SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 1274 words

COMMITTEE: HOUSE WAYS AND MEANS

HEADLINE: ENERGY AND TAX LAWS

TESTIMONY-BY: MAX SANDLIN, REPRESENTATIVE

BODY:
June 12, 2001

Statement of the Hon. Max Sandlin, 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

Mr. SANDLIN: Thank you Mr. Chairman for calling this important hearing and allowing me an opportunity to testify before the Subcommittee today. I have long been concerned that our country lacks a comprehensive energy plan that links the balances between supply and demand to federal environmental, regulatory, and tax policies. A patchwork of local and national rules and laws sends mixed cues to the energy industry, stifling expansions in capacity and advances in technology. The federal tax code in particular plays a crucial role shaping industry behavior. I am here today to highlight what I believe are ways we can modify the tax code to maximize capital formation within the energy sector, promote stability in energy markets, and thus lower the cost of energy paid by consumers. The exploration and production of energy resources is capital intensive. Those who explore and produce energy must leverage large amounts of capital throughout the process of identifying and recovering energy supplies. In many respects, this process is not that different from other sectors of the economy. The energy industry relies on the use of cutting edge technologies and the large capital investments in equipment common to other industries. However, unlike the high-tech companies of Silicon Valley, that until recently seemed to only reap huge profits for investors, the domestic oil and gas industry is just now recovering from the record-low prices and abysmal earnings of 1998 and 1999. The energy sector's traditional cyclical fluctuations present hurdles to attracting a consistent stream of capital for investment. Try attracting investment when natural gas is .98 cents tcf - as it was in 1999 - and you begin to understand why dozens of independent oil and gas producers went out of business, curtailing the production of natural gas, an increasingly critical fuel stock for electricity generation. Modifying the federal tax code will allow producers to retain the necessary capital crucial to expanding capacity and spurring production.

Providing access to capital is linked to securing market stability, which benefits both consumers and energy producers. The domestic oil and gas industry - particularly the independent petroleum and gas producers - is just now recovering from losses caused by low prices in 1998 and 1999. The failure to recognize the need to respond to those low prices resulted in a 10% loss in domestic production - most of which has been made up by imports of gas and oil from Canada and OPEC. Easing the feast or famine swings of the oil and gas markets must be a key priority to a comprehensive energy policy. Congress should modify the federal tax code by providing the proper cues and incentives to maintain adequate levels of production during times of low and high prices. A basket of targeted tax incentives can help maintain and increase domestic production, deterring wild price swings that hurt American families and produce uncertainty within the industry.

A bipartisan coalition of Congress recognizes the need to secure our energy future. Numerous bills have been introduced in the House and Senate with substantial co-sponsorship during the 106th Congress and now in the 107th Congress. I am pleased to join as a cosponsor and speak in support of two bills - H.R. 805 and H.R. 876 - which, if enacted, will encourage the production and development of energy resources.

H.R. 805 - Independent Energy Production Act of 2001

H.R. 805, the Independent Energy Production Act of 2001, is designed to preserve the marginal properties and capital of independent oil and gas producers and to protect this important yet high-risk sector of our economy from volatile world price fluctuations. Many of the provisions contained in H.R. 805 encourage independent gas and oil producers to reinvest capital in capacity and production, which will smooth out the supply and demand chain. I would like to briefly outline a few of the measures in the bill.

Marginal Well Production Tax Credit: This credit will allow a $3 per barrel tax credit for the first 3 barrels of daily production from an existing marginal oil well and a $.50 per Mcf tax credit for the first 18Mcf of daily natural gas production from a marginal well. This credit could cost the Treasury as little as $20 million a year, but according to the Department of Energy could prevent the loss of 140,000 bpd if fully employed during times of low oil prices like 1998 and 1999.

Geological and Geophysical Costs: Geological and geophysical (G&G) surveys are used to locate and identify properties with the potential to produce oil and natural gas, as well as to determine the optimal location for developing a well. An example of a G&G expense is the use of 3-D technology, which utilize state-of-the- art computer models to provide more detailed and thus reliable predictions of possible resources. By allowing current expensing of geological and geophysical costs incurred domestically, domestic producers can benefit from the same tax incentives for research and development that we provide to other industries.

H.R. 876, Wind Energy Production Tax Credit

I would like to shift gears for a moment and focus on incentives for the production of electricity from renewable resources.

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.

Recently, I met with a Texas-based wind generating company that is preparing to undertake a significant expansion of their infrastructure that will provide power to tens of thousands of Texans. To promote the continued development of wind energy production in the United States, and to encourage projects such as the one I described, it is imperative that Congress act to extend the wind energy production tax credit. The construction of wind power generating facilities is capital intensive with projects often competing against fossil fuel generated power. Extending the wind tax credit will provide developers with certainty and stability to undertake the massive projects ready to be unleashed.

In closing Mr. Chairman, I am hopeful that Congress will take up these pro-growth tax reform proposals in the 107th Congress. Democrats recognize the importance of promoting a wide range of energy supplies. The Democratic Caucus energy plan utilizes the tax code to encourage domestic energy production and development. Additionally, the Blue Dog Democrats are working to outline a comprehensive, forward-looking, market-based, and balanced national energy strategy.

In past Administrations, Democratic and Republican, various public officials have taken an ad hoc pledge to pursue energy independence for the nation, but this commitment quickly fades into complacency once the crisis-of-the-moment begins to subside. We must not allow this to happen again. Although the energy recommendations set forth by the current Administration omit several of the provisions outlined in my testimony, Congress should not be deterred from leading on energy by passing these good bills.

Thank you, Mr. Chairman



LOAD-DATE: June 13, 2001