U.S. electricity decontrol tops energy agenda for 105th Congress

A recent Senate energy committee hearing on electric industry restructuring drew a standing-room-only crowd.

The 105th Congress is now working at full speed but has relatively few oil and gas issues on its agenda.

Once again, much of the focus will be on environmental bills, such as reauthorization of the Clean Water Act. And once again, energy policy is likely to be set through environmental and tax legislation.

Although industry has again proposed some modest changes in the tax code to encourage drilling and production (OGJ, Mar. 3, 1997. p. 26), it faces a major challenge to defend existing tax provisions that are being challenged as "corporate welfare."

The current session should be less confrontational than the last one, which featured the first Republican Congress in 40 years struggling with a Democratic administration anxious to remain in power.

Electricity decontrol

Electric restructuring promises to be a hot issue not only for this Congress but for the next one as well. Few observers expect Congress to be able to revamp the $208 billion industry in this session alone.

The issue affects oil producers, who are major consumers of electricity, especially those operating pumps. Also, gas producers are concerned that electric restructuring might cause them to lose market share in power generation.

The Natural Gas Supply Association (NGSA) cites several threats to its industry:

• Cost-driven utilities are likely to dispatch electricity from different fuel sources in order of lowest to highest marginal cost. The marginal costs of gas-fired power are generally higher than the marginal costs of power fired by coal, nuclear, and hydro.

• Many utilities have substantial unused coal and nuclear capacity with which to compete for new markets, largely on a marginal-cost basis.

• Competition is likely to encourage utility efficiencies such as the substitution of some wheeling for gas-fired peaking.

• The lower-priced electricity expected to result from restructuring is likely to trim cost advantages currently enjoyed by some natural gas applications.

"The resulting negative impact on gas demand may be more severe, however, if federal and/or state actions taken during the restructuring process unfairly discriminate against natural gas used for power generation or fail to correct current discrimination."

NGSA explained that mandates for renewable energy sources threaten to reduce gas demand in power generation, failure to achieve competition by a certain date (with guaranteed uniform access) threatens the viability of gas-fired independent power producers, and failure to achieve comparability in fuel standards encourages the use of higher pollution fuels at the expense of gas.

Hearings begin

The House commerce committee's energy and power subcommittee plans electricity decontrol hearings Apr. 14 in Atlanta, Apr. 18 in Richmond, May 2 in Chicago, and May 9 in Dallas-Fort Worth.

Subcommittee Chairman Dan Schaefer (R-Colo.) held nine hearings on the subject in the last Congress and said the testimony convinced him that the current monopoly system is harming consumers. He has introduced a bill (H.R. 655) that would allow all consumers to choose their electric provider by Dec. 15, 2000.

Commerce committee Chairman Tom Bliley (R-Va.) said deregulation would "free up as much of 25% of existing unused generating capacity, all without adding a single new generator or a single transmission wire."

Frank Murkowski (R-Alas.), chairman of the Senate energy committee, has held three hearings on the issue, but favors a "go-slow" approach.

He noted, "Public power has a host of special advantages. It is exempt from corporate income taxes, it can issue tax-free municipal bonds, it is not subject to utility regulation by state public utility commissions or the Federal Energy Regulatory Commission, and it has access to low-cost federal loans.

"Private power has a number of special provisions under the federal tax code that are not available to public power. The question facing the committee is how can we create fair competition between public and private power?"

Murkowski said he is reluctant to allow the federal government to preempt the states on the issue.

"That is not deregulation, it is only different regulation. Those who claim that without a federal mandate nothing will occur are simply wrong. States are already taking the lead on restructuring issues.

"The basic goal of electricity decontrol is to give consumers the opportunity to choose their electricity supplier. California, Rhode Island, and Pennsylvania have passed laws requiring 'retail choice' be allowed consumers in the next few years. Other states are expected to follow suit."

Stranded costs

Probably the toughest issue in the debate is who will pay for utility investments, known as "stranded costs," that have become uneconomic in the new competitive market.

Many utilities have built plants that produce power at costs higher than the price of electric supplies available on the market today.

The congressional debate is likely to center on the federal government's role in regulation, how quickly it will happen, and what laws will govern the market across the state borders.

The first step for Congress may be to review legislation that would repeal or reform the Public Utility Holding Company Act and the Public Utilities Regulatory Policies Act.

Although FERC laid the groundwork for the current movement last year with rules that require competition in the wholesale electricity market, the Clinton administration has been slow to issue its own retail electric decontrol position.

The Energy Department's electric restructuring proposal, under review at other agencies, would not require the states to mandate "retail choice" by a certain date and supports the recovery of stranded costs but would let the states decide the particulars.

The Petroleum Marketers Association of America (PMAA) said, "The issue is much broader than prices and customer choice. Congress must not adopt a piecemeal approach to deregulation. Rather, it must enact a comprehensive measure that recognizes the substantial opportunities that exist for job creation and promote fair competition, not unfair market dominance."

Corporate 'welfare'

The Clinton administration overruled DOE when it proposed to restrict use of the foreign tax credit for oil firms as part of its fiscal 1998 budget proposal.

The American Petroleum Institute complained that the proposal is "unwise, unwarranted, and unfair."

The proposal would further limit the companies' foreign tax credits and would impose immediate taxation on all reinvested oil and gas earnings of controlled foreign corporations.

The joint committee on taxation has estimated the proposal carries a $1.5 billion price tag for the next 5 years. API says it would reduce U.S. companies' rate of return on foreign operations by a third.

API said the measure would hamper the competitiveness of the U.S. oil industry overseas. "Many of these areas-such as China, Southeast Asia, and the former Soviet Union-are opening up for the first time. All of them have strategic as well as political importance.

"Other industrial countries are actively promoting their own oil industries to exploit these opportunities to the fullest extent. If U.S. companies cannot compete, these resources will be developed by foreign competitors. U.S. exports and employment will suffer."

API said the existing rules on foreign extraction taxes were revised in 1983 to correct perceived abuses and recognize the right of sovereign nations to develop fiscal systems of their own choosing.

And it said to focus the tax only on the oil and gas industry is discriminatory. "U.S. government policies have made most of the promising (exploration) prospects remaining in the U.S. off-limits to exploration and development. To force domestic U.S. companies offshore and then to penalize them for the activity is outrageous."

Some congressmen also are planning attacks on other federal programs that they consider to be corporate welfare. They include DOE's fossil research and development programs and agencies that help U.S. firms do business overseas, such as the Export-Import Bank, Overseas Private Investment Corp., and the Trade and Development Agency.

Other taxes

The administration's budget proposes a 24.3¢/gal tax on kerosine used as diesel fuel. Exceptions would be provided for aviation fuel and some feedstock uses. Persons using kerosine for heating could apply for refunds.

The tax is designed to ensure that persons blending kerosine in diesel do not escape the 24.3¢/gal tax that applies to unblended, undyed diesel fuel.

The budget would extend the 5¢/bbl Oil Spill Trust Fund tax on oil production and imported crude and products. The $200 million/year tax would be suspended if the trust fund reaches more than $2.5 billion.

Independents again will be asking Congress to pass tax measures that would maintain or increase U.S. production, but as before, the problem is finding offsetting revenues. One of their primary goals is to persuade Congress to allow expensing of geological and geophysical costs.

Majors are more interested in fundamental reform of the alternative minimum tax. They say integrated oil companies are the only capital-intensive industry that cannot use accelerated cost recovery for a substantial portion of capital investment.

Industry groups also are working to gather information to support legislation to extend the enhanced oil recovery tax credit to horizontal wells.

Oil associations, DOE, and the Department of Interior are concerned about ways to keep marginal wells in production, because they provide nearly 15% of the nation's oil and 5% of its gas output.

But DOE officials said they have found it very difficult to ensure that the proposal would encourage production and yet be revenue-neutral.

Endangered species

The Endangered Species Act (ESA) has been due for reauthorization since 1992. It protects 1,530 species listed as endangered or threatened from human-caused decline while DOI develops and implements population recovery plans.

Congressmen also are concerned that the ESA violates the Fifth Amendment to the Constitution, which prohibits the government from taking private property without paying "just compensation."

The courts long have held that the government must provide compensation for a taking only when the owner is deprived of nearly all of a property's value.

Rep. Don Young (R-Alas.), House resources committee chairman, noted last year the committee passed an ESA reform and reauthorization bill, but the Clinton administration opposed it and the House did not take it up.

Young said, "For the past 2 years, we've only heard complaints from the administration about efforts to reform the ESA. After 4 years of inaction, we'd like to finally see a legislative proposal from the White House to reauthorize the act." He requested a bill by April.

He said legislation should protect landowners' rights through cooperative management agreements, habitat conservation grants, and land exchanges. He said the federal government should protect private property owners when ESA restrictions diminish property values by 20% or more.

Meanwhile, the committee already has approved a bill allowing citizens to sue the government if they sustain economic losses due to federal actions taken to protect endangered species.

In the Senate, Sens. John Chafee (R-R.I.) and Dirk Kempthorne (R-Ida.) also are working on a broad ESA reauthorization bill.

Other lands bills

Little or nothing has been said this session of Congress about opening the Arctic National Wildlife Refuge Coastal Plain for leasing.

Murkowski and Young, both Alaskans, head the congressional committees with key responsibility for oil and gas leasing issues. Last session, they inserted federal approval for leasing in budget bills, but the provisions were deleted.

The oil industry would like to explore the ANWR Coastal Plain because of strong indications that it contains major oil fields and because oil produced from those fields could move the existing Trans-Alaska Pipeline System. President Bill Clinton and Interior Sec. Bruce Babbitt are staunchly opposed to ANWR leasing.

Murkowski and Young had been expected to attempt the same legislative tactics this session. But Murkowski said last week, "I don't have a plan for ANWR leasing. We'll have to wait and see what happens."

Meanwhile, 65 congressmen have introduced bipartisan legislation to require congressional approval before the United Nations and the administration can make international land use designations that would limit private developments.

Without public hearings, the U.S. already has agreed to 67 U.N. land designations, either as U.N. Biosphere Reserves or World Heritage sites. The congressmen said the Biosphere program is not authorized by a U.S. law or an international treaty.

On another issue, two House resources subcommittees plan a joint hearing Apr. 15 on the U.S. Forest Service and the Bureau of Land Management's operation of wilderness preservation lands.

Superfund

Congress will revisit some big environmental bills again this year, including reauthorizations of the Clean Water Act and the Comprehensive Environmental Response Cleanup and Liability Act (Superfund).

If those bills are to pass, the Democrats and Republicans must seek major, bipartisan compromises, as they did last session with the Safe Drinking Water Act.

Only 353 of the nation's 1,300 Superfund sites have been cleaned, and the average cleanup takes 12-15 years and costs $30 million.

On Superfund, a key point of contention is whether Congress should repeal the retroactive liability provision in the law which makes companies responsible for cleaning hazardous waste generated before the law was enacted in 1980.

States oppose retroactive liability repeal, fearing that they will be forced to assume the costs previously borne by responsible parties.

Businesses have complained the tough liability provisions that hold all parties jointly and severally liable for cleaning Superfund sites is basically unfair and increases program costs by encouraging litigation.

The administration has proposed to reinstate oil, chemical, and corporate environmental taxes to finance the Superfund cleanup program. The taxes could raise as much as $1.8 billion/ year to pay for cleaning toxic waste sites.

Superfund taxes expired at yearend 1995, and Congress refused to renew them last year until it could agree on a reauthorization. Current funds will last until 2000.

Rep. Bill Archer (R-Tex.), House ways and means committee chairman, has pledged his panel will not reinstate the tax until the program is overhauled.

Other issues

The House will begin from scratch on a reauthorization of the Clean Water Act, rather than use the bill that it passed last session and the Senate ignored.

Last year, the House bill would have shifted many federal regulatory powers to state and local governments. It would allow polluters to try new prevention procedures and even temporarily exceed discharge limits, if they achieve a net improvement.

And it would require that water quality protection programs be based on scientifically objective assessments of the risks and rules be based on cost/benefit analysis.

Senate leaders scoffed at the bill, saying only a few changes were needed, such as stormwater runoff and wetlands permitting. And President Clinton pledged to veto the House bill, saying it would roll back water protection.

The major issue of interest to the petroleum industry is the wetlands provisions of the bill, because many wells are drilled on and pipelines cross what are technically wetlands.

Congress also is expected to hold oversight hearings on the administration's proposals for global climate change mitigation measures. A number of nations are expected to seek a treaty on the subject at a meeting in Japan this fall.

Industry is concerned that the administration will propose a hydrocarbon use tax as part of its plan to curb global carbon dioxide emissions.

Congress already has held some oversight hearings on EPA's proposed rule toughening ozone and particulate emissions standards (see Newsletter this issue and OGJ, Dec. 9, 1996, p. 34). More hearings are expected.

Industry says the regulations would cost more than the $6-8 billion EPA has estimated and are basically unnecessary.

DOE, DOI issues

At the direction of Congress, DOE sold 12 million bbl of oil last summer to raise $227 million and then 10 million bbl last fall to raise $220 million for fiscal 1997 Strategic Petroleum Reserve operations (OGJ, Jan. 13, 1997, p. 20).

No SPR sales are proposed, as yet, for the fiscal 1998 budget, but the Clinton administration has proposed the sale of $1.5 billion worth of oil in 2002 to balance the budget.

Energy Sec. Federico Pe?a recently told a congressional appropriations committee the provision is merely a "marker" and said other means would be sought to raise the same money.

Although legislation has been filed again to dismantle DOE, that clearly will not happen. The Clinton administration strongly opposes the measure, and Congress is unlikely to waste time on it.

Congress may play an oversight role for the Minerals Management Service's proposed royalty valuation rules (OGJ, Jan. 27, 1997, p. 36). Rep. Carolyn Maloney (D-N.Y.) again has filed a bill to shift the responsibility of collecting royalties from Interior to the Treasury Department.

Oversight hearings are expected on recent mergers and acquisitions in the refining industry (see stories, p. 24). PMAA said if the Federal Trade Commission allows the recently announced Shell Oil Co./Texaco Inc./Star Enterprise downstream merger, then more such alliances are likely to follow.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.