SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3746 words

COMMITTEE: HOUSE WAYS AND MEANS

HEADLINE: ENERGY AND TAX LAWS

TESTIMONY-BY: CHARLES W. STENHOLM, REPRESENTATIVE

BODY:
June 12, 2001

Statement of the Hon. Charles W. Stenholm, M.C., Texas

Testimony Before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means

Hearing on the Effect of Federal Tax Laws on the Production, Supply and Conservation of Energy

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 double 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 form 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 form 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 a part 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 in to 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.



LOAD-DATE: June 13, 2001