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ENERGY LEGISLATION: DECEMBER 2007: DOA
Market Comment, 12/07/2007
“An Act to move the United States toward greater energy independence and
security, to increase the production of clean renewable fuels, to
protect consumers from price gouging, to increase the energy efficiency
of products, buildings, and vehicles, to promote research on and deploy
greenhouse gas capture and storage options, and to improve the energy
performance of the Federal Government, and for other purposes.
Bill # H.R. 6” (...do you think the
title could have been any longer... or hit more buzz words?)
Despite
all the politically correct selling points contained in H.R. 6 failed to
advance in the Senate receiving 53 Yeas and 42 Nays with 60 votes needed
to pass. At this point it appears that without a substantial effort in
the few remaining days of the Congress, it is safe to conclude that
energy legislation in 2007 is now DOA.
To
increase its selling points H.R. 6 is not lacking on politically correct
terms and sound bites; some of the real popular ones will:
§
Tighten
fuel-efficiency standards for vehicles
§
15 % of
the electricity generated by the nation’s utilities would have to come
from renewable energy sources
§
Takes away
$13.5 billion in tax benefits from the 5 largest U.S. oil producers and
redirects the funds to new and alternative fuels (À la
Robin
Hood)
Passage of
“final” energy legislation this year is not showing much promise,
despite the House’s ability to ratify the 1,000 page opus after giving
members 12 hours to review the document. The bill did not pass muster
with the Senate on December 7th, 2007, they have already warned that
they are troubled by several measures – notably those dealing with a
$13.5 billion roll-back in tax breaks over 10 years granted to the five
largest U.S. oil companies – specifically, ExxonMobil Corp., Chevron
Corp., ConocoPhillips, Royal Dutch Shell PLC and BP PLC. The diversion
of these funds would be used as tax incentives to encourage the
development of renewable and alternative energy sources, for example,
Ethanol, Biodiesel, Solar, Wind, etc.
(...the Robin Hood approach ... its hard to get more politically
correct).
Another
problem area is the requirement that the nation’s electric utilities use
renewable and alternative fuels to generate 11% to 15% of the
electricity produced by 2020. In theory, the concept has merit,
however, certain region of the U.S. do no lend themselves to the
alternatives contemplated in H.R. 6. For example, in the West, Solar
and Wind qualify as alternatives but the reliability of these energy
sources, as measured by “load factors” (i.e. the amount of time these
facilities can produce and deliver electricity) is problematic. Europe
has had difficulty achieving load factors much above 30% for Solar and
Wind plants, whereas the conventional load factor for existing
technologies is above 90%. With the advent of deregulation (...thank
you California for yet another bad idea), electric utilities nationwide
have lowered their reserve margin standards from the 15% to 20% range
down to 12%. Based on customary operating rates, these “new” forms of
renewable and alternative energy sources would have to achieve load
factors comparable with conventional fuels.
Finally,
the White House would like to see a single agency oversee the fuel
efficiency standards rather than dividing the functions between the
Environmental Protection Agency and the Transportation Department.
Legislation this year was not helped by a statement from the White House
that the President would veto the bill “in its current form.”
Nevertheless, the House forged ahead, passing (by a vote of 235 to 181)
H.R. 6, which exceeded earlier energy proposals passed by both the House
and Senate this past summer. The $13.5 billion cut in tax incentives
for oil companies surprised several Democratic and Republican Senators.
Speaker Nancy Pelosi reportedly had to calm a “brief rebellion” by her
own part members and fend off allegations that the bill had secretly
been put together in her office.
(...secret dealings, not our U.S. representatives...Rep. John
Dingell’s, Democrat Michigan, made it clear on the house floor that “he
was sympatric with the rebels”)
Another
selling point for H.R. 6 was a provision calling for an increase in
fuel-efficiency standards for passenger cars and light-duty trucks – the
so called CAFÉ standard – to 35 miles per gallon by 2020.
Fuel-efficiency for autos has not been revised in more than 30 years,
and the current standard still remains at 27.5 per gallon. Republican
and Democrats both supported raising vehicle fuel-efficiency standards
to 35 miles per gallon, and we can only assume that the Auto Industry
accepted this as a foregone conclusion.
(...why waste political capital on an industry that has already been
beaten up).
Political
capital would clearly be diverted to other measures of H.R. 6, in all
likelihood the repeal of oil tax incentives and the use of renewable
energy resources by electric utilities.
(...the Auto Industry never had a chance).
Key
provisions of H.R. 6 are:
§
Measures
to raise $21 billion, in large part from repealing tax breaks for the
biggest oil and gas companies, these funds will mainly be diverted
toward renewable energy sources like wind and solar over 10 years.
§
Raise
vehicle fuel- efficiency standards to 35 miles per gallon by 2020, from
the current 27.5 miles per gallon standard.
§
A measure
that would require utilities to generate 11% to 15% of their power from
renewable energy sources, such as wind and solar power, by 2020.
§
Repeals
the Section 199 tax deduction for major integrated oil companies,
generating $10 billion over 10 years.
§
Drops
Section 907 for foreign income tax deductions for companies that produce
oil and natural gas overseas, raising $3.19 billion over 10 years.
§
Ends tax
breaks for companies who write off some exploration expenses over seven
years, raising $4.1 billion over 10 years.
§
Extends
tax credits to produce energy from renewable sources like wind, biomass,
geothermal, landfill gas and trash-burning facilities. Tax credits will
be extended by four years through December 31, 2012. Cost is $6.6
billion over 10 years.
§
Extends a
30% investment tax credit for businesses to install solar, fuel cells,
and a 10% tax credit to install micro-turbines through the end of 2016,
and gives a new 10% tax credit for combined heat and power projects.
Cost is $602 million over 10 years.
§
Gives $1.5
billion in extra investment tax credits for building low-emission coal
plants, and $500 million extra for industrial coal gasification
projects. Cost is $1.8 billion over 10 years.
§
Gives new
production tax credits up to $1.01 per gallon for producing motor fuel
from nonfood cellulosic sources like woodchips and grass, ending by the
end of 2013. Total cost is $482 million over 10 years.
§
Reduces the 51-cent-per-gallon tax credit for ethanol by 5 cents
beginning with the first calendar year after the year in which 7.5
billion gallons of ethanol (including cellulosic ethanol) is produced.
Total cost is $854 million over 10 years.
§
Gives a
new $3,000 tax credit to buy "plug-in" hybrid vehicles that can run off
batteries and gasoline engines. Total cost is $993 million over 10
years.
§
Increases
the "New York Liberty Zone" tax credit in order to expand the
transportation infrastructure in New York City. Total cost is $1.1
billion over 10 years.
§
Gives new
tax credit bonds to green community programs to reduce greenhouse gases,
limited to $3 billion. Total cost is $864 million over 10 years.
§
Extends tax deductions for energy-efficient commercial buildings
by five years through 2013. Total cost is $901 million over 10 years.
§
Allows
7-year depreciation for companies that install remote-sensing devices to
monitor real-time electricity use. Total cost is $1.2 billion over 10
years.
The
electric utility industry cannot be pleased with the requirement that
power production must be between 11% and 15% of generation by 2020 from
renewable energy sources, such as wind, solar and other renewable
resources, etc.
In
closing, H.R. 6 illustrates one disturbing point – we have a Congress
which is not only incapable of dealing effectively with energy, or the
energy crisis which began in the mid – seventies. Moreover, I suspect
that the rhetoric and reality have become confused. For the most part,
it is clear that Washington really does not understand the subject and
instead opts to obscure the subject with rhetoric and an assortment of
politically correct sound bites. It’s sad to think we can manage to
travel to Jupiter and its Moons (...is
this a priority for the average American?), yet are unable
deal with the more mundane earthly issues.
(...do you think the British would consider
taking us back?).
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