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Highlights of House-passed Energy Bill

00:00AM Sep 17, 2008

via a special arrangement with Informa Economics, Inc.

But rocky road ahead for Senate energy alternative

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The House energy bill (HR 6899) passed 236-189 despite the objections of Republicans who said it would do little to boost offshore oil and gas production. President Bush threatened a veto, citing a lack of revenue sharing, among other concerns. Other Republicans criticized the lack of provisions to promote "clean coal” and nuclear power.

Highlights of the House-passed energy bill:

-- Permits oil and gas drilling between 50 and 100 miles from the Atlantic and Pacific coasts if the adjacent coastal states enact laws allowing it, but drilling beyond 100 miles would be permitted regardless of the states' wishes. It does not lift the current ban on drilling in the eastern Gulf of Mexico off the Florida coast. The bill also permits oil shale mining on federal lands if the applicable states enact laws allowing it.

-- Permits lease holders that entered into leases in 1998 and 1999 to renegotiate their leases to include provisions requiring them to pay royalties to the federal government if the price of oil or gas exceeds $34.73 per barrel of oil and $4.34 per million British thermal units of gas (in 2005 dollars). Currently, these leases have no price thresholds. The bill prohibits these lease holders from acquiring new leases if they do not negotiate price thresholds.

-- Requires the Interior Department to conduct lease sales in the National Petroleum Reserve - Alaska, every year (instead of every two years), and bars the exportation of Alaskan oil. The measure also requires the federal government to take steps to expedite construction of a planned natural gas pipeline that would stretch from Alaska's North Slope to the lower 48 states.

-- Requires lease holders to "diligently develop" leases currently held before becoming eligible for new leases. The Interior Department would determine the definition of "diligent development."

-- Requires the government to exchange 70 million barrels of "light, sweet" crude oil from the Strategic Petroleum Reserve (SPR) for "heavy, sour" oil, which is more difficult to refine. Under current law, the government is prohibited from putting any additional oil in the reserve this year unless the average price of oil does not exceed $75 per barrel over the most recent 90-day period.

-- Requires electric power companies to produce at least 15 percent of their electricity from renewable resources by 2020, with incremental increases required starting in 2010. The measure establishes new Housing and Urban Development Department energy efficiency demonstration and grant programs to promote the use of energy efficiency guidelines in residential buildings. The bill also establishes a grant program to assist institutions of higher education to research renewable energy, alternative energy, energy efficiency, and energy conservation.

Tax Provisions (for more, see fuel provisions):

-- Includes several tax incentives for renewable energy that would reduce revenue by an estimated $19 billion over 10 years. At a cost of $6.9 billion over 10 years, it extends a renewable energy production tax credit, covering wind facilities for one additional year, through 2009, and certain other renewable energy production for three years, through 2011, while capping credits for facilities that come into service after 2009. The bill extends for eight years, through 2016, a credit for investing in solar energy and fuel cells, at a cost of $1.8 billion. It also extends the energy-efficient commercial building deduction for five years, the credit for efficiency improvements to existing homes for one year, and a credit for energy-efficient appliances for three years.

-- Provides for the allocation of $2.625 billion in energy conservation bonds, $1.75 billion in clean renewable energy bonds, and $1.75 billion in energy security bonds to finance the installation of natural gas pumps at gas stations; all would be tax-credit bonds, which provide a tax credit in lieu of interest, and projects financed through the bonds would have to comply with Davis-Bacon requirements. It also creates a new tax credit for plug-in electric vehicles, an accelerated recovery period for smart electric meters and grid systems, and provides $1.1 billion in tax credits for carbon capture and sequestration projects.

-- Offsets the cost of the tax incentives through provisions that raise revenue, complying with the pay-as-you-go budget rule. The bulk of that revenue — $13.9 billion over 10 years — would come from repealing the ability of the "big five" major integrated oil companies, as well foreign government-controlled oil companies, to use the current tax deduction aimed at domestic manufacturing, while freezing the deduction at its current rate for other firms. The bill also raises $3.9 billion by changing the treatment of oil and gas income earned outside the country.

Fuel Provisions:

-- Adds cellulosic biofuel to bonus depreciation rules: Current law provides a 50 percent "bonus" depreciation in the first year that certain property is placed in service at cellulosic biomass ethanol plants. Under the rules for the depreciation, a business can deduct an additional 50 percent of its adjusted basis in property in the year it is placed in service, thus essentially writing off those costs. The rule generally applies to items placed in service through the end of 2012. The bill allows any cellulosic biofuels, and not just cellulosic biomass ethanol, to qualify for the bonus depreciation rules. It defines "cellulosic biofuel" to mean any liquid fuel which is produced from lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. The depreciation rules currently cover ethanol made from such materials. These changes are estimated to be revenue neutral over 10 years.

-- Credits for biodiesel & renewable diesel: Extends for one year, through 2009, certain credits for biodiesel that currently expire at the end of 2008, including the $1-per-gallon production tax credit and the 10-cent-per gallon small biodiesel production credit. The measure extends through 2009 the $1-per-gallon production tax credit for renewable diesel created from biomass. The measure amends current law to eliminate a requirement that diesel fuel be produced using a particular, specified process, thereby making the credit available to any diesel fuel produced from biomass. It also eliminates a current disparity in how the credit applies to biodiesel and agri-biodiesel. Together, these changes ensure that the credit can be claimed for any diesel fuel created from biomass, without any limit based on the process used. The bill clarifies that the credit for renewable diesel is available only for fuels produced solely from biomass, making co-processed diesel produced after Feb. 13, 2008, eligible instead for the 50-cent-per-gallon credit for alternative fuels. The bill also clarifies that certain fuel-related tax credits are designed to provide an incentive for US production, which would apply to claims for credit or payment made after May 15. These changes would cost an estimated $401 million over 10 years.

-- Credit for alternative refueling property: Under current law, taxpayers who install certain "clean-fuel" refueling technology at a business, such as E-85 or natural gas pumps, can claim a tax credit for 30 percent of the costs of installing the technology, up to $30,000 per taxable year, per location. The credit also can be claimed for technology installed at a residence, but in such cases the credit is limited to $1,000 per location per year. The credit covers property for storing or dispensing clean-burning fuels. The bill extends the credit for installing non-hydrogen refueling properties for one year, to cover installations through 2010. (Under current law, the credit applies through 2014 for hydrogen refueling properties.) The bill also increases the credit to 50 percent of the costs of installation, and increases the cap to $50,000 per location, per year, for business installations, effective for installations after the date of enactment, in taxable years that end after that date. For individuals, the bill doubles the annual limit to $2,000. The measure also extends, through 2017, the availability of the credit in the case of property related to natural gas, compressed natural gas, or liquefied natural gas, and which is not of a character subject to a depreciation allowance. These provisions would reduce revenue by an estimated $226 million through FY 2018.

Comments: The Senate could take up its own energy legislation in the coming days, but prospects for working out a final version with the House appear difficult. The House-passed bill tis unlikely to advance in the Senate, which already in this Congress has rejected the 15 percent renewable energy standard contained in the measure, as well as provisions that end the oil industry tax breaks. The Senate this week may vote on three competing energy proposals that contain offshore drilling provisions, although none are expected to garner the 60 votes necessary to advance.

House Speaker Nancy Pelosi (D-Calif. ) said that some provisions of the energy bill could end up in the continuing resolution (CR) should they fail to pass the Senate. The first stopgap funding measure for Fiscal 2009 may be a CR that puts off spending decisions until a few weeks after the election, with Nov. 17 mentioned as a possible end date.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.