, 2002. The credit amount
is indexed for inflation after 1992.
Solar energy
A 10-percent investment tax credit is provided to businesses for
qualifying equipment that uses solar energy to generate electricity, to
heat or cool or provide hot water for use in a structure, or to provide
solar process heat.
Ethanol and renewable source methanol
An income tax credit and an excise tax exemption are provided for
ethanol and renewable source methanol used as a fuel. In general, the
income tax credit is 53 cents per gallon for ethanol and 60 cents per
gallon for renewable source methanol. As an alternative to the income
tax credit, gasohol blenders may claim an equivalent gasoline tax
exemption for each ethanol and renewable source methanol that is
blended into qualifying gasohol.
The income tax credit expires on December 31, 2007, and the excise
tax exemption expires on September 30, 2007. In addition, the ethanol
credit and exemption are each reduced by 1 cent per gallon in 2003 and
by an additional 1 cent per gallon in 2005. Neither the credit nor the
exemption applies during any period in which motor fuel taxes dedicated
to the Highway Trust Fund are limited to 4.3 cents per gallon. Under
current law, the motor fuel tax dedicated to the Highway Trust Fund
will be limited to 4.3 cents per gallon beginning on October 1, 2005.
Energy conservation subsidies
Subsidies provided by public utilities to their customers for the
purchase or installation of energy conservation measures are excluded
from the customers' gross income. An energy conservation measure is any
installation or modification primarily designed to reduce consumption
of electricity or natural gas or to improve the management of energy
demand with respect to a dwelling unit.
Administration budget proposals
The Administration's budget proposals for fiscal year 2002 include
tax incentives for renewable energy resources. The budget also proposes
to modify the tax treatment of nuclear decommissioning funds. The
Administration's proposals are described below.\2\
---------------------------------------------------------------------------
\2\ For a more detailed description, see General Explanations of
the Administration's Fiscal Year 2002 Tax Relief Proposals, Department
of the Treasury, April 2001.
---------------------------------------------------------------------------
Electricity from wind and biomass
The Administration proposes to extend the credit for electricity
produced from wind and biomass for three years to facilities placed in
service before January 1, 2005. In addition, eligible biomass sources
would be expanded to include certain biomass from forest-related
resources, agricultural sources, and other specified sources. Special
rules would apply to biomass facilities placed in service before
January 1, 2002. Electricity produced at such facilities from newly
eligible sources would be eligible for the credit only from January 1,
2002, through December 31, 2004. The credit for such electricity would
be computed at a rate equal to 60 percent of the generally applicable
rate. Electricity produced from newly eligible biomass co-fired in coal
plants would also be eligible for the credit only from January 1, 2002,
through December 31, 2004. The credit for such electricity would be
computed at a rate equal to 30 percent of the generally applicable
rate.
Residential solar energy systems
The Administration proposes a new tax credit for individuals that
purchase solar energy equipment used to generate electricity
(photovoltaic equipment) or heat water (solar water heating equipment)
for use in a dwelling unit that the individual uses as a residence. The
credit would be available only for equipment used exclusively for
purposes other than heating swimming pools. The proposed credit would
be equal to 15 percent of the cost of the equipment and its
installation. The credit would be nonrefundable and an individual would
be allowed a lifetime maximum credit of $2,000 per residence for
photovoltaic equipment and $2,000 per residence for solar water heating
equipment. The credit would apply only to solar water heating equipment
placed in service after December 31, 2001, and before January 1, 2006,
and to photovoltaic systems placed in service after December 31, 2001,
and before January 1, 2008.
Nuclear decommissioning funds
The Administration proposes to repeal the current law provision
that limits deductible contributions to a nuclear decommissioning fund
to the amount included in the taxpayer's cost of service for ratemaking
purposes. Thus, unregulated taxpayers would be allowed a deduction for
amounts contributed to a qualified nuclear decommissioning fund. The
Administration also proposes to permit funding of all decommissioning
costs (including pre-1984 costs) through qualified nuclear
decommissioning funds. Contributions to fund pre-1984 costs would be
deductible except to the extent a deduction (other than under the
qualified fund rules) or an exclusion from income has been previously
allowed with respect to those costs. The Administration's proposal
would clarify that any transfer of a qualified nuclear decommissioning
fund in connection with the transfer of the power plant with which it
is associated would be nontaxable and no gain or loss will be
recognized by the transferor or transferee as a result of the transfer.
In addition, the proposal would permit taxpayers to make deductible
contributions to a qualified fund after the end of the nuclear power
plant's estimated useful life and would provide that nuclear
decommissioning costs are deductible when paid.
NEPD Group Proposals
The Report of the NEPD Group also included tax incentives for
renewable energy resources and for more efficient energy use. The NEPD
Group proposals are described below.\3\
---------------------------------------------------------------------------
\3\ For a more detailed description, see the attachments to this
testimony.
---------------------------------------------------------------------------
Fuel from landfill methane
The NEPD Group proposes to extend the section 29 credit for fuel
produced from landfill methane produced at a facility (or portion of a
facility) that is placed in service after December 31, 2001. Fuel
produced at such facilities would be eligible for the credit through
December 31, 2010. The proposal would also expand the credit by
permitting the credit for fuel used by the taxpayer to produce
electricity. The credit for fuel produced at landfills subject to EPA's
1996 New Source Performance Standards/Emissions Guidelines would be
limited to two-thirds of the otherwise applicable amount. In the case
of landfills with facilities that currently qualify for the section 29
credit, this limitation would not apply until after 2007.
Ethanol and renewable source methanol
The NEPD Group proposes to extend the income tax credit and excise
tax exemption for ethanol and renewable source methanol through
December 31, 2010. The current law rule providing that neither the
credit nor the exemption applies during any period in which motor fuel
taxes dedicated to the Highway Trust Fund are limited to 4.3 cents per
gallon would be retained. As under current law, the credit and the
exemption would each be reduced by 1 cent per gallon in 2003 and by an
additional 1 cent per gallon in 2005.
Hybrid and fuel cell vehicles
The NEPD Group proposes to provide temporary tax credits for
certain hybrid and fuel cell vehicles.
A credit of $250 to $4,000 would be available for purchases of
qualifying hybrid vehicles after December 31, 2001, and before January
1, 2008. A hybrid vehicle is a vehicle that draws propulsion from both
an on-board internal combustion or heat engine using combustible fuel
and an on-board rechargeable energy storage system. To qualify for the
minimum credit, a hybrid vehicle would be required to derive at least 5
percent of its maximum available power from the rechargeable energy
storage system. Larger credits would be available for vehicles that
derive larger percentages of power from the rechargeable energy storage
system and for vehicles that meet specified fuel economy standards.
A credit of $1,000 to $8,000 would be available for the purchase of
qualifying fuel cell vehicles after December 31, 2001, and before
January 1, 2008. A fuel cell vehicle is a motor vehicle propelled by
power derived from one or more cells that convert chemical energy
directly into electricity by combining oxygen with on-board hydrogen
(including hydrogen produced from on-board fuel that requires
reformation before use). To qualify for the minimum credit, a fuel cell
vehicle would be required to meet a minimum fuel economy standard for
its weight class. Larger credits would be available for vehicles that
achieve higher fuel economy standards.
Combined heat and power systems
To encourage more efficient energy usage, the NEPD Group proposes
to provide a 10-percent investment credit for qualifying combined heat
and power (CHP) systems. CHP systems are used to produce electricity
(and/or mechanical power) and usable heat from the same primary energy
source. To qualify for the credit, a system would be required to
produce at least 20 percent of its total useful energy in the form of
thermal energy and at least 20 percent in the form of electrical and/or
mechanical power and would also be required to satisfy an energy
efficiency standard. The credit would apply to CHP equipment placed in
service after December 31, 2001, and before January 1, 2007.
Increasing Domestic Oil and Gas Production
Before turning to a discussion of the present tax treatment of oil
and gas activities, we would like to provide a brief overview of this
sector.
Overview
Oil is an internationally traded commodity with its domestic price
set by world supply and demand. Domestic exploration and production
activity is affected by the world price of crude oil. Historically,
world oil prices have fluctuated substantially. From 1970 to the early
1980s, there was a fivefold increase in real oil prices. World oil
prices fell sharply in 1986 and were relatively more stable from 1986
through 1997. During that period, average refiner acquisition costs
ranged from $14.91 to $23.59 per barrel in real 1992 dollars. In 1998,
however, oil costs to the refiner declined to $12.52 per barrel in
nominal dollars ($11.14 per barrel in 1992 dollars), their lowest level
in 25 years in real terms. Since 1998, the decline has reversed with
refiner acquisition costs (in nominal dollars) rising to $17.51 per
barrel in 1999 and $27.69 per barrel in 2000 (the price has since
dropped to $23.89 per barrel in April 2001, the latest month for which
composite figures are available). The equivalent prices in 1992 dollars
are $15.31 per barrel in 1999, $24.28 per barrel in 2000, and $20.20
per barrel in April 2001.
Domestic oil production has been on the decline since the mid-
1980s. From 1978 to 1983 oil consumption in the United States also
declined, but increasing consumption since 1983 has more than offset
this decline. In 2000, domestic oil consumption was 28 percent higher
than in 1970. The decline in oil production and increase in consumption
have led to an increase in oil imports. Net petroleum (crude and
product) imports have risen from approximately 38 percent of
consumption in 1988 to 52 percent in 2000.
A similar pattern of large recent price increases and increasing
dependence on imports has occurred in the natural gas market. During
the second half of the 1990s, spot prices for natural gas exceeded
$4.00 per million Btu (MMBtu) in only one month (February 1996). The
spot price again exceeded $4.00 per MMBtu in May 2000, rose above $5.00
per MMBtu in September 2000, and exceeded $10.00 per MMBtu for several
days last winter. Since last winter the price has fallen sharply. The
current spot price is approximately $3.71 per MMBtu.\4\
---------------------------------------------------------------------------
\4\ All price references are to the spot price at the Henry Hub and
are in nominal dollars.
---------------------------------------------------------------------------
The United States has large natural gas reserves and was
essentially self-sufficient in natural gas until the late 1980s. Since
1986, natural gas consumption has increased by more than 30 percent but
natural gas production has increased by only 17 percent. Net imports as
a share of consumption nearly quadrupled from 1986 to 2000, rising from
4.2 percent to 15.6 percent. Natural gas from Canada makes up nearly
all of the imports into the United States.
Current law tax incentives for oil and gas production
Although the Administration's energy plan contains no new tax
incentives for oil and gas production, the Internal Revenue Code
includes a variety of measures to stimulate domestic exploration and
production. They are generally justified on the ground that they reduce
vulnerability to an oil supply disruption through increases in domestic
production, reserves, exploration activity, and production capacity.
The tax incentives contained in present law address the drop in
domestic exploratory drilling that has occurred since the mid-1950s and
the continuing loss of production from mature fields and marginal
properties.
Incentives for oil and gas production are estimated to total $9.8
billion for fiscal years 2002 through 2006.\5\ They include the
nonconventional fuels (i.e., oil produced from shale and tar sands, gas
produced from geopressured brine, Devonian shale, coal seams, tight
formations, or biomass, and synthetic fuel produced from coal)
production credit ($2.4 billion), the enhanced oil recovery credit
($4.4 billion), the allowance of percentage depletion for independent
producers and royalty owners, including increased percentage depletion
for stripper wells ($2.3 billion), the exception from the passive loss
limitation for working interests in oil and gas properties ($100
million), and the expensing of intangible drilling and development
costs ($640 million). In addition to those tax expenditures, oil and
gas activities have largely been eliminated from the alternative
minimum tax. These provisions are described in detail below.
---------------------------------------------------------------------------
\5\ Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2002, U.S. Government Printing Office,
Washington, DC, 2001, p. 6.
---------------------------------------------------------------------------
Percentage depletion
Certain costs incurred prior to drilling an oil--or gas-producing
property are recovered through the depletion deduction. These include
costs of acquiring the lease or other interest in the property, and
geological and geophysical costs (in advance of actual drilling). Any
taxpayer having an economic interest in a producing property may use
the cost depletion method. Under this method, the basis recovery for a
taxable year is proportional to the exhaustion of the property during
the year. The cost depletion method does not permit cost recovery
deductions that exceed the taxpayer's basis in the property or that are
allowable on an accelerated basis. Thus, the deduction for cost
depletion is not generally viewed as a tax incentive.
Independent producers and royalty owners (as contrasted to
integrated oil companies) \6\ may qualify for percentage depletion. A
qualifying taxpayer determines the depletion deduction for each oil or
gas property under both the percentage depletion method and the cost
depletion method and deducts the larger of the two amounts. Under the
percentage depletion method, generally 15 percent of the taxpayer's
gross income from an oil--or gas-producing property is allowed as a
deduction in each taxable year. The amount deducted may not exceed 100
percent of the net income from that property in any year (the ``net-
income limitation'').\7\ Additionally, the percentage depletion
deduction for all oil and gas properties may not exceed 65 percent of
the taxpayer's overall taxable income (determined before such deduction
and adjusted for certain loss carrybacks and trust distributions).\8\
---------------------------------------------------------------------------
\6\ An independent producer is any producer who is not a
``retailer'' or ``refiner.'' A retailer is any person who directly, or
through a related person, sells oil or natural gas or any product
derived therefrom (1) through any retail outlet operated by the
taxpayer or related person, or (2) to any person that is obligated to
market or distribute such oil or natural gas (or product derived
therefrom) under the name of the taxpayer or the related person, or
that has the authority to occupy any retail outlet owned by the
taxpayer or a related person. Bulk sales of crude oil and natural gas
to commercial or industrial users, and bulk sales of aviation fuel to
the Department of Defense, are not treated as retail sales for this
purpose. Further, a person is not a retailer within the meaning of this
provision if the combined gross receipts of that person and all related
persons from the retail sale of oil, natural gas, or any product
derived therefrom do not exceed $5 million for the taxable year. A
refiner is any person who directly or through a related person engages
in the refining of crude oil, but only if such person or related person
has a refinery run in excess of 50,000 barrels per day on any day
during the taxable year.
\7\ By contrast, for any other mineral qualifying for the
percentage depletion deduction, the deduction may not exceed 50 percent
of the taxpayer's taxable income from the depletable property.
\8\ Amounts disallowed as a result of this rule may be carried
forward and deducted in subsequent taxable years, subject to the 65-
percent-of-taxable-income limitation for those years.
---------------------------------------------------------------------------
A taxpayer may claim percentage depletion with respect to up to
1,000 barrels of average daily production of domestic crude oil or an
equivalent amount of domestic natural gas. For producers of both oil
and natural gas, this limitation applies on a combined basis. All
production owned by businesses under common control and members of the
same family must be aggregated; each group is then treated as one
producer for application of the 1,000-barrel limitation.
Special percentage depletion provisions apply to oil and gas
production from marginal properties. The statutory percentage depletion
rate is increased (from the general rate of 15 percent) by one
percentage point for each whole dollar that the average price of crude
oil (as determined under the provisions of the nonconventional fuels
production credit of section 29) for the immediately preceding calendar
year is less than $20 per barrel. In no event may the rate of
percentage depletion under this provision exceed 25 percent for any
taxable year. The increased rate applies for the taxpayer's taxable
year which immediately follows a calendar year for which the average
crude oil price falls below the $20 floor. To illustrate the
application of this provision, the average price of a barrel of crude
oil for calendar year 1999 was $15.56; thus, the percentage depletion
rate for production from marginal wells was increased by four percent
(to 19 percent) for taxable years beginning in 2000. The 100-percent-
of-net-income limitation has been suspended for marginal wells for
taxable years beginning after December 31, 1997, and before January 1,
2002. The Administration's budget for fiscal year 2002 proposes a one-
year extension of this provision. Under the Administration proposal,
marginal wells would continue to be exempt from the limitation during
taxable years beginning in 2002.
Marginal production is defined for this purpose as domestic crude
oil or domestic natural gas which is produced during any taxable year
from a property which (1) is a stripper well property for the calendar
year in which the taxable year begins, or (2) is a property
substantially all of the production from which during such calendar
year is heavy oil (i.e., oil that has a weighted average gravity of 20
degrees API or less corrected to 60 degrees Fahrenheit). A stripper
well property is any oil or gas property for which daily average
production per producing oil or gas well is not more than 15 barrel
equivalents in the calendar year during which the taxpayer's taxable
year begins.\9\ A property qualifies as a stripper well property for a
calendar year only if the wells on such property were producing during
that period at their maximum efficient rate of flow.
---------------------------------------------------------------------------
\9\ Equivalent barrels is computed as the sum of (1) the number of
barrels of crude oil produced, and (2) the number of cubic feet of
natural gas produced divided by 6,000. If a well produced 10 barrels of
crude oil and 12,000 cubic feet of natural gas, its equivalent barrels
produced would equal 12 (i.e., 10 + (12,000/6,000)).
---------------------------------------------------------------------------
If a taxpayer's property consists of a partial interest in one or
more oil--or gas-producing wells, the determination of whether the
property is a stripper well property or a heavy oil property is made
with respect to total production from such wells, including the portion
of total production attributable to ownership interests other than the
taxpayer's. If the property satisfies the requirements of a stripper
well property, then each owner receives the benefits of this provision
with respect to its allocable share of the production from the property
for its taxable year that begins during the calendar year in which the
property so qualifies.
The allowance for percentage depletion on production from marginal
oil and gas properties is subject to the 1,000-barrel-per-day
limitation discussed above. Unless a taxpayer elects otherwise,
marginal production is given priority over other production for
purposes of utilization of that limitation.
Because percentage depletion, unlike cost depletion, is computed
without regard to the taxpayer's basis in the depletable property,
cumulative depletion deductions may be far greater than the amount
expended by the taxpayer to acquire or develop the property.
Intangible drilling and development costs
In general, costs that benefit future periods must be capitalized
and recovered over such periods for income tax purposes, rather than
being expensed in the period the costs are incurred. In addition, the
uniform capitalization rules require certain direct and indirect costs
allocable to property to be included in inventory or capitalized as
part of the basis of such property. In general, the uniform
capitalization rules apply to real and tangible personal property
produced by the taxpayer or acquired for resale.
Special rules apply to intangible drilling and development costs
(``IDCs'').\10\ Under these special rules, an operator (i.e., a person
who holds a working or operating interest in any tract or parcel of
land either as a fee owner or under a lease or any other form of
contract granting working or operating rights) who pays or incurs IDCs
in the development of an oil or gas property located in the United
States may elect either to expense or capitalize those costs. The
uniform capitalization rules do not apply to otherwise deductible IDCs.
---------------------------------------------------------------------------
\10\ IDCs include all expenditures made by an operator for wages,
fuel, repairs, hauling, supplies, etc., incident to and necessary for
the drilling of wells and the preparation of wells for the production
of oil and gas. In addition, IDCs include the cost to operators of any
drilling or development work (excluding amounts payable only out of
production or gross or net proceeds from production, if the amounts are
depletable income to the recipient, and amounts properly allocable to
the cost of depreciable property) done by contractors under any form of
contract (including a turnkey contract). Such work includes labor,
fuel, repairs, hauling, and supplies which are used in the drilling,
shooting, and cleaning of wells; in such clearing of ground, draining,
road making, surveying, and geological works as are necessary in
preparation for the drilling of wells; and in the construction of such
derricks, tanks, pipelines, and other physical structures as are
necessary for the drilling of wells and the preparation of wells for
the production of oil and gas. Generally, IDCs do not include expenses
for items which have a salvage value (such as pipes and casings) or
items which are part of the acquisition price of an interest in the
property.
---------------------------------------------------------------------------
If a taxpayer elects to expense IDCs, the amount of the IDCs is
deductible as an expense in the taxable year the cost is paid or
incurred. Generally, IDCs that a taxpayer elects to capitalize may be
recovered through depletion or depreciation, as appropriate; or in the
case of a nonproductive well (``dry hole''), the operator may elect to
deduct the costs. In the case of an integrated oil company (i.e., a
company that engages, either directly or through a related enterprise,
in substantial retailing or refining activities) that has elected to
expense IDCs, 30 percent of the IDCs on productive wells must be
capitalized and amortized over a 60-month period.\11\
---------------------------------------------------------------------------
\11\ The IRS has ruled that if an integrated oil company ceases to
be an integrated oil company, it may not immediately write off the
unamortized portion of the IDCs capitalized under this rule, but
instead must continue to amortize those ICDs over the 60-month
amortization period.
---------------------------------------------------------------------------
A taxpayer that has elected to deduct IDCs may, nevertheless, elect
to capitalize and amortize certain IDCs over a 60-month period
beginning with the month the expenditure was paid or incurred. This
rule applies on an expenditure-by-expenditure basis; that is, for any
particular taxable year, a taxpayer may deduct some portion of its IDCs
and capitalize the rest under this provision. This allows the taxpayer
to reduce or eliminate IDC adjustments or preferences under the
alternative minimum tax.
The election to deduct IDCs applies only to those IDCs associated
with domestic properties.\12\ For this purpose, the United States
includes certain wells drilled offshore.\13\
---------------------------------------------------------------------------
\12\ In the case of IDCs paid or incurred with respect to an oil or
gas well located outside of the United States, the costs, at the
election of the taxpayer, are either (1) included in adjusted basis for
purposes of computing the amount of any deduction allowable for cost
depletion or (2) capitalized and amortized ratably over a 10-year
period beginning with the taxable year such costs were paid or
incurred.
\13\ The term ``United States'' for this purpose includes the
seabed and subsoil of those submerged lands that are adjacent to the
territorial waters of the United States and over which the United
States has exclusive rights, in accordance with international law, with
respect to the exploration and exploitation of natural resources (i.e.,
the Continental Shelf area).
---------------------------------------------------------------------------
Intangible drilling costs are a major portion of the costs
necessary to locate and develop oil and gas reserves. Because the
benefits obtained from these expenditures are of value throughout the
life of the project, these costs would be capitalized and recovered
over the period of production under generally applicable accounting
principles.
Nonconventional fuels production credit
Taxpayers that produce certain qualifying fuels from
nonconventional sources are eligible for a tax credit (``the section 29
credit'') equal to $3 per barrel or barrel-of-oil equivalent.\14\ Fuels
qualifying for the credit must be produced domestically from a well
drilled, or a facility treated as placed in service before January 1,
1993.\15\ The section 29 credit generally is available for qualified
fuels sold to unrelated persons before January 1, 2003.\16\
---------------------------------------------------------------------------
\14\ A barrel-of-oil equivalent generally means that amount of the
qualifying fuel which has a Btu (British thermal unit) content of 5.8
million.
\15\ A facility that produces gas from biomass or produces liquid,
gaseous, or solid synthetic fuels from coal (including lignite)
generally will be treated as being placed in service before January 1,
1993, if it is placed in service by the taxpayer before July 1, 1998,
pursuant to a written binding contract in effect before January 1,
1997. In the case of a facility that produces coke or coke gas,
however, this provision applies only if the original use of the
facility commences with the taxpayer. Also, the IRS has ruled that
production from certain post-1992 ``recompletions'' of wells that were
originally drilled prior to the expiration date of the credit would
qualify for the section 29 credit.
\16\ If a facility that qualifies for the binding contract rule is
originally placed in service after December 31, 1992, production from
the facility may qualify for the credit if sold to an unrelated person
before January 1, 2008.
---------------------------------------------------------------------------
For purposes of the credit, qualified fuels include: (1) oil
produced from shale and tar sands; (2) gas produced from geopressured
brine, Devonian shale, coal seams, a tight formation, or biomass (i.e.,
any organic material other than oil, natural gas, or coal (or any
product thereof); and (3) liquid, gaseous, or solid synthetic fuels
produced from coal (including lignite), including such fuels when used
as feedstocks. The amount of the credit is determined without regard to
any production attributable to a property from which gas from Devonian
shale, coal seams, geopressured brine, or a tight formation was
produced in marketable quantities before 1980.
The amount of the section 29 credit generally is adjusted by an
inflation adjustment factor for the calendar year in which the sale
occurs.\17\ There is no adjustment for inflation in the case of the
credit for sales of natural gas produced from a tight formation. The
credit begins to phase out if the annual average unregulated wellhead
price per barrel of domestic crude oil exceeds $23.50 multiplied by the
inflation adjustment factor.\18\
---------------------------------------------------------------------------
\17\ The inflation adjustment factor for the 2000 taxable year was
2.0454. Therefore, the inflation-adjusted amount of the credit for that
year was $6.14 per barrel or barrel equivalent.
\18\ For 2000, the inflation adjusted threshold for onset of the
phaseout was $48.07 ($23.50 x 2.0454) and the average wellhead price
for that year was $26.73.
---------------------------------------------------------------------------
The amount of the section 29 credit allowable with respect to a
project is reduced by any unrecaptured business energy tax credit or
enhanced oil recovery credit claimed with respect to such project.
As with most other credits, the section 29 credit may not be used
to offset alternative minimum tax liability. Any unused section 29
credit generally may not be carried back or forward to another taxable
year; however, a taxpayer receives a credit for prior year minimum tax
liability to the extent that a section 29 credit is disallowed as a
result of the operation of the alternative minimum tax. The credit is
limited to what would have been the regular tax liability but for the
alternative minimum tax.
The provision provides a significant tax incentive (currently about
$6 per barrel of oil equivalent or $1 per thousand cubic feet of
natural gas). Coalbed methane and gas from tight formations currently
account for most of the credit.
Enhanced oil recovery credit
Taxpayers are permitted to claim a general business credit, which
consists of several different components. One component of the general
business credit is the enhanced oil recovery credit. The general
business credit for a taxable year may not exceed the excess (if any)
of the taxpayer's net income tax over the greater of (1) the tentative
minimum tax, or (2) 25 percent of so much of the taxpayer's net regular
tax liability as exceeds $25,000. Any unused general business credit
generally may be carried back one taxable year and carried forward 20
taxable years.
The enhanced oil recovery credit for a taxable year is equal to 15
percent of certain costs attributable to qualified enhanced oil
recovery (``EOR'') projects undertaken by the taxpayer in the United
States during the taxable year. To the extent that a credit is allowed
for such costs, the taxpayer must reduce the amount otherwise
deductible or required to be capitalized and recovered through
depreciation, depletion, or amortization, as appropriate, with respect
to the costs. A taxpayer may elect not to have the enhanced oil
recovery credit apply for a taxable year.
The amount of the enhanced oil recovery credit is reduced in a
taxable year following a calendar year during which the annual average
unregulated wellhead price per barrel of domestic crude oil exceeds $28
(adjusted for inflation since 1990).\19\ In such a case, the credit
would be reduced ratably over a $6 phaseout range.
---------------------------------------------------------------------------
\19\ The average per-barrel price of crude oil for this purpose is
determined in the same manner as for purposes of the section 29 credit.
---------------------------------------------------------------------------
For purposes of the credit, qualified enhanced oil recovery costs
include the following costs which are paid or incurred with respect to
a qualified EOR project: (1) the cost of tangible property which is an
integral part of the project and with respect to which depreciation or
amortization is allowable; (2) IDCs that the taxpayer may elect to
deduct;\20\ and (3) the cost of tertiary injectants with respect to
which a deduction is allowable, whether or not chargeable to capital
account.
---------------------------------------------------------------------------
\20\ In the case of an integrated oil company, the credit base
includes those IDCs which the taxpayer is required to capitalize.
---------------------------------------------------------------------------
A qualified EOR project means any project that is located within
the United States and involves the application (in accordance with
sound engineering principles) of one or more qualifying tertiary
recovery methods which can reasonably be expected to result in more
than an insignificant increase in the amount of crude oil which
ultimately will be recovered. The qualifying tertiary recovery methods
generally include the following nine methods: miscible fluid
displacement, steam-drive injection, microemulsion flooding, in situ
combustion, polymer-augmented water flooding, cyclic-steam injection,
alkaline flooding, carbonated water flooding, and immiscible non-
hydrocarbon gas displacement, or any other method approved by the IRS.
In addition, for purposes of the enhanced oil recovery credit,
immiscible non-hydrocarbon gas displacement generally is considered a
qualifying tertiary recovery method, even if the gas injected is not
carbon dioxide.
A project is not considered a qualified EOR project unless the
project's operator submits to the IRS a certification from a petroleum
engineer that the project meets the requirements set forth in the
preceding paragraph.
The enhanced oil recovery credit is effective for taxable years
beginning after December 31, 1990, with respect to costs paid or
incurred in EOR projects begun or significantly expanded after that
date.
Conventional oil recovery methods do not recover all of a well's
oil. Some of the remaining oil can be extracted by unconventional
methods, but these methods are generally more costly. At current world
oil prices, a large part of the remaining oil in place is uneconomic to
recover by unconventional methods. In this environment, the EOR credit
can increase recoverable reserves. Although recovering oil using EOR
methods is more expensive than recovering it using conventional
methods, it may be less expensive than producing oil from new
reservoirs. Although the credit could phase out at higher oil prices,
it is fully effective at present world oil prices.
Alternative minimum tax
A taxpayer is subject to an alternative minimum tax (``AMT'') to
the extent that its tentative minimum tax exceeds its regular income
tax liability. A corporate taxpayer's tentative minimum tax generally
equals 20 percent of its alternative minimum taxable income in excess
of an exemption amount. (The marginal AMT rate for a noncorporate
taxpayer is 26 or 28 percent, depending on the amount of its
alternative minimum taxable income above an exemption amount.)
Alternative minimum taxable income (``AMTI'') is the taxpayer's taxable
income increased by certain tax preferences and adjusted by determining
the tax treatment of certain items in a manner which negates the
deferral of income resulting from the regular tax treatment of those
items.
As a general rule, percentage depletion deductions claimed in
excess of the basis of the depletable property constitute an item of
tax preference in determining the AMT. In addition, the AMTI of a
corporation is increased by an amount equal to 75 percent of the amount
by which adjusted current earnings (``ACE'') of the corporation exceed
AMTI (as determined before this adjustment). In general, ACE means AMTI
with additional adjustments that generally follow the rules presently
applicable to corporations in computing their earnings and profits. As
a general rule a corporation must use the cost depletion method in
computing its ACE adjustment. Thus, the difference between a
corporation's percentage depletion deduction (if any) claimed for
regular tax purposes and its allowable deduction determined under the
cost depletion method is factored into its overall ACE adjustment.
Excess percentage depletion deductions related to crude oil and
natural gas production are not items of tax preference for AMT
purposes. In addition, corporations that are independent oil and gas
producers and royalty owners may determine depletion deductions using
the percentage depletion method in computing their ACE adjustments.
The difference between the amount of a taxpayer's IDC deductions
and the amount which would have been currently deductible had IDC's
been capitalized and recovered over a 10-year period may constitute an
item of tax preference for the AMT to the extent that this amount
exceeds 65 percent of the taxpayer's net income from oil and gas
properties for the taxable year (the ``excess IDC preference''). In
addition, for purposes of computing a corporation's ACE adjustment to
the AMT, IDCs are capitalized and amortized over the 60-month period
beginning with the month in which they are paid or incurred. The
preference does not apply if the taxpayer elects to capitalize and
amortize IDCs over a 60-month period for regular tax purposes.
IDC's related to oil and gas wells are generally not taken into
account in computing the excess IDC preference of taxpayers that are
not integrated oil companies. This treatment does not apply, however,
to the extent it would reduce the amount of the taxpayer's AMTI by more
than 40 percent of the amount that the taxpayer's AMTI would have been
if those IDCs had been taken into account.
In addition, for corporations other than integrated oil companies,
there is no ACE adjustment for IDCs with respect to oil and gas wells.
That is, such a taxpayer is permitted to use its regular tax method of
writing off those IDCs for purposes of computing its adjusted current
earnings.
Absent these rules, the incentive effect of the special provisions
for oil and gas would be reduced for firms subject to the AMT. These
rules, however, effectively eliminate AMT concerns for independent
producers.
Passive activity loss and credit rules
A taxpayer's deductions from passive trade or business activities,
to the extent they exceed income from all such passive activities of
the taxpayer (exclusive of portfolio income), generally may not be
deducted against other income.\21\ Thus, for example, an individual
taxpayer may not deduct losses from a passive activity against income
from wages. Losses suspended under this ``passive activity loss''
limitation are carried forward and treated as deductions from passive
activities in the following year, and thus may offset any income from
passive activities generated in that later year. Losses from a passive
activity may be deducted in full when the taxpayer disposes of its
entire interest in that activity to an unrelated party in a transaction
in which all realized gain or loss is recognized.
---------------------------------------------------------------------------
\21\ This provision applies to individuals, estates, trusts,
personal service corporations, and closely held C corporations.
---------------------------------------------------------------------------
An activity generally is treated as passive if the taxpayer does
not materially participate in it. A taxpayer is treated as materially
participating in an activity only if the taxpayer is involved in the
operations of the activity on a basis which is regular, continuous, and
substantial.
A working interest in an oil or gas property generally is not
treated as a passive activity, whether or not the taxpayer materially
participates in the activities related to that property. This exception
from the passive activity rules does not apply if the taxpayer holds
the working interest through an entity which limits the liability of
the taxpayer with respect to the interest. In addition, if a taxpayer
has any loss for any taxable year from a working interest in an oil or
gas property which is treated pursuant to this working interest
exception as a loss which is not from a passive activity, then any net
income from such property (or any property the basis of which is
determined in whole or in part by reference to the basis of such
property) for any succeeding taxable year is treated as income of the
taxpayer which is not from a passive activity.
Similar limitations apply to the utilization of tax credits
attributable to passive activities. Thus, for example, the passive
activity rules (and, consequently, the oil and gas working interest
exception to those rules) apply to the nonconventional fuels production
credit and the enhanced oil recovery credit. However, if a taxpayer has
net income from a working interest in an oil and gas property which is
treated as not arising from a passive activity, then any tax credits
attributable to the interest in that property would be treated as
credits not from a passive activity (and, thus, not subject to the
passive activity credit limitation) to the extent that the amount of
the credits does not exceed the regular tax liability which is
allocable to such net income.
As a result of this exception from the passive loss limitations,
owners of working interests in oil and gas properties may use losses
from such interests to offset income from other sources.
Tertiary injectants
Taxpayers are allowed to deduct the cost of qualified tertiary
injectant expenses for the taxable year. Qualified tertiary injectant
expenses are amounts paid or incurred for any tertiary injectant (other
than recoverable hydrocarbon injectants) which is used as a part of a
tertiary recovery method.
The provision allowing the deduction for qualified tertiary
injectant expenses resolves a disagreement between taxpayers (who
considered such costs to be IDCs or operating expenses) and the IRS
(which considered such costs to be subject to capitalization).
This concludes our testimony. We would be pleased to answer any
questions the Subcommittee may have.
ATTACHMENTS: NEPD GROUP PROPOSALS
Extend and Modify Credit for Fuel Produced from Landfill Methane
Current Law
Taxpayers that produce gas from biomass (including landfill
methane) are eligible for a tax credit (``the section 29 credit'')
equal to $3 per barrel-of-oil equivalent. For this purpose, a barrel-
of-oil equivalent is the amount of gas that has a Btu (British thermal
unit) content of 5.8 million. To qualify for the credit, the gas must
be produced domestically from a facility placed in service by the
taxpayer before July 1, 1998, pursuant to a written binding contract in
effect before January 1, 1997. In addition, the gas must be sold to an
unrelated person before January 1, 2008.
The amount of the section 29 credit generally is adjusted by an
inflation adjustment factor for the calendar year in which the sale
occurs. The inflation adjustment factor for the 2000 taxable year was
2.0454, and the inflation-adjusted amount of the credit for that year
was $6.14 per barrel or barrel equivalent. The credit begins to phase
out if the annual average unregulated wellhead price per barrel of
domestic crude oil exceeds $23.50 multiplied by the inflation
adjustment factor. For 2000, the inflation adjusted threshold for onset
of the phaseout was $48.07 ($23.50 x 2.0454) and the average wellhead
price for that year was $26.73.
The amount of the section 29 credit allowable with respect to a
project is reduced by any unrecaptured business energy tax credit or
enhanced oil recovery credit claimed with respect to such project.
The section 29 credit may not be used to offset alternative minimum
tax liability. Any unused section 29 credit generally may not be
carried back or forward to another taxable year; however, a taxpayer
receives a credit for prior year minimum tax liability to the extent
that a section 29 credit is disallowed as a result of the operation of
the alternative minimum tax. The credit is limited to what would have
been the regular tax liability but for the alternative minimum tax.
Reasons for Change
The tax credit helps make fuel produced from landfill methane
competitive with other fuels. Extending the credit would continue the
important contribution of this renewable energy source to the Nation's
long-term energy supply.
Proposal
The credit would be allowed for fuel produced from landfill methane
if the fuel is produced from a facility (or portion of a facility)
placed in service after December 31, 2001, and before January 1, 2011,
and is sold (or used to produce electricity that is sold) before
January 1, 2011. The credit for fuel produced at landfills subject to
EPA's 1996 New Source Performance Standards/Emissions Guidelines would
be limited to two-thirds of the otherwise applicable amount beginning
on January 1, 2008, if any portion of the facility for producing fuel
at the landfill was placed in service before July 1, 1998, and
beginning on January 1, 2002, in all other cases. The proposal would
clarify, for purposes of determining the extent to which a facility is
placed in service after December 31, 2001, that the facility includes
the wells, pipes, and related components used to collect landfill
methane and that only production attributable to wells, pipes, and
related components placed in service after December 31, 2001, is
treated as produced from the portion of the facility placed in service
after that date.
Extension of Tax Incentives for Ethanol
Current Law
Current law provides an income tax credit and an excise tax
exemption for ethanol and renewable source methanol used as a fuel. In
general, the income tax credit for ethanol is 53 cents per gallon, but
small ethanolproducers (i.e., those producing less than 30 million
gallons of ethanol per year) qualify for a credit of 63 cents per
gallon on the first 15 million gallons of ethanol produced in a year. A
credit of 60 cents per gallon is allowed for renewable source methanol.
As an alternative to the income tax credit, gasohol blenders may
claim a gasoline tax exemption of 53 cents for each gallon of ethanol
and 60 cents for each gallon of renewable source methanol that is
blended into qualifying gasohol.
The income tax credit expires on December 31, 2007, and the excise
tax exemption expires on September 30, 2007. In addition, the ethanol
credit and exemption are each reduced by 1 cent per gallon in 2003 and
by an additional 1 cent per gallon in 2005. Neither the credit nor the
exemption applies during any period in which motor fuel taxes dedicated
to the Highway Trust Fund are limited to 4.3 cents per gallon. Under
current law, the motor fuel tax dedicated to the Highway Trust Fund
will be limited to 4.3 cents per gallon beginning on October 1, 2005.
Reasons for Change
The tax credit and excise tax exemption help make ethanol and
renewable source methanol competitive with other fuels. Extending the
credit and exemption would continue the important contribution of these
renewable energy sources to the Nation's long-term energy supply.
Proposal
The income tax credit and the excise tax exemption would be
extended through December 31, 2010. The current law rule providing that
neither the credit nor the exemption applies during any period in which
motor fuel taxes dedicated to the Highway Trust Fund are limited to 4.3
cents per gallon would be retained. As under current law, the credit
and the exemption would each be reduced by 1 cent per gallon in 2003
and by an additional 1 cent per gallon in 2005.
Provide Tax Credit for Certain Hybrid and Fuel Cell Vehicles
Current Law
No generally available income tax credit for purchases of hybrid
vehicles is available currently. A 10-percent tax credit is provided
for the cost of a qualified electric vehicle, up to a maximum credit of
$4,000. A qualified electric vehicle is a motor vehicle that is powered
primarily by an electric motor drawing current from rechargeable
batteries, fuel cells, or other portable sources of electric current,
the original use of which commences with the taxpayer, and that is
acquired for use by the taxpayer and not for resale. The full amount of
the credit is available for purchases prior to 2002. The credit begins
to phase down in 2002 and does not apply to vehicles placed in service
after 2004.
Certain costs of qualified clean-fuel property, including clean-
fuel vehicles, may be deducted when such property is placed in service.
Qualified electric vehicles do not qualify for the clean-fuel vehicle
deduction. The deduction begins to phase down in 2002 and does not
apply to property placed in service after 2004.
Reasons for Change
The transportation sector now accounts for 67 percent of U.S. oil
consumption. Cars, sport utility vehicles, light trucks, and minivans
alone account for 40 percent of U.S. oil consumption, about 20 to 40
percent of all urban smog-forming emissions and 20 percent of
greenhouse gas emissions. Almost all of these vehicles use a single
gasoline-fueled engine.
Hybrid vehicles, which have more than one source of power on board
the vehicle, and electric vehicles have the potential to reduce
petroleum consumption, air pollution, and greenhouse gas emissions. The
proposed credits will encourage the purchase of highly fuel efficient
vehicles that incorporate advanced automotive technologies and will
help to move hybrid and fuel cell vehicles from the laboratory to the
highway. These vehicles can significantly reduce oil consumption,
emissions of air pollutants, and emissions of carbon dioxide, the most
prevalent greenhouse gas.
Proposal
The proposal would provide temporary tax credits for certain hybrid
and fuel cell vehicles:
(1) Credit for qualified hybrid vehicles. A credit, of up to
$4,000, would be available for purchases of qualified hybrid
vehicles after December 31, 2001, and before January 1, 2008.
The credit would be:
(a) $250 if the rechargeable energy storage system provides
at least 5 percent but less than 10 percent of the maximum
available power;
(b) $500 if the rechargeable energy storage system provides
at least 10 percent and less than 20 percent of the maximum
available power;
(c) $750 if the rechargeable energy storage system provides
at least 20 percent and less than 30 percent of the maximum
available power; and
(d) $1,000 if the rechargeable energy storage system provides
30 percent or more of the maximum available power.
If the vehicle's fuel economy exceeds the 2000 model year city fuel
economy, the amount of credit shown in (a) through (d) above would be
increased by the following amounts:
(i) $500 if the vehicle achieves at least 125 percent but
less than 150 percent of the 2000 model year city fuel economy;
(ii) $1,000 if the vehicle achieves at least 150 percent but
less than 175 percent of the 2000 model year city fuel economy;
(iii) $1,500 if the vehicle achieves at least 175 percent but
less than 200 percent of the 2000 model year city fuel economy;
(iv) $2,000 if the vehicle achieves at least 200 percent but
less than 225 percent of the 2000 model year city fuel economy;
(v) $2,500 if the vehicle achieves at least 225 percent but
less than 250 percent of the 2000 model year city fuel economy;
and
(vi) $3,000 if the vehicle achieves at least 250 percent of
the 2000 model year city fuel economy.
(2) Credit for qualified fuel cell vehicles. A credit of up
to $8,000 would be available for the purchase of new qualified
fuel cell vehicles after December 31, 2001, and before January
1, 2008. The credit would be $4,000, but, if the vehicle's fuel
economy exceeds the 2000 model year city fuel economy, the
credit would increase by the following amounts:
(i) $1,000 if the vehicle achieves at least 150 percent but
less than 175 percent of the 2000 model year city fuel economy;
(ii) $1,500 if the vehicle achieves at least 175 percent but
less than 200 percent of the 2000 model year city fuel economy;
(iii) $2,000 if the vehicle achieves at least 200 percent but
less than 225 percent of the 2000 model year city fuel economy;
(iv) $2,500 if the vehicle achieves at least 225 percent but
less than 250 percent of the 2000 model year city fuel economy;
(v) $3,000 if the vehicle achieves at least 250 percent but
less than 275 percent of the 2000 model year city fuel economy;
(vi) $3,500 if the vehicle achieves at least 275 percent but
less than 300 percent of the 2000 model year city fuel economy;
and
(vii) $4,000 if the vehicle achieves at least 300 percent of
the 2000 model year city fuel economy.
The 2000 model year city fuel economy would be the following:
------------------------------------------------------------------------
The 2000 model year city
fuel economy is:
-------------------------
If the vehicle inertia weight class is: For a
passenger For a light
automobile: truck:
------------------------------------------------------------------------
1,500 or 1,750 lbs............................ 43.7 mpg 37.6 mpg
2,000 lbs..................................... 38.3 mpg 33.7 mpg
2,250 lbs..................................... 34.1 mpg 30.6 mpg
2,500 lbs..................................... 30.7 mpg 28.0 mpg
2,750 lbs..................................... 27.9 mpg 25.9 mpg
3,000 lbs..................................... 25.6 mpg 24.1 mpg
3,500 lbs..................................... 22.0 mpg 21.3 mpg
4,000 lbs..................................... 19.3 mpg 19.0 mpg
4,500 lbs..................................... 17.2 mpg 17.3 mpg
5,000 lbs..................................... 15.5 mpg 15.8 mpg
5,500 lbs..................................... 14.1 mpg 14.6 mpg
6,000 lbs..................................... 12.9 mpg 13.6 mpg
6,500 lbs..................................... 11.9 mpg 12.8 mpg
7,000 or 8,500 lbs............................ 11.1 mpg 12.0 mpg
------------------------------------------------------------------------
The ``vehicle inertia weight class'' is defined in regulations
prescribed by the Environmental Protection Agency for purposes of title
II of the Clean Air Act.
A qualifying hybrid vehicle is a motor vehicle that draws
propulsion energy from on-board sources of stored energy which are
both: (1) an internal combustion engine or heat engine using
combustible fuel, and (2) a rechargeable energy storage system. A
qualifying fuel cell vehicle is a motor vehicle that is propelled by
power derived from one or more cells which convert chemical energy
directly into electricity by combining oxygen with hydrogen fuel which
is stored on board the vehicle and may or may not require reformation
prior to use. A qualifying vehicle must meet all applicable regulatory
requirements.
Maximum available power means the maximum value available from the
battery or other energy storage device, during a standard power test,
divided by the sum of the battery or other energy storage device and
the SAE net power of the heat engine.
These credits would be available for all qualifying light vehicles
including cars, minivans, sport utility vehicles, and light trucks.
Taxpayers would be able to claim only one of the credits per vehicle
and taxpayers who claim either credit would not be able to claim the
qualified electric vehicle credit or the deduction for clean-fuel
vehicle property for the same vehicle. Business taxpayers claiming
either credit would be subject to the limitations on the general
business credit and would be required to reduce the basis of the
vehicle by the amount of the credit.
Investment Credit for Combined Heat and Power (CHP) Systems
Current law
Combined heat and power (CHP) systems are used to produce
electricity (and/or mechanical power) and usable thermal energy from a
single primary energy source. Depreciation allowances for CHP property
vary by asset use and capacity. Assets employed in the production of
electricity used by the taxpayer in an industrial manufacturing process
or plant activity (and not ordinarily available for sale to others)
have a general cost recovery period of 15 years if rated with total
capacity in excess of 500 kilowatts. Electricity production assets of
lesser-rated capacity generally are classified with other manufacturing
assets and have cost recovery periods of five to ten years. Assets used
in the production of electricity for sale have either a 15-year or 20-
year recovery period. For assets that are structural components of
buildings, however, the recovery period is either 39 years (if
nonresidential) or 27.5 years (if residential), and the straight-line
method for computing depreciation allowances must be used. For assets
with recovery periods of 10 years or less, the 200 percent declining
balance method may be used to compute depreciation allowances. The 150
percent declining balance method may be used for assets with recovery
periods of 15 or 20 years. No income tax credit is provided currently
for investment in combined heat and power property.
Reasons for change
Combined heat and power systems utilize thermal energy that is
otherwise wasted in producing electricity by more conventional methods.
CHP systems achieve a greater level of overall energy efficiency, and
thereby lessen the consumption of primary fossil fuels, lower total
energy costs, and reduce carbon emissions. An investment tax credit for
CHP assets is expected to encourage increased energy efficiency by
accelerating planned investments and inducing additional investments in
such systems. The increased demand for CHP equipment should, in turn,
reduce CHP production costs and spur additional technological
innovation in improved CHP systems.
Proposal
The proposal would establish a 10-percent investment credit for
qualified CHP systems with an electrical capacity in excess of 50
kilowatts or with a capacity to produce mechanical power in excess of
67 horsepower (or an equivalent combination of electrical and
mechanical energy capacities). CHP property would be defined as
property comprising a system that uses the same energy source for the
simultaneous or sequential generation of (1) electricity or mechanical
shaft power (or both) and (2) steam or other forms of useful thermal
energy (including heating and cooling applications). A qualified CHP
system would be required to produce at least 20 percent of its total
useful energy in the form of thermal energy and at least 20 percent of
its total useful energy in the form of electrical or mechanical power
(or a combination thereof) and would also be required to satisfy an
energy-efficiency standard. For CHP systems with an electrical capacity
in excess of 50 megawatts (or a mechanical energy capacity in excess of
67,000 horsepower), the total energy efficiency of the system would
have to exceed 70 percent. For smaller systems, the total energy
efficiency would have to exceed 60 percent. For this purpose, total
energy efficiency would be calculated as the sum of the useful
electrical, thermal, and mechanical power produced by the system at
normal operating rates, measured on a Btu basis, divided by the lower
heating value of the primary fuel source for the system supplied. The
credit would be allowed with respect to qualified CHP property only if
its eligibility is verified under regulations prescribed by the
Secretary of the Treasury.
Investments in qualified CHP assets that are otherwise assigned
cost recovery periods of less than 15 years would be eligible for the
credit, provided that the taxpayer elected to treat such property as
having a 22-year class life. Thus, regular tax depreciation allowances
would be calculated using a 15-year recovery period and the 150 percent
declining balance method.
The credit would be treated as an energy credit under the
investment credit component of the section 38 general business credit,
and would be subject to the rules and limitations governing that
credit. Taxpayers using the credit for CHP equipment would not be
entitled to any other tax credit for the same equipment.
The credit would apply to investments in CHP equipment placed in
service after December 31, 2001, but before January 1, 2007.
Statement of the American Soybean Association
The American Soybean Association (ASA) appreciates the opportunity
to present written testimony to the House Ways and Means Subcommittee
on Select Revenue Measures regarding our proposal to provide a partial
exemption to the diesel fuel excise tax to diesel fuel suppliers who
use blends of biodiesel. The amount of the exemption would be three
cents for diesel fuel containing two percent biodiesel. We also propose
to provide 20 cents for diesel fuel containing twenty percent or higher
blends of biodiesel.
This approach is similar to the partial tax exemption for ethanol,
which provides a 5.4-cent exemption for gasoline that contains ten
percent ethanol. Biodiesel and ethanol are complementary renewable
fuels, since they are sold in separate fuel markets.
One of the first concerns with excise tax exemptions is the lost
revenue to the Highway Trust Fund. ASA isvery sensitive to the needs of
highway users, and proposes to reimburse the Trust Fund with USDA's
Commodity Credit Corporation (CCC). The cost to the CCC would be
offset, at least initially, by savings realized in the cost of the
soybean marketing loan program brought about by higher soybean prices
from the increased use of soybean oil in biodiesel.
For example, if 100 million gallons of biodiesel were used under
this program, it would be blended at two percent per gallon into five
billion gallons of diesel fuel. At a cost of three cents per gallon,
the cost of the incentive would be $150 million.
Soybean oil is a primary feedstock for biodiesel production.
Assuming soyoil use in our example, reduced soybean oil surpluses will
result in higher soybean prices, which will reduce CCC outlays under
the soybean marketing loan program. Using a conservative 13 cents per
bushel impact on price, the savings for this year's estimated 2.75
billion bushel soybean crop would be $357 million. Our proposal will
save more than two dollars for each dollar it costs.
The Congressional Budget Office (CBO) baseline released in December
2000 estimated that the CCC would incur the following costs (in
billions) by fiscal year for the soybean marketing loan program:
------------------------------------------------------------------------
FY02 FY03 FY04 FY05 FY06 FY07
------------------------------------------------------------------------
$3.3 $3.3 $3.3 $3.0 $2.3 $0.9
------------------------------------------------------------------------
These figures indicate that sufficient CCC funds will be available
to offset the cost of our proposal to the Highway Trust Fund. It also
is clear that stimulating demand for biodiesel through a tax incentive
and thereby reducing farm program costs by more than two dollars for
every dollar spent under the tax incentive is good fiscal policy.
Additionally, development of the biodiesel industry and the further use
of biodiesel in fuel will help address our nation's future energy
needs.
Mr. Chairman, the biodiesel industry believes that the timing is
right for this proposal. For the last ten years U.S. soybean growers
have invested in the research, development and commercialization of
biodiesel. Biodiesel is a mono-alkyl ester-based oxygenated fuel. It
contains no petroleum but can easily be blended with petroleum.
Biodiesel is typically blended at the 20% level with diesel or at the
2% or lower levels. It can be used in compression-ignition, diesel
engines with no major modifications. Biodiesel in its neat or pure form
is biodegradable and nontoxic, and is the first and only alternative
fuel to meet EPA's Tier I and II health effects testing standards.
Biodiesel is renewable and domestically produced from agricultural
resources, including soybean oil.
Biodiesel has many environmental and operational benefits. However,
I would like to highlight the fuel's lubricity benefits. Even at very
low blends, biodiesel contributes operational and maintenance benefits
to diesel engines. This is even more significant when using ultra-low
sulfur diesel.
The Administration has decided to move forward with an EPA proposal
to reduce the sulfur content of highway diesel fuel by over 95%, from
its current level of 500 parts per million to 15 ppm. Biodiesel has no
sulfur or aromatics, and tests have documented its ability to increase
fuel lubricity significantly when blended with petroleum diesel fuel,
even at less than one percent.
Soybean growers began to invest in biodiesel because of the
economics of the soybean industry. Soybeans are widely produced for the
protein feed provided by in soybean meal. It is the plant protein of
choice in the pork and poultry industries, leaving soybean oil as a
valuable but abundant co-product. Because of large supplies of
vegetable oils in the world market, we have a large surplus of soybean
oil in the domestic market, which depresses the price of the whole
soybean.
Several years ago, ASA recognized that the traditional approach of
riding out a depressed market by storing surplus soybean oil until
better times was not going to work. The industry had to do more. It
needed to be proactive and aggressive in developing new markets.
Through our state and national check off programs soybean growers began
investing in the development of new uses of soybean oil. Several of the
products are widely accepted in the marketplace, such as soy ink, and
others are just reaching acceptance, such as biodiesel, solvents,
lubricants and other fluids.
While biodiesel as a fuel is relatively new to our country, it is
widely accepted and utilized in Europe, where motorists consume 250
million gallons annually. Our biodiesel industry leaders have worked
closely with the European industry by sharing research, performance
data and consumer information. The European biodiesel industry is
strongly supported by government and by agribusiness. In fact, several
major U.S. oilseed processors are producing biodiesel in Europe.
While biodiesel offers environmental, energy security, and economic
development benefits, it is not yet cost-competitive in the U.S. Public
support is needed to help the industry develop. ASA strongly believes
that our nation needs an aggressive energy policy that includes
renewable fuels and power generation as well as significant domestic
production of oil and natural gas.
Statement of the Hon. Susan A. Davis, a Representative in Congress from
the State of California
Mr. Chairman, Distinguished Members of the Subcommittee:
Thank you for the opportunity to present my forthcoming bill, the
Renewable Energy Act for Credit on Taxes.
This is a tax credit to be given for investments in renewable
energy systems based on solar, wind, or fuel cells providing up to
$4.50 per Watt of electricity produced, capped at the lesser of 35% of
the cost of the system or $6000 for residences and $50,000 for
commercial enterprises. It would sunset in four years.
I would like to answer six key questions about this proposal:
1. Why renewable energy?
2. Why now?
3. Why residential and small commercial?
4. Why solar, wind, and fuel cell?
5. Why this method and these numbers?
6. What else is needed to make this program effective?
The recent ABC poll showed that 90% of the public support increased
investment in renewable energy sources. In its National Energy Policy
the administration has identified the need for investment in renewable
sources. Clearly, a large number of members of Congress, including
those from whom you have heard today, have given a great deal of
thought to this issue and have constructed programs which they believe
will meet this public policy goal.
I do not need to reiterate the importance of weaning America from
its dependence on fossil fuels or to make the argument about pollution
of the atmosphere. There is a common belief that we will need more
energy, more readily available at peak times throughout our country in
the near future. However, development of long term fossil fuel sources
is not a strategy to address the short or near-term needs for energy
supplies.
I offer an alternative focus, partly because I have been working on
this issue steadily in California for the last year, and I believe it
should be clear that responding to the shape of this supply-side need
requires actions that will supply more energy at peak periods in the
short run. Our experience in California has been that, without
increasing the demand for energy during the peak periods of the year,
we suddenly found ourselves with an inadequate supply of energy. The
reasons that existing energy plants were not producing energy when
needed is not the focus here. The issue is that one has to provide more
peak load resources.
One of the problems encountered last summer was that when the
normal pattern failed, the ability to transfer power between states was
inadequate. There were also transfer points within the state that
prevented power available in Southern California to be shared with
needs in Northern California. There has been a general call to build
additional transmission lines. However, these are both costly and time-
consuming to site, and in the long run the need may be reduced and
perhaps avoided. I understand that a number of companies are nearing
commercial application of new transmission cabling technology that will
increase the capacity of presently sited transmission lines.
Not only are there transmission capacity and transfer problems, but
it appears that the very complex system of grids nationally and the
oversight, financing, and regulatory responsibility are in need of
major review and improvement to meet near-term as well as long-term
needs. This issue merits study and solution, but it also makes clear
that in the short and near term we must increase that production of
power where it will be used.
I believe it is clear that America needs a multi-faceted approach
to meeting our energy needs, targeted to different time frames and
using different resources. New, full-sized plants must be built, but
they take several years to come on line. Co-generation plants can be
built much more quickly and are currently cost competitive. They must
be encouraged for large sites, such as college campuses and large
office buildings. Although they supply power on the site used and avoid
transmission congestion, most plants rely on natural gas as a supply.
This further exacerbates the existing supply/cost and pipeline capacity
problem. In addition, energy efficient buildings must be promoted both
in new construction and in retrofitting. In particular, schools and
government buildings should lead in this effort. Finally, conservation
of all sorts must be practiced. Not only are 90% of citizens supportive
of conservation, but also in California the record of 11% reduction in
demand in May shows that citizens will take action.
All of these methods are helpful, but, in the near term, it is
evident that we need to give additional incentives to power sources
that can be put into operation relatively quickly, locally, produce
power at peak times and use renewable energy sources. The
administration's National Energy Policy states, ``Photovoltaic solar
distributed energy is a particularly valuable energy generation source
during times of peak use of power.'' [p. 6-10] I believe that this
source meets all four policy goals; therefore, I have focused on
increasing locally produced solar energy.
Under-used locations for increased production of power are homes
and businesses. Owners have not invested in personal energy systems in
part because they did not have an energy pricing incentive to do so as
the systems themselves may have been too costly to provide a reasonable
return on the investment. I believe that this gap can be bridged by
using tax incentives to motivate additional private investment in power
based on renewable resources and provide energy where it will be used
in order to reduce demand on the current transmission systems,
particularly at peak load times. The key concepts are ``on-site''
production and ``environmentally sound sources.'' The benefit is a
continuing stream of power without continued cost for purchase of fuel.
One type, solar power for water heating, has been used extensively
in the West over many years because it has been a good investment.
Although solar water heating also removes energy load from the system,
alone it has not made a large dent in over-all demand. Yet, it
demonstrates the willingness of owners to make this investment in
appropriate circumstances.
Now, newer materials and more reliable systems have become
available to make individual photovoltaic systems attractive as well.
In April a solar demonstration home was built on the Washington Mall
that not onlyincorporated many energy saving designs but also employed
a solar energy system with back-up batteries. The system was designed
to meet the household's energy needs (facilitated, to be sure, by the
energy efficient design of the building and choice of Energy Star
appliances and lighting which would decrease the demand.) The
additional cost for the solar system for this large, three-bedroom, two
story home was given as $30,000.
As a newly built home, after being moved to another site, the cost
would become part of the value of the house and could be included in
the mortgage an owner would obtain. Clearly, it is possible for a great
many new homes to be built in this way. The question is how to motivate
a buyer to choose this house over a similar one without the solar
energy but at a price $30,000 less. Although future energy savings will
pay back the investment over enough years, additional incentives would
be needed to make it a sound investment today. A refundable tax credit
that would convey to the original purchaser of the house can fill that
margin. An owner of an existing home or business could also be
encouraged to invest in a renewable energy system, although the
opportunity for funding through a second mortgage or line of credit may
be somewhat more costly.
Is a federal tax credit enough to encourage a homeowner to make
this investment? Here is a possible financial scenario. Under my bill,
the owner of an existing home comparable to the Mall home could invest
in a similar system providing 4 kWh of electricity per year, with
battery back-ups. Based on that amount of output, under my bill
allowing for $4.50 per kWh, the system would qualify for $18,000 of the
cost; however, the proposed cap in my bill would be the lesser of 35%
of the cost or $6,000, leaving $24,000 of uncovered cost.
Although there would be price savings over time, it might not be a
prudent investment. However, some states and municipalities have
additional rebates. California, for example, has a rebate program also
measured at the $4.50 per kWh rate--but capped at 50% of the cost; it
would rebate approximately $15,000 in this case. Thus, the California
homeowner combining the two programs would be paying only $9,000 of
that cost. Without the California rebate, however, a homeowner could
buy a system of half the capacity at $15,000 and have approximately
$9,750 net cost.
Just how attractive this investment would be has many variables
based on the current local cost of power, the cost of credit, and the
individual's monthly energy use that affect the length of time required
for the investment to pay for itself. In the California house
comparable to the Mall demonstration house, depending on other energy
efficiency attributes, that household might use more power than
provided by a system that size. Nonetheless, the owner could
potentially reduce current electricity costs by 50% to 100% and provide
a full return of that investment in five to ten years, depending on the
cost of power where it was located. In a state without a rebate
program, the homeowner choosing a system half the size supplying half
as much power would of course require twice the time for return on the
investment.
For businesses in non-rebate localities, the difference would be
that with a cap of $50,000 the owner could purchase about 20 kWh of
electricity for an additional $100,000. Again, the attractiveness
depends on interest costs and local prices.
The advantage of a solar solution in terms of public policy is that
in many locations the solar energy is most available when it is most
needed--in the summer in the middle of the day. Obviously, not every
climate makes this investment worthwhile, nor does every home or
business have the appropriate roof size facing the required direction
for currently available applications.
Because of regional variations in weather, I have also included
wind systems. Presently, a new generation of larger, more efficient and
cheaper commercial systems are available for wind farms. Assuming that
the current program that expires December 31 is reauthorized, a rebate
of 1.7 cents per kWh produced is given at the end of the year. At the
present time, the net price is competitive with other types of power
sold in the western market. Entrepreneurial businesses are putting
together funding mechanisms and equipment to build additional wind
farms. These will add to long-term needs, but applicable sites are
limited and often require extensive time for permitting.
For individuals, the production tax credit is not an attractive
financial incentive since the owner is using the product not selling
it. Thus, a tax credit on the system's cost is the appropriate
mechanism. There are applications available suitable for residences and
businesses, not all of which require a tower and wind turbine system.
Wind machines that look like a typical roof top vent can also create
wind power, although each one may supply only one kWh of power, and
several would be required. Once again, this is not a system that can
necessarily take over all of the needs of a household or business
because in most locations wind power is not a constant. However, it is
a potential addition to the nation's energy supply that has the two key
attributes--on-site generation and a renewable, non-polluting energy
source.
Finally, I have included fuel cells for this funding. At the
present time, these are marginally available for home application.
However, again, the technology is in process, and fuel cells can
provide a non-polluting source of on-site energy.
Regarding the financing mechanisms in this bill, I have chosen a
tax credit rather than a grant program as providing a less
bureaucratically complicated funding mechanism that is readily
understood by and accessible to a taxpayer. I have made it a refundable
credit, as it is the policy to create incentives for an investment that
decreases demand. The details of a particular individual's tax
obligation is unrelated to meeting that policy goal. I have given a
sunset to the bill in the belief, first, that our need is immediate and
that the home or business owner should consider this as an option that
requires current action. Second, any program should be reviewed after a
reasonable time for its success and appropriate renewal.
Basing the payment on a verified, standards-based kilowatt/hour
output assures that the funds are buying a desired quantity of
generation. The amount is chosen to be comparable to the rates for the
California program and to bear a cost-based relation to commercial
prices for these types of systems per kilowatt hour. The cap was
selected from the perception that they would be sufficient to motivate
an owner to make a decision that he was not otherwise financially able
to choose purely out of a desire to add to the nation's renewable
energy sources.
To make these self-supplied energy sources viable, some additional
mechanisms are required. I am aware that they are covered in other
bills that have been submitted, and I have signed as a co-author.
First, there must be a net metering system required for all
jurisdictions. One of the greatest disincentives to providing
individual renewable energy systems has been the unwillingness of
commercial utilities to allow individuals to come onto their system and
reduce their use of the utility's product. Charging high prices for the
connection has been their practice. Reasonable charges for connection
and for transmission must be a basis for fair pricing and must be both
monitored and controlled by the appropriate agencies.
The value, particularly of solar energy systems, is that a personal
system not only supplies power to its household, but it may have an
oversupply which is then given to the grid (net metering) in return for
possible use from the grid when the solar system may not be fully
operative and back-up batteries are insufficient--at night and in bad
weather. Utilities may, but have not been required to, pay an
individual where this net metering system results at the end of the
month in a surplus added to the grid. From a policy standpoint, the
producer even of this excess supply should be valued at some level.
In sum, right now and as our population grows, more energy
generation will be needed, particularly at peak-load times. For the
next decade or so, energy providers may need to continue building low-
polluting generating plants using non-renewable sources, in part to
decommission older, more polluting plants. During that time and with
government investment in Research, Development, and Demonstration, we
need to achieve economically viable technologies based on renewable
sources. However, we will also benefit both now and in the future by
giving financial incentives to individuals both in their residences and
in their businesses to meet at least some of their energy needs in the
short term through personal systems. We will benefit from having on-
site energy production that can be installed in a short time frame,
produces energy at times of peak use, does not require transmission,
and is based on non-polluting, renewable sources.
Thank you for the opportunity to appear before you today to present
this proposal. I appreciate your time and attention.
Statement of the Hon. Martin Frost, a Representative in Congress from
the State of Texas
Thank you Mr. Chairman for allowing me the opportunity to testify
before you today. I appreciate the fact your Subcommittee is holding
this hearing in order to explore the many tax proposals introduced by
Members relating to the discovery, production, transportation,
generation, and end-use of power. Given the current focus on these
issues as a result of the West Coast electricity situation, and the
President's own description of the national ``crisis'' we are facing,
these hearings are indeed timely.
As Chairman of the Democratic Caucus, I have over the last 18-
months chaired the Democratic Caucus Task Force on Energy. Our Task
Force is composed of Members from all parts of the country representing
a diverse spectrum of political views. While we all do not necessarily
agree on all aspects of energy policy, there is a strong agreement in
our Caucus that this Nation's energy needs can be met through a
combination of increased production, use of alternative and renewal
energy sources, and through energy efficiency and conservation. We
believe national polls have shown that the American people agree with
our focus on a balanced approach to solving our Nation's energy needs
in the 21st Century.
Last month our Caucus released a report prepared by the Caucus
Energy Task Force that outlines our view of what energy policy should
look like. While not everyone agrees with every part of the report, I
believe, on balance it represents a good starting point for any
discussion of how we should be addressing the energy problems we
currently face. Please notice I have termed the current situation as a
problem and not as a crisis, as has President Bush. While he and I both
hail from Texas, a major energy producing state, I cannot agree with
him that we are facing a crisis. And I do not believe most of my
colleagues from Texas or other oil patch states would agree we are in a
crisis mode. We do believe however, along with our colleagues from the
North, the West, the Midwest, and the South, that the Congress, working
with the Administration and the private sector, can find solutions to
problems that might become crises if they are not addressed adequately
and if they are not addressed in the short-term with long-term results
in mind.
Our report calls for very specific actions that will lead to
increased energy supply as well as increases in conservation and energy
efficiencies. We do not believe energy problems can be solved without
concentrating on both supply and demand. We also reject the notion that
the environment must be sacrificed in order to maximize production and
generation. As stated in our report, ``Democrats strongly object to
President Bush's assertions that the substantial improvements made in
cleaning the air we breathe, cleaning the water we drink, or improving
our public health must be sacrificed in order to ensure adequate energy
will be available to fuel our industries, heat or cool our homes and
businesses, and keep motorists on the road * * *. Democrats support a
plan that recognizes the need for new energy production and generation,
and will at the same time save consumers money, continue the important
work to cut pollutants that affect the health of every American, create
real jobs, and will reduce the percentage of imported foreign oil we
need to keep our economy strong and to protect our national security.''
(Principles for Energy Prosperity: Helping Consumers, Promoting Growth
& Protecting the Environment, House Democratic Caucus, May 15, 2001)
Our report calls for several tax incentives that will promote both
increased domestic energy production as well as enhanced conservation
and energy efficiency in homes and businesses.
First, we believe the independent domestic oil and gas industry
needs greater market stability in order to maintain and increase
domestic production of oil and gas resources. We endorse a number of
tax incentives for the domestic industry embodied in H.R. 805, a bill
sponsored by my Republican colleague from Texas, Mac Thornberry as well
as my colleagues Ralph Hall, Charlie Stenholm, and Max Sandlin. These
targeted tax incentives are designed to insure that the domestic
production of oil and gas does not suffer long-term damage in times
when the price of a barrel of oil drops so low it is impossible for
small producers to continue to exploreand produce. When these producers
are forced to cap wells, lay off their crews and cannibalize their
equipment, it becomes extremely difficult for them to retool or reopen
their wells once the price rises to more profitable levels. The
President and the Vice President, both veterans of the oil industry,
should understand the difficulties small producers experience in times
of price swings, yet the President's energy plan contains no tax
provisions that will help smaller domestic producers continue to
produce oil and gas domestically. We believe this Committee should give
the Thornberry bill every consideration when forming a legislative
proposal.
Secondly, we have called for the creation of a Best Energy Saving
Tax Credit (BEST Credit) which would help consumers by providing a
flexible tax credit of up to $4,000 for new homes meeting certain
energy efficiency criteria, up to 20 percent of cost up to $4,000 for
the retrofitting of existing homes or the replacement of existing
heating and cooling systems, appliances, lighting, windows, doors, and
insulation that meet or exceed federal guidelines; and a credit of up
to $4,000 for the purchase of vehicles utilizing new technologies or
alternative fuel engines.
We also call for assisting American businesses reduce their energy
costs and thus increase their profitability through the creation of a
Structure and Vehicle Efficiency Tax Incentive (SAVE Incentives). Our
plan would create an investment tax credit of up to 30 percent of the
cost of the purchase of renewable energy generation, including wind
turbines, co-generation, solar water heating and photovoltaic panels,
fuel cells, geothermal technologies and other similar energy efficient
technologies. We would create a business deduction of up to $2.25 a
square foot for property improvements that reduce energy use by 50
percent below defined standards. Finally, the SAVE Incentives would
provide a 20 percent investment tax credit for the purchase of cars
and/or light trucks/SUV's/minivans equipped with fuel-saving new
technology or alternative fuel engines.
Democrats understand that coal is currently the source for over 50
percent of America's electricity generation, but at the same time we
remain concerned about the emissions coming from coal-fired plants.
While there have been encouraging strides made to reduce those
emissions, we have called for the creation of an EXCEED Tax Credit
which would provide a ten percent investment tax credit for the cost of
clean air control technology for utilities that lead a power plant to
exceed mandatory emissions reductions levels for pollutants regulated
under Title I of the Clean Air Act, or for significant early compliance
with clean air emissions reduction target dates. We would also extend
this credit to those technologies that cap their CO2 emissions at 2000
levels. And, important to rural America, we would permit public
utilities and coops to trade these credits or use them as offsets
against debt or obligations.
Also very important to rural America and the farming industry, we
support an investment tax credit of up to ten percent for modifications
made to existing coal plants to allow the use of biomass and/or
synthetic liquid or gaseous fuels form coal, in combination with coal
to produce at least five and up to 15 percent of a plant's fuel
requirements.
Finally, our report calls for continued investments tax credits for
renewable energy sources. We support increasing the existing investment
credit for renewable energy infrastructure to 20 percent for solar and
geothermal, and extending the credit to wind, biomass, and other energy
produced form renewable resources. We also call for increasing the
current tax credit for producing electricity to 2 cents per kilowatt
hour for electricity produced from wind and biomass, and for extending
the credit to solar and geothermal.
Mr. Chairman, many of the proposals called for the Democratic
Caucus energy plan are already embodied in legislation introduced by
both Republican and Democratic Members of the House. Some of these
proposals can be found in the President's energy plan. These are all
good places to start any discussion of energy policy and I believe we
can develop a meaningful energy policy that will benefit all Americans
through a cooperative and deliberative legislative process. Certainly
none of these proposals will solve the current problems consumers and
businesses are experiencing in the West, but by working together it is
possible to fashion an energy policy that will benefit all Americans,
an energy policy that will create jobs for American workers, an energy
policy that will protect the health of all Americans, and, most
importantly, protect our national security in the years ahead.
Again, thank you for the opportunity to appear before you today. On
behalf of the Democratic Caucus, I look forward to working with you as
you develop proposals to be incorporated into an overall energy policy
for the 21st Century.
Statements of the Hon. Wally Herger, a Representative in Congress from
the State of California
Mr. Chairman and Members of the Subcommittee.
I would like to make a few comments to underline the importance of
recognizing and providing strong support to the nation's solid-fuel
biomass power industry. This unique asset provides both reliable
electricity and an extraordinary range of public benefits including
measurable reduction in the risk and severity of wildfires, waste
management services to agriculture, improved air quality, and a solid
base of rural employment across the nation.
The biomass power industry converts more than 20 million tons of
wood waste and other organic residuals into clean electricity every
year. It makes productive use of materials that would otherwise be an
environmental liability. Unfortunately, the industry has been
destabilized by the volatility in our energy markets and rising costs.
The productivity of our industry is diminishing and the public benefits
provided are increasingly at risk.
I have introduced legislation (HR 1657) to remedy this situation by
providing a much-needed production tax credit to this important
industry, and I am heartened by the growing list of bipartisan
cosponsors who have joined me in this important effort.
Independent research sponsored by the U.S. Department of Energy
recently confirmed that the monetary value of the environmental and
economic benefits of the biomass power industry--separate from the
renewable electricity itself--is approximately 11.4 cents per kilowatt
hour of electricity produced. I recommend that the committee recognize
the singular importance of this finding which is quite significant and
far in excess of the public benefits generated by any other energy
technology. It tells us two things.
First, we learn that the value of the industry's environmental and
economic benefits are nearly double the cost of the electricity it
produces. In other words, the public receives an environmental and
economic reward when biomass power is generated. Second--and equally
important--the value of the public benefits are more than six times
greater than the 1.7 cent cost of the tax credit proposed in my
legislation. From a public policy perspective, Congress would be well
served by approving a tax credit that delivers such an extraordinary
rate of return.
I would like to emphasize the fact that the nation's biomass power
industry is dependably producing clean electricity right now at a time
when we are confronted with electricity shortages, in my state and
elsewhere, that threaten our economy, our public health and our safety.
While other renewable energy technologies may also make meaningful
contributions to our electricity supply over time, few are as important
in the present. We simply cannot afford to see a decline in biomass
energy output and its inherent public benefits at a time when we have a
clear responsibility to provide the American people with an
uninterrupted supply of much needed electricity.
* * *
Mr. Chairman and Members of the Subcommittee:
No discussion of the effect of the federal tax laws on production,
supply and conservation of energy would be complete without
acknowledging the significant role that capital cost recovery rules
play in this regard. The electric power industry is one of the most
capital-intensive industries in this country. The ability to recoup
investment costs, including the depreciation and amortization of
assets, is of critical importance to its viability and the nation's
access to reliable power.
The electric industry is rapidly changing to one in which
generation is becoming fully competitive at a time when there is a
growing need for new energy supply. However, the capital recovery rules
that have applied in the past under a regulatory framework are now
inadequate. Generating companies are no longer guaranteed a specified
rate of return on their investment, and current tax law serves as a
disincentive to upgrading and building more generation capacity at a
time of increasing demand.
To efficiently meet our nation's energy needs through adequate and
reliable power, the electric supply industry requires the same ability
that other industries have to more rapidly depreciate assets for
Federal income tax purposes. I have introduced legislation, H.R. 1802,
the ``National Energy Security Act of 2001,'' that would amend the
Federal income tax laws to allow electric generation facilities to be
depreciated over seven years. Identical provisions are included in
comprehensive legislation (S. 389) introduced by Senator Frank
Murkowski (R-AK) in the Senate.
The Nation's Inadequate Energy Supply Underscores the Need for New
Investment.
The need for new investment to meet growing demand, to maintain the
reliability of the electric system, and to ensure adequate energy
supply across the nation has become clear. The energy crunch in
California, preceded by spikes in the price for spot power in the
Midwest, and power outages in cities such as New York and Chicago, has
visibly underscored the need for new generation. Real events, supported
by numerous studies, identify regions that will have dangerously narrow
capacity margins within the next decade. The ability to obtain cost
recovery must be provided to encourage the construction of new or
improved electric generation facilities.
Other Capital-Intensive Industries Are Given Shorter Lives.
In stark contrast to the 15- or 20-year depreciation lives for
electric generation assets, facilities for other capital-intensive
manufacturing processes, such as pulp and paper mills, steel mills,
lumber mills, foundries, automobile plants, shipbuilding, and even
cigarette manufacturing plants are depreciable for Federal income tax
purposes over seven years. Chemical plants and facilities for the
manufacture of electronic components and semiconductors can be
depreciated over five years.
There is no sound justification for these types of distinctions in
today's competitive environment. For example, according to tax law,
investment in pollution control equipment at other types of
manufacturing facilities have shorter depreciable lives, but not at
electric generation facilities. As the electricity industry evolves and
becomes competitive, it is important for it to have the same types of
tax incentives to encourage modernization and increase productivity as
those available to other industries.
New Investments Are Required to Comply with Environmental Laws.
New environmental requirements for electric generating facilities
may impair the value and useful life of existing assets. For example,
clean air compliance requirements, such as those relating to the Clean
Air Act amendments, new source performance review, state implementation
plans, National Ambient Air Quality Standards, and the Environmental
Protection Agency's toxic release inventory, are requiring significant
new investment in environmental mitigation technologies. In some cases,
existing plants will have to be effectively abandoned and new
generation plants constructed. This will require new capital
investment, investment that the tax laws should encourage, not
discourage as under current law.
Upgrades to Existing Generation Facilities Will Be Accelerated.
The current fleet of generating facilities must run to their full
advantage during this period of potential energyshortfalls. To optimize
their capabilities, these plants must be maintained and in many cases,
upgraded to become more efficient and cleaner. For example, an existing
facility may be retrofitted with new turbine blades to increase
conversion efficiencies and production output. And some facilities must
be upgraded to comply with new environmental requirements. Revisions in
the tax law will accelerate the necessary maintenance and enhancement
of critical facilities.
Deregulation Is Fostering Innovation and Efficiency.
Deregulation of electric generation is already fostering
innovation. The preponderance of new generation facilities constructed
a generation ago were nuclear or coal-fired facilities. Today, most new
power plants are gas turbine facilities, often operated in combined-
cycle or as co-generation facilities that produce steam for sale as
well as electricity. These new state-of-the-art combined cycle
generators operate at energy conversion efficiency levels of 70%
compared to 40%-50% a decade ago. However, tax laws discourage the
construction of these more efficient units--while regular gas turbine
facilities are depreciable over 15 years, combined cycle units are
depreciable over 20 years.
In addition, new developments, such as distributed generation,
could render longer-lived generation assets functionally obsolete.
Distributed generation is electricity produced on a customer's site
using fuel cells, micro turbines, or other small scale generating
equipment that can displace power generated by a central station
generating unit. With these types of rapid changes in the electric
industry, it is unlikely that electric generation facilities will have
the same useful lives as they have had in the past.
Cost Recovery of Existing Plants Is Uncertain.
Congress suggested in the legislative history to the Tax Reform Act
of 1986 that one reason why electric assets are depreciated over longer
periods is because of the certainty of cost recovery through rates. As
the market for electric energy becomes competitive, this rationale
becomes obsolete--there will be no more such certainty. Investors will
demand a competitive return on their investments over much shorter
periods of time. This new reality is inconsistent with the current tax
rules that allow cost recovery only over 15-20 years.
Just as the electric industry is rapidly changing, there is a need
for a legislative solution to cost recovery for electric generation
assets. A robust electric power industry must have the same ability as
other competitive, market-based industries to rapidly depreciate assets
for Federal income tax purposes. The Federal tax laws should be changed
to allow electric generation facilities to be depreciated over 7 years.
* * *
Mr. Chairman and Members of the Subcommittee:
As a representative of a state which has a good deal at stake in
the ongoing energy debate, I am pleased to have the opportunity to
discuss aspects of the tax code that hinder or help the production and
distribution of energy resources. The provision that I am going to
focus on in this testimony is one that many have overlooked with regard
to its potential effect on our energy needs. In my opinion, however,
this is an area where a small change in the tax law could reap
substantial benefits by providing capital for the energy infrastructure
necessary to gather, process, and store energy products such as crude
oil, natural gas, natural gas liquids, refined petroleum products and
propane, and to transport them from the areas where they are produced
to the areas throughout the country where they are needed.
Many of those in the energy business have long raised capital
through partnerships, which allowed investors to have a direct stake in
both the risks and the rewards of the business, including the tax
benefits that have been placed in the Code to encourage energy
production. Back in the early 1980s, searching for a way to reach a
broader class of investors and make the partnership a more efficient
form of raising capital, the Apache Oil Company created the first
publicly traded partnership (PTP). Others soon followed suit, not only
in the energy industry, but in real estate and other industries that
used partnerships as well. PTPs, also referred to as master limited
partnerships or MLPs, were a way not only to reach new investors but to
finance business expansion without resorting to debt and to spin off
undervalued assets and let them reach their full market value.
PTPs, as their name suggests, are simply partnerships the interests
in which, known as ``units,'' are traded on public stock exchanges.
Traditional, nontraded partnerships required limited partners to invest
a substantial amount of money, and it was very hard to dispose of a
partnership interest. This meant that partnership investment was
limited to affluent individuals who could afford to tie up a large
amount of money for several years. The development of PTPs, with
interests divided into liquid, affordable units, has opened partnership
investment to the average, middle-class investor, thus broadening the
base of individuals from whom partnerships could raise capital. For the
individual investor, PTP units provide a steady stream of income
through quarterly, tax deferred distributions, and, particularly in the
energy partnerships, the potential for growth both in income and in
value.
There are currently about 50 PTPs on the market, operating
primarily in natural resource and real estate related industries as
well as a smattering of others. The most exciting story is to be found
in the energy sector: although those PTPs are only about half the total
number, they represent, according to their 10-Ks for 2000, close to
two-thirds of PTP market capital, 71% of total assets owned by PTPs,
and 90% of total revenue earned by PTPs. Several PTP equity offerings
early in 2001 have probably raised these figures. Every new PTP to
enter the market in the past few years has been in the energy business.
These PTPs are helping to address the current energy situation.
They are exploring and developing offshore oil and gas supplies. They
are gathering, storing, transporting, and marketing crude oil, refined
petroleum products, natural gas, and natural gas liquids. They are
operating refineries, fractionation plants, and natural gas processing
plants. They are building pipelines and transporting a range of
petroleum products through them from energy-producing areas to
virtually every state in the union. They are marketing, distributing,
and selling propane and propane-related products and services at both
the wholesale and the resale level.
So what's the problem? It is this: PTPs could be doing far more of
all these activities, developing more energy infrastructure and sending
far more products through the system, but are prevented from doing so
by a small provision of the tax code. In order to engage in all these
activities to their maximum potential, PTPs need to raise equity
capital, and under current tax law they are limited to raising it from
the individual, or ``retail'' investors. While access to these
investors has been part of the engine that drives PTPs, the individual
segment of the market is not, in itself, large enough to provide the
capital that these energy companies need.
One of the sources that PTPs would like to tap is mutual funds,
which are becoming an ever more important part of the capital markets.
15 years ago, only about 6% of equity securities were held by mutual
funds; now the figure is 20%. According to the Investment Company
Institute, almost $7 trillion in capital is currently invested through
mutual funds.
Mutual funds, however, are very reluctant to invest in PTPs--not
because they are not a good investment, but because of the tax code. In
order to maintain its tax status under the Regulated Investment Company
(RIC) rules, a mutual fund must receive 90% of its gross income from
specific sources. Income from a partnership (whether it be the share of
partnership income allocated for tax purposes or the cash
distributions) is not on the qualifying list. This means that if a
mutual fund receives more than 10% of its income from PTPs (along with
other ``nonqualifying'' income), it will lose its RIC status. Faced
with this possibility, as well as the burden entailed in keeping track
of income percentages, most mutual funds turn away from PTPs.
This, combined with the lack of institutional investment caused by
the UBIT rules, forces PTPs to raise capital almost exclusively from
individual investors. And while these investors are certainly a
sizeable share of the market, they do not make the large share
purchases that mutual funds and institutions do. Moreover, individual
investors are increasingly making their investments through mutual
funds. The result is that PTPs, compared other equity issuers, are
extremely limited in the amount they can raise in any one offering and
in the frequency with which they can go to the market.
Recently I had the opportunity to speak with several executives of
these partnerships. They talked about the frustration they feel in
trying to raise the large amounts of capital needed to expand and build
new energy infrastructure when they can raise only limited amounts of
equity capital in any one offering and don't want to increase their
debt burden. These companies have done a lot with the capital they have
raised, but they all feel they could do much more if they were freed
from this constraint.
There is no policy reason for PTPs to be treated any differently
than any publicly traded security when it comes to mutual fund
eligibility. The reason that partnerships were left off the qualifying
income list was that before PTPs emerged, partnerships were highly
illiquid, often risky investments, not the sort that was appropriate
for a mutual fund. It was also felt that a mutual fund might be too
closely involved with a nontraded partnership's business. None of these
concerns applies to PTPs--they are liquid, they are safe--fully
regulated by the SEC, filing the same reports as corporations--and the
mutual fund, as a PTP investor, would be one of tens of thousands of
unitholders, not a manager of the business.
For all these reasons, I am pleased to be the sponsor this year of
legislation that was introduced by Chairman Thomas in the 105th and
106th Congresses. The Publicly Traded Partnership Equity Act (H.R.
1463) simply adds income derived from a PTP to the list of qualifying
income sources under the RIC rules. This bill has cosponsors from both
parties, including some members of this Subcommittee. During the 106th
Congress it was approved by both the House and the Senate as part of
the Taxpayer Refund and Relief Act of 1999, which was subsequently
vetoed by the President.
It is time that we freed these energy companies to do what they do
best--build and operate the infrastructure that will deliver needed
energy supplies to communities across the country. This is a simple,
low-cost, and effective way to increase the capital flowing into the
energy industry. It is an appropriate part of any energy bill that may
come out of this Subcommittee and the Committee as a whole, and I urge
that it be included.
Itron Inc.
Spokane, Washington 99216
June 18, 2001
To: The Honorable Jim McCrery
Members of the Subcommittee on Select Revenue Measures of the
Committee on Ways and Means
From: LeRoy Nosbaum, President and CEO, Itron Inc.
Subject: Testimony supporting advanced metering technology
Thank you for the opportunity to submit this testimony to your
committee. My company, Itron Inc., based in Spokane, Washington, is a
technology provider and source of knowledge to the energy and water
industry. We enable utilities to collect, analyze and apply critical
data about the usage of electricity, gas and water though the use of
radio and telephone based technology that automatically collects
information from meters. Currently, over 18 million ``smart meters''
have been automated with Itron technology in the U.S. and Canada.
The current energy situation and skyrocketing prices have brought
energy policy to the forefront of our country's political agenda, and
along with it, many innovative ideas to help deal with the problem have
been put forward. The long-term solution, balancing supply with overall
demand, is easier said than done. Despite efforts to increase supply
through generation capacity, solutions are years out and are going to
be expensive.
This leads us to the demand side of the energy equation, where
there are dramatic opportunities to impact theproblem in the near term.
Others will undoubtedly speak to you about the need to improve our
traditional conservation efforts, and those actions are important.
There is also a need to manage demand in a more efficient manner. While
there have been incremental advances in technologies to improve
generation, transmission and distribution of energy over the years, our
current energy delivery system and information structure does not
operate much differently than it did when it was first established in
1935.
To manage demand more effectively and empower conservation efforts
that will have a significant impact on the overall demand for
electricity, utility distribution companies, energy providers and their
customers need much more timely access to detailed energy usage data
that empowers them to take charge of energy distribution and
consumption.
This is where advanced metering technology can be used. ``Smart
meters'' are able to collect reliable, timely and detailed knowledge
about how much energy people and businesses need, how much they use,
when they use it, and most importantly, how much can be saved if given
the incentives to do so. This works because it successfully exposes
customers to the cost savings and efficiency benefits of reducing
consumption or shifting electricity demand to off-peak hours. The
economic upside to renewing our energy information infrastructure by
putting the power of technology to work through advanced metering
systems is tremendous.
This technology is not new, nor is Itron Inc. the only provider of
such technology. Puget Sound Energy, another Washington State-based
corporation, recently earned The Edison Award, the electric industry's
highest honor, for pioneering the use of real-time electricity pricing
and metering. We congratulate our fellow Washingtonians on earning this
prestigious award and appreciate that the industry recognized their
innovation.
This technology is proven, affordable and available on the market.
But adoption of this technology by utilities and energy providers has
been limited, due mainly to regulatory uncertainty and fear of stranded
costs.
Congresswoman Jennifer Dunn's HR 1797 attempts to address these
fears with incentives, including the provision of tax credits for
investments in ``smart meter'' technology. We encourage you to consider
this bill as you help shape our country's energy policies.
We believe the use of advanced metering technology will provide an
immediate positive impact on the current energy situation. Thus, it's
important that not only are smart meters in place, but that utilities,
energy providers and customers have the ability in real time to use the
information they are getting back from the meter.
I've included a copy of our report, which was submitted to the U.S.
Department of Energy, which fully describes advanced metering or
``smart meter'' technology and its role in optimizing energy delivery
and efficiency. Among the most important aspects this technology allows
are the following:
Real-time data to balance supply and demand
Enhanced load management and control capacity
Accurate demand forecasts for long-term power
purchases
Proactive demand reduction to avoid rolling blackouts
Data for businesses and consumers to manage energy use
Empowerment of conservation measures
Thank you again for allowing me to comment today. Itron Inc. is
appreciative this committee is looking at new technologies to help deal
with our current energy situation, and we look forward to working with
others to be part of the solution. If you have any questions or require
additional information, please contact me at 509-924-9900. You may also
learn more by viewing our company website at www.itron.com.
The Critical Role of Advanced Metering Technology in Optimizing Energy
Delivery and Efficiency
A Report to the U.S. Department of Energy
Today's Real-Time Business Cycle
Imagine the futility of trying to grow an investment portfolio
using nothing more than month-old reports of the Dow Jones 30
Industrials Average. Or think of what a recipe for disaster it would be
for a manufacturing company to maintain only intermittent monthly
contact with its supply chain and distribution network. What a step
backward it would be if consumers had to manage their bank accounts
today without the aid of automatic teller machines, the Internet or
automated telephone banking services? Instead they must rely only on
monthly bank statements that arrive in the mail and in-person visits to
the branch office between 9 a.m. and 3 p.m. to balance their checkbooks
or move money from one account to another.
In this age of e-commerce, automated transactions and real-time
information exchange, scenarios such as those listed above would
represent the height of inefficiency and inconvenience, not to mention
a clear impediment to economic growth. Yet as absurd as these examples
might sound, they represent, by and large, exactly how our country's
energy marketplace and infrastructure continue to operate at the
beginning of the 21st century.
In fact, though there have been incremental advances in the
technologies to improve generation, transmission and distribution of
energy over the years, our energy delivery system and information
structure doesn't really operate much differently from the time the
Public Utility Holding Company Act was passed in 1935, establishing the
basic parameters of the vertically integrated, highly regulated utility
industry that has defined energy delivery in the U.S. to this day.
Specifically, the nation's current metering system--the cash register,
data source and link to the customer--is unsuited to meet the dynamic
needs of energy providers and energy consumers in the years to come.
While proven and affordable advanced metering and automation
technologies have been available on the market for nearly a decade,
adoption of the technology by utilities and energy providers has been
limited thus far. One of the primary reasons for this slow adoption is
that many utilities have been hobbled by regulatory uncertainty and
fear of stranded costs.
New Requirements
The times, requirements and stakes are changing. Plans to
deregulate and restructure the electricity market are approved or
underway in some 34 states. Deregulation of the natural gas market,
particularly at the wholesale level, and more recently at the retail
level, is well underway and gaining momentum. Energy prices continue to
spiral upward--hitting consumers and businesses hard in the pocketbook
and undermining economic growth. And the continuing energy crisis in
California provides a sobering harbinger of things to come if steps are
not taken to re-align--much more precisely--energy supply with demand,
and enable market forces to exert their proper influence in stabilizing
energy prices.
Despite these clear challenges and recent wake-up calls, neither
California nor other areas of the country are well positioned to
unleash the true benefits of competition in the energy marketplace.
This is because, until now, utilities and energy providers have not had
sufficient incentive or need to deploy the necessary data collection
and management systems that will be required to ensure that the new
energy marketplace functions in an efficient, reliable, safe and less
volatile manner. Advanced metering systems and technology will provide
the foundation for businesses and consumers to makes choices about
their energy supplier and about their energy use on the basis of cost
and pricing signals from the marketplace.
Relative to other vital infrastructure systems that have evolved to
meet new challenges and requirements in recent years--transportation,
banking and finance, telecommunications, law enforcement and emergency
services, even national defense--the nation's energy delivery system
has not adopted and made use of advanced data collection, data
management and communication technologies that will be required to meet
the needs of the dynamic energy marketplace. And while no single
analogy can adequately capture all the nuance and interdependencies of
the nation's energy delivery system, we're driving in the dark with the
lights off when it comes to collecting and capturing the full value of
timely, accurate and detailed energy usage data. As the crisis in
California is showing us, we do so at the imperilment of our economic
well-being and consumer needs for safe, reliable and competitively
priced energy.
The Metering Status Quo
The vast majority of utility customers throughout the United States
still receive a monthly visit from their utility's meter reader. This
meter reader visually reads the electric and/or gas meter, records the
amount of energy used for the past month, and forwards that information
to the utility's billing office to generate a monthly consumption bill.
If the meter reader is unable to access the meter because it's located
in the basement and the consumer is not home, or because the backyard
gate is locked and a dog is standing post right behind it, most
utilities will proceed to estimate the gas or electricity consumption
based on previous usage, recent weather patterns, and then use that
estimate as the basis for the next bill.
In fact, in an age of rapidly increasing energy prices, it's not at
all uncommon for utilities--particularly those in higher-density urban
areas--to estimate 10 percent, 20 percent, even 30 percent or more of
the meter reads each month for billing purposes. This practice leads to
inaccurate billing, increased customer complaints, and higher costs for
utilities to investigate and resolve those complaints. How would
consumers feel if their local gas station estimated how much gas they
put in their tank when filling up, or if long distance carriers and
credit card companies began estimating their customers' usage and
bills?
Meter Tampering and Energy Theft
Another area of growing concern for utilities, regulators and
consumers (who end up footing the bill) related to metering and meter
reading is energy theft. Nationwide, theft of energy services costs
utilities, their shareholders and consumers billions of dollars each
year. The consensus estimate among most industry groups and analysts is
that energy theft in the U.S. stands between .5 percent and 3.5 percent
of annual gross revenues. With U.S. electricity revenues at $280
billion in the late 1990s, theft of electricity alone would equate to
between $1 billion and $10 billion annually. A recent article in the
Wall Street Journal estimated the nationwide electricity theft figure
at $4 billion per year. That doesn't include natural gas. And with
energy prices increasing sharply nationwide, theft of energy services
is only likely to increase as consumers struggle to pay energy bills
that have doubled or tripled over the past year.
In addition to costing consumers, meter tampering and theft of
electricity and natural gas service create significant public safety
issues. A consumer tampering with a gas meter may cause that meter to
leak, creating a risk of explosion or fire. An electric meter that is
tampered with poses the risk of electrocution or other serious injury.
Technology is currently available and in use that is capable of
automatically detecting tampering with the meter, which would provide a
crucial asset in efforts to improve public safety and deter energy
theft.
If the current crisis in California is any indication, the billing,
customer service and theft problems perpetuated by traditional manual
meter reading operations today will pale in comparison to the problems
caused by a complete dearth of accurate, timely and reliable
information about energy use and demand in the highly dynamic and
interdependent energy markets of the 21st century. Without this
automated metering technology, energy providers and consumers have no
access to detailed and timely energy use data that would allow them to
reduce energy consumption and reduce load when available power is in
short supply, prices are high or distribution system conditions make it
necessary to reduce load.
What is Advanced Metering Technology?
While systems differ from vendor to vendor, most advanced metering
solutions involve retrofitting an existing electric, gas or water meter
with a data recording and communications device, called a meter module.
The meter module is attached to the existing meter or is installed on a
new meter. The meter module device automatically monitors and then
transmits energy use data to nearby collection devices or
communications networks, which in turn forward the information to a
database at the utility or energy service provider. The average cost of
a meter module, that is attached to an existing meter, is approximately
$50 for a meter on a residential home and $500 for commercial or
industrial facilities. More than 85% of meters in the U.S. can be
retrofitted with these meter modules and not require the purchase and
installation of a new meter.
In addition to more frequent and accurate consumption information,
many of these automated advanced metering systems are capable of
collecting a variety of other data, such as power outage and
restoration alerts, and meter tampering data to detect theft of
services. These advanced metering systems also serve as the foundation
to enable an array of new content value management applications that
will support greater consumer choice and control capabilities with
regard to their energy use both now and in the years to come.
Many companies have developed different approaches for their
advanced metering technology solutions. Despite the diversity of
approaches, the vast majority of systems deployed thus far make use of
either public and private wireless communications networks or some
combination of the two. These data collection systems, which integrate
hardware, software and communications systems, provide a wide range of
functionality and sophistication.
The array of systems comprise radio-equipped handheld computers,
vehicle-based mobile collection systems and advanced ``fixed network''
systems that deliver real-time data and are deployed over geographic
areas that can range in size from a small neighborhood or apartment
complex to a large metropolitan area. Other advanced metering
technologies make efficient use of existing telephone and cellular
communication networks to communicate with the meter and send the data
to the utility. Some systems are better suited for residential
metering, while others feature more advanced functionality ideally
suited to meeting the more complex needs of larger commercial and
industrial energy customers.
Depending on the type of solution deployed, advanced metering
technology efficiently and cost-effectively delivers a wealth of
critical data to the utility, its energy customers and other players in
the deregulated energy market. In addition to automatically delivering
basic energy usage data for customer billing, advanced metering systems
are capable of gathering and delivering real-time and near real-time
energy use data from all types of energy customers in all types of
service environments.
The Value of Advanced Metering Data
The automated collection of advanced or ``interval'' energy use
data is necessary to enable energy market participants to more closely
match energy supply with demand. Balancing energy supply and demand
will become increasingly important to making the new competitive energy
marketplace work in a cost effective and reliable manner.
To manage the demand-side of the equation, advanced metering and
energy data allows energy market participants to more accurately
forecast the required energy load, negotiate long-term power purchase
contracts, perform proactive energy load management and control,
establish demand-side management programs and incentives to reduce
energy use, develop more dynamic rate structures to shave peak loads,
and put into place knowledge-driven conservation programs and content
value management innovations that empower consumers to take charge of
and reduce their energy use. By collecting more advanced metering data,
a utility can build a body of knowledge to develop an entirely new
portfolio of dynamic rate structures and incentive programs, real-time
pricing packages and interruptible rates that can be targeted to
specific customers to significantly improve load management
capabilities and reduce peak demand when distribution system conditions
become critical.
These energy management and load control capabilities would help
prevent extreme crisis management measures such as the costly rolling
blackouts initiated by the California Independent System Operator (ISO)
earlier this year. These blackouts are hugely disruptive and costly to
consumers and businesses; they also pose a serious threat to public
safety. These data-driven capabilities can also insulate utilities and
their customers from the volatile whims of today's wholesale energy
market by providing the means to forecast future demand more precisely.
The utility or energy service provider can then use this knowledge to
negotiate longer-term power purchasing contracts at much more
competitive prices. Without detailed, real-time energy usage delivered
by advanced metering systems, this type of precise planning, management
and control is unachievable.
By combining advanced metering technology with the Internet and new
load management and demand side management technologies, businesses and
consumers can take charge of their energy consumption to reduce their
costs. Businesses can monitor their energy consumption much more
closely, and alter production schedules or equipment start-up sequences
to take advantage of off-peak hours. Consumers can adjust their
thermostats while they're away from home, or use the data in concert
with new technologies from the home automation and control sector to
monitor energy consumption by appliance to create a new model for home
energy efficiency in the 21st century. For small businesses owners,
large increases in energy costs can put their business in jeopardy,
while the ability of American companies to compete in the global
economy is undermined. Ultimately, increased energy costs are passed on
to consumers and with the current metering infrastructure, they have
little or no means and little or no knowledge to do anything about it.
Furthermore, by using automated metering systems to collect
advanced energy usage data from strategic numbers and segments of
energy customers on a daily, hourly or 15-minute interval basis,
utilities and energy service providers gain knowledge necessary to
optimize their own load forecasting accuracy, which reduces the risk of
hugely expensive spot-market energy purchases that have led at least
two large California utilities to the brink of bankruptcy.
On the supply-side of the equation, accurate energy use forecasting
supports the precise planning of supply or generation requirements,
which reduces frantic and costly searches for available power supply
when energy reserves are near emergency levels.
Safety and Reliability
In addition to delivering real-time consumption data, many advanced
metering systems provide other types of information that improve energy
delivery while also improving consumer safety and distribution system
reliability. Even today, customer phone calls continue to be the
utility's primary source of information about power outages. Many
advanced metering systems provide immediate outage detection and
restoration notification capability to remove the guesswork and
inference from the outage management equation. The systems provide
precise, immediate and reliable data--all the way down to individual
customers' homes and businesses--that enable utilities to reduce the
duration of power outages and improve the reliability of their
distribution system. Furthermore, automatic outage detection, improved
outage response and restoration times, and improved system reliability
have significant economic ramifications. As we saw during the recent
rolling blackouts in California, outages cost businesses large amounts
of money in ruined product and lost productivity. According to the
Department of Energy's own figures, power outages and fluctuations cost
U.S. businesses and consumers $30 billion each year. Yet that estimate
may be very conservative in today's information--and technology-driven
economy. As this year's energy crisis in California revealed, power
outages at large, high-tech manufacturing companies with energy-
sensitive production methods can cost just a single company millions of
dollars per hour.
When outages and system reliability issues do arise, advanced
metering systems enable a utility to quickly identify and isolate the
problem, efficiently dispatch maintenance resources with pinpoint
precision, and they can provide customers with much more reliable and
timely information concerning restoration of service. More frequent
data collection of advanced metering combined with outage information
also enables utilities to identify trouble spots in their distribution
system, replace or resize equipment, improve outage response and
restoration times and overall distribution system reliability and
safety. These safety benefits are not limited to electricity delivery.
By recording and reporting abnormal gas consumption patterns, the
technology also helps to identify potential gas leaks before they turn
into safety hazards that threaten property and consumer safety.
Adoption of Technology Has Been Slow
While proven and affordable advanced metering and automation
technologies have been available on the market for nearly a decade,
adoption of the technology by energy providers has been limited thus
far. According to recent statistics compiled by Chartwell, a leading
energy industry research group and publisher, more than half of
utilities nationwide are installing or piloting advanced metering
technology. However, the majority of those are doing so only on a
limited basis to this point. Overall penetration of advanced metering
and automation technology currently stands at about 8 percent of
electric, gas and water meters in the U.S., according to the most
recent industry statistics available. More than nine out of every 10
electric, gas and water meters nationwide are still read manually once
each month by a meter reader who must physically access the customer's
house and property.
One of the primary reasons for the slow adoption of advanced
metering technology is that many utilities have been hobbled by
regulatory uncertainty and fear of stranded costs. Stranded costs and
investments refer to assets that were purchased to serve customers
under the traditional regulated model and their costs were recovered in
the utility's ratebase. Those assets may become ``stranded'' if
regulatory decisions ``unbundle'' those assets from utility ownership
before their cost is recovered, or if asset cost exceeds its market-
driven value in a deregulated market. With one foot forward in a new
business model of a competitive marketplace, and one foot stuck
fulfilling the obligations of the traditional business model,
investments in advanced metering and automation technology and other
infrastructure improvements still seem risky to many utilities. As a
result, some utilities have postponed, delayed, downsized or altogether
shelved their plans for investment in advanced metering technologies
until this cloud of uncertainty clears.
In the end, those delays cost everyone: utilities, their
shareholders, businesses, consumers, and they delay further our
nation's ability to move toward an efficient energy delivery model that
is characterized by consumer choice among energy providers,
competitively priced energy and energy services, and a highly efficient
and reliable energy delivery system that enhances consumer safety and
provides a strong foundation economic growth.
Lack of Enterprise-Wide Perspective
To this point, virtually all utilities have appraised advanced
meter reading technology in relative isolation. In the view of most
utilities thus far, the technology delivers value merely by automating
meter reading and reducing or eliminating many of the operations costs
associated with a manual meter reading operation. Advanced metering
technology delivers some further value to utilities by eliminating
meter access problems, estimated reads and improving meter reading
accuracy, which results in improved billing accuracy, fewer customer
complaints, reduced call center traffic and improved customer service.
Because they eliminate the need for large utility vehicle fleets
associated with traditional meter reading operations, automated
metering systems also reduce gas consumption, and vehicle emissions.
As mentioned earlier, many systems on the market today also feature
automatic meter tampering detection to detect and deter theft of
services and improve revenue assurance. That's about as far as many
utility project teams will take their business case. And this limited
view has made it very challenging, many industry experts say, to
develop a compelling business case to justify the technology's
widespread deployment.
However, when comparing the operational costs associated with meter
reading and revenue cycle services to the overall cost of delivering
energy, there's a persuasive case to be made that meter data collection
technology, by virtue of the information it delivers, provides an even
stronger return on investment to the utility's distribution system
operations and business development initiatives. Yet many utilities,
for many different reasons, have difficulty seeing the value of
advanced metering technology beyond automation of the meter reading
function.
Performance-based Drivers
Some electric and natural gas utilities are working with regulators
to implement an innovative new regime of Performance-Based Regulation
(PBR) aimed at providing utilities with strong financial incentives to
ensure that consumer needs for reliable and competitively priced energy
services are maintained.
As energy markets ``regionalize'' and become increasingly
interdependent, the efficacy of a federal mechanism establishing basic
performance-based regulation increases significantly. This innovative
and proven regulatory approach would provide utilities and energy
service providers with clear financial incentives to ensure that
consumer needs for safe, reliable and competitively priced energy
services are maintained.
This approach strikes a desirable balance between the benefits of
competition and the vital interests of consumers, and is gaining
significant momentum in the energy industry as it transitions from a
highly regulated,monopolized model to a competitive one. With these
incentives in place, energy providers would have a strong opportunity
to mitigate risk and achieve a higher return on investment in advanced
metering technology while meeting the vital needs of businesses and
consumers.
These important objectives can be achieved with minimal government
intrusion and regulation by instituting a new regime of performance-
based incentive programs at the federal level that will provide
utilities nationwide with the impetus to invest in new technology to
optimize energy delivery. These performance-based incentives should
focus on critical distribution and customer service functions such as
system reliability; outage response and restoration times; meter
reading, estimated reads and billing accuracy; as well as call center
operations and customer complaint resolution. These incentives could
also focus on conservation and demand-side management programs to trim
overall demand for energy. With reliability, energy costs and customer
service high on the minds of regulators nationwide, uniform
performance-based regulation has opened a window of opportunity to
address critical energy distribution issues and consumer needs through
automation technology in a manner that minimizes costs and strengthens
shareholder value.
The California Crisis
When it comes to issues facing the energy and utility industry, the
California energy crisis rightly deserves top-of-mind billing for both
state and federal policymakers. The California energy crisis is a
multidimensional problem that doesn't lend itself to easy answers.
Blaming ``deregulation'' is overly simplistic. While there are
important lessons to be learned from California's early deregulation
initiative, the fundamental premise that competition in the energy
industry will ultimately benefit consumers is hardly disproved.
Deregulation of electricity markets in other states is proceeding
without the price volatility and supply problems seen in California.
Instead, it is a mosaic of circumstances that have put the power supply
in California so wildly out of step with rapidly increasing demand.
Many in the industry have dubbed California's energy crisis ``the
perfect storm,'' and they're right.
Most industry experts predict that the state will be unable to
muster the necessary mega wattage to make it through the summer without
persistent service interruptions and widespread rolling blackouts. Some
predict a deficit of 4,000 to 8,000 megawatts during peak summer load,
or enough energy to power approximately 800,000 homes. The stakes are
huge. California represents the sixth largest economy in the world and
is home to many of the high-tech companies that are driving the new
economy. When the power goes out, it can cost large companies with
energy-sensitive operations and production methods millions of dollars
an hour in lost productivity, not to mention the impact rising energy
prices have on the overall cost of doing business. Many of these
companies have already made it clear to the state's politicians that
they have no intention of expanding their presence in the state without
being assured of a reliable supply of competitively priced power. Add
in the costs, difficulties and uncertainties for the state's
agriculture, manufacturing and tourism sectors, and the adverse
economic effects of a protracted power crisis will likely ripple far
beyond the California border.
Yet this seemingly dark period in the evolution of the competitive
energy marketplace will likely be looked back upon on as a trial-and-
error period, a time in which utilities, regulators, politicians and
other market participants corrected the course and trimmed the sails.
At the same time consumers, despite current regulatory rate caps that
insulate them from the law of supply and demand in California, are
slowly coming to grips with the fact that electricity is not an
inexhaustible resource.
The ultimate solution to the problems plaguing California is to
balance--much more precisely--the supply of electricity with overall
demand. This, of course, can be achieved in two ways: increase supply
or decrease demand. Ultimately, as new power plants are constructed,
more portable or ``distributed generation'' technology proliferates
(such as back-up generators and fuel cells), and existing power plants
that are currently idle return to service, supply shortages will ease.
Despite expedited efforts to speed up power plant siting, approval and
start-up, it will take three to five years before appreciable
generations assets to serve the California market will go on line, and
it could be nearly a decade before generation capacity catches up with
California's again-booming economy, which has brought with it a 25
percent increase in energy demand over the past five years that no one
seemed to anticipate. Cleary, addressing this problem on the supply
side of this unbalanced equation represents a longer-term and very
expensive strategy.
An Opportunity in Disguise
That leads us to the demand side of the equation, where, through
the application of advanced metering systems and technology, we find
dramatic opportunities to put a big dent in this problem in the near
term. To manage demand more effectively and empower a new regime of
conservation and demand management efforts, utility distribution
companies and their customers need access to much more timely and
detailed energy usage data that empowers them to manage energy
distribution and consumption much more effectively. What's required to
solve today's energy problems in California and meet tomorrow's
requirements is an infrastructure that empowers businesses and people
to take control of their energy use and costs. What a golden
opportunity California has to establish a new model of effective load
management, energy efficiency and conservation for the 21st century.
But to meet this challenge, energy providers require better data,
which they can turn into valuable knowledge for themselves and their
customers. As previously discussed, the automated collection of
advanced metering data would enable utilities and energy service
providers in California to more closely match energy supply with demand
through precision load forecasting, effective load management and
control, demand-side management programs and incentives, development of
more dynamic rate structures, and knowledge-driven conservation
programs. For example, if the large utilities in California were to
move aggressively to deploy advanced meter data collection capability
for their commercial and industrial customers, they could conceivably
have the data collection and management infrastructure in place to
proactively manage as much as 60 percent of their load in relatively
short order. Whether it could happen in time to provide some relief
from the looming summer crisis would depend on a number of variables.
But the technology is there and ready to go.
Policy Solutions
One of the most cost-effective, potent and yet measured public
policy solutions to these problems in the near term would be for
regulators and legislators, at both the state and federal levels, to
enact tax incentives and/or asset recovery mechanisms to encourage all
forms of investment in this country's energy infrastructure as part of
a comprehensive national energy policy.
This public policy effort should not only include new generation
facilities and energy exploration to increase energy supply and reduce
our dependence on foreign energy sources, but should also include
advanced metering systems and data management technology to increase
distribution system efficiency and reliability while empowering
businesses and consumers to take control of their energy consumption in
response to market forces and price signals. It's time to remove
uncertainty. Remove obstacles. Remove risk. But this calls for nothing
less than a revolutionary retooling of the energy infrastructure at a
level and sense of purpose comparable to what the Interstate Highway
System did for transportation and commerce in the 1950s and the 1960s.
Conclusion
In the long-term, the solution to the problem posed by volatile
energy markets requires a carefully balanced prescription of increased
energy supply and reduced demand. If we focus only on increasing supply
through expanded generation capacity, the solution to our problems will
be much more expensive than it needs to be. We will achieve our energy
management objectives most cost-effectively if we also deploy the
technology to collect reliable, timely and detailed knowledge about how
much energy people need, how much they use, when they use it, and most
importantly, how much can be saved if people are given incentives and
the means to do so. The economic upside to renewing our energy
information infrastructure by putting the power of technology to work
through advanced metering systems is tremendous; the downside is very
steep.
In that light, the crisis before us in California is really an
opportunity. It is an opportunity to invest in new technology that will
enable us to put the power of information to work in our energy
delivery infrastructure. The result will be improved public safety,
improved reliability and greater price stability. An affordable,
reliable energy supply is critical to economic growth in our knowledge-
driven economy of the 21st century. Increasing energy supply is part of
the answer to the nation's energy needs. Stimulating investment in
technology and information that empower utilities, businesses and
consumers to more effectively manage the demand side of the equation is
an equally important component to any long-term energy policy. In the
end, advanced metering technology is vital to keeping the lights on and
keeping energy prices affordable. Incentives to implement this
technology and make full use of the data it delivers offer the fastest,
most cost-effective way to restore balance between energy supply and
demand. Ultimately that capability will enable the nation's energy
providers to deliver safer, more reliable and competitively priced
supply of energy to businesses and consumers today, and well into the
future.
Statement of the Hon. James R. Langevin, a Representative in Congress
from the State of Rhode Island
Chairman McCrery, Ranking Member McNulty, and esteemed members of
the Committee, I appreciate the opportunity to join you today in
addressing the need for a national energy strategy, and I thank you for
convening this hearing.
The rolling blackouts in California and the high price of gasoline
have focused national attention on the need for a comprehensive energy
policy for the United States. We must ensure that a national strategy
addresses short-term energy problems such as rising costs, while
encouraging the development of clean and diverse energy supplies to
meet our growing need for power. Through a variety of tax incentives,
we can foster conservation efforts and encourage the production of
clean, renewable energy.
Most importantly, we must dispel the myth that the energy situation
in the Western United States is not a national problem. I am concerned
by repeated statements from the Administration that energy shortfalls
are attributable to faulty state laws and should therefore be left to
the California legislature for resolution. As the fifth largest economy
in the world, California is inextricably tied to the rest of the
nation, and any state economic downturn will certainly spill beyond her
borders and have disastrous effects across our nation and among our
neighbors. Even Rhode Island residents are keeping a watchful eye on
other energy markets. While New England is expected to have a
sufficient supply of electricity from diverse sources this summer, any
shortfalls in New York may have adverse effects on our residents
through increased prices. Congress has a unique opportunity to address
our existing energy concerns while laying the groundwork for a national
strategy that meets our future needs.
One of the simplest methods to prevent skyrocketing energy
consumption in the United States is to promote conservation efforts
among residential and business customers. Congress should pursue tax
credits to encourage both the construction of new energy-efficient
homes and buildings as well as the purchase of efficient appliances,
heating and cooling equipment, lighting, windows and doors, and other
devices. Additionally, Congress should support conservation efforts by
providing tax credits for the purchase of fuel-efficient vehicles. The
automobile industry has the technology to bring high-efficiency and
alternative fuel vehicles to market, and we should provide incentives
to increase the use of such vehicles in the U.S. Ideally, vehicle tax
credits should be coupled with an increase in corporate average fuel
efficiency (CAFE) standards, so that our nation's vehicle fleet will
help reduce, not exacerbate, our consumption of fossil fuels.
However, I recognize that conservation will not meet all of our
nation's energy needs, and I support tax credits to encourage the
production of clean and renewable energy sources. Most importantly, we
must extend the existing investment credit for wind and biomass energy,
and expand the credit for solar and geothermal energy. By encouraging
further development and production of these sources, we can make them
competitive with fossil fuels, and will ultimately diversify our
nation's energy supply. Additionally, Congress must promote responsible
fossil fuel production, and develop existing oil and gas fields before
even considering exploration in new areas.
When major nationwide concerns about energy first arose, I saw that
the situation in California presented an opportunity for Congress and
the Administration to develop a forward-looking, comprehensive energy
policyfor the United States. Now, however, I question the future of
these efforts in light of the $1.35 trillion tax cut that was recently
signed into law. Whereas three months ago, Congress had the resources
to initiate fundamental changes to our energy policy through tax
incentives, the meager sums remaining in our coffers make any new
energy investments more daunting. I sincerely hope that those
benefiting most from the tax cut recognize the importance of
conservation, renewable and alternative fuels, and energy
infrastructure and invest their rewards accordingly.
It is incumbent on Congress to work actively on this issue and to
find the resources needed to implement a national energy strategy. We
should target our immediate efforts to working- and middle-class
families to help them address rising energy costs through conservation
and efficiency efforts. Programs such as the Low Income Home Energy
Assistance Program (LIHEAP) and the Weatherization Assistance Program
(WAP) have been effective tools in mitigating the high cost of energy
for low-income households and seniors, and Congress must continue its
strong commitment to these initiatives.
I know that the people of Rhode Island are looking to the federal
government for leadership on this issue, and I am eager to work with
you to develop legislation that meets our current and future energy
needs in an environmentally and fiscally responsible manner.
Thank you.
Statement of the Hon. Scott McInnis, a Representative in Congress from
the State of Colorado
I appreciate the opportunity to share my thoughts with the Members
of the Subcommittee on Select Revenue Measures on this very important
issue, and would like to thank Chairman McCrery for giving Members the
opportunity to discuss this issue. Between 1992 and 2000, America's
dependence upon foreign oil rose 56%. Each year, billions of tax
dollars are spent to maintain an already strained transportation
infrastructure. Congestion on the nation's highways is at an all time
high and our ever-increasing consumption of energy is taking a toll on
the environment. These hearings are not only timely, but they are
desperately needed. In addition, Mr. Chairman, I wholeheartedly agree
with the statement you made during the first hearing of this
Subcommittee that in order to avoid the mistakes of the past, it is
important that we examine all angles of America's energy policy.
There is no single solution to our energy challenges. Our national
energy policy should address the production, efficient use, as well as
the conservation of energy. Today I will focus on the conservation of
energy, and I will also propose legislation that will take steps toward
not only reducing energy consumption, but that will also improve the
environment and address other key policy initiatives.
At the first hearing of this Subcommittee, Mary Hutzler of the U.S.
Department of Energy provided some sobering statistics on our nation's
projected consumption and supply of energy as well as the impact that
that consumption will have on our environment. Per Ms. Hutzler's
testimony, even with projected efficiency gains, the consumption of
petroleum for transportation uses is expected to far exceed domestic
production and supplies by 2020, resulting in net imports of petroleum
to increase from 51 percent to 64 percent of domestic petroleum demand.
In other words, absent any unexpected breakthroughs in domestic
petroleum production, developments in alternative energy sources, or
significant strides in conservation efforts, America's dependence upon
foreign oil will continue to grow.
I believe that our federal tax laws should continue to promote
domestic exploration and production of oil, gas, and other energy
sources. The Department of Treasury provided this Subcommittee with an
excellent overview of existing tax incentives and their role in our
national energy policy. But I also believe that our tax laws should be
more proactive in promoting energy conservation measures. Specifically,
I urge this Subcommittee to consider tax incentives to promote
widespread participation in teleworking, also referred to as
telecommuting. In short, teleworking is an arrangement whereby advanced
communications technology is used to replicate or completely eliminate
the ``traditional'' workplace--thereby eliminating the commute to and
from that workplace, reducing overall energy consumption, and improving
the environment. Consider the following:
It is estimated that staying at home to work
requires 3 times less energy consumption than commuting to
work;
According to a George Mason study, for each 1% of
the regional workforce that teleworks, there is a 3% reduction
in traffic congestion;
It was recently reported that if 10 to 20 percent of
commuters switched to teleworking:
1,800,000 tons of regulated pollutants would
be eliminated,
3,500,000,000 gallons of gas would be saved,
3,100,000,000 hours of personal time would be
freed up, and
maintenance and infrastructure costs would
decrease by $500,000,000 annually because of reduced
congestion and reduced vehicle miles traveled.
Teleworking is also a superior choice as a conservation measure
since it does not infringe upon an individual's recreational travel
time. Instead, it seeks to eliminate or substantially reduce the daily
commute to and from work--a drudgery that all of us would rather avoid.
The benefits of teleworking do not end with energy conservation,
reduced congestion and transportation infrastructure costs, and a
cleaner environment. Studies have shown that teleworking can provide
significant benefits to both employers and employees. For employers,
teleworking results in a more satisfied and efficient workforce
resulting in greater productivity, reductions in real estate costs and
employee turnover and related costs, and serves as an important tool to
attract and retain employees. For employees, teleworking results in
better work and family balance, greater productivity, a better attitude
toward the employer, greater career satisfaction, and more personal
time due to a reduced commute.
Despite all of these positive attributes, broad employer and
employee participation in teleworking will not occur unless individuals
have remote access to broadband communication technologies. To that
end, I suggest that the Subcommittee consider The Broadband Deployment
and Telework Incentive Act of 2001, a bill that I will be introducing
with Congressman John Tanner. This legislation represents a fresh and
comprehensive approach to addressing several important policy
objectives: conserving energy, improving the environment, and closing
the nation's growing digital divide. By offering modest tax incentives
to both providers and potential users of broadband services, this bill
will stimulate investment in the broadband technologies that will in
turn stimulate greater telework participation.
As I mentioned earlier, there is no single solution to our energy
challenges. We should always promote exploration of new and alternative
energy sources and development of more efficient ways to use energy
sources. We should also promote intelligent conservation of those
sources. While the positive impacts of alternative sources and
efficient uses of energy can take years to become reality, conservation
measures--such as teleworking--offer an effective and timely solution
to our energy challenges and should be an integral part of our national
energy policy. Also, by promoting good conservation habits now, we will
maximize the future effectiveness of all other energy policy
initiatives.
Thank you once again for this opportunity.
Statement of the Hon. Mark Udall, a Representative in Congress from the
State of Colorado
I want to join Rep. Jay Inslee to speak in support of the Clean
Energy Incentives Act, a bill he will soon introduce with my support
and with the support of a number of other Members who are interested in
seeing a broad range of incentives provided for the development of
clean energy technologies.
Increasing the contributions of clean energy technologies to our
energy mix requires a combination of policy tools. For best effect, we
should implement a number of tools simultaneously. At the most basic
level, we should increase funding for the Department of Energy's
research and development programs for renewable energy and energy
efficiency technologies. To increase the integration of these
technologies into the marketplace, we should require that a certain
percentage of power generation come from new renewable technologies
such as wind, solar thermal, photovoltaic, geothermal, or biomass. To
encourage their broad adoption among the public, we should hold up the
federal government as a role model and require that it purchase an
ever-growing portion of its energy needs from renewables. To ensure the
development of these technologies isn't blocked by transmission
obstacles, we should push the Federal Energy Regulatory Commission to
integrate alternative energy sources into the electric utility grid.
Finally, perhaps the most important policy tool to help accelerate
commercialization of clean energy technologies is the tax credit. By
creating incentives for the development and purchase of these
technologies, we can generate environmental benefits, provide reliable
sources of power for business as well as homeowners, reduce our
nation's dependence on foreign oil supplies, help commercialize clean
technology, enhance U.S. technology leadership, and create economic
benefits for the nation.
I joined Rep. Inslee and a number of other Members in working to
craft a bipartisan and comprehensive clean energy tax package. We've
finally done that in the Clean Energy Incentives Act. The legislation
covers all the bases, from renewables to efficiency technologies. The
bill would expand the renewable resource tax credit to include more
alternative energy sources; encourage the use of alternative fuel
vehicles and alternative fuels and related infrastructure; promote
energy efficient technologies for certain commercial and industrial
property, new and existing homes, and appliances; and encourage the use
of demand management technologies and investment in distributed energy
generation powered by renewable energy and fuel cells.
In drafting the legislation, we consulted closely with clean energy
advocates representing a spectrum of technologies. After months of
meetings, we are confident we have compiled a package of incentives
that best addresses the needs of the various clean energy sectors and
the needs of this country to move toward a new energy future. We feel
that our approach is comprehensive and that it should serve as the
basis for any energy tax package that this Committee considers.
Statement of the Hon. Wes Watkins, a Representative in Congress from
the State of Oklahoma
Mr. Chairman, I thank you for the opportunity to submit testimony
today. I also applaud your efforts on holding this series of hearings
on the effects of federal tax laws on the production, supply and
conservation of energy.
As you know, I have always stressed the need for a national energy
policy. The world is operating with a small supply of petroleum and the
U.S. is facing tight natural gas supplies. We now depend on foreign
nations for nearly 60 percent of the oil we use--and that figure is
growing rapidly. From 1986 to 1997 (before the latest price crisis)
domestic oil production dropped by 2 million barrels per day--roughly
25 percent of 1986 capacity.
The fact is that the United States is now dependent on foreign
countries--some who have unfriendly dictators--for the very life-blood
(oil) of our Nation.
Now is the time to clearly address a national energy policy and
build a program that is needed to meet future demand. I believe a clear
national energy policy will stabilize the roller coaster energy prices
and make the U.S. more energy self-sufficient.
It is very important to recognize that the domestic oil and natural
gas industry has changed significantly overthe last fifteen years.
Independent producers of both oil and natural gas have grown in their
importance. They account for 85 percent of the wells drilled in the
U.S., produce 40 percent of the oil--60 percent in the lower 48 states
onshore--and produce 65 percent of the natural gas.
Tax incentives are critical to help the energy economy survive the
peaks and valleys of energy prices. Because oil and natural gas
exploration and production are capital intensive and high-risk
operations that must compete for capital against more lucrative
investment choices, much of its capital comes from cash flow. The
federal tax code is a key factor in defining how much capital will be
retained.
Therefore, I believe we must enact provisions designed to encourage
new production, maintain existing production, and put a safety net
under the most vulnerable domestic production--marginal wells.
I have authored and cosponsored legislation in the past that is
designed to preserve production of independent oil and gas producers'
marginal wells, and to protect this high-risk sector of the economy
from volatile world price fluctuations.
Two fundamental tax incentives are the suspension or elimination of
the net income limitation on percentage depletion and the marginal well
tax credit.
The net income limitation severely restricts the ability of
independent producers to use percentage depletion, particularly with
respect to marginal wells. Percentage depletion is already subject to
many limitations. First, its allowance may only be taken by independent
producers and royalty owners and not by integrated oil companies.
Second, depletion may only be claimed up to specific daily production
levels of 1,000 barrels of oil or 6,000 Mcf of natural gas. Third,
depletion is limited to the net income from the property. Fourth, the
deduction is limited to 65% of net taxable income. The net income
limitation requires percentage depletion to be calculated on a
property-by-property basis. It prohibits percentage depletion to the
extent it exceeds the net income from a particular property.
This provision is extremely important for marginal oil wells. These
wells account for approximately 20 percent of domestic oil production.
The U.S. is the only country with significant production from marginal
wells. Once wells are plugged, it becomes nearly impossible to reclaim
the remaining oil or gas. Eliminating the net income limitation on
percentage depletion would encourage producers to keep marginal wells
in production and enhance optimum oil and natural gas resource
recovery.
As you know, I worked to include a two-year suspension of the net
income limitation on percentage depletion in the Taxpayer Relief Act of
1997. The suspension has been extended through 2001. We must act to
extend or eliminate the suspension before it expires at the end of this
year.
To help preserve our domestic production and energy security, we
must create a counter-cyclical marginal well tax credit. Essentially
establish a sliding scale tax credit that kicks in for marginal well
producers when prices are low, as they were in 1998 and 1999. A
marginal well is defined as an oil well producing less than 15 barrels
a day or a gas well producing less than 90 cubic feet per day. The tax
credit would be phased in and out in equal increments as prices for oil
and natural gas fall and rise. The tax credit will protect during down
turns and helps marginal wells to keep producing during low price
cycles.
In addition, two other tax incentives allow taxpayers to expense
(a) delay rentals and (b) geological and geophysical expenses. Delay
rental payments are contractual payments made by an oil and gas
producer to the mineral owner in the event mineral production is
delayed. Geological and geophysical (``G&G'') expenses are costs
incurred by an oil and gas producer for the purpose of obtaining and
accumulating data that will serve as a basis for the acquisition and
retention of oil or gas properties. In both cases, these are out-of-
pocket expenses incurred by taxpayers in the oil and gas drilling
business.
Again, I thank you for this opportunity to testify before your
subcommittee. I look forward to working with you and the Committee to
structure the Federal tax code so it encourages increased domestic
energy production; therefore, as a Nation, we can declare our
independence from foreign oil and gas.
Statement of the Hon. Ed Whitfield, a Representative in Congress from
the State of Kentucky
Mr. Chairman and Members of the Committee, I am pleased to offer my
testimony on the effects of federal tax laws on the production, supply
and conservation of energy.
The National Academy of Engineering recently identified
``Electrification--the vast networks that power the developed world''
as the single most important achievement of the 20th century. The
economy of the 21st century will require increased amounts of reliable,
clean and affordable electricity. Coal, the nation's most abundant
energy resource, can help meet these requirements if new technologies
are developed and deployed to convert this resource to electricity more
efficiently and cleanly. I hope to soon introduce the National
Electricity and Environmental Technology Act, which would make such a
venture possible.
By the year 2020, U.S. electricity consumption is projected to grow
35% and worldwide electricity is projected to grow by 70%. Today, more
than half of that U.S. electricity is generated from abundant, low-cost
domestic coal. In fact, coal constitutes more than 85% of U.S. fossil
fuel resources, enough to last more than 250 years at current rates of
consumption.
Not only does an ample supply of coal exist, but the electricity it
produces is significantly cheaper than other sources of power. For
example, on average the cost of electricity from coal is less than one-
half the cost of electricity generated from natural gas or oil, and it
also costs less than nuclear power. Additionally, even though
electricity produced from coal has tripled since 1970, overall
emissions from U.S. coal-based generating plants have been reduced by
one-third.
Despite the benefits of using coal to produce electricity,
uncertainty about new environmental requirements and electricity
deregulation, as well as optimistic projections about natural gas
prices, has led generators to rely heavily on natural gas for new
electric generating capacity. Consumption of natural gas for
electricity is projected to triple by 2020.
Such widespread use of an expensive resource could prove
detrimental to many Americans. Average wellhead prices for natural gas
in 2000 exceeded $9.00/mcf, well above the $3.66/mcf price DOE
forecasted for 2020. Large-scale conversion to natural gas generation
could double retail electric prices--creating a significant hardship
for low and fixed income consumers. It would also eliminate an
advantage the U.S. enjoys in the world marketplace.
Currently, only expensive retrofit technologies can achieve the
more stringent emissions limits being considered for existing coal-
based generating facilities. Advanced technologies for converting coal
into electricity could effectively eliminate health-based pollutants
and substantially improve efficiency in new power generating
facilities. Unfortunately, initial commercial deployment of new coal
generating technologies entails significant risk which generators are
unwilling to accept in a newly competitive electricity market.
The National Electricity and Environmental Technology Act provides
a measure of burden-sharing to cushion the cost of improving the
environmental performance of existing coal-based generating facilities.
It also stimulates deployment of advanced technologies to further
reduce emissions and improve efficiency in new generating facilities,
allowing our most abundant domestic energy resource to help meet the
nation's growing need for clean, reliable and affordable electricity.
Title I of the bill provides for an accelerated technology research
and development program for new and existing coal-based generation
facilities. The Secretary of Energy, in consultation with the private
sector, is authorized to establish R&D cost and performance goals that
can be achieved by 2007, 2015 and 2020 by existing and new coal-based
generating facilities. The bill authorizes the Secretary to study the
technologies capable of achieving the performance goals and make
recommendations for the programs required to develop those
technologies. It also authorizes the appropriations necessary to carry
out the R&D program to advance the technologies identified in the study
as being capable of achieving the cost and performance goals. The
Secretary will be authorized to carry out a power plant improvement
initiative that will demonstrate commercial applications to new and
existing plants of coal-based technologies that will advance the
efficiency, environmental performance and cost competitiveness beyond
that of facilities in service or demonstrated to date. The bill allows
for 50% of the private sector cost-sharing along with the use of
uncommitted Clean Coal Technology program funds to provide the federal
share of the demonstration projects.
Title II makes the provisions for tax credits for emission
reductions and efficiency improvements in existing coal-based
generating facilities. It establishes a 10% investment tax credit for
investments in systems of continuous emissions controls retrofitted to
existing coal-based electricity generating units. Additionally, it
creates a production tax credit (0.34 cents/kWH) for the first 10 years
of electricity output from existing coal-based generation units that
are repowered with qualifying clean coal technologies.
Title III makes the provisions for tax credits for early commercial
applications of advanced coal-based generating technologies. It
establishes a 10% investment tax credit for investment in qualifying
advanced coal-based generating technologies for use in new or repowered
units. It establishes an efficiency-based production tax credit for
electricity generated during the first 10 years of operation of a new
or repowered unit using qualified advanced coal-based generation
technologies. In subsequent years, eligible technologies must achieve
increasingly higher levels of efficiency to qualify for the credits.
Finally, it establishes a risk pool amounting to 5% of the cost of the
new technologies to help defray the cost of any modifications necessary
to achieve design performance levels.
Title IV provides credits for certain exempt organizations and
government units. Additionally, it establishes an offset against
payments required as an annual return on appropriations by the
Tennessee Valley Authority.