Instead of an Energy Policy, We Get Tax Complications

By Arthur O'Donnell, Editorial Director, Energy Central

After months of political wrangling and horse-trading, Congress has finally adjourned -- only to return following the November 2 election to finish many of the things it couldn't accomplish during the regular session. Things like passing a federal budget, adopting a new debt ceiling, and possibly taking on legislation to revamp national intelligence agencies.

For all intents and purposes, the pending legislation for a comprehensive national energy policy bill (HR 6) is dead for this year. That's not to say that Congress has failed to address energy matters.

The problem is that instead of laying out a rational case for promoting or endorsing certain energy policies, lawmakers once again have taken the back-door approach of accomplishing policy via taxation. Or, as in most of the cases related to energy, via the complicated tax credit and exemption system now part of HR 4520. This so-called Jobs Creation Act of 2004 is a sprawling 650-page bill, packed to the gills with nearly $140 billion in incentives, subsidies and tax breaks for various enterprises [See The Business Electric, "Follow the Bouncing Tax Breaks," July 6, 2004].

The final version of the bill, hammered together by a conference committee earlier this month, merged a number of Senate amendments into the House measure -- but, at least with regards to energy provisions, quite a few of the $19 billion in energy tax provisions from the Senate version were left on the conference room floor.

What remains, however, are sections that extend the production tax credit (PTC) previously applied to wind energy and certain kinds of biomass power production for another two years while expanding eligibility to geothermal, solar, municipal solid waste, small irrigation and open-loop biomass projects. The PTC now amounts to 1.8 cents/KWh of production for new facilities that go into service before January 1, 2006. Open-loop biomass gets only half the PTC amount, or 0.9 cents/KWh. A credit of $4.375 per ton of “refined coal” applies, with certain restrictions.

New tax credits for the production of crude oil ($3/barrel) and natural gas (50 cents per 1,000 cubic feet of production) join a revised credit for refining low-sulfur diesel fuel (a nickel per gallon). The fossil fuel credits only come into play when prices are below $18/barrel for oil or $2/Mcf -- so the immediate impact is negligible while current market prices for oil hover in the $50/barrel range.

Ethanol subsidies, a core concern for several influential lawmakers from corn-growing districts, found a welcome home in the bill. The “volumetric ethanol excise tax credit” will extend through 2010 some existing credits, while many more small farmers will be eligible for new tax relief. Agri-biodiesel earned a $1/gallon tax credit and recycled oil production is worth 50 cents/gallon in tax breaks.

Other energy incentives alter tax depreciation treatment of the transfer of transmission facilities and seem to encourage transfers of nuclear decommissioning trust funds accompanying the sale of nuclear plants or ownership shares in such plants.

Another stealth element of the bill is to reduce the corporate tax rate for “manufacturers” and domestic production activities to 32 percent from the current 35 percent, while greatly expanding the definition of “manufacturer.” Basically makers of products “manufactured, produced, grown or extracted” in the U.S. now qualify as manufacturers. Domestic oil and gas producers are now manufacturers, according to the bill, but so evidently are commercial generators of electricity.

One D.C. wag commented, “any company with a lobbyist is now a manufacturer.”

Numerous provisions relate to excise tax collections for blended gasoline products and biodiesel fuels, as well as extending the enhanced-oil recovery credit to Alaskan gas processors while reducing the depreciation life for Alaskan pipeline property to seven years. The Alaskan pipeline provisions were a last-minute addition to the conference bill, taken from the moribund Energy Policy Act. The proposed pipeline also found support in a separate bill for military construction appropriations -- giving the pipeline developers an $18 billion federal loan guarantee.

Despite the nearly $140 billion in various tax breaks built into the measure, the Joint Committee of Taxation has estimated the net federal revenue impacts will be minor through 2014 because the Jobs Act also eliminates various tax breaks and exclusions -- including the existing export subsidies that caused the World Trade organization to allow sanctions against American manufacturers (the issue that gave rise to the Jobs Act in the first place).

Still, according to the committee’s spreadsheets, several energy provisions in particular will reduce tax revenues substantially:

Extending and expanding the PTC will cost $2.278 billion;
Repealing excise taxes on railroad diesel and ship fuels will cost $1.532 billion;
The Alaskan pipeline incentives add up to $450 million;
Debt service for a $2 billion bond earmarked for “green buildings and sustainable designs” will be $231 million;
Allowing tax expensing of capital costs incurred for refineries complying with EPA sulfur regulations will amount to $119 million.

A provision with a minor fiscal impact but an interesting policy implication is the temporary suspension of customs duties through 2008 on certain types of imported steam generators and reactor vessel heads and pressurizers used in nuclear facilities. The $9 million of lost taxes in negligible, but the incentive for nuclear plant owners to replace deteriorating equipment during the exemption window is a significant policy statement accomplished via tax law.

The Bottom Line: One can make an argument of support for each and every one of these provisions, I suppose. The PTC, which had lapsed at the end of 2003, continues to be crucial for getting renewable energy plant built. A frequently used estimate is that some $2 billion in construction of wind power projects alone had been put on hiatus because of the lack of a PTC this year. Almost immediately after hearing of the passage of the Jobs Act, wind developers from Minnesota to Colorado resumed plans to get their projects operating in time to collect the PTC.

The problem, of course, is that energy policy by taxation (or lack thereof) is inconsistent, incredibly complex, subject to limits and restrictions that make sense to no human, and sometimes fall victim to adverse IRS interpretations. For example, an energy policy might determine that the PTC should last for 5 or even 10 years to bring stability to the market; instead what we get in this bill is another two-year “boom and bust” extension that merely adds uncertainty to project economics and is subject to its sunset dates.

Is there a rationale for treating biomass with lesser credits than other renewables? Certainly none exists in the wording of this bill or the accompanying conference committee report. Although there is no documentation of the committee deliberations, it’s apparent that certain provisions stand or fall based on whether their tax impacts can be offset somewhere else in the bill. Though the Senate version contained quite a number of energy efficiency incentives, nearly all fell aside during conference deliberations.

And can’t you just wait for the multiple lawsuits and IRS rulings over which companies are “manufacturers” and which are not for purposes of the new tax code?

Arthur O’Donnell is Editorial Director for Energy Central. The Business Electric is found exclusively on Energy Central.

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